<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2000

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

                         COMMISSION FILE NUMBER: 0-08718

                                CT HOLDINGS, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

            DELAWARE                                            75-2432011
(STATE OR OTHER JURISDICTION OF                               (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                              IDENTIFICATION NO.)

            3811 TURTLE CREEK BLVD., SUITE 770, DALLAS, TX 75219-4421
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (214) 520-9292
                (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

       SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE

         SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (TITLE OF CLASS)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period 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 [ ]

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference to such filing requirements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year............. $ 1,292,250

As of June 12, 2000, the last reported sale price of the Company's common stock
was $2.00 per share. The aggregate market value of the voting and non-voting
common stock held by non-affiliates of the Company was $67,090,980 as of June
12, 2000.

As of June 12, 2000, there were 51,275,317 shares of common stock, $.01 par
value per share, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement (the "Proxy Statement") to be filed
with the Securities and Exchange Commission relative to the Company's Annual
Meeting of Stockholders for the fiscal year ended February 29, 2000 are
incorporated by reference into Part III of this Report.

Transitional Small Business Disclosure Format.                   Yes [ ] No [X]



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                                CT HOLDINGS, INC.
                                   FORM 10-KSB
                                  ANNUAL REPORT
                            FOR THE FISCAL YEAR ENDED
                                FEBRUARY 29, 2000

                                Table of Contents


<TABLE>
<S>                                                                                                    <C>
PART I

Item 1.  Description of Business.......................................................................... 1

Item 2.  Description of Property .........................................................................33

Item 3.  Legal Proceedings ...............................................................................33

Item 4.  Submission of Matters to a Vote of Security Holders .............................................34

PART II

Item 5.  Market for Common Equity and Related Stockholder Matters ........................................35

Item 6.  Management's Discussion and Analysis ............................................................36

Item 7.  Financial Statements ............................................................................41

Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial
         Disclosure ......................................................................................41

PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
                 16(a) of the Exchange Act ...............................................................43

Item 10. Executive Compensation ..........................................................................43

Item 11. Security Ownership of Certain Beneficial Owners and Management ..................................43

Item 12. Certain Relationships and Related Transactions ..................................................43

Item 13. Exhibits and Reports on Form 8-K ................................................................44
</TABLE>



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         This Annual Report on Form 10-KSB contains forward-looking statements
that involve known and unknown risks and uncertainties. The statements contained
in this Report that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. In this Report, the words "anticipates,"
"believes," "expects," "estimates," "intends," "future" and similar expressions
identify forward-looking statements. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed elsewhere in this Report under
the heading "Factors That May Affect Future Operating Results" as well as those
discussed elsewhere in this Report, and the risks discussed in our Securities
and Exchange Commission filings.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW OF CT HOLDINGS

         We are an incubator of business-to-business (B2B) Internet companies
that provides early stage business-to-business ventures with a single source of
management capital, as well as consulting on operations, marketing and strategic
planning. Our B2B incubator model is designed to enable the start up companies
with whom we partner to become online market leaders in their industries. We
believe that by focusing on B2B Internet companies, we are positioned to
identify the latest trends and opportunities and attract promising companies and
talent in this industry. Our strategy is to leverage the B2B expertise of our
management and affiliates and to capitalize upon opportunities to
cross-pollinate the strongest qualities among our holdings. We believe that the
anticipated growth in B2B e-commerce creates strong opportunities for us to
increase shareholder value by investing in well-positioned early stage ventures
in this industry. Forrester Research estimates that the United States B2B
e-commerce market, defined as the intercompany trade of hard goods over the
Internet, will grow from $43 billion in 1998 to more than $1.3 trillion by 2003.

         We began our Internet activities in 1999 with the formation of Parago,
Inc. (formerly How2.com, Inc.), an application service provider (ASP) and
Internet based business process outsourcer (BPO) that provides an online suite
of offerings designed to increase sales, reduce costs, and retain customers for
retailers, manufacturers and service organizations. These continuous customer
interaction services include online promotional management (including online
rebate processing), proactive email, online surveys, online multimedia product
demonstrations and manuals, and online customer data warehousing, analysis and
reporting. Parago's comprehensive integrated suite of outsourced customer care
solutions are marketed across multiple industry lines. Parago's revenues were
$3.5 million for the quarter ended March 31, 2000. In March 2000, Parago
announced that it had received $36.5 million in new private equity financing
from four investors led by THLee.Putnam Internet Partners. Co-investors were
Dain Rauscher Wessels Investors LLC, Watershed Capital and Seaboard Ventures.
The investments will be used to expand Parago's proprietary Internet-based B2B
solutions, which optimize and redefine customer care processes. We continue to
hold 20 million shares of Parago common stock.

         In May 2000 we completed a previously announced transaction whereby we
acquired a minority interest in River Logic, Inc. (formerly iNetze.com, Inc.).
River Logic creates and operates integrated decision support networks for
industries such as K-12 Education, Utilities, Forest Products, Healthcare and
others. These networks are designed to leverage the flow and processing of
knowledge and information to provide a decisive competitive advantage. River
Logic has several industry-specific networks in development. Additionally, River
Logic develops and licenses its technologies to key industry partners.

         In addition to our B2B incubation business, we continue to operate our
"Citadel Technology" business line, which is focused on developing and marketing
security and administration software products for both computer networks and
desktop personal computers. Our integrated, easy-to-use software products enable
network administrators to control access to network resources, automate routine
network maintenance tasks, and



<PAGE>   4
automatically shutdown and restart servers and desktop PCs in the event of a
network crash. These software products also enable individual PC users to
control access to their desktops, secure files, and index and retrieve files
stored in a variety of storage media. Our Citadel Technology software products
are designed to reduce the direct and indirect costs of computer network
operations, protect proprietary networks and information, and otherwise improve
overall office productivity. Our core focus will be on our B2B incubation
services, and we are currently analyzing various strategic alternatives for our
Citadel Technology security software business, including new strategic alliances
with third parties, new applications of the technology, new third party
licensing or joint venture arrangements or the sale of the business. As a
result, management believes that our results of operations for our Citadel
Technology security software business will continue to be adversely affected in
the future.

OVERVIEW OF PARAGO

         Parago provides Internet-based solutions that automate customer
relationship management. Parago's solutions enable both brick-and-mortar and
e-commerce businesses to more efficiently develop, retain and extend customer
relationships and improve sales, marketing and customer retention. Parago's
Internet-enabled enterprise solutions include PromoCenter, InfoCenter and
KnowledgeCenter. By automating customer care activities such as online and
traditional rebate processing and promotions, Parago allows its clients to
enhance customer retention, increase revenue opportunities and improve operating
efficiencies. Parago's Internet-based solutions seek to transform promotional
management and product information from customer service liabilities to
retention and extension opportunities.

         Parago's online solutions provide a new vehicle for its clients to
conduct targeted marketing to customers with whom they have traditionally lost
contact subsequent to the point of purchase. Parago is developing proprietary
software that will provide an online mechanism for customers, many of whom have
immediate purchasing power in the form of promotional proceeds, to apply those
proceeds towards the purchase of additional products or services. Parago's
solutions also capture valuable customer information that can help its clients
better understand customer behavior. Parago plans to provide fee-based customer
specific or aggregated data analyses to assist clients in designing future
promotions. Parago's solutions also enable businesses to improve operating
efficiencies by allowing them to analyze the results of their promotions and
manage these promotions on a real time basis.

         Parago markets its solutions to retailers, manufacturers and service
providers across multiple industries. Parago currently provides its online
solutions to approximately 130 clients.

         Parago is committed to providing exemplary service to each of its
clients. As part of this commitment, Parago is pursuing COPC Certification
(www.copc.com), the industry standard for customer service excellence in the
call center and fulfillment industry. In addition, Parago has applied for three
patents with the United States Patent and Trademark Office involving the
technical innovations of Parago's Promotion Tracking System (PTSystem) and the
proprietary promotion technology Parago has developed.

         PromoCenter. Parago's PromoCenter offers its business clients the
opportunity to increase sales, strengthen brand loyalty and increase customer
retention via a fully functional web-based promotion center, branded with the
"look and feel" of the clients' own web sites and "powered by Parago". To the
clients' end-customers, the PromoCenter will be a part of the clients' web
sites, while behind the scenes, it will be completely developed, maintained and
serviced by Parago.

         PromoCenter is capable of supporting multiple promotion styles and can
scale with clients' business needs. It supports continuous customer interaction
through online promotion entry and status check, and targeted email campaigns.
These solutions strengthen brand equity and distinguish clients' promotional
offerings from competitors'. Moreover, providing these services demonstrates to
clients' customer bases their commitment to the highest levels of quality with
respect to customer experience.



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         PromoCenter is powered by Parago's Promotion Tracking System
(PTSystem). The PTSystem enables Parago to support a suite of promotion
offerings throughout the lifecycle of clients' products, from pre-purchase to
post-purchase.

         The PTSystem can be used to help clients shape their promotion
strategies by customizing the information captured from end-customers. This data
can then be analyzed to determine the effectiveness of a specific promotion.
This continuous evaluation streamlines promotional strategy and enables clients
to implement more efficient and effective programs. The PTSystem's design allows
for quick and customized implementation of the PromoCenter solution, allowing
clients' promotional ideas to work at the speed of Internet business.

         Parago's promotional offerings extend beyond traditional rebate
processing to create new lines of revenue for its business clients. Currently, a
common promotional strategy is to offer customers a rebate on a specific product
purchase. Even though many manufacturers' rebate processing budgets match or
exceed their advertising budgets, the return on investment from this promotional
method is often limited. The standard rebate process concludes when businesses
mail the rebate check to a customer, with no ability to recapture those dollars.
Parago's patent-pending process allows clients to recapture promotion expenses
and encourage their customers to apply those dollars to new products and
services, creating new revenue streams.

         Benefits of Parago's PromoCenter include:

     o   Increase clients' sales and bottom line performance

     o   Increase customer retention

     o   Strengthen brand equity

     o   Convert promotion cost centers into profit centers

         InfoCenter. Clients are often overwhelmed with the challenge of getting
timely and relevant information to their customers about new products or
advancements. Parago will offer an online solution. Parago's InfoCenter combines
its video and audio production studio, extensive expertise in static and
animated content development, a substantial investment in technology and the
power of the Internet to create state-of-the-art, comprehensive product
information mega-centers. This leading edge solution represents a higher level
of product information management.

         Although InfoCenter is branded with the "look and feel" of clients' own
web sites, behind the scenes it will be developed, hosted, maintained and
serviced by Parago. This extension of clients' web sites will strengthen their
brand and provide their customers with innovative products and services,
resulting in increased customer satisfaction, retention and loyalty to clients'
businesses.

         The InfoCenter solution contains a host of modules designed to serve as
the optimal product information and support package for clients' customers. This
robust platform will allow clients' customers to quickly



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retrieve multimedia product specific information, configuration assistance,
online installation help, lost user manuals and other important product support
services. InfoCenter provides clients' customers with product information,
throughout the lifecycle of clients' products, from pre-launch demonstrations to
new product cross sales opportunities.

         InfoCenter has been designed to provide the following tangible and
immediate bottom-line benefits to clients' organizations:

     o   Increase product sales

     o   Increase profit margin

     o   Increase customer retention

     o   Reduce product returns

     o   Reduce product support expenses

     o   Strengthen brand equity

     KnowledgeCenter. Parago's KnowledgeCenter is a robust data management
solution that is designed to provide clients with a wealth of previously
unexplored customer data. With a substantial investment in hardware and
software, Parago has built a solid, scalable, world-class data management
solution. Parago offers KnowledgeCenter to clients who find their information
systems littered with mountains of unexplored customer data, as well as to
clients using Parago's PromoCenter and/or InfoCenter solutions. KnowledgeCenter
and Parago's team of data management experts will help clients effortlessly turn
their gigabytes of useless data into a wealth of information about the clients'
customers. KnowledgeCenter can aggregate and analyze the following types of
data:

     o   Promotional data gathered through PromoCenter

     o   Product information gathered through InfoCenter

     o   Data from other sources

     o   Any combination of the above

     KnowledgeCenter turns clients' data into value-added information that will
enhance sales and marketing efforts, improve strategic analysis, support
business planning and much more. This information is presented in a user
friendly format via a dynamic, easy-to-use interface for viewing, analyzing,
exporting data, and printing reports or charts right on clients' desktops.
KnowledgeCenter empowers clients to interact with their customer data, enabling
them to better understand their customers and their customers' buying trends.
Clients can "drill down" for more information, reveal new data relationships
with pivot tables, export data and print professional quality charts, tables,
and reports from a familiar web browser interface. Additionally, Parago's team
of data management experts offers consulting services to help clients get the
most valuable information out of their data.

KnowledgeCenter offers various levels of information access to meet the
different needs that drive clients' organizations. For example:

     o   Managers can utilize predefined Performance Tracking and Business
         Intelligence categories for fast insight into promotion performance and
         customer behavior;

     o   Executives can gather at-a-glance information, graphically presented in
         Executive Snapshots; and

     o   Business analysts can employ the full power of online analytical
         processing (OLAP) to get the most business value from every byte of
         data collected.



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     Interactive Customer Care. Interactive Customer Care is the anchor in
Parago's philosophy of providing customer satisfaction through the use of
technology. The Parago Customer Service Team supports customers through five
individual interfaces to facilitate access for all customers. Parago recognizes
that its clients' highest priority is their customer base and Parago has
invested heavily to provide world-class customer care. In its continuing effort
to offer unsurpassed customer response, Parago is constantly reviewing new
channels to support customers. Listed below are Parago's current support
mediums:

         Live Phone Support. Parago's world-class Customer Service Team is
         trained to respond to customer calls with client specific scripts. This
         allows clients to control the entire customer experience including
         interaction with the Parago customer service representatives. By
         utilizing scripts, Parago ensures consistency in customer response
         across all of the clients' promotions. The Customer Service Team has
         drawn on its service background to compile an outline of suggested
         responses that can be custom tailored to fit the clients' specific
         marketing needs. In addition to the monthly training programs, each of
         the customer service representatives undergoes a live monitoring
         process weekly, whereby their customer calls are monitored at random to
         ensure quality and service.

         Interactive Voice Response (IVR) Phone Support. In addition to Live
         Phone Support, Parago offers IVR technology to permit customers to
         receive automated information 24 hours a day. This application offers
         customers a specific menu of options, again fully scripted by the
         client and the Customer Service Team. IVR gives customers the ability
         to check the status of their promotions at their convenience, in
         real-time, over the phone, 24 hours a day, 7 days a week. For advanced
         questions, the IVR application rolls customers directly over to Live
         Phone Support for personal assistance.

         Email and Fax Support. Customer Service offers unique email addresses
         tied directly to a client to provide targeted email support. These
         emails are answered by the Customer Service Team, which has complete
         access to the PTSystem and is able to research any questions or issues.
         Additionally, customer can fax their questions, comments and
         suggestions 24 hours a day.

         Online Chats. The Parago Customer Service Team will be adding Online
         Chat as a support channel. Online Chat employs the Internet to provide
         live interaction with Parago's customer representatives. This service
         permits online users to ask questions or request information in
         real-time. Parago expects this to become one of the most utilized
         support methods as it provides immediate online gratification.

         Online Customer Status Checking for Promotions. In an industry first,
         Parago leverages the power of the Internet by allowing customers to
         check the status of their promotion online, 24 hours a day. Online
         Status Checking allows customers to track their promotion as it
         progresses through each step of the process. The web interface is tied
         directly into Parago's PTSystem, ensuring accurate and timely
         information. By empowering the customer to view their status online,
         Parago decreases its clients' cost for live-person support while
         enhancing the overall customer experience.

OVERVIEW OF RIVER LOGIC

         On May 5, 2000 we completed a previously announced transaction whereby
we acquired a minority interest in River Logic, Inc. (formerly iNetze.com,
Inc.). As part of this transaction we acquired approximately 5.9% of the
outstanding shares of capital stock of River Logic, Inc. from several of its
existing shareholders in exchange for 333,333 shares of our common stock. We
also acquired shares of Series A Convertible Preferred Stock from River Logic in
exchange for the contribution by one of our wholly-owned subsidiaries of the
ESRN Assets, as described below. The acquired shares of River Logic's preferred
stock are convertible into shares of common stock that represent approximately
13.1% of the currently outstanding shares of capital stock of River Logic on a
post conversion basis as of May 5, 2000.

         In connection with this transaction, we also made two $300,000 bridge
loans to River Logic that



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together are convertible into 800,000 shares, in the aggregate, of common stock
that would represent approximately 3.8% of the currently outstanding capital
stock of River Logic on a post conversion basis as of May 5, 2000. Each of the
bridge loans (i) bears interest at a rate of 12% per annum through its first
anniversary and at one percent above the prime rate per annum thereafter, (ii)
is secured by certain assets of River Logic, (iii) is payable upon the Company's
demand and (iv) is prepayable by River Logic commencing on its third anniversary
date. As a result of the transaction, the Company owns approximately 19% (22.2%
in the event the bridge loans and other securities are converted in full) of the
voting stock of River Logic.

         The ESRN Assets consist of the EBSCO School Resource Network (ESRN
Network), an educational network catering to kindergarten through 12th grade
(K-12). The ESRN Network is designed to support school administrators, teachers,
students and parents by providing them with a comprehensive set of tools and
resources targeting their specific needs. The ESRN Network is comprised of
learning applications that integrate EBSCO Industries' database of content
relating to K-12. The ESRN Network was acquired by a wholly-owned subsidiary of
the Company from EBSCO Industries in connection with this transaction in
exchange for 666,667 shares of the Company's common stock.

         We intend to file a resale registration statement relating to the
shares of our common stock issued in connection with this transaction within 90
days of the closing.

         River Logic, headquartered in Beverly, Massachusetts, creates and
operates integrated decision support networks for industries such as K-12
Education, Utilities, Forest Products, Healthcare and others. These networks are
designed to leverage the flow and processing of knowledge and information to
provide a decisive competitive advantage. River Logic has several
industry-specific networks in development. Additionally, River Logic develops
and licenses its technologies to key industry partners.

OUR CITADEL TECHNOLOGY BUSINESS LINE

INDUSTRY BACKGROUND RELATING TO OUR CITADEL TECHNOLOGY BUSINESS LINE

         Network Security and Administration. Largely as a result of the
increasing power, ease of use, and low cost of PCs, many businesses and other
organizations have shifted from a centralized mainframe computer platform,
usually procured from a single vendor, to a distributed multiple-PC networked
platform, the elements of which are procured from a variety of vendors. These
organizations have invested heavily in client-server networks, intranets, and
other distributed computing networks to realize the cost and productivity
benefits of sharing applications, files, data, and printers and other
peripherals among PC users across a work group, department or entire enterprise.
As a result of the migration of mainframe applications to network servers,


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mission critical functions are increasingly performed over such distributed
networks. These functions include e-mail; electronic funds transfer; reservation
entry for airlines, hotels and rental car companies; and telemarketing and order
entry.

         The use of complex, heterogeneous distributed networks linking multiple
host servers and client PCs creates substantial risk. Unauthorized interception,
alteration, and theft of proprietary information, as well as electronic
vandalism or terrorism aimed at disrupting network operations, can have major
adverse effects on the organizations that own, operate, and/or use those
distributed networks. This risk grows every day because of the deployment of
more capable PCs, growth in the number of network access points, enhancements in
the ability of different types of computers to communicate with one another, and
expansion in the number of public and private communications networks used to
support distributed computing environments. As a result of these developments,
protecting distributed networks and the information transmitted over those
networks is an increasingly important and difficult task.

         Another challenge facing organizations that depend on distributed
computing networks is network administration. In many cases, because of
budgetary or other constraints, organizations are hard pressed to address the
network administration needs that arise as their networks grow in size and
complexity. Some organizations outsource some or all network administration
tasks to a service bureau or VAR. Some smaller organizations have no formally
trained network administrator available on a daily basis. Organizations without
a substantial (and usually expensive) in-house network administration effort are
vulnerable to network disruptions. Such disruptions can reduce top-line revenue
by preventing the entry of order information and delaying transaction
processing, reducing internal productivity by idling network users, alienating
customers by interfering with customer service functions, and increasing overall
workplace tension.

         PC Security and Administration. Even in a distributed computing
environment, many users prefer to maintain all or a substantial portion of their
business, personal and other important files on their desktop hard drive or
other desktop storage media like diskettes and Zip drives. Desktop computer
storage continues to grow and new systems provide on average more than 5 GB of
storage for each user's data, e-mail, and Internet downloads. Storage of large
amounts of information at the desktop level increases the risk of security
breaches by inviting unauthorized access, viewing and copying of confidential
information, and access to network information during the many times a user is
away from his or her desk, including lunch breaks or meetings. Moreover,
organizations are moving to expand sharing of desktop PCs by employees,
particularly in functions that require 24-hour service. Shared PCs are found
often in service bureaus, call center operations, government and education
agencies, libraries, and the home. Protecting an individual user's data and PC
settings and configuration is critical, especially in a shared PC environment.

         OUR CITADEL TECHNOLOGY STRATEGY

         Our core focus will be on our B2B incubation services, and we are
currently analyzing various strategic alternatives for our Citadel Technology
security software business, including new strategic alliances with third
parties, new applications of the technology, new third party licensing or joint
venture arrangements or the sale of the business. Management has reduced
operating expenses related to the software business while we implement our new
strategic focus. As a result, management believes that our results of operations
for our Citadel Technology security software business will continue to be
adversely affected in the future.


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<PAGE>   10


         OUR CITADEL TECHNOLOGY PRODUCTS

         WinShield. WinShield is designed to address the problems that arise
when users share desktop PCs in work environments such as schools, libraries,
government offices, and resource centers such as Kinkos and AlphaGraphics. The
product enables a network administrator (or in a smaller office, individual
users) to establish different profiles for different users that can only be
modified by the administrator. These profiles include desktop appearance,
configuration, and initialization, as well as restrictions on user access to
various PC and network resources (including hard drives, diskettes, CD-ROMs,
printers, Internet access, etc.). The same desktop PC can then toggle between
several user profiles.

         WinShield prevents deliberate or accidental configuration changes that
can disrupt use of a desktop PC, abuse of PC or network resources (such as
unauthorized Internet surfing or installation of unauthorized software), and
interception or alteration of proprietary information. The user can govern
access to CD-ROM or disk drives and control the specific CDs that can be used.
WinShield is currently available for Windows 95, 98 and NT. A WinShield network
version was released in June 1998. The product has been included in Compaq's and
Microsoft's software bundles for the educational market and has been a feature
product of the month on Microsoft's website.

         WinShield Secure PC. In August 1999, we completed beta testing and
launched our new WinShield Secure PC product, the next generation WinShield
desktop security and configuration tool. The network version of WinShield Secure
PC was completed and launched in December 1999. This product provides powerful
new Internet security features that allow Internet filtering and blocking which
permit the administrator to specify the



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Internet protocols and Web sites that are available for users of the protected
computer. Desktop administrators will have the ability to assign access rights
to files and folders for all Windows 95, 98, NT and Windows 2000 systems. Other
new features WinShield Secure PC provides are security mechanisms such as screen
saver control with network authentication, event management for automatic
logoff, a well as timed application usage. WinShield Secure PC is available for
network or stand alone workstations.

         WinShield 95/NT. In 1998, we introduced WinShield 95/NT, our solution
for desktop users who want to protect their PC system from unauthorized
modification or access. WinShield was the Spotlight product for February 1998 on
Microsoft's educational software Web site.

         NetOFF. NetOFF is designed to protect a network by shutting down
unattended client PCs automatically after a specified period of inactivity.
Network administrators may also use NetOFF to shut down such PCs to complete a
clean backup. The product ensures an orderly shutdown by automatically closing
all open files and applications on the PC and saving the information. NetOFF is
available for the Windows NT and NetWare platforms and supports Windows 3.1, 95,
98 and NT desktop PCs. The benefits of NetOFF include:

         o        Enhancing Overall Computer Security. Unattended desktop PCs
                  subject the network and PC to a heightened risk of data theft.
                  NetOFF protects confidential files and information by loading
                  a password protected screensaver and logging off the
                  unattended PCs, thus shutting off access to PC hard drives and
                  the network.

         o        Facilitating Clean Back-Ups. To protect important information,
                  almost every company employs a back-up system. The back-up
                  system is a magnetic tape drive or other storage medium that
                  periodically copies all of the data stored in the network.
                  Should a data loss occur from a power failure, mechanical
                  failure or other error, the lost information can be restored
                  in a relatively short time, saving the company the time and
                  effort necessary to attempt to reconstruct lost data and
                  files. The back-up system, however, backs up only closed
                  files. If a PC is logged on during the process, data in open
                  files can be corrupted or omitted from the back-up tape.
                  NetOFF eliminates these problems by automatically logging off
                  network client stations at a time pre-selected by the network
                  administrator.

         o        Conserving Resources. Software license fees are often based on
                  the number of actual users of the licensed product. Many
                  companies pay excess license fees for programs that are left
                  open on unattended computers. NetOFF helps customers reduce
                  costs by logging off unattended PCs.

         FolderBolt. FolderBolt provides desktop users, particularly users in a
shared desktop PC environment, such as education, with several tools to protect
proprietary information. Users can protect groups of directories, individual
directories, or files by designating them as locked or read-only protected or as
a secure drop box. Optional data encryption adds another layer of security
against more sophisticated intruders. Users are able to send self-extracting
encrypted e-mails within the company or across the Internet. FolderBolt is
available for Windows 3.1, 95, 98 and NT.

         SALES AND MARKETING FOR CITADEL TECHNOLOGY

         Our multi-channel sales strategy includes an enterprise sales group,
OEM distribution arrangements, VAR and dealer channels, direct sales channels,
strategic alliances with industry leaders, and trade shows.

         o        Enterprise Sales Group and VARs. This direct sales group is
                  responsible for end users owning or operating large,
                  sophisticated enterprise networks, including corporations and
                  educational institutions. These end users place orders
                  primarily for our products and have a sales cycle from two to
                  six months depending on the size of the network and the
                  resources they have available for testing. In addition to
                  managing our relationship with these end users, the Enterprise
                  Sales Group is responsible for recruiting and managing VARs
                  nationwide. Each sales person is


                                       9
<PAGE>   12


                  responsible for developing relationships with VARs and end
                  users in their geographic territory. VARs and other resellers
                  broaden our exposure to corporate and educational accounts.
                  VARs can purchase our products through wholesale distributors
                  or direct from us, depending on their business model.

         o        Direct Sales Group. This group, which is primarily composed of
                  in-house telemarketers, focuses on qualifying leads for the
                  Enterprise Sales Group. This function includes cold calls and
                  follow-up calls from marketing events and trade shows. The
                  group does the majority of the prospecting and qualifying of
                  large deals, thus allowing the Enterprise Sales Group to focus
                  on closing the sale. The Direct Sales Group also closes sales
                  on small deals and inbound calls.

         o        OEM Sales. We have entered into arrangements with OEMs that
                  focus on creating bundled solutions to permit customers to
                  purchase total desktop applications incorporating our
                  software. These partners include Compaq, IBM, Microsoft,
                  Hewlett-Packard and Dell, which resell our products with their
                  hardware, software and networking solutions.

         PRODUCT DEVELOPMENT

         In developing new Citadel Technology products, we strive to meet the
following standards in product development:

         o        Standards Compliance and Network Compatibility. Our products
                  comply with industry standards and are designed to be
                  compatible with the leading network and desktop PC operating
                  systems, including Novell's NetWare and Microsoft's Windows
                  NT. To that end, our products are currently developed using
                  Microsoft Visual C++ and Novell toolkits.

         o        Ease of Use. Our products are designed to function without
                  extensive and continual user involvement. The aim is to
                  simplify, not complicate, the user's work environment.

         o        Ease of Administration. We have extended our ease-of-use
                  concept to network administration with our Citadel Network
                  Administrator, which is designed to provide central management
                  and security features with the ability to "plug and play"
                  additional functions at a low cost.

         o        Cost Effectiveness. We provide products at a price and
                  performance level that we believe offers superior network and
                  PC security and administration options at affordable prices.

         Schedules for the development of high technology products are
inherently difficult to predict, and there can be no assurance that we will
achieve targeted initial customer shipment dates for any of our products, or at
all.

         We account for software development costs in accordance with SFAS No.
86 ("accounting for the costs of computer software to be sold, leased or
otherwise marketed") issued by FASB. Under this pronouncement, we are required
to capitalize software development costs after technological feasibility of a
project is established and must cease capitalizing such costs when the products
derived from the project are available for sale, lease or otherwise marketed.
The capitalized costs are then amortized on a product-by-product basis, based on
the greater of (a) the amount computed by the straight-line method over the
estimated useful life of the product or (b) the amount computed by using the
ratio that current gross revenues bear to the total of current and anticipated
future revenues. We evaluate the estimated net realizable value of each
software product at each balance sheet date and record write-downs to net
realizable value for any product for which the net book value is in excess of
its net realizable value. For a discussion of the write-downs taken in fiscal
2000 and 1999, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."


                                       10
<PAGE>   13


         We maintain a core software development staff at our corporate office
to maintain existing code bases and define our approach in developing new
technologies and products to meet market opportunities. Once a product design
has been finalized, the actual final development work is either performed
in-house or by third party contractors, depending on project scope and resource
schedules.

         CLIENT SUPPORT AND WARRANTIES

         We believe that retention of customers is a critical element.
Therefore, we are dedicated to customer support and satisfaction. We encourage
our sales employees in their interaction with a customer to be flexible and
innovative to ensure that the customer's needs are met. Our information systems
also further our customer service goals. They enable our employees to enter
comments regarding a customer's order, as well as comments regarding feedback,
both positive and negative, from the customer. These comments can then be
accessed by other employees, allowing them to quickly reference a particular
customer's preferences, needs, and past ordering practices, among other
information. Our Citadel Technology products are generally warranted to be free
of defects in materials and workmanship for 90 days. We offer yearly maintenance
contracts on most of our software and basic technical support and replacement of
defective media.

         MANUFACTURING AND SUPPLIERS

         We prepare master software disks, user manuals and packaging for some
products and out-source production of other products. Certain of our disk
duplication, as well as our product packaging, is performed by us at our
offices, while the other disk duplication and product packaging and printing of
user manuals and related materials is performed to our specifications by outside
sources. During peak demand, we may use outside sources to perform disk
duplication and product packaging services. To date, we have not experienced any
material difficulties or delays in manufacture through an interruption in our
own production or the production of any suppliers. Because of the generally
short cycle between order and shipment, we do not believe that our backlog as of
a particular date is indicative of future sales.

         CITADEL TECHNOLOGY CUSTOMERS

         Our customers include many Fortune 2000 companies and educational
users. There are no assurances that these companies or institutions will
continue to utilize our products in the future.

         CITADEL TECHNOLOGY COMPETITION

         The security and administration software industry is intensely
competitive and rapidly changing. We compete against large companies (such as
Microsoft, Novell, Computer Associates, Network Associates, Symantec and others)
that offer network and desktop PC security and administration software as a
segment of their businesses. We also compete with a large number of small
companies that offer security and administration software for networks and
desktop PCs as a portion of their product line. Some of these competitors offer
products that address multiple aspects of network and desktop security and
administration and management, while other competitors market products that
provide narrow solutions. Many of our competitors have longer operating
histories and significantly greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and a larger installed
customer base, than we do. Further, many competitors have established
relationships with our customers and end users of our products. Our competitors
could, in the future, introduce products with more features and lower prices
than our product offerings. These companies could also bundle existing or new
products with other, more established products in order to compete with us.

         We generally compete on the basis of product features and functions,
product architecture, product quality, the ability of products to run on a
variety of different network and desktop operating systems, technical support
and other related services, and price/performance features. Based on these
factors, we believe that our products are well positioned in the market and that
we have targeted promising niche opportunities.


                                       11
<PAGE>   14


         We also expect that competition may increase as a result of software
industry consolidations, which have occurred in the past. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. In addition, network and desktop PC
operating system vendors could introduce new or upgrade existing operating
systems or environments that include security and administration functionality
offered by our products, which could render our products obsolete and
unmarketable. There can be no assurance that we will be able to compete
successfully against current or future competitors or that competitive pressures
faced by us will not materially adversely affect our business, operating results
and financial conditions.

         INTELLECTUAL PROPERTY RIGHTS

         We regard some features of our Citadel Technology internal operations,
software and documentation to be proprietary intellectual property. We have been
and will be dependent in part on our ability to protect our proprietary
technology. We rely primarily upon a combination of copyright, trademarks, trade
secret laws, confidentiality agreements and other measures to establish and
protect our rights in our proprietary technology. We do not have any patents or
statutory copyrights on any of our proprietary technology which we believes to
be material to our future success, and we cannot be certain that others will not
develop substantially equivalent or superseding proprietary technology.
Furthermore, there can be no assurance that any confidentiality agreements
between our employees and us will provide meaningful protection of our
proprietary information in the event of any unauthorized use or disclosure of
such proprietary information.

         There can be no assurance that we will not become the subject of claims
of infringement with respect to intellectual property rights associated with our
products. In addition, we may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights. Any such claims could be time consuming and could
result in costly litigation or lead us to enter into royalty or licensing
agreements rather than disputing the merits of such claims.

         EMPLOYEES

         As of May 31, 2000, we had nine employees, including three in business
development, sales and marketing, three in product research and development, two
in administration, finance, MIS, production and operations and one in customer
service and technical support, and Parago employs more than 340 persons. Our
future success depends in significant part upon the continued service of our key
technical and senior management personnel and our continuing ability to retain
highly qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that we can retain our key
technical and managerial employees or that we can assimilate or retain other
highly qualified technical and managerial personnel in the future. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.

         GOVERNMENT REGULATION

         Government regulation has not had a material effect on the conduct of
our business to date.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

         Investing in our common stock involves a high degree of risk. Any of
the following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.

         In addition to the other information in this Report, the following
factors should be considered carefully in evaluating the Company and its
business. This disclosure is for the purpose of qualifying for the "safe harbor"
provisions of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. It contains factors
which could cause results to differ materially from such


                                       12
<PAGE>   15


forward-looking statements. These factors are in addition to any other
cautionary statements, written or oral, which may be made or referred to in
connection with any such forward-looking statement.

         The following matters, among other things, may have a material adverse
effect on the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to these factors in
the context of a forward-looking statement or statements shall be deemed to be a
statement that any one or more of the following factors may cause actual results
to differ materially from those in such forward-looking statement or statements.

         Before you invest in our common stock, you should be aware of various
risks, including those described below. Investing in our common stock involves a
high degree of risk. You should carefully consider these risk factors, together
with all of the other information included in this prospectus, before you decide
whether to purchase shares of our common stock. Our business and results of
operations could be seriously harmed by any of the following risks. The trading
price of our common stock could decline due to any of these risks, and you may
lose part or all of your investment.

GENERAL RISKS

WE RECENTLY DECIDED TO CHANGE OUR BUSINESS TO FOCUS ON INCUBATION OF EARLY STAGE
B2B COMPANIES; HENCE, WE WILL ENCOUNTER NUMEROUS RISKS ASSOCIATED WITH OUR NEW
BUSINESS FOCUS AND OUR PRIOR OPERATING HISTORY MAY NOT BE A MEANINGFUL GUIDE TO
EVALUATING OUR FUTURE PERFORMANCE.

         In January 2000 we announced that we were changing our business model
to focus on the incubation of early stage B2B ventures. Other than our formation
and development of Parago, we have little experience in this area. As a
consequence, our prior operating history may not provide a meaningful guide to
our prospects in the emerging B2B market. Moreover, our new business model and
prospects must be considered in light of the risk, expense and difficulties
frequently encountered by companies in early stages of development, particularly
companies in new and rapidly evolving markets such as B2B e-commerce. We may be
unable to execute our strategy of developing our B2B incubation business due to
numerous risks, including the following:

    o    We may be unable to identify or develop relationships with attractive
         emerging B2B companies.

    o    Any B2B companies that we are able to attract may not succeed and the
         value of our assets and the price of our common stock could
         consequently decline.

    o    Our new business model is unproven and depends on the willingness of
         companies to participate in our incubator and collaborate with us and
         each other.

    o    Our expenses will increase as we refocus on our new B2B incubation
         business model and seek to build the infrastructure necessary to
         implement this model.

    o    We face competition from other incubators of B2B e-commerce companies,
         some of which are publicly traded companies, venture capital companies
         and large corporations; many of these competitors have greater
         financial resources and brand name recognition than we do, which may
         make it difficult for us to effectively compete.

    o    We will require additional capital resources in order to implement our
         new B2B e-commerce business model and we may not be able to obtain
         these resources on attractive terms, if at all.


                                       13
<PAGE>   16


WE RECENTLY COMPLETED OUR FIRST INVESTMENT IN AN EARLY STAGE B2B VENTURE
FOLLOWING OUR FORMATION AND DEVELOPMENT OF PARAGO; THERE CAN BE NO ASSURANCE
THAT THIS INVESTMENT WILL PROVE TO BE A FINANCIALLY ATTRACTIVE INVESTMENT.

     We recently completed a transaction in which we acquired approximately 19%
of the shares of River Logic, Inc. We have never done business with River Logic
before and this is our first investment in an early stage B2B venture following
our formation and development of Parago. Inasmuch as River Logic is an early
stage venture, it is difficult to judge its future prospects.

WE MAY INCUR SIGNIFICANT COSTS TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER
OTHER ADVERSE CONSEQUENCES IF WE ARE DEEMED TO BE AN INVESTMENT COMPANY.

         We may incur significant costs to avoid investment company status and
may suffer other adverse consequences if we are deemed to be an investment
company under the Investment Company Act of 1940. Some of our contemplated
equity investments in other businesses may constitute investment securities
under the 1940 Act. A company may be deemed to be an investment company if it
owns investment securities with a value exceeding 40% of its total assets,
subject to certain exclusions. Investment companies are subject to registration
under, and compliance with, the 1940 Act unless a particular exclusion or
Securities and Exchange Commission safe harbor applies. If we were to be deemed
an investment company, we would become subject to the requirements of the 1940
Act. As a consequence, we would be prohibited from engaging in some businesses
or issuing our securities and might be subject to civil and criminal penalties
for noncompliance. In addition, certain of our contracts might be voidable, and
a court-appointed receiver could take control of us and liquidate our business.

         Although we have yet to make any investments in the investment
securities of an incubation startup or existing company other than Parago and
River Logic, such investments, if and when made, could fluctuate in value, which
may cause the value of such securities to exceed 40 percent of our total assets.
Unless an exclusion or safe harbor were available to us, we would have to
attempt to reduce our investment securities as a percentage of our total assets.
This reduction could be accomplished in a number of ways, including the
disposition of investment securities and the acquisition of non-investment
security assets. If we were required to sell investment securities, we may sell
them sooner than we may otherwise have preferred. These sales may be at
depressed prices and we might never realize anticipated benefits from, and may
incur losses on, these investments. Some investments may not be sold due to
contractual or legal restrictions or the inability to locate a suitable buyer.
Moreover, we may incur tax liabilities when we sell assets. We may also be
unable to purchase additional investment securities that may be important to our
operating strategy. If we decide to acquire non-investment security assets, we
may not be able to identify and acquire suitable assets and businesses.

OUR EARNINGS AND STOCK PRICE ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

         Due to the factors noted below, our earnings and stock price have been
and may continue to be subject to significant volatility, particularly on a
quarterly basis. We have previously experienced shortfalls in revenue and
earnings from levels expected by investors, which have had an immediate and
significant adverse effect on the trading price of our common stock. This may
occur again in the future.

         Additionally, we have received requests from the staff of the
Securities and Exchange Commission for additional information regarding the
accounting for some of our acquisitions, including questions relating to the
write-off of associated in-process research and development costs and other
matters. While we have responded to these requests, we cannot determine at this
time the effect, if any, that the outcome of this matter will have on our
reported financial position or results of operations. However, should the staff
of the Securities and Exchange Commission require us to retroactively record any
adjustments, the effect could have a material adverse impact on the future
trading price of our common stock.

RISKS RELATED TO OUR INTERNET SUBSIDIARY, PARAGO, INC.

         The following are some risks related to the business of Parago, Inc.,
our Internet subsidiary, and should be considered in addition to the risk
factors described in this prospectus. Any of these factors could have a material
adverse effect on us, as we owned 45.2 % of the outstanding shares of common
stock of Parago at February 29, 2000. Parago filed a registration statement with
the Securities and Exchange Commission relating


                                       14
<PAGE>   17


to an initial public offering of shares of its common stock in October 1999, but
applied to withdraw this registration statement in March 2000. Parago plans to
refile a registration statement covering its proposed initial public offering.

THERE CAN BE NO ASSURANCE THAT PARAGO'S CONTEMPLATED INITIAL PUBLIC OFFERING
WILL TIMELY, OR EVER, BE SUCCESSFULLY COMPLETED.

         The delay or complete abandonment of the contemplated Parago initial
public offering could have a material adverse effect on our stock price due to
our substantial equity interest in Parago. You cannot be assured that the
initial public offering will occur in the near future or ever at all. In
addition, we have agreed to convert the shares of Parago common stock issued in
connection with the acquisition of 2-Lane Media by Parago into up to 500,000 of
our shares at the option of the 2-Lane Media shareholders. Pursuant to the terms
of the subscription agreements between Parago and some of its stockholders, we
may be required to issue up to 414,000 shares of our common stock based on a
conversion price of $3.75 per share (above the fair market value on the dates of
issuance) at the option of such stockholders. These provisions could have the
effect of diluting our stockholders if the market price for our stock is above
that price at the time of conversion.

WE MAY NOT BE ABLE TO EFFECT THE DISTRIBUTION OF PARAGO SHARES.

         We previously announced that we intend to distribute shares of Parago
common stock to our shareholders upon compliance with the Securities and
Exchange Commission (SEC) requirements applicable in connection with the
proposed distribution and upon the expiration of a 180 day lockup agreement
between the underwriters of Parago's proposed initial public offering and us. If
there are problems associated with compliance with SEC requirements or state
law, then the distribution of Parago shares may be delayed or may not occur.
There can be no assurance that we will complete the distribution on the proposed
terms or at all.

PARAGO'S BUSINESS AND FUTURE PROSPECTS ARE EXTREMELY DIFFICULT TO EVALUATE
BECAUSE ITS OPERATING HISTORY IS VERY LIMITED AND ITS BUSINESS MODEL IS NEW,
UNPROVEN AND EVOLVING.

         Parago was formed in January 1999. Since its formation, Parago has:

                  o        acquired its rebates operation in May 1999;

                  o        launched its Web site in September 1999; and

                  o        completed the initial development of its online
                           rebate application in December 1999.

         As a result, Parago has only a limited operating history on which one
can base an investment decision. You should consider its prospects in light of
the uncertainties and difficulties frequently encountered by companies in their
early stages of development.

         In addition, its business model is new, unproven and evolving. In
December 1999, Parago focused its business to concentrate on its online customer
care solutions. Parago cannot assure that its new, focused business model will
be commercially successful. Parago cannot assure you that that its online
solutions will be accepted by businesses or consumers. If Parago is unable to
establish pricing and service models acceptable to manufacturers, retailers and
service providers and attractive to their customers, its Internet-based solution
may not be commercially successful.

SOME MAJOR COMPONENTS OF PARAGO'S BUSINESS STRATEGY HAVE NOT YET BEEN
IMPLEMENTED AND THE TECHNOLOGIES AND APPLICATIONS NECESSARY TO IMPLEMENT ITS
ENTIRE BUSINESS STRATEGY HAVE NOT YET BEEN DEVELOPED. IF PARAGO DOES NOT DEVELOP
THESE TECHNOLOGIES AND APPLICATIONS IN A TIMELY MANNER, ITS RESULTS OF
OPERATIONS WILL SUFFER.

         Some of Parago's business strategies related to its Internet-based
solution have not yet been implemented. To implement these strategies Parago
must develop new applications and enhance its existing


                                       15
<PAGE>   18


applications. Its online promotional management and product information
applications are new, unproven and evolving and Parago continues to develop
enhancements to these applications. Its technology that enables its clients'
customers to apply promotional proceeds to additional products and services
immediately following submission has not yet been completed. Further, the more
advanced aspects of its technology that enables clients to access customized,
real time customer data analysis are still in the design phase. These
applications and technologies are critical to the success of its business. The
development and implementation of these technologies and applications is
complicated and time consuming. Parago cannot assure you that Parago will
successfully develop all of its planned technologies and applications. If Parago
does not develop and implement these technologies and applications in a timely
manner, its results of operations will suffer.

PARAGO HAS A HISTORY OF NET LOSSES AND EXPECTS TO CONTINUE TO INCUR SUBSTANTIAL
NET LOSSES IN THE FUTURE.

         Parago had a net loss of approximately $39.4 million and an accumulated
deficit of approximately $39.4 million for the period from its inception,
January 7, 1999, through February 29, 2000. Parago anticipates that its
operating expenses will increase in the foreseeable future as Parago continues
to develop its technology and applications, increase its sales and marketing
activities, expand its outsourced solutions capabilities and improve its
operational and financial systems. In addition, because its increasing expense
levels are based, in part, on expectations of its future revenues, any decline
in its revenues below its expectations would have a disproportionately adverse
impact on its operating results. Accordingly, Parago expects to incur additional
losses for the foreseeable future. If its revenues do not grow as Parago
anticipates, Parago may never be profitable.

PARAGO'S REBATE AND RELATED SERVICES HAVE ACCOUNTED FOR SUBSTANTIALLY ALL OF ITS
REVENUES SINCE INCEPTION, AND PARAGO EXPECTS TO DEPEND ON ITS PROMOTIONAL
MANAGEMENT APPLICATION AND PROCESSING SERVICES FOR A SIGNIFICANT PORTION OF ITS
REVENUES FOR THE FORESEEABLE FUTURE.

         Parago's rebate and related services accounted for approximately 88.4%
of its total revenues from inception through February 29, 2000. Parago
anticipates that revenues from its rebate solution will continue to constitute
the major portion of its revenues for the foreseeable future. A decrease in the
amount of promotional dollars spent on rebate programs by its clients or a
decrease in the rebate service fees Parago receives would negatively impact its
results of operations.

PARAGO IS DEPENDENT ON FOUR CLIENTS FOR A SUBSTANTIAL PORTION OF ITS BUSINESS.

         Parago is dependent upon its relationship with a small number of
clients for a substantial portion of its existing and anticipated revenues. Four
of its rebate clients accounted for approximately 82.0% of its aggregate
invoiced revenue for the year ended February 29, 2000. As a result of this
concentration of sales, Parago's business, operating results or financial
condition would suffer as a result of the termination of or adverse change in
its relationship with any of these clients.

         In addition, Parago cannot assure you that its relationship with these
clients will continue, or if continued, that the revenues from these clients
will remain at current levels or increase in any future period. The initial term
of its agreement with Staples expires in July 2000. The agreement is renewable
annually upon mutual agreement. In addition, Staples' vendors may not use, or
may discontinue their use of, Parago's rebate solution. Parago currently
performs rebate services for eMachines under an oral agreement. Consequently,
its agreement with eMachines could be terminated. Based on the nature of these
agreements, Parago cannot assure you that Parago will generate significant
revenues in future periods from any of its principal rebate clients. The loss of
all or any part of Parago's relationship with any of these clients would
seriously harm its business.

MANY OF PARAGO'S CLIENT AGREEMENTS ARE TERMINABLE BY THE CLIENT AT WILL.

         Parago does not have any long-term agreements with its clients. In
addition, many of its agreements with its clients are terminable by the client
at will. Therefore, Parago cannot assure you that any of its clients


                                       16
<PAGE>   19


will continue to use its online solutions for any period of time. The loss of a
significant number of its clients would seriously harm its business.

PARAGO'S REVENUE IS DEPENDENT UPON ITS CLIENTS' BUSINESS AND PRODUCT SALES.

         Parago's revenue is primarily transaction based and will fluctuate with
the volume of transactions or levels of sales of products by its business
clients for which Parago provides its online customer relationship management
solutions. Its business would suffer if its clients decrease their activity that
relates to its online customer relationship management solutions.

PARAGO'S BUSINESS MODEL IS DEPENDENT ON ITS ABILITY TO SUCCESSFULLY ENTER INTO
RELATIONSHIPS WITH CLIENTS, OF WHICH PARAGO CURRENTLY HAS ONLY A LIMITED NUMBER.
MOST OF THESE RELATIONSHIPS WILL NOT BE EXCLUSIVE AND MAY BE TERMINATED BY ITS
CLIENTS AT ANY TIME.

         Parago's ability to become profitable depends on its ability to
successfully enter into relationships with manufacturers, retailers and service
providers that wish to use its online promotional management and product
information solutions. Parago currently has these business relationships with
only a limited number of clients. Currently, Parago has four principal
promotional management clients that use its promotional management application.
Parago only recently began marketing its online product information solution and
currently does not have any clients using this solution. Parago anticipates that
its arrangements with clients will typically not be exclusive and will be
subject to termination upon short notice. In addition, Parago cannot assure you
that these arrangements will result in revenues or be profitable for it. If
Parago cannot develop relationships with new clients, its results of operations
will be significantly and negatively impacted.

PARAGO'S QUARTERLY OPERATING RESULTS WILL LIKELY VARY SIGNIFICANTLY IN THE
FUTURE.

         Parago expects that its revenues and operating results may vary
significantly from quarter to quarter. As a result, quarter-to-quarter
comparisons of its results of operations may not be meaningful. In some future
quarter or quarters, its operating results are likely to fall below
expectations. Any shortfall will likely adversely affect the price of its common
stock in a manner that may be unrelated to its long-term operating performance.

         Its quarterly operating results, as well as its operating results
generally, may also vary depending on a number of factors, including but not
limited to:

     o   demand for its online promotional management and product information
         solutions;

     o   fluctuations in the average promotion amount and number of the
         transactions processed by it;

     o   seasonality in its clients' rebate promotions;

     o   its ability to develop, introduce and market new applications and
         enhancements to its existing applications on a timely basis;

     o   its ability to attract and retain clients and to generate client
         satisfaction;

     o   changes in its pricing policies or those of its competitors;

     o   changes in accounting standards and revenue recognition policies; and

     o   costs related to the acquisition of technologies and businesses.

         Because of its limited operating history, Parago has limited insight
into trends that may emerge and affect its operating results.

THE AMOUNT OF REVENUES PARAGO RECOGNIZES AS A RESULT OF EXPIRED OR UNCASHED
REBATE CHECKS MAY BE REDUCED BY ABANDONED PROPERTY LAWS OR AN INCREASE IN THE
PERCENTAGE OF REBATE CHECKS CASHED BY CONSUMERS.

         Parago bills its rebate clients for the full amount of the rebate
checks that it issues to its customers, plus a processing fee. Some customers
never cash their rebate checks. In the rebate industry, expired or uncashed


                                       17
<PAGE>   20


checks are referred to as "slippage". Slippage is recorded on its books as an
increase to revenues. The unclaimed property and escheat laws of each state
provide that under circumstances defined in that state's statutes, holders of
unclaimed or abandoned property, possibly including slippage, must surrender
that property to the state. As a result, any state into which Parago sends
rebate checks could assert that it is entitled to unclaimed rebate checks that
Parago has issued to consumers in that state.

         For the period from January 7, 1999 to February 29, 2000, its revenues
included approximately $3.0 million of slippage, representing 36.2% of its
revenues for the period. Its operating results could suffer if any state is
entitled to a significant portion of these slippage amounts as a result of its
unclaimed property or escheat laws.

         Furthermore, Parago expects that more of its clients' customers will
cash their rebate checks as a result of its online rebate solution, which would
reduce slippage. A decline in the amount of slippage that Parago retain could
decrease its revenues and negatively impact its results of operations.

TO CONTINUE ITS OPERATIONS AND BUSINESS, PARAGO MUST COMPLETE ITS INITIAL PUBLIC
OFFERING OR FIND ALTERNATIVE FINANCING.

         Parago's ability to maintain and grow its business is dependent on its
access to sufficient funds to support its working capital and capital
expenditure needs. If Parago does not complete its initial public offering,
Parago must find an alternative method of financing. If Parago does not complete
its initial public offering or find an alternative source of funds, its business
and results of operations will be seriously harmed. Parago believes that the net
proceeds from its initial public offering, if completed, will be sufficient to
fund its working capital and capital expenditure needs for at least the next 12
months.

PARAGO'S BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION AND LOYALTY NECESSARY TO
SUCCEED.

         Parago believes that broad recognition and favorable business
perception of the Parago brand are essential to its future success. Accordingly,
Parago is pursuing an aggressive brand-enhancement strategy, which includes
advertising, trade shows, promotional programs and public relations activities.
Successful positioning of its Parago brand will largely depend upon:

     o   its ability to provide high quality service to its clients and their
         customers, including online and offline responses to customer inquiries
         regarding the status of their promotional proceeds;

     o   the success of its promotional programs and public relations
         activities; and

     o   the technical performance and visual appearance of its applications and
         Web site.

         To increase awareness of the Parago brand Parago spent significant
amounts in a sales and marketing campaign in the last half of 1999 and will
spend significant amounts in the future on marketing and promotions programs
targeted at decision makers within its prospective clients' organizations. These
expenditures may not result in a sufficient increase in net revenues to cover
these marketing and promotion expenses. Even if brand recognition increases, its
number of clients, the number of transactions processed through its online
solutions or number of licenses sold to use its applications may not increase.

         Between September and December 1999, Parago spent approximately $17.0
million on a brand advertising campaign that was partially related to
informational tutorials related to lifestyle topics Parago offered on its Web
site. In December 1999, Parago focused its business model to concentrate on its
online solutions. Therefore, Parago may not be able to realize the full benefit
of the advertising expenses that related to the information tutorials that did
not relate primarily to its online solutions.


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<PAGE>   21


THE DAY-TO-DAY OPERATIONS OF PARAGO'S COMPUTER AND COMMUNICATIONS EQUIPMENT ARE
DEPENDENT ON THIRD PARTIES. THE PERFORMANCE OF EXODUS COMMUNICATIONS, INC. IS
CRITICAL TO ITS OPERATIONS.

         Parago depends upon third parties for several critical elements of its
technology. Parago has entered into material contracts with Exodus
Communications, Inc. for its data center hosting, and plans to continue to enter
into material contracts with other third parties, to manage, maintain and expand
the computer and communications equipment and software needed for the day-to-day
operations of its business.

         To assist Parago with its technical operations, Exodus maintains
Parago's communications lines and manages the network data centers where its
network data is stored. If Exodus does not perform to its requirements, Parago
would have to obtain similar services from another provider or perform these
functions themselves. Parago may not be able to successfully obtain or perform
these services on a timely or cost-effective basis. Due to the third party
installation of the computers, communications equipment and software needed for
the day-to-day operations of its Web site, Parago may be entirely dependent on
that party to manage, maintain and provide security for this technology. Any
termination or breach of these contracts could have a material adverse effect on
its business.

IN ORDER TO MANAGE ITS GROWTH AND EXPANSION, PARAGO WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.

         Since its formation, Parago has experienced significant expansion of
its operations. Since its inception in January 1999, Parago has expanded from
one employee to more than 340 employees. Further, since inception, Parago has
expanded from operating solely from its Dallas headquarters to operating from
three additional facilities located in Coppell, Texas and the metropolitan areas
of Los Angeles and San Jose, California. This expansion has placed a strain upon
its management systems by increasing management responsibilities, consuming more
of management's time and making close coordination among its executive, finance,
accounting, sales, marketing and operations organizations more complex. Other
resources, such as the cash required to meet increased expenses associated with
expansion, have also been strained. Its ability to compete effectively and to
manage future expansion of its operations, if any, will require it to continue
to improve its financial and management controls, reporting systems and
procedures as well as continue to train and manage its employee work force. If
Parago is unable to manage its growth and expansion, its business will be
materially adversely affected.

ADOPTION AND INTEGRATION OF ITS APPLICATIONS BY LARGE CLIENTS IS COMPLEX, TIME
CONSUMING AND EXPENSIVE AND PARAGO MAY EXPEND RESOURCES ON DEVELOPING NEW
RELATIONSHIPS THAT DO NOT MATERIALIZE.

         Parago recruits clients to process their promotions, and their vendors'
promotions in the case of retail clients and includes their product information
as part of its online solutions. Most of the clients Parago recruits are large
companies. The adoption and integration of its solutions by large companies
tends to be complex, time consuming and expensive. In many cases, its clients
must change established business practices and conduct business in new ways in
order to use Parago's online solutions and associated applications. In addition,
they generally consider a wide range of other issues, including the benefits,
ease of use, ability to work with existing systems, functionality and
reliability of Parago's applications, before committing to use its online
solutions. It frequently takes several months to complete the sale of an online
solution to a client and requires approval at a number of management levels
within the client's organization. These long cycles may cause delays in its
sales and Parago may spend a large amount of time and resources on potential
clients who decide not to use any of its online solutions, which could
materially and adversely affect its business.


                                       19
<PAGE>   22


IF PARAGO LOSES ANY OF ITS KEY PERSONNEL, INCLUDING ITS CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, PRESIDENT AND CHIEF OPERATING OFFICER, OR THE KEY EMPLOYEES
OF ITS FINANCE, TECHNOLOGY, LEGAL, SALES AND MARKETING OPERATIONS, ITS BUSINESS
MAY SUFFER.

         Since formation in January 1999, Parago has employed many of its key
personnel, including Steven B. Solomon, its Chairman and Chief Executive
Officer, Kenneth R. Johnsen, its President and Chief Operating Officer, and the
key employees in its finance, technology, legal, sales and marketing operations.
Parago has applied for life insurance policies that would pay proceeds to it
upon the death of Messrs. Solomon and Johnsen. Parago's business could be
negatively impacted if it were to lose the services of one or more of these
persons.

PARAGO HAS LIMITED EXPERIENCE WITH THE HOSTING OF ITS APPLICATIONS ON OTHER WEB
SITES AND PRICING OF THESE TRANSACTIONS.

         Parago's business plan contemplates that it will host its technology,
for a fee, to businesses that want to provide its applications through their own
Web sites. However, Parago has limited experience with negotiating or pricing
these transactions.

         Parago intends to sell hosting services on an annual or fixed-price
basis. To do this, Parago must estimate the amount of work involved in
implementing its application on a client's Web site and the value of the
application. If Parago underestimates the amount of time or resources required
to implement its applications on clients' Web sites or the value of its
application, its revenues and results of operations will suffer.

         Parago also intends to sell hosting services on a varying price basis
where Parago would receive an initial fee and share in revenues generated by the
use of its applications on a client's Web site. To do this, Parago must estimate
the amount of work involved in implementing an application on a client's Web
site, the value of the application and the revenues that will be generated by
the use of its application on a particular client's Web site. If Parago
underestimates these amounts and revenues, its revenues and results of
operations will suffer.

PARAGO'S APPLICATIONS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE OR PRODUCT LIABILITY CLAIMS.

         Parago's applications are complex. Complex applications often contain
errors or defects, particularly when first introduced or when new enhancements
to those applications are introduced. Despite internal testing and testing by
clients as Parago licenses the use of its applications, its applications may
contain serious defects of which Parago is unaware.

         Since Parago plans to license its applications to clients for critical
customer interaction activities, such as promotional processing and hosting
product information, and uses the same applications themselves for clients
outsourcing these activities to it, any errors, defects or other performance
problems in the applications could result in damage to its clients. Injured
clients could seek significant compensation for their losses from it. Even if
not successful, a product liability claim brought against it would likely be
time-consuming and costly. Errors or defects in Parago's applications could also
result in delayed market acceptance of its applications, diversion of its
developmental resources to correcting these errors or defects and lost revenues.

PARAGO WRITES ITS APPLICATIONS IN THE JAVA PROGRAMMING LANGUAGE AND ITS BUSINESS
COULD BE HARMED IF JAVA LOSES MARKET ACCEPTANCE OR IF PARAGO IS NOT ABLE TO
CONTINUE USING JAVA OR JAVA RELATED TECHNOLOGIES.

         Parago writes its applications in the Java computer programming
language which was developed by Sun Microsystems. While many companies have
introduced Internet-based applications based on Java, Java could fall out of
favor and support by Sun Microsystems or other companies could decline. If
Parago could not continue to use Java or related Java technologies or if Java
support decreased, Parago might have to rewrite the source code for its
applications to enable its products to run on other computer platforms. Changes
to Java could


                                       20
<PAGE>   23


also require it to change its products. If Parago failed to implement or develop
appropriate modifications to its applications in a timely manner, Parago could
lose revenue opportunities and its business could be harmed.

PARAGO'S MARKETS ARE HIGHLY COMPETITIVE.

         The promotional management and product information industry is highly
competitive and fragmented. Parago expects competition to persist and to
intensify in the future. Its competitors include small firms offering specific
promotional applications, divisions of larger entities and large independent
firms, such as Young America Corporation and Continental Promotions Group. Some
companies are already engaged in various aspects of the promotional management
business online. A number of competitors have or may develop greater
capabilities and resources than it. Similarly, additional competitors with
greater resources than it may enter the industry. Its performance and growth
could be negatively affected if its existing or potential clients decide to
perform their own promotional management operations that are currently
outsourced or use another provider. In addition, competitive pressures from
current or future competitors could cause its promotional management application
to lose market acceptance or result in significant price erosion. This could
result in a material adverse effect upon its business.

         Many of its current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing, production
and other resources. In addition, some have significantly greater name
recognition and a larger base of clients, and many have well-established
relationships with its current and potential clients and have extensive
knowledge of its industry. Its current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products and services to address
clients' needs. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Competition may also increase as a result of industry consolidations. In the
event a larger company acquires one or more of its competitors, Parago would
face increased competition.

         In order to remain competitive, Parago may need to acquire additional
businesses, applications, technologies, expertise, products or other resources.
Parago may not be able to identify suitable acquisition candidates or negotiate
satisfactory terms for acquisitions successfully, finance the acquisitions or
integrate the acquired operations into its existing business. Further,
completing a potential acquisition and integrating the acquired businesses or
resources will cause significant diversions of management time and resources. If
Parago consummates significant acquisitions in which the consideration consists
of stock or other equity securities, your ownership could be significantly
diluted. If Parago proceeds with significant acquisitions in which the
consideration includes cash, Parago could have to use a substantial portion of
its available cash to consummate these acquisitions. Acquisition financing may
not be available on favorable terms, or at all. In addition, Parago may be
required to amortize significant amounts of goodwill and other intangible assets
in connection with past and future acquisitions, which would adversely affect
its results of operations. Parago has no current plans, commitments or
agreements with respect to any acquisitions, and Parago may not make any
acquisitions.

PARAGO'S BUSINESS IS VERY DEPENDENT ON ITS TECHNICAL SUPPORT AND SALES
PERSONNEL.

         Parago's future success depends on its ability to attract, hire, train
and retain highly skilled personnel. In addition, Parago will need to add a
significant number of new technical support and sales personnel to develop and
market its existing and new applications. Competition for qualified personnel is
intense, and Parago may fail to attract or retain these personnel, in which case
its business would be negatively impacted. Parago expects to hire approximately
66 additional technical support and sales and marketing employees by the end of
2000.

         Because labor costs are a significant portion of its costs, an increase
in wages, costs of employee benefits or employment taxes could seriously harm
its business. In addition, its facilities are located in areas, including
Dallas, Los Angeles and Silicon Valley (Campbell, California), with high demand
for technical and other personnel and relatively low unemployment rates. It is
more difficult and costly to hire qualified personnel in these areas.


                                       21
<PAGE>   24


IF THE PROTECTION OF PARAGO'S INTELLECTUAL PROPERTY IS INADEQUATE, ITS
COMPETITORS MAY GAIN ACCESS TO ITS CONTENT AND TECHNOLOGY.

         Parago depends on its ability to develop and maintain the intellectual
property aspects of its content and technology. To protect its content and
technology, including its promotional management and product information
applications, Parago relies primarily on a combination of contractual
provisions, confidentiality procedures, trade secrets and patent, copyright and
trademark laws. Parago seeks to avoid disclosure of its trade secrets through a
number of means including, but not limited to, requiring those persons with
access to its intellectual property to execute confidentiality agreements and
restricting access to its source codes. Parago seeks to protect its content,
applications, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. Parago has no registered
copyrights, but claim copyright protection on most of the content on its Web
site. Parago cannot assure you that any of its intellectual property with
respect to its solutions will be viable or of value in the future because the
validity, enforceability and type of protection of intellectual property in
Internet-related industries are uncertain and still evolving.

         Despite its efforts to protect its intellectual property, unauthorized
parties may attempt to copy aspects of its content and other intellectual
property or to obtain and use information that Parago regards as proprietary.
Policing unauthorized use of its products is difficult, and while Parago is
unable to determine the extent to which piracy of its content or other
intellectual property exists, piracy can be expected to be a persistent problem.
In addition, the laws of some foreign countries do not protect its intellectual
property as well as the laws of the United States. Its means of protecting its
intellectual property may not be adequate and its competitors may independently
develop similar technology, duplicate its solutions or applications or design
around patents issued to it or its content or other intellectual property.

PARAGO HAS NO REGISTERED TRADEMARKS AND MAY NOT RECEIVE ANY TRADEMARKS.

         Parago has filed 23 trademark applications with respect to trademarks
that Parago has used or is using in connection with its business, Parago has
received no legal opinion and has not conducted full searches regarding


                                       22
<PAGE>   25


the registrability of its marks. The trademarks that are the most significant to
its business model and branding strategy, and for which Parago has filed
applications, are "Parago," "PromoPath," "How2.com," "C.A.R.E. Customer
Acquisition, Retention, and Extension," "ManualsHQ" and "RebatesHQ." Parago has
not conducted extensive searches regarding the availability of any of the
trademarks for which Parago has filed applications. Parago has received no
trademark registrations to date. Any of its trademarks may be successfully
challenged or may not provide it with any competitive advantages. None of its
trademarks may be registrable and other parties may have priority of use of such
trademarks or variants thereof. Parago may not successfully carry out its
business strategy of establishing a strong brand name for Parago if Parago
cannot prevent others from using its trademarks. This could impair its ability
to increase market share and revenues.

PARAGO HAS NO PATENTS, ITS PATENT APPLICATIONS MAY BE UNSUCCESSFUL AND OTHER
PARTIES MAY HAVE PRIOR CLAIMS TO PATENTS ISSUED TO IT.

         Although Parago has filed three patent applications and one provisional
patent application with respect to its online promotional management systems and
processes, Parago has not received any legal opinion or conducted full searches
regarding the patentability of its patent applications. Its three patent
applications specifically relate to its system and method of computer-aided
promotional management processing, its promotional management processing system
and method that offers selectable disbursement options and its promotional
management processing system and method that provides a promotions database and
interface. Its provisional patent application specifically relates to its method
and apparatus for a computer network system designed to facilitate promotional
fulfillment and customer information gathering. Parago has no patents, and may
not receive any patents related to its online promotional management
applications. If Parago receives a patent related to its promotional management
application either resulting from its current patent applications or future
applications, Parago may be unable to claim the filing date of, and priority
from, its existing provisional patent application. Its future patents, if any,
may be successfully challenged, rendering them invalid or unenforceable, or may
not provide it with any competitive advantages.

         Parago may not develop technologies that are patentable and other
parties may have prior claims to those technologies. Additionally, other parties
may claim to have rights to any patents issued to it, and, if proven, these
parties would be able to use the patented technology or license it to others
without its consent. The validity and enforceability of its future patents, if
any, may also be affected by future legislative actions or judicial decisions,
especially to the extent such future patents may be deemed "method of doing
business" patents.

PARAGO MAY BE SUBJECT TO CLAIMS THAT ITS APPLICATIONS, CONTENT, OR SERVICES
INFRINGE ON THE INTELLECTUAL PROPERTY OF OTHERS.

         There has been a substantial amount of litigation regarding
intellectual property rights relating to the Internet. While Parago has not been
the subject of any infringement claims, it is possible that in the future third
parties may claim that Parago or its current or potential future applications,
content or services infringe upon their intellectual property. Parago expects
that developers and providers of Internet-based solutions and applications will
increasingly be subject to infringement claims as the number of products and
competitors in this industry segment grows and products in different industry
segments overlap. Any claims, made against it, with or without merit, could be
time-consuming, result in costly litigation, cause delays in implementation of
its services or require it to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to it, which could seriously harm its business.

PARAGO IS DEPENDENT ON ITS DOMAIN NAMES, AND PARAGO COULD SUFFER LOSSES IF ITS
DOMAIN NAMES ARE NOT PROTECTED.

         Parago currently owns and controls the Internet domain names that
Parago currently uses, "www.parago.com" "www.how2.com" "www.how2hq.com" and
"www.rebateshq.com" as well as approximately 300 various other related names,
and names that Parago acquired in acquisitions of businesses and assets that
Parago does not currently use. Generally, Internet regulatory bodies regulate
domain names. The regulation of domain names in the United States and in foreign
countries is subject to change. Regulatory bodies


                                       23
<PAGE>   26


could establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result,
Parago may not acquire or maintain the domain names "www.parago.com"
"www.how2.com" "www.how2hq.com" and "www.rebateshq.com" in all of the countries
in which Parago conducts business.

         The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore,
Parago may be unable to prevent third parties from acquiring or using domain
names that infringe or otherwise decrease the value of its trademarks and other
intellectual property.

CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM PARAGO'S BUSINESS.

         While Parago has not experienced capacity constraint or system failure
problems in the past, if Parago cannot expand its systems in the future to cope
with any increased demand, or its technology systems fail to perform properly,
Parago could experience:

     o   unanticipated disruptions in service;

     o   slower response times;

     o   decreased client service and satisfaction;

     o   decreased customer service and satisfaction; or

     o   delays in the introduction of new products and services.

         Any of these factors could impair its reputation, damage the Parago
brand and materially and adversely affect its business.

         Parago's ability to provide high quality client and consumer service
depends on the efficient, uninterrupted operation of its computer and
communications hardware systems. While Parago has not had any computer or
communications hardware systems related interruptions in the past, its Web site
may experience periodic system interruptions from time to time. Its systems and
operations are also vulnerable to damage or interruption from human error,
natural disasters, power loss, telecommunication failures, break-ins, sabotage,
computer viruses, acts of vandalism and similar events. While Parago plans to
establish redundant servers and a mirror site to provide limited service during
system disruptions, Parago does not currently have fully redundant systems, a
formal disaster recovery plan, alternative providers of hosting services or a
mirror site.

         Parago's business is highly dependent on its computer and telephone
equipment and software systems. While Parago maintains backup systems, the
temporary or permanent loss of any of this equipment or these systems, through
casualty loss due to events such as fire, flood, earthquake or tornado, or
operating malfunction, could seriously harm its business. While Parago has
property and business interruption insurance, its insurance may not adequately
compensate it for all losses.

PARAGO'S MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND TO COMPETE PARAGO
MUST CONTINUALLY ENHANCE ITS SYSTEM AND APPLICATIONS TO COMPLY WITH EVOLVING
STANDARDS.

         To remain competitive, Parago must continue to enhance and improve the
responsiveness, functionality and features of its applications. If Parago is
unable to adapt to changing market conditions, client requirements or emerging
industry standards, its business could be adversely affected. The Internet is
characterized by rapid technologic change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
technologies and emergence of new industry standards and practices that could
render its technology and applications obsolete. To succeed, Parago must
internally develop and license leading technologies to enhance its existing
solutions and applications and develop new applications. Parago must continue to
address the increasingly sophisticated and varied needs of its clients and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of proprietary technology
involves significant technical and business risks. Parago may fail to develop
new


                                       24
<PAGE>   27


technologies effectively or to adapt its proprietary technology and systems to
client requirements or emerging industry standards.

PARAGO MUST EXPAND EXISTING TECHNOLOGY SYSTEMS AND DEVELOP AND IMPLEMENT NEW
TECHNOLOGY SYSTEMS AS PARAGO INTRODUCES NEW AND ENHANCED SOLUTIONS AND
APPLICATIONS AND AS DEMAND FOR ITS SOLUTIONS AND APPLICATIONS INCREASES.

         As Parago introduces new and enhanced solutions and applications,
Parago will need to develop and implement new technology systems. Parago uses
internally developed and third party systems to operate its Web site, including
transaction processing and order management systems designed to be scalable.
Parago does not know whether Parago will be able to accurately project the rate
or timing of any increases in demand to allow it to upgrade its systems and
infrastructure in a timely manner to accommodate these increases. Significant
outages, delays and other difficulties due to its failure to expand existing
technology systems or develop and implement new technology systems could cause
its clients and their customers that use its online applications to perceive its
applications as not functioning properly and, therefore, cause them to use other
online solutions.

PARAGO DEPENDS ON INCREASING USE OF THE INTERNET. IF THE USE OF THE INTERNET
DOES NOT GROW AS ANTICIPATED, ITS BUSINESS WILL BE MATERIALLY ADVERSELY
AFFECTED.

         Parago's Internet-based solutions depend on the increased acceptance
and use of the Internet as a medium of commerce. Rapid growth in the use of the
Internet is a recent phenomenon. As a result, acceptance and use of the Internet
may not develop at projected rates and a sufficiently broad base of users may
not adopt the Internet as a medium of conducting commerce. If the Internet is
not broadly adopted as quickly as Parago anticipates, potential and existing
clients may not choose to use its solutions.

CONCERNS REGARDING THE SECURITY OF TRANSMISSION OF CONFIDENTIAL INFORMATION OVER
THE INTERNET MAY REDUCE CONSUMER CONFIDENCE IN PARAGO'S ONLINE SOLUTIONS AND
NEGATIVELY IMPACT ITS BUSINESS.

         The secure transmission of confidential information over the Internet
is essential to maintaining consumer and client confidence in Parago's online
solutions. The secure transmission of confidential information over the Internet
is essential in maintaining consumer and supplier confidence in its online
solutions. While Parago has not had security breaches of its system in the past,
substantial or ongoing security breaches of its system or other Internet-based
systems could significantly harm its business. It is possible that advances in
computer capabilities, new discoveries or other developments could result in a
compromise or breach of the technology used by it to protect client and customer
transaction data.


                                       25
<PAGE>   28


         A party that is able to circumvent its security systems could steal
proprietary information or cause interruptions in Parago's operations. Security
breaches also could damage its reputation and expose it to a risk of loss or
litigation and possible liability. Its insurance policies carry low coverage
limits, which may not be adequate to reimburse it for losses caused by security
breaches. While Parago attempt to protect against and remedy security breaches,
Parago cannot guarantee that its security measures will prevent security
breaches.

         Parago also faces risks associated with security breaches affecting
others conducting business over the Internet. Any publicized security problems
relating to third parties could heighten concern regarding security and privacy
on the Internet, inhibit the growth of the Internet and, therefore, its Internet
solutions.

PARAGO IS HEAVILY DEPENDENT ON TELEPHONE, POSTAL AND DELIVERY SERVICES.

         Parago materially relies on services provided by various local and long
distance telephone companies in connection with its promotional management
solution. A significant increase in the cost of telephone services that Parago
cannot recover through an increase in the pricing of its solutions, or any
significant interruption in telephone services, could have a material adverse
effect on its business.

         Its business is also materially dependent on the United States Postal
Service and, to a lesser degree, on private delivery companies. Postal and
delivery service rate increases affect the cost of its mailings and shipments to
consumers. Any increase in postal and other delivery service rates, including
the elimination of existing discounts, could have a material adverse effect on
its business.

PARAGO AND OUR COMPANY, CT HOLDINGS, COULD FACE POTENTIAL CONFLICTS OF INTERESTS
RELATING TO EACH OTHER.

    o    Because of Parago's relationship with us, and because we owned 45.2% of
         its outstanding shares of common stock at February 29, 2000, and
         because of our interlocking directors and officers, who collectively
         owned 20.1% of Parago's common stock as of February 29, 2000, Parago
         and we are likely to face potential conflicts of interest relating to
         each other.

    o    Executives, employees and consultants associated with us assisted in
         the development of Parago's business model. Steven B. Solomon, our CEO
         and President, is the founder, Chairman and CEO of Parago. In addition,
         Lawrence Lacerte, Victor K. Kiam II, and Steven B. Solomon serve as
         directors of both Parago and us.

    o    Some of Parago's executive officers, key employees and directors also
         beneficially own, or hold options or warrants to purchase,
         approximately 26.6% of our outstanding common stock as of February 29,
         2000. Steven B. Solomon owned approximately 10.9% of our common stock
         as of February 29, 2000.

    o    Accordingly, conflicts of interest may arise from time to time between
         Parago and us, particularly with respect to the pursuit of overlapping
         business opportunities. Parago has not adopted any formal plan or
         arrangement to address these potential conflicts of interest and
         intends to review related-party transactions with CT Holdings on a
         case-by-case basis.

    o    Because Parago has interlocking directors and officers with us, there
         may be inherent conflicts of interest for these directors and officers
         related to transactions between Parago and us. Directors may be
         required to abstain from voting with respect to matters involving both
         us and Parago. Parago may lose valuable management input from the
         directors and officers who have conflicts.


                                       26
<PAGE>   29


IN THE EVENT OF THE COMPLETION OF PARAGO'S INITIAL PUBLIC OFFERING, PARAGO'S
STOCK PRICE IS LIKELY TO BE VERY VOLATILE.

    o    Currently, Parago's common stock can not be bought or sold publicly.
         Although it is anticipated that the initial public offering price will
         be determined based on several factors, the market price after the
         offering may vary significantly from the initial offering price. The
         market price of Parago's common stock is likely to be highly volatile
         and could be subject to wide fluctuations in response to factors that
         are beyond its control. A decline in Parago's stock price will
         adversely affect our stock price.

    o    Domestic and international stock markets often experience extreme price
         and volume fluctuations. Market fluctuations, as well as general
         political and economic conditions, such as a recession or interest rate
         or currency rate fluctuations, could adversely affect the market price
         of Parago's common stock.

    o    The market prices for stocks of Internet-related and technology
         companies, particularly following an initial public offering,
         frequently increase to levels that bear no relationship to the
         operating performance of these companies. Those market prices generally
         are not sustainable and are subject to wide variations. If Parago's
         common stock trades at levels significantly above its initial public
         offering price, its common stock likely will experience a material
         decline.

    o    Sales of a substantial number of shares of Parago's common stock in the
         public market after its initial public offering could depress the
         market price of the Parago common stock and could impair Parago's
         ability to raise capital through the sale of additional equity
         securities.

RISKS RELATED TO OUR CITADEL TECHNOLOGY BUSINESS

OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND WE WILL NEED TO
ADAPT OUR DEVELOPMENT TO THESE CHANGES.

         We participate in a highly dynamic industry characterized by rapid
change and uncertainty relating to new and emerging technologies and markets.
The recent trend toward server-based applications in networks and applications
distributed over the Internet could have a material adverse affect on sales of
our products. Future technology or market changes may cause some of our products
to become obsolete more quickly than expected.

THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE AND WE EXPECT THAT
COMPETITION WILL CONTINUE AND MAY INCREASE.

         The market in which we compete is influenced by the strategic direction
of major microcomputer hardware manufacturers and operating system providers.
Our competitiveness depends on our ability to enhance existing products and to
offer successful new products on a timely basis. We have limited resources and
must restrict product development efforts to a relatively small number of
projects.

INTRODUCTION OF NEW OPERATING SYSTEMS MAY CAUSE SIGNIFICANT FLUCTUATIONS IN OUR
FINANCIAL RESULTS AND STOCK PRICE.

         If we are unable to successfully and timely develop products that
operate under existing or new operating systems, or if pending or actual
releases of the new operating systems delay the purchase of our products, our
future net revenues and operating results could be materially adversely
affected. Additionally, as hardware vendors incorporate additional server-based
network management and security tools into network operating systems, the demand
may decrease for some of our products, including those currently under
development.


                                       27
<PAGE>   30


THE TREND TOWARD CONSOLIDATION IN OUR INDUSTRY MAY IMPEDE OUR ABILITY TO COMPETE
EFFECTIVELY.

         As consolidation in the software industry continues, fewer companies
dominate particular markets, changing the nature of the market and potentially
providing consumers with fewer choices. Also, many of these companies offer a
broader range of products than us, ranging from desktop to enterprise solutions.
We may not be able to compete effectively against these competitors.
Furthermore, we may use strategic acquisitions, as necessary, to acquire
technology, people and products for our overall product strategy. We have
completed a number of acquisitions and dispositions of technologies, companies
and products and may acquire and dispose of other technologies, companies and
products in the future. The trend toward consolidation in our industry may
result in increased competition in acquiring these technologies, people or
products, resulting in increased acquisition costs or the inability to acquire
the desired technologies, people or products. Any of these changes may have a
significant adverse effect on our future revenues and operating results.

WE MUST EFFECTIVELY ADAPT TO CHANGES IN THE DYNAMIC TECHNOLOGICAL ENVIRONMENT OF
THE INTERNET IN A TIMELY MANNER.

         Critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease of use, accessibility, quality of
service or potential tax or other government regulation, remain unresolved and
may affect the use of the Internet as a medium to distribute or support our
software products and the functionality of some of our products. If we are
unsuccessful in timely assimilating changes in the Internet environment into our
business operations and product development efforts, our future net revenues and
operating results could be adversely affected.

WE FACE INTENSE PRICE-BASED COMPETITION FOR SALES OF OUR PRODUCTS.

         Price competition is often intense in the software market, especially
for utility and security products. Many of our competitors have significantly
reduced the price of their products. Price competition may continue to increase
and become even more significant in the future, resulting in reduced profit
margins.

THE TRANSITION TO INTEGRATED SUITES OF UTILITIES MAY RESULT IN REDUCED REVENUES.

         We and our competitors now provide integrated suites of utility
products. The price of integrated utility suites is significantly less than the
aggregate price of stand-alone products that are included in these utility
suites when sold separately. As a result of the shift to integrated utility
suites, price competition is intense and we have experienced cannibalization of
our stand-alone products that are included within the suite. As a result, there
may be a negative impact on our revenues and operating income from selling
integrated utility suites rather than individual products, as the lower price of
integrated utility suites may not be offset by increases in the total volume of
utility suites sold. Additionally, our products may not compete effectively with
competitors' products or integrated utility suites introduced in the future.

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

         We have been subject to substantial fluctuations in quarterly net
revenues, and these fluctuations may occur in the future. Fluctuations may be
caused by a number of factors, including:

    o    the timing of announcements and releases of new or enhanced versions of
         our products and product upgrades;

    o    the introduction of competitive products by existing or new
         competitors;

    o    reduced demand for any given product;

    o    seasonality in the end-of-period buying patterns of foreign and
         domestic software markets; and

    o    the market's transition between operating systems.


                                       28
<PAGE>   31


         Due to these factors, forecasts may not be achieved, either because
expected sales do not occur or because they occur at lower prices or on terms
that are less favorable to us. In addition, these factors increase the chances
that our results could diverge from the expectations of investors and analysts.

WE MAY BE UNSUCCESSFUL IN UTILIZING NEW DISTRIBUTION CHANNELS.

         We currently offer products over the Internet. We may not be able to
effectively adapt our existing, or adopt new, methods of distributing our
software products utilizing the rapidly evolving Internet and related
technologies. The adoption of new channels may adversely impact existing
channels and/or product pricing, which may reduce our future revenues and
profitability.

PRODUCT RETURNS MAY AFFECT OUR NET REVENUES.

         Product returns can occur when we introduce upgrades and new versions
of products or when distributors or retailers have excess inventories. Our
return policy allows distributors, subject to various limitations, to return
purchased products in exchange for new products or for credit towards future
purchases. End users may return our products through dealers and distributors
within a reasonable period from the date of purchase for a full refund. In
addition, retailers may return older versions of our products. We estimate and
maintain reserves for product returns. However, future returns could exceed the
reserves we have established, which could have a material adverse affect on our
operating results.

OUR INCREASED SALES OF SITE LICENSES MAY INCREASE FLUCTUATIONS IN OUR FINANCIAL
RESULTS AND COULD AFFECT OUR BUSINESS.

         We sell corporate site licenses through the distribution channel and
through corporate resellers. We are increasingly emphasizing sales to
corporations and small businesses through volume licensing agreements. These
licensing arrangements tend to involve a longer sales cycle than sales through
other distribution channels, require greater investment of resources in
establishing the enterprise relationship and can sometimes result in lower
operating margins. The timing of the execution of volume licenses, or their
non-renewal or renegotiation by large customers, could cause our results of
operations to vary significantly from quarter to quarter and could have a
material adverse impact on our results of operations. In addition, if the
corporate marketplace grows and becomes a larger component of the overall
marketplace, we may not be successful in expanding our corporate segment to take
advantage of this growth.

WE DEPEND ON DISTRIBUTION BY VALUE ADDED RESELLERS AND INDEPENDENT SOFTWARE
VENDORS FOR A SIGNIFICANT PORTION OF OUR REVENUES.

         We distribute some of our products through value added resellers and
independent software vendors under arrangements through which our products are
included with these resellers' and vendors' hardware and software products prior
to sale by them through retail channels. If we are unsuccessful in maintaining
our current relationships and securing license agreements with additional value
added resellers and independent software vendors, or if these resellers and
vendors are unsuccessful in selling their products, our future net revenues and
operating results may be adversely affected.

THE RESULTS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE UNCERTAIN.

         We believe that we will need to make significant research and
development expenditures to remain competitive. While we perform extensive
usability and beta testing of new products, the products we are currently
developing or may develop in the future may not be technologically successful.
If they are not technologically successful, our resulting products may not
achieve market acceptance and our products may not compete effectively with
products of our competitors currently in the market or introduced in the future.


                                       29
<PAGE>   32


THE LENGTH OF THE PRODUCT DEVELOPMENT CYCLE IS DIFFICULT TO PREDICT.

         The length of our product development cycle has generally been greater
than we originally expected. We are likely to experience delays in future
product development. These delays could have a material adverse affect on the
amount and timing of future revenues.

WE MUST MANAGE AND RESTRUCTURE OUR OPERATIONS EFFECTIVELY.

         We continually evaluate our product and corporate strategy. We have in
the past undertaken and will in the future undertake organizational changes
and/or product and marketing strategy modifications. These organizational
changes increase the risk that objectives will not be met due to the allocation
of valuable limited resources to implement changes. Further, due to the
uncertain nature of any of these undertakings, these efforts may not be
successful and we may not realize any benefit from these efforts.

WE MUST ATTRACT AND RETAIN PERSONNEL WHILE COMPETITION FOR PERSONNEL IN OUR
INDUSTRY IS INTENSE.

         We believe that our future success will depend in part on our ability
to recruit and retain highly skilled management, marketing and technical
personnel. Competition in recruiting personnel in the software industry is
intense. To accomplish this, we believe that we must provide personnel with a
competitive compensation package, including stock options, which requires
ongoing stockholder approval.

WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.

         We regard our software as proprietary and underlying technology as
proprietary. We seek to protect our proprietary rights through a combination of
confidentiality agreements and copyright, patent, trademark and trade secret
laws. However, we do not employ technology to prevent copying of our products.
Third parties may copy aspects of our products or otherwise obtain and use our
proprietary information without authorization or develop similar technology
independently. We do not have any patents or statutory copyrights on any of our
proprietary technology which we believe to be material to our future success,
although Parago has filed a provisional patent application with respect to some
of its business applications and intellectual property rights. In selling our
products, we rely primarily on "shrink wrap" licenses that are not signed by
licensees, and, therefore, such licenses may be unenforceable under the laws of
some jurisdictions. In addition, existing copyright laws afford limited
practical protection. Furthermore, the laws of some foreign countries do not
offer the same level of protection of our proprietary rights as the laws of the
United States. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology substantially equivalent or superseding
proprietary technology. Furthermore, there can be no assurance that any
confidentiality agreements between us and our employees will provide meaningful
protection of our proprietary information, in the event of any unauthorized use
or disclosure thereof. Any legal action that we may bring to protect proprietary
information could be expensive and may distract management from day-to-day
operations.

WE ARE INVOLVED IN LITIGATION THAT COULD, AND FUTURE CLAIMS AGAINST US MAY,
AFFECT OUR FINANCIAL RESULTS.

         From time to time, we may be subject to claims that we have infringed
the intellectual property rights of others, that our products are not Year 2000
compliant or other product liability claims, or other claims incidental to our
business. We are involved in a number of judicial and administrative proceedings
incidental to our business. We intend to defend and/or pursue all claims against
us. We may suffer an unfavorable outcome as a result of one or more claims. We
do not expect the final resolution of these claims to have a material adverse
effect on our financial position, individually or in the aggregate. However,
depending on the amount and timing of unfavorable resolutions of claims against
us, or the costs of settlement or litigation, our future results of operations
or cash flows could be materially adversely affected in a particular period.


                                       30
<PAGE>   33


YEAR 2000 - PRODUCT LIABILITY LITIGATION.

         We believe the software products that we currently develop and actively
market are Year 2000 compliant for significantly all functionality. However,
these products could contain errors or defects related to the Year 2000.

         In addition, earlier versions of our products, those that are not the
most currently released or are not currently being developed, may not be Year
2000 compliant. We have sold some of our older products, which are not being
actively developed and updated. These older products are also not necessarily
Year 2000 compliant and are no longer sold by us.

SOFTWARE DEFECTS AND PRODUCT LIABILITY.

         Software products frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. For example,
in the past, our anti-virus software products have incorrectly detected viruses
that do not exist. We have not experienced any material adverse effects
resulting from any of these defects or errors to date and we test our products
prior to release. Nonetheless, defects and errors could be found in current
versions of our products, future upgrades to current products or newly developed
and released products. Software defects could result in delays in market
acceptance or unexpected reprogramming costs, which could materially adversely
affect our operating results. Most of our license agreements with customers
contain provisions designed to limit our exposure to potential product liability
claims. It is possible, however, that these provisions limiting our liability
may not be valid as a result of federal, state, local or foreign laws or
ordinances or unfavorable judicial decisions. A successful product liability
claim could have a material adverse affect on our business, operating results
and financial condition.

OUR SOFTWARE PRODUCTS AND WEB SITE MAY BE SUBJECT TO INTENTIONAL DISRUPTION.

         While we have not been the target of software viruses specifically
designed to impede the performance of our products, such viruses could be
created and deployed against our products in the future. Similarly, experienced
computer programmers, or hackers, may attempt to penetrate our network security
or the security of our Web site from time to time. A hacker who penetrates our
network or Web site could misappropriate proprietary information or cause
interruptions of our services. We might be required to expend significant
capital and resources to protect against, or to alleviate, problems caused by
virus creators and hackers.

WE HAVE EXPERIENCED REDUCED DEMAND FOR OUR PRODUCTS DUE TO CHANGES IN CUSTOMER
BEHAVIOR RESULTING FROM YEAR 2000 PREPARATION.

         As a result of Year 2000 compliance and functionality, many enterprise
customers used their Information Technology budgets in 1999 to focus on Year
2000 issues. In addition, some of our customer's Information Technology
organizations were unwilling to deploy new software until after the Year 2000 in
order to reduce the complexity of any changes in their systems required by any
actual Year 2000 failures. We believe that these factors reduced sales of our
products and had an adverse affect on revenues. In addition, we have experienced
and may continue to experience significantly reduced revenues from our product
sales as demand may significantly decline and could adversely affect our future
operating results.

WE MAY STILL EXPERIENCE DISRUPTION IN OUR BUSINESS AS A RESULT OF THE YEAR 2000.

         Even though the date is now past January 1, 2000, and the Company has
not experienced any immediate adverse impact from the transition to the year
2000, it cannot provide any assurance that its suppliers and customers have not
been affected in a manner that is not yet apparent. In addition, certain
computer programs which were date sensitive to the year 2000 may not have been
programmed to process the year 2000 as a leap year, and any negative
consequential effects remain unknown. As a result, the Company will continue to
monitor its year 2000 compliance and the year 2000 compliance of its suppliers
and customers. In assessing the effect of the year 2000 problem, management
determined that there existed two general areas that needed to be


                                       31
<PAGE>   34


evaluated: - Internal infrastructure and - Supplier/third-party relationships. A
discussion of the various activities related to assessment and actions resulting
from those evaluations is set forth below.

INTERNAL INFRASTRUCTURE. The Company verified that all of its personal computers
and software are Year 2000 compliant. The Company replaced or upgraded all items
that were not to Year 2000 compliant. The costs related to these efforts were
not material.

SUPPLIERS/THIRD-PARTY RELATIONSHIPS. The Company relies on its outside vendors
for water, electrical, and telecommunications services as well as climate
control, building access, and other infrastructure services. Although the
Company has not experienced any delays or interruptions in its service, it has
received any assurance of compliance from the providers of these services. Any
failure of these third-parties to resolve year 2000 problems with their systems
could have a material adverse effect on the Company's operations.

CONTINGENCY PLANS. Based on the above actions, the Company has not developed a
formal contingency plan to be implemented as part of its efforts to identify and
correct year 2000 problems affecting our internal systems. However, if it deems
necessary, the Company may take the following actions: - Accelerated replacement
of affected equipment or software; - Short to medium-term use of backup
equipment and software; - Increased work hours for Company personnel; - Other
similar approaches. If the Company is required to implement any of these
contingency plans, such plans could have a material adverse effect on its
business. Based on the actions taken to date, and the lack of any problems to
date, the Company is reasonably certain that it has identified and resolved all
year 2000 problems that could hurt its business.

WE HAVE A HISTORY OF NET LOSSES AND MAY NEED ADDITIONAL FINANCING.

         Since inception, we have incurred losses, and at February 29, 2000, we
had an accumulated deficit of $44,586,725. Our ultimate success in fully
implementing our new strategy and continuing our existing business line is
dependent on our ability to raise additional capital. While the Company
currently believes that it has the ability to obtain additional equity or debt
financing, we have received a commitment from our President to fund up to
$1,500,000 of our expected operating cash flow needs, if any, through March 1,
2001 in the event the Company's cash flows from operating, investing and
financing activities are insufficient to meet the expected operating obligations
of the Company as they come due. Additionally, we also plan to sell stock in
private equity financings during fiscal year 2001. We expect that our equity
investee, Parago, will incur losses in the foreseeable future as it continues to
develop and upgrade its technology and infrastructure, develop and expand its
product and service offerings, establish and sustain relationships with
manufacturers, retailers and service organizations. Parago believes that the net
proceeds from its private equity financings will be sufficient to fund its
working capital needs for at least the foreseeable future.

         We currently fund our Citadel Technology product development and sales
and marketing activities through existing cash reserves and cash from operations
and issuances of securities. In the event that cash from operations and other
available funds prove to be insufficient to fund our Citadel Technology
anticipated operations, we will be required to seek additional financing. There
can be no assurance that, if additional financing is required, it will be
available on acceptable terms, or at all. Additional financing may involve
substantial dilution to the interests of our then-current shareholders.

WE RELY ON MICROSOFT AND NOVELL TECHNOLOGY.

         Our software products are designed for Microsoft technologies,
including Windows NT and Windows 95/98, and Novell Netware. Although we believe
that Microsoft and Novell technologies are and will be widely utilized by
businesses in the corporate market, no assurances can be given that these
businesses will actually adopt such technologies as anticipated or will not in
the future migrate to other computing technologies that the Company does not
support. Moreover, if our products and technology are not compatible with new
developments in Microsoft and Novell technologies, as to which there can be no
assurances, our business, results of operations and financial condition could be
materially and adversely affected.


                                       32
<PAGE>   35


WE FACE INCREASED RISK AS A RESULT OF OUR INTERNATIONAL OPERATIONS.

         We have entered into affiliations in Japan and Mexico. While we have
taken steps to minimize the financial exposure of such ventures, there can be no
assurances that its products will be successful overseas and that these ventures
will not have an adverse impact on our financial condition. In addition, in
order to successfully expand international sales significant management
attention and financial resources could be required and could have an adverse
effect on our operating margins. In addition, we rely significantly on our
distributors and other resellers in international sales efforts, that are not
our employees and do not offer our products exclusively, and there can be no
assurance that they will continue to market our products. Additional risks
inherent in our international business activities generally include unexpected
changes in regulatory requirements, fluctuations in the values of currencies,
tariffs and other trade barriers, costs to localize products, lack of acceptance
of localized products, if any, in foreign countries, longer accounts receivable
payment cycles, difficulties in managing international operations, potentially
adverse tax consequences including restrictions on the repatriation of earnings,
and the burdens of complying with a wide variety of foreign laws. There can be
no assurance that such factors will not have a material adverse effect on our
future international sales and, consequently, our business, operating results
and financial condition.

LEGAL PROCEEDINGS.

         We are involved in certain legal proceedings as described in "Item 3.
Legal Proceedings" and from time to time, we may be subject to other legal
proceedings, including but not limited to claims that we have infringed the
intellectual property rights of others, that our products are not Year 2000
compliant or other product liability claims, or other claims incidental to our
business. While we intend to defend such lawsuits, adverse decisions or
settlements, and the costs of defending such suits, could have a material
adverse effect on us.

ITEM 2. DESCRIPTION OF PROPERTY

         We lease approximately 7,200 square feet as our principal executive
office premises located at 3811 Turtle Creek Blvd., Suite 770, Dallas, Texas,
pursuant to a lease that expires in 2001 with two five-year renewal options. We
believe that these facilities are adequate for our current needs and that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.

         Our Internet subsidiary, Parago, also leases approximately 14,500
square feet of office space in Dallas, Texas, 99,000 square feet of warehouse
and office space in Coppell, Texas, approximately 4,800 square feet in Campbell,
California and 4,500 square feet in Los Angeles, California.

         The telephone number of our principal office is (214) 520-9292. The
Company maintains a site on the World Wide Web at http://www.ct-holdings.com.

ITEM 3. LEGAL PROCEEDINGS

         Set forth below are certain litigation matters in which we are a party.
We believe that they have meritorious defenses and will vigorously defend
ourself. However, an unfavorable resolution of or settlement or defense costs
related to one or more of these lawsuits could have a material adverse effect on
our business, results of operations or financial condition.

         We and one of our officers were involved in an arbitration proceeding
with Vestcom Ltd., which claimed compensation and a finder's fee for introducing
us to a third party. Vestcom sought damages of the value of 100,000 shares of
our common stock (alleged to be valued at $1,900,000), plus 50% of additional
compensation paid by us to the third party. We filed a declaratory judgment
action against Vestcom to determine that the alleged contract was not valid
based on our defenses. The case was styled Citadel Computer Systems, Inc. and
Steven B. Solomon v. Vestcom, Ltd., in the 193rd Judicial District Court in
Dallas County, Texas. In October 1998, the Texas court entered a judgment and
preliminary injunction in favor of us and our officer that


                                       33
<PAGE>   36


the purported agreement was a forgery. As a result, the arbitration proceeding
was dismissed by the American Arbitration Association. The defendant appealed
the decision of the Texas court. In November 1998, Vestcom filed a lawsuit
against us in Texas state court styled Vestcom v. Citadel in the 68th Judicial
Court, Dallas County, Texas, reasserting the same basic claims as in the
arbitration proceeding. In January 2000 the parties reached an agreement to
settle the suit for the original amount of the warrants claimed (100,000 shares
with an exercise price of $1.375 per share). This action was dismissed for want
of prosecution on the announcement of settlement by the parties. Assuming
Vestcom received actual or constructive notice of that dismissal near the time
of its entry, the Company believes that the time to seek reinstatement of the
case, a new trial, or review before the Court of Appeals has expired. However,
as of June 12, 2000, no binding agreement has been signed by both parties.

         In August 1998, Janssen-Meyers Associates L.P. ("JMA") filed a lawsuit
against us. The suit alleges that we breached a letter of intent dated September
1995 and/or a Placement Agency Agreement dated November 1995 between JMA and
Citadel Computer Systems Incorporated, which merged with a subsidiary of the
Company in February 1996. As its damages, JMA claims that it is entitled to,
among other things, the cash value of 1.8 million $0.89 warrants valued during
May 1996. According to JMA's valuation of those warrants, potential damages are
alleged to exceed $25 million. The Company vigorously disputes that it breached
either the letter of intent or the Placement Agency Agreement or that it is
liable to JMA. The Company has retained a valuation expert to address JMA's
valuation claims. The lawsuit, styled Janssen-Meyers Associates, L.P. v. Citadel
Technology, Inc., was filed in the Supreme Court of the State of New York,
County of New York. We removed the case to federal court in the Southern
District of New York. Subsequent to November 30, 1999, Janssen-Meyers filed a
motion for partial summary judgment and we filed a motion for summary judgment
in the matter. On March 30, 2000, the court heard the motions for summary
judgment and denied the motions filed by the Company and JMA. The case is
scheduled for mediation on June 27, 2000, and is set for trial on August 14,
2000. In addition to vigorously defending the claims asserted by JMA, the
Company will be filing a separate lawsuit to recover some potential overpayments
to JMA.

         In February 2000, we settled a lawsuit filed by Argos Capital I, LP, by
the issuance of 400,000 shares of common stock in exchange for the plaintiffs'
relinquishment of rights under (i) a $140,000 promissory note (exclusive of
interest and attorneys' fees) and (ii) 438,750 stock purchase warrants at $.59
per share.

         We are a party to some other legal proceedings. At this time, we are
unable to predict the ultimate outcome of these proceedings, the costs
associated with defending the claims and pursuing counterclaims, and monetary
compensation awarded, if any. Unfavorable resolutions of these proceedings or
the costs of litigation and settlement could have a material adverse effect on
our results of operations or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         On February 25, 2000, we held our Annual Stockholders Meeting, at which
time our stockholders approved the election of the following individuals as
directors of the Company:

<TABLE>
<CAPTION>
NAME                       FOR              WITHHELD
<S>                        <C>              <C>
Steven B. Solomon          31,087,420       21,767
Victor Kiam II             31,087,420       21,767
Lawrence Lacerte           31,087,420       21,767
Chris A. Economou          31,087,420       21,767
Mark Rogers                31,087,420       21,767
Michael Ruff               31,087,420       21,767
Dr. Axel Sawallich         31,087,420       21,767
</TABLE>


                                       34
<PAGE>   37


PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

         Our common stock began trading on the Nasdaq SmallCap Market under the
symbol CITN on February 29, 2000. The Common Stock was traded on the OTC
Bulletin Board prior to its listing on the Nasdaq SmallCap Market. The following
table sets forth, for the periods indicated, the high and low bid and ask prices
for the Common Stock as reported on the OTC Bulletin Board for all periods
through the fourth quarter of the 2000 fiscal year. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. For periods beginning after the fourth quarter of
the 2000 fiscal year the table sets forth the high and low sale prices.

<TABLE>
<CAPTION>
                                                    Bid                                 Ask

                                           High              Low               High               Low
       <S>                                 <C>              <C>               <C>               <C>
       Fiscal 1999
            1st Quarter.............       1.94              .35               1.97               .35
            2nd Quarter.............       2.20              .80               2.25               .85
            3rd Quarter.............       1.05              .40               1.09               .47
            4th Quarter.............       4.09              .65               4.12               .68

       Fiscal 2000
            1st Quarter.............       3.62             1.94               3.65              2.00
            2nd Quarter.............       2.97             1.34               2.75              1.38
            3rd Quarter.............       3.13             1.81               3.19              1.25
            4th Quarter.............       7.84             2.13               7.81              2.22
</TABLE>

<TABLE>
<CAPTION>
       ====================================================================
                                                           High      Low
       --------------------------------------------------------------------
       <S>                                                 <C>       <C>
       Fiscal 2001
            1st Quarter                                    7.13      1.47
            2nd Quarter (through June 12, 2000)            2.00      1.55
       ====================================================================
</TABLE>

         Holders of common stock are entitled to dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. The
Company has never paid cash dividends on its Common Stock, and management
intends, for the immediate future, to retain any earnings for the operation and
expansion of the Company's business. Any future determination regarding the
payment of dividends will depend upon results of operations, capital
requirements, the financial condition of the Company and such other factors that
the Board of Directors of the Company may consider. The Company has issued
preferred stock, which entitles the holders thereof to preferences as to payment
of dividends and liquidation proceeds.

Recent Sales of Unregistered Securities

         The Company issued 200,000 shares of its common stock in December 1999
to Tom Oxley in a private placement under Section 4(2) under the Securities Act
for proceeds of $500,000. As of February 29, 2000, the Company's subsidiary,
Parago, had issued 12,854,593 shares of its common stock pursuant to private
placements to accredited investors under Section 4(2) under the Securities Act
for proceeds of $29.8 million. Certain of the securities are convertible into up
to 414,000 shares of shares of Citadel


                                       35
<PAGE>   38


common stock at a conversion price of $3.75 per share. In January 2000, Parago
raised $15,000,000 through the issuance of 200,000 shares of Series A
Convertible Preferred Stock to Seaboard Ventures, LLC and 100,000 shares of
Series B Convertible Preferred Stock to Watershed Capital I, L.P. Subsequent to
February 29, 2000, Parago raised $21,500,000 through the issuance of 430,000
shares of Series C Convertible Preferred Stock to THLee.Putnam Internet Partners
LP, Dain Rauscher Wessels Investors LLC and Watershed Capital I, L.P.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

         The following discussion should be read in conjunction with the
financial statements and notes thereto found elsewhere herein, as well as the
disclosure relating to forward-looking statements set forth below under the
caption "Factors That May Affect Future Operating Results."

OVERVIEW

         CT Holdings, Inc. is an incubator of business-to-business (B2B)
Internet companies that provides early stage business-to-business ventures with
a single source of management capital, as well as consulting on operations,
marketing and strategic planning. Our B2B incubator model is designed to enable
the start up companies with whom we partner to become online market leaders in
their industries. We began our Internet activities in 1999 with the formation of
Parago, an application service provider (ASP) and Internet based business
process outsourcer (BPO) that provides an online suite of offerings designed to
increase sales, reduce costs, retain customers and increase client
profitability. These services include online promotional management, online
rebate processing, proactive email, online surveys, online multimedia product
demonstrations and manuals, and online customer data warehousing, analysis and
reporting. Parago's comprehensive integrated suite of outsourced customer care
solutions are marketed across multiple industry lines.

         In addition to our B2B incubation business, we continue to operate our
"Citadel Technology" security software line, which is focused on developing and
marketing security and administration software products for both computer
networks and desktop personal computers. Our integrated, easy-to-use software
products enable network administrators to control access to network resources,
automate routine network maintenance tasks, and automatically shutdown and
restart servers and desktop PCs in the event of a network crash. These software
products also enable individual PC users to control access to their desktops,
secure files, and index and retrieve files stored in a variety of storage media.
Our Citadel Technology software products are designed to reduce the direct and
indirect costs of computer network operations, protect proprietary networks and
information, and otherwise improve overall office productivity. Our core focus
will be on our B2B incubation services, and we are currently analyzing various
strategic alternatives for our Citadel Technology security software business,
including new strategic alliances with third parties, new applications of the
technology, new third party licensing or joint venture arrangements or the sale
of the business line. As a result, management believes that the results of
operations for our Citadel Technology security software business will continue
to be adversely affected in the future.

         In December 1999, we changed our corporate name to CT Holdings, Inc. We
believe that our new name is more descriptive of our focus on incubation of
emerging B2B ventures and our current substantial investment in Parago. We
believe that any goodwill associated with our former legal name will be
preserved due to the continued use of the name "Citadel Technology" to identify
our software business. Following the inadvertent failure of our outside
consultants to file a return with the Delaware franchise tax authority in
November 1999 another entity obtained the name Citadel Technology, Inc. in
Delaware. When we filed reinstatement materials in Delaware, we adopted our new
name CT Holdings, Inc. pursuant to statutory procedures.

OVERVIEW OF PARAGO SUBSIDIARY

         In January 1999, we announced that we had formed a subsidiary, Parago
(formerly How2.com), to implement our Internet and e-commerce strategies. Parago
is an application service provider (ASP) and Internet based business process
outsourcer (BPO) that provides an online suite of offerings designed to increase
sales, reduce costs, retain customers and increase client profitability. These
services include online promotional


                                       36
<PAGE>   39


management (including online rebate processing), proactive email, online
surveys, online multimedia product demonstrations and manuals, and online
customer data warehousing, analysis and reporting. Parago's comprehensive
integrated suite of outsourced continuous customer interaction solutions are
marketed across multiple industry lines. Parago's approximately 130 clients
include retailers, manufacturers and service providers.

         Parago has completed several acquisitions since its inception. In March
1999, Parago acquired 2-Lane Media, Inc., an award-winning
interactive/multimedia communications firm. The principal asset acquired in this
transaction was the technical expertise of the 2-Lane personnel, who, prior to
the acquisition, offered Web site and e-commerce design services for a diverse
client roster. In May 1999, Parago completed its acquisition of FCI Services,
Inc., Forward Communications, Inc. and Forward Freight, Inc. (collectively,
"Forward"), a product rebate and promotional fulfillment operation that offered
its clients solutions for designing, implementing and fulfilling merchandise and
consumer rebate programs. In addition to processing rebates, Forward handled
fulfillment assignments for e-commerce, high technology and other companies. In
August 1999, Parago completed its acquisition of some of the assets of Broadcast
Production Group, Inc. used in multimedia production and content conversion (to
convert traditional media formats into web-enabled content). In addition, in
connection with the acquisition, Parago retained certain members of Broadcast
Production Group's management team as employees of Parago. In connection with
Parago's acquisition of 2-Lane, we agreed to convert the Parago shares of common
stock issued in connection with the merger into up to 500,000 of our shares at
the option of the 2-Lane shareholders. In addition, pursuant to the terms of the
subscription agreements between Parago and some of its stockholders, we may be
required to issue up to 414,000 shares of our common stock to such stockholders
based upon a conversion price of $3.75 per share. These provisions could have
the effect of diluting our stockholders if the market price of our common stock
is above the effective conversion prices at the time of conversion.

         At February 29, 2000, we owned 20,000,000 shares of the common stock of
Parago, representing 45.2% of the outstanding common stock of Parago. As a
result, we account for our ownership interest in Parago using the equity method
of accounting. Since its inception, Parago has incurred net losses and now has a
substantial accumulated deficit, which have had an impact upon and are reflected
in our financial statements. For example, for the fiscal year ended February 29,
2000, we recorded an "equity in loss of unconsolidated affiliate" of $18.1
million. We understand that Parago expects to incur net losses for the
foreseeable future, so we expect that we will continue to record significant
losses relating to our Parago subsidiary as it continues to develop its business
services.

         Parago filed a registration statement with the Securities and Exchange
Commission relating to an initial public offering of shares of its common stock
in October 1999, but applied to withdraw this registration statement in March
2000. Parago plans to refile a registration statement covering its proposed
initial public offering. We previously announced that we intend to distribute
15% of the shares of Parago common stock that we hold to our stockholders,
subject to compliance with the SEC requirements applicable to the proposed
distribution and upon the expiration of a 180-day lock-up agreement between the
underwriters of the Parago proposed initial public offering and us. If there are
some problems associated with compliance with SEC requirements or state law,
then the distribution of Parago shares may be delayed or may not occur. There
can be no assurance that Parago's initial public offering will be completed, or
that we will otherwise complete the distribution of a portion of our shares to
our stockholders on the proposed terms or at all.

RESULTS OF OPERATIONS

YEAR ENDED FEBRUARY 29, 2000 AS COMPARED WITH YEAR ENDED FEBRUARY 28, 1999

NET REVENUE

During the year ended February 29, 2000, we had net sales of $1,292,250, a
decrease of $3,147,358, or 70.9%, compared to net sales of $4,439,608 for the
year ended February 28, 1999. We attribute the decrease in our software product
revenues for fiscal 2000 to our focus on our activities as an Internet business
incubator, as well as the deferral


                                       37
<PAGE>   40


of OEM/system integrator purchases as a result of year 2000 issues, and the late
introduction of our WinShield Secure PC products (desktop and network versions).
In addition, during fiscal 1999, we had one large system integrator sale that
accounted for approximately $1,200,000, or 27% of our revenues.

COST OF SALES

The costs and expenses incurred in connection with producing our products for
the year ended February 29, 2000 were $61,564 compared to $190,461 for the year
ended February 28, 1999, or a decrease of $128,897, or 67.7%. As a percentage of
sales, cost of sales for the years ended February 29, 2000 and February 28, 1999
were 4.8% and 4.3%, respectively. The increase in our cost of sales on a
percentage basis for the year ended February 29, 2000 over last year can be
attributed to the large sale in fiscal 1999 to a system integrator, which had a
higher margin.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended February 29,
2000 were $4,334,755 as compared to $5,817,188 for the year ended February 29,
1999, or a decrease of $1,482,433, or 25.5%. The decrease in our selling,
general and administrative expenses for fiscal year 2000 resulted primarily from
the shift in our business to an Internet business incubator model and our
decreased emphasis on selling and marketing activities related to our software
business. Accordingly, we have incurred significantly lower costs in
advertising, marketing and other general and administrative activities, as well
as reduced employee and recruiting expenses which resulted from our reduced
headcount, and we expect to continue to decrease these costs over the first two
quarters of fiscal year 2001.

PROVISION FOR UNCOLLECTIBLE RECEIVABLES

For the year ended February 28, 1999, the provision for uncollectible
receivables totaled $1,231,092. In fiscal 1999, the provision was primarily
established to reserve part of the international sales made, given the
international economic difficulties that were being experienced in fiscal 1999.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization expense for the year ended February 29, 2000 was
$1,361,556, compared to $1,569,519 for the year ended February 29, 1999, or a
decrease of $207,963, or 13.3%. This decrease resulted from the write-off of
approximately $1,400,000 of software costs in the fourth quarter of fiscal year
1999. This reduction in depreciation and amortization expense was offset by the
commencement of amortization on certain capitalized product development costs
relating to products that became available for sale during the current fiscal
year.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development costs charged to expense for the year ended February
29, 2000, were $392,315 as compared to $485,275 for the year ended February 29,
1999, or a decrease of $92,960, or 19.2%. For the years ended February 29, 2000
and February 28, 1999, we capitalized approximately $649,000 and $882,000,
respectively. The decrease in costs capitalized for the year ended February 29,
2000 related primarily to a decrease in the level of development work being
performed by outside contract consultants during this fiscal year when compared
to last year. In fiscal 1999, we spent considerable resources in upgrading our
products to be


                                       38
<PAGE>   41


both Windows 98 and NT compliant. In fiscal 2000, we internally developed our
WinShield Secure PC product ("Secure PC"), the total security solution for
desktops. We launched the desktop version of Secure PC in August 1999,
originally scheduled to be launched in May 1999. The delay was caused by product
enhancements determined to be beneficial to the product after the product's
initial alpha and beta testing. The network version of this product was launched
in December 1999 (originally scheduled for release in October 1999).

WRITE-OFF OF PURCHASED AND CAPITALIZED SOFTWARE COSTS

In fiscal year 2000, purchased and capitalized software costs were written down
by $625,336 as compared to $1,422,697 for fiscal 1999, resulting in a decrease
of $797,361 or 56.0%. These write-offs were recognized as a result of the net
book value of some of our products exceeding the net realizable value associated
with those same products.

OTHER INCOME (EXPENSE)

Interest expense for the years ended February 29, 2000 and February 28, 1999 was
$53,340 and $141,806, respectively. This decrease in expense resulted primarily
from the fact that we had less interest bearing debt during this fiscal year
than we did last year. Equity in loss of unconsolidated affiliate was
$18,122,874 for the year ended February 29, 2000, resulting primarily from
Parago allocating a considerable amount of resources to its marketing and
advertising programs aimed at building name/brand awareness for its web site and
business-to-business services. We expect that these losses would continue to be
significant for at least the foreseeable future as our Internet subsidiary
continues to develop its business services.

Included in other income (expense) for fiscal year 1999 is a charge to earnings
of $822,000 incurred in connection with the settlement of a number of lawsuits.
The major portion of this expense related to the settlement of three lawsuits.

OPERATING LOSS BEFORE EXTRAORDINARY ITEM

As a result of the foregoing, for the year ended February 29, 2000, we reported
a net loss before extraordinary items of $23,656,939 (which included the
$18,122,874 related to Parago as referred to above), compared to a net loss of
$7,209,498 for last year.

EXTRAORDINARY ITEM - FORGIVENESS OF DEBT

During fiscal year 1999, the Company recognized gains on the settlement of debts
of $459,592. The gains resulted primarily from the restructuring of a note
payable and the settlement of accrued obligations. In connection with the
settlement of the note payable, the holder agreed to reduce the amount of the
note and accrued interest payable thereon by $520,816. In exchange, the Company
agreed to a shorter maturity and the issuance of 250,000 shares of restricted
stock to the holder (valued at $92,500 as of the date of the transaction). The
value of the stock was treated as a reduction in the gain and the transaction
resulted in a net gain of approximately $428,000. In connection with the
settlement of accrued obligations, the Company settled approximately $96,000 in
obligations for approximately $65,000.

NET LOSS

As a result of these factors, for the year ended February 29, 2000, we reported
a net loss of $23,656,939 and $6,749,906 for the year ended February 29, 1999.


                                       39
<PAGE>   42


DIVIDENDS ON PREFERRED STOCK

Preferred stock dividends consisted primarily of dividends accrued on Series D
preferred stock. In June 1999, we converted $2,000,000 of Series D preferred
stock, plus dividends in arrears of approximately $238,000, into 2,081,937
shares of our common stock.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents at February 29, 2000 were $707,412.

Cash flows used in operations were $3,365,629 for the year ended February 29,
2000, as compared to $5,209,211 for the year ended February 29, 1999. This
decrease results primarily from a decrease in the net loss funded during fiscal
year 2000, as compared to fiscal year 1999, in addition to an increase in our
accounts receivable turnover. The decrease in cash flows for operating
activities was also offset by an increase in our accounts payable turnover.

Cash used in investing activities was $1,387,466 for the year ended February 29,
2000, as compared to $197,095 for last fiscal year. Of the $1,190,371 difference
in cash flows from the prior fiscal year, $1,176,292 represents the effect of
the deconsolidation of Parago. In fiscal 1999, the Company owned approximately
63% of the outstanding shares of Parago and, as a result, reported consolidated
results of operations. However, as of February 29, 2000, the Company's ownership
interest has decreased to approximately 45% and the Company is accounting for
its subsidiary's results of operations using the equity method of accounting. In
addition, during fiscal year 2000 the Company made a capital contribution of
approximately $140,000 to Parago.

Cash flows provided by financing activities were $2,074,138 for the year ended
February 29, 2000, as compared to $8,784,120 for the year ended February 29,
1999. This decrease was due to the fact that in fiscal year 1999 we received
$1,936,904 from the exercise of stock options and warrants, $2,253,642 from the
sale of preferred stock and $3,735,000 from the sale of common stock. In fiscal
year 2000, our primary source of cash provided by financing activities resulted
from $1,872,808 received from the exercise of stock options and warrants and
$500,000 from the sale of common stock.

As a result of the aforementioned factors, cash and cash equivalents decreased
by $2,678,957 for the year ended February 29, 2000, versus an increase of
approximately $3,377,814 for last fiscal year.

Unless software sales increase, we may need to seek additional capital to fund
our Citadel Technology operations for at least the next 12 months. Moreover, we
will need additional capital resources to implement our new B2B incubation
business model. While we have been successful in the past in raising additional
capital when needed, there can be no assurances that we will be successful in
the future, or if successful, that capital will be available on acceptable terms
or will not have a dilutive effect on existing shareholders. While the Company
currently believes that it has the ability to obtain additional equity or debt
financing, we have received a commitment from our President to fund up to
$1,500,000 of our expected operating cash flow needs, if any, through March 1,
2001 in the event the Company's cash flows from operating, investing and
financing activities are insufficient to meet the expected operating obligations
of the Company as they come due.

INFLATION

Inflation did not have a material effect on the Company's results during the
periods discussed.

YEAR 2000 COMPLIANCE

Even though the date is now past January 1, 2000, and we experienced no
immediate adverse impact from the transition to the year 2000, we cannot provide
any assurance that our key partners, suppliers or customers have not been
affected in a manner that is not yet apparent. In addition, certain computer
programs which were date sensitive to the year 2000 may not have been programmed
to process the year 2000 as a leap year, and any negative consequential effects
remain unknown. As a result, we will continue to monitor our year 2000
compliance and the year 2000 compliance of our key partners, suppliers and
customers. The financial impact of Year 2000 compliance has not been, and is not
expected to be, material to our financial position or results of operations in
any given year.


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<PAGE>   43


ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

The Financial Statements for the fiscal years ended February 29, 2000 and
February 28, 1999 are found following the signature page of this report.

ITEM 8. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS

         In April  2000, we filed current reports on Form 8-K related to our
determination to dismiss our former independent public accountants, Grant
Thornton LLP ("Grant Thornton"), and engage Ernst & Young LLP as our independent
public accountants for fiscal year 2000 and (a) disagreement with Grant
Thornton. Ernst & Young serves as the independent public accountants for our
subsidiary, Parago and we believe that using that firm to provide audit services
is in our best interests.

         Grant Thornton's reports on the financial statements for the past two
years contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
Except as set forth below, during the past two years there were no disagreements
with Grant Thornton on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of Grant Thornton, would have caused it to make a
reference to the disagreement in connection with its reports. We have been
advised by Grant Thornton that Grant Thornton believes that the following matter
meets the criteria of the Securities and Exchange Commission for a reportable
disagreement, even though the matter was resolved to the satisfaction of Grant
Thornton: We recorded in our preliminary year-end financial statements for the
fiscal year ended February 28, 1999 a $500,000 sale in the fourth quarter of
fiscal 1999 to our distributor in Mexico under an international distribution
agreement dated November 24, 1998. While management initially believed that the
sales commitment schedule included in the distribution agreement, combined with
receipt of the master licenses by the distributor, warranted the recognition of
revenues, in accordance with the advice of Grant Thornton, we did not include
the sale in our financial statements.

         During our two most recent fiscal years and the subsequent interim
periods preceding Grant Thornton's dismissal:

         (i) Grant Thornton has not advised us that the internal controls
necessary for us to develop reliable financial statements do not exist;

         (ii) Grant Thornton has not advised us that information has come to its
attention that has led it to no longer be able to rely on management's
representations or that has made it unwilling to be associated with the
financial statements prepared by management;

         (iii) Grant Thornton has not advised us (a) of the need to expand
significantly the scope of our audit, or that information has come to its
attention, during the two most recent fiscal years and the subsequent interim
periods preceding the dismissal, that if further investigated may (i) materially
impact the fairness or reliability of either a previously issued audit report or
the underlying financial statements, or the financial statements issued or to be
issued covering the fiscal periods subsequent to the date of the most recent
financial statements covered by an audit report (including information that may
prevent it from rendering an unqualified audit report on those financial
statements), or (ii) cause it to be unwilling to rely on management's
representations or be associated with the Registrant's financial statements or,
(b) that due to its dismissal, or for any other reason, it did not so expand the
scope of its audit or conduct such further investigation;

         We have been advised by Ernst & Young that neither the firm nor any of
its associates has any material relationship with us or any affiliate of ours.
During our two most recent fiscal years and the subsequent interim periods prior
to engaging Ernst & Young, we have not consulted Ernst & Young regarding either:
(i) the application of accounting principles to a specific transaction, either
completed or proposed, or the type of audit


                                       41
<PAGE>   44


opinion that might be rendered on our financial statements, for which advice was
provided that Ernst & Young concluded was an important factor considered by us
in reaching a decision as to an accounting, auditing or financial reporting
issue; or (ii) any matter that was either the subject of a disagreement (as
defined in paragraph (a)(1)(iv) of Regulation S-K Item 304) or a reportable
event (as described in paragraph (a)(1)(v) of Regulation S-K, Item 304).


                                       42
<PAGE>   45


                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

         The information set forth under the captions "Election of Directors"
and "Executive Officers" of the Proxy Statement for our 2000 Annual Meeting of
Stockholders is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

         The information set forth under the caption "Director and Executive
Compensation" of the Proxy Statement for our 2000 Annual Meeting of Stockholders
is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information set forth under the caption "Outstanding Capital Stock
and Stock Ownership of Directors, Certain Executive Officers and Principal
Stockholders" of the Proxy Statement for our 2000 Annual Meeting of Stockholders
is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information set forth under the caption "Certain Transactions" of
the Proxy Statement for our 2000 Annual Meeting of Stockholders is incorporated
herein by reference.


                                       43
<PAGE>   46


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

2.1      Second Amended and Restated Plan of Merger, dated February 29, 1996, by
         and between LoneStar Hospitality Corporation, LSHC Acquisition, Inc.
         and Citadel Computer Systems Incorporated (without exhibits)
         (incorporated by reference to Exhibit 2.1 of the Company's Current
         Report on Form 8-K dated February 29, 1996).

2.2      Purchase and Sale Agreement, dated March 1, 1996, by and between the
         LoneStar Hospitality Corporation, LS Holding Corp. and Miami Subs USA,
         Inc. (without exhibits) (incorporated by reference to Exhibit 2.2 of
         the Company's Current Report on Form 8-K dated February 29, 1996).

2.3      Technology Transfer Agreement, by and between LoneStar Hospitality
         Corporation and Circuit Masters Software, Inc., dated February 29, 1996
         (without exhibits) (incorporated by reference to Exhibit 2.3 of the
         Company's Current Report on Form 8-K dated February 29, 1996).

2.4      Technology Transfer Agreement, by and between the Company and Bill
         Mulvany, dated February 29, 1996 (without exhibits) (incorporated by
         reference to Exhibit 2.4 of the Company's Current Report on Form 8-K
         dated February 29, 1996).

2.5      Technology Transfer Agreement, by and between the Company and Kim Marie
         Newman, dated February 29, 1996 (without exhibits) (incorporated by
         reference to Exhibit 2.5 of the Company's Current Report on Form 8-K
         dated February 29, 1996).

2.6      Agreement, by and between the Company, Circuit Masters Software, Inc.,
         Patrick William Mulvany and Kim Marie Newman, dated May 16, 1996,
         effective as of February 29, 1996 (incorporated by reference to Exhibit
         2.6 of the Current Report on Form 8-K/A filed with the Securities and
         Exchange Commission on June 10, 1996).

3.1      Certificate of Incorporation (incorporated by reference to the
         registration statement on Form S-1, File No. 33-25462, for Apollo
         Resources, Inc., on November 10, 1988, and declared effective January
         4, 1989).

3.2      Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on June 4, 1990 (incorporated by reference
         to Exhibit 3.2 of the Company's Annual Report on Form 10-KSB for the
         fiscal year ended February 29, 1996).

3.3      Bylaws (incorporated by reference to the registration statement on Form
         S-1, File No. 33-25462, filed with the Securities and Exchange
         Commission on November 10, 1988).

3.4      Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on October 15, 1991 (incorporated by
         reference to the Company's Annual Report on Form 10-KSB for the year
         ended December 31, 1991).

3.5      Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on July 20, 1994 (incorporated by reference
         to the Company's Quarterly Report on Form 10-QSB for the quarter ended
         June 30, 1994).

3.6      Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on December 11, 1995 (incorporated by
         reference to the Company's Quarterly Report on Form 10-QSB for the
         quarter ended December 31, 1995).


                                       44
<PAGE>   47


3.7      Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on May 1, 1996 (incorporated by reference
         to Exhibit 3.7 of the Company's Annual Report on Form 10-KSB for the
         fiscal year ended February 29, 1996).

3.8      Certificate of Designations of Series A Preferred Stock. (incorporated
         by reference to Exhibit 4 of the Company's Quarterly Report on Form
         10-QSB for the fiscal quarter ended May 31, 1996).

3.9      Certificate of Designations of Series B Preferred Stock (incorporated
         by reference to Exhibit 4.2 of the Company's Quarterly Report on Form
         10-QSB for the fiscal quarter ended August 31, 1996).

3.10     Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on February 27, 1998 (incorporated by
         reference to Exhibit 4.2 of the Company's registration statement on
         Form S-8 filed May 20, 1998, File No. 333-53131).

3.11     Certificate of Designations of Series C Preferred Stock (incorporated
         by reference to Exhibit 4.6 of the Company's registration statement on
         Form S-8 filed May 20, 1998, File No. 333-53131).

3.12     Certificate of Designations of Series D Preferred Stock (incorporated
         by reference to Exhibit 4.8 of the Company's registration statement on
         Form S-8 filed May 20, 1998, File No. 333-53131).

3.13     Certificate of Designations of Series E Preferred Stock (incorporated
         by reference to Exhibit 4.7 of the Company's registration statement on
         Form S-8 filed May 20, 1998, File No. 333-53131).

*3.14    Certificate for Renewal and Revival of Charter filed with the Delaware
         Secretary of State on October 29, 1999.

10.1     Employment Agreement dated July 15, 1997, by and between the Company
         and Steven Solomon (incorporated by reference to Exhibit 10.1 to the
         Company's Annual Report on Form 10-KSB for the fiscal year ended
         February 28, 1998).

10.2     Stock Purchase Agreement, dated August 16, 1996, among the Company,
         Kent-Marsh Ltd., Inc., Bob Wesolek and Vance Nesbitt. (incorporated by
         reference to Exhibit 2.1 of the Company's Current Report on Form 8-K
         filed September 3, 1996).

10.3     Stock Purchase Agreement, dated August 16, 1996, among the Company,
         Astonishing Developments, Inc., Bob Wesolek and Vance Nesbitt
         (incorporated by reference to Exhibit 2.2 of the Company's Current
         Report on Form 8-K filed September 3, 1996).

10.4     Agreement dated April 11, 1997, among the Company, George Sharp and Gil
         Gertner (incorporated by reference to Exhibit 99.1 of the Company's
         Current Report on Form 8-K filed April 11, 1997).

10.5     Form of Offshore Securities Subscription Agreement, Convertible Notes,
         Warrants and Registration Rights Agreement between the Company and
         First Bermuda Securities Limited (incorporated by reference to Exhibits
         99.1 through 99.4 of the Company's Current Report on Form 8-K filed
         March 26, 1997).

10.6     Form of Offshore Securities Subscription Agreement, Convertible Notes,
         Warrants and Registration Rights Agreement between the Company and
         Willora Company Ltd. (incorporated by reference to Exhibits 99.1
         through 99.4 of the Company's Current Report on Form 8-K filed April
         28, 1997).


                                       45
<PAGE>   48


10.7     Form of Offshore Securities Subscription Agreement, Convertible Notes,
         Warrants and Registration Rights Agreement between the Company and
         Silenus Ltd. (incorporated by reference to Exhibits 99.1 through 99.4
         of the Company's Current Report on Form 8-K filed June 24, 1997).

10.8     Purchase Agreement between the Company and CORESTAFF, Inc., dated
         October 6, 1997 (incorporated by reference to Exhibit 10.10 to the
         Company's Annual Report on Form 10-KSB for the fiscal year ended
         February 28, 1997).

10.9     Warrant to Purchase Common Stock of the Company issued to Worldwide
         PetroMoly Inc. (incorporated by reference to Exhibit 10.11 to the
         Company's Annual Report on Form 10-KSB for the fiscal year ended
         February 28, 1997).

10.10    Series D Preferred Stock Purchase Agreement between the Company and
         METAMOR WORLDWIDE, Inc., dated May 15, 1998 (incorporated by reference
         to Exhibit 10.12 to the Company's Annual Report on Form 10-KSB for the
         fiscal year ended February 28, 1998).

10.11    Stock Purchase Agreement between the Company and Precision Capital
         Limited Partnership I, dated April 30, 1998 (incorporated by reference
         to Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the
         fiscal year ended February 28, 1998).

10.12    Stock Purchase Agreement between the Company and Icarus Investments I,
         Ltd., dated May 27, 1998 (incorporated by reference to Exhibit 10.14 to
         the Company's Annual Report on Form 10-KSB for the fiscal year ended
         February 28, 1998).

10.13    Stock Purchase Agreement, dated March 11, 1999, among inLighten.com,
         Inc., 2-Lane Media, Inc., and the shareholders of 2-Lane Media,
         Inc.(incorporated by reference to Exhibit 10.15 to the Company's Annual
         Report on Form 10-KSB for the fiscal year ended February 28, 1999).

10.14    Stock Purchase Agreement, dated May 20, 1999, among inLighten.com,
         Inc., Forward Communications, Inc., FCI Services Inc., and the
         shareholders of Forward Communications, Inc. and FCI Services Inc.
         (incorporated by reference to Exhibit 2.1 to the Company's Current
         Report on Form 8-K filed June 3, 1999).

10.15    Agreement and Plan of Reorganization, dated May 20, 1999, among
         inLighten.com, Inc., Forward Freight, Inc., and the shareholders of
         Forward Freight Inc. (incorporated by reference to Exhibit 2.1 to the
         Company's Current Report on Form 8-K filed June 3, 1999).

10.16    Settlement and Release Agreement dated January 14, 2000 by and among
         Richard L. Travis, How2.com, Inc. and the Company (incorporated by
         reference to Exhibit 10.18 to Post-Effective Amendment No. 1 to the
         Company's Registration Statement on Form SB-2 filed March 23, 2000).

10.17    Settlement and Release Agreement dated March 1, 2000 by and among
         Bennett Klein and the Company (incorporated by reference to Exhibit
         10.19 to Post-Effective Amendment No. 1 to the Company's Registration
         Statement on Form SB-2 filed March 23, 2000).

*10.18   Standard Office Lease, dated August 2, 1999, between Arden Realty
         Limited Partnership and How2HQ.com, Inc. (Santa Monica, California).

*10.19   Guaranty of Lease, dated August 2, 1999, by the Company to Arden Realty
         Limited Partnership, with respect to certain obligations of How2HQ.com,
         Inc. under Standard Office Lease.

*10.20   Promissory Note dated September 30, 1999 payable to How2HQ.com, Inc.


                                       46
<PAGE>   49


10.21    Asset Purchase Agreement dated as of May 5, 2000 by and between EBSCO
         CASIAS, Inc., iNetze.com, Inc., ESRN Acquisition, LLC and the Company
         (incorporated by reference to Exhibit 2.1 to the Company's Current
         Report on Form 8-K filed June 12, 2000).

10.22    Asset Contribution Agreement dated as of May 5, 2000 by and between
         iNetze.com, Inc., ESRN Acquisition, LLC, the Company and the
         stockholders set forth on the signature pages attached hereto
         (incorporated by reference to Exhibit 2.2 to the Company's Current
         Report on Form 8-K filed June 12, 2000).

10.23    Stock Purchase Agreement dated as of May 5, 2000 by and between the
         Company, Tim Collins, F. Shanahan McAdoo and Robert C. Whitehair
         (incorporated by reference to Exhibit 2.3 to the Company's Current
         Report on Form 8-K filed June 12, 2000).

*21      Subsidiaries of the Company.

*23.1    Consent of Ernst & Young LLP.

*23.2    Consent of Grant Thornton LLP.

*27      Financial Data Schedule.


* Filed herewith.


REPORTS ON FORM 8-K

         The Company filed no Current Reports on Form 8-K for the fourth quarter
of the fiscal year ended February 29, 2000.


                                       47
<PAGE>   50


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Annual
Report on Form 10-KSB to be signed on its behalf by the undersigned, thereunto
duly authorized.

Date: June 13, 2000

                                       CT HOLDINGS, INC.

                                       By: /s/ STEVEN B. SOLOMON
                                          --------------------------------------
                                          Steven B. Solomon, President and
                                          Chief Executive Officer


                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven B. Solomon his true and lawful
attorneys-in-fact and agent, with full power of substitution and resubstitution,
to sign any and all amendments to this Annual Report on Form 10-KSB and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.

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


<TABLE>
<CAPTION>
                  SIGNATURE                                            TITLE                                 DATE
                  ---------                                            -----                                 ----

<S>                                             <C>                                                        <C>
/s/ STEVEN B. SOLOMON
------------------------------------------      President, Chief Executive Officer and Director              June 13, 2000
Steven B. Solomon                               (Principal Executive Officer and Principal
                                                Accounting Officer)
/s/ VICTOR K. KIAM, II
------------------------------------------      Chairman of the Board                                        June  5, 2000
Victor K. Kiam, II

/s/ LAWRENCE LACERTE
------------------------------------------      Director                                                     June 13, 2000
Lawrence Lacerte

/s/ CHRIS A. ECONOMOU
------------------------------------------      Director                                                     June 13, 2000
Chris A. Economou

/s/ MARK ROGERS
------------------------------------------      Director                                                     June 13, 2000
Mark Rogers

/s/ MICHAEL RUFF
------------------------------------------      Director                                                     June 13, 2000
Michael Ruff

/s/ DR. AXEL SAWALLICH
------------------------------------------      Director                                                     June 13, 2000
Dr. Axel Sawallich
</TABLE>


                                       48
<PAGE>   51


                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<S>                                                                         <C>
Reports of Independent Certified Public Accountants.........................F-2

Consolidated Balance Sheets as of February 29, 2000 and
  February 28, 1999.........................................................F-4

Consolidated Statements of Operations for the years ended
  February 29, 2000 and February 28, 1999...................................F-6

Consolidated Statement of Stockholders' Equity
  for the years ended February 29, 2000 and February 28, 1999...............F-7

Consolidated Statements of Cash Flows for the years ended
  February 29, 2000 and February 28, 1999...................................F-10

Notes to Consolidated Financial Statements..................................F-11
</TABLE>



                                       F-1



<PAGE>   52

      REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS - FISCAL YEAR 2000

The Board of Directors
CT Holdings, Inc.

         We have audited the accompanying consolidated balance sheet of CT
Holdings, Inc. and subsidiaries (the Company) as of February 29, 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

         We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CT Holdings, Inc. and subsidiaries as of February 29, 2000, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.



                                                       /s/ Ernst & Young LLP

Dallas, Texas
June 2, 2000


                                      F-2

<PAGE>   53
     REPORT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS - FISCAL YEAR 1999


Board of Directors
Citadel Technology, Inc.


We have audited the accompanying consolidated balance sheet of CT Holdings, Inc.
(formerly Citadel Technology, Inc.) as of February 28, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit 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 our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CT Holdings, Inc.
(formerly Citadel Technology, Inc.) as of February 28, 1999, and the
consolidated results of its operations and its consolidated cash flows for the
year then ended, in conformity with generally accepted accounting principles.




GRANT THORNTON LLP

Dallas, Texas
June 11, 1999


                                      F-3
<PAGE>   54

                                CT HOLDINGS, INC.

                           CONSOLIDATED BALANCE SHEETS




<TABLE>
<CAPTION>
                                                                February 29,   February 28,
                 ASSETS                                             2000           1999
                                                                ------------   ------------
<S>                                                             <C>            <C>
CURRENT ASSETS
    Cash and cash equivalents                                   $    707,412   $  3,386,369
    Accounts receivable-trade, less allowance for returns and
       doubtful accounts of $1,100,000 and $1,208,000                 55,241        466,288
    Receivables from sale of common stock of subsidiary                   --      6,042,000
    Notes receivable from related parties                            208,934        478,933
    Inventory                                                         80,617        148,676
    Prepaid expenses                                                  78,535        208,223
                                                                ------------   ------------

                 Total current assets                              1,130,739     10,730,489

INVESTMENT IN UNCONSOLIDATED AFFILIATE                               827,350             --

PROPERTY AND EQUIPMENT, NET                                          228,102        386,901

PURCHASED SOFTWARE, net of accumulated
    amortization of $1,505,536 and $2,718,486                        546,864      1,394,706

CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
    net of accumulated amortization of $785,762 and $577,000         944,674      1,181,052

OTHER ASSETS                                                         154,308        448,372
                                                                ------------   ------------

                                                                $  3,832,037   $ 14,141,520
                                                                ============   ============
</TABLE>



        The accompanying notes are an integral part of these statements.


                                      F-4
<PAGE>   55

                                CT HOLDINGS, INC.

                     CONSOLIDATED BALANCE SHEETS - CONTINUED




<TABLE>
<CAPTION>
                                                                       February 29,    February 28,
         LIABILITIES AND STOCKHOLDERS' EQUITY                              2000            1999
                                                                       ------------    ------------
<S>                                                                    <C>             <C>
CURRENT LIABILITIES
    Accounts payable and accrued expenses                                 1,030,501       2,247,600
    Payable to affiliate                                                     71,299              --
    Current maturities of long-term debt                                    150,000         311,812
    Notes payable                                                           111,288         347,424
                                                                       ------------    ------------

          Total current liabilities                                       1,363,088       2,906,836

OTHER LIABILITIES
    Minority interest in consolidated subsidiary                                 --       2,742,432
                                                                       ------------    ------------

          Total liabilities                                               1,363,088       5,649,268

COMMITMENTS AND CONTINGENCIES                                                    --              --

STOCKHOLDERS' EQUITY
    Common stock, $.01 par value per share; authorized,
       60,000,000 shares; issued and outstanding, 50,136,400
       shares in 2000 and 43,259,274 shares in 1999                         501,364         432,592
    Preferred stock, $.01 par value per share; authorized, 1,000,000
       shares; issued and outstanding
          Series B convertible, 50 shares in 2000 and 1999
                (liquidation value, $50,000)                                      1               1
          Series D convertible, 2,000 shares in 1999 (liquidation
               value, $2,000,000)                                                --              20
    Equity notes                                                                 --         150,000
    Additional paid-in capital                                           50,390,070      32,985,018
    Accumulated deficit                                                 (44,586,725)    (20,641,875)
    Treasury stock, at cost (4,164,613 common shares)                    (2,500,239)     (2,500,239)
    Notes receivable for the exercise of stock options
       Officers and directors                                            (1,335,522)     (1,857,577)
       Others                                                                    --         (75,688)
                                                                       ------------    ------------

          Total stockholders' equity                                      2,468,949       8,492,252
                                                                       ------------    ------------

                                                                       $  3,832,037    $ 14,141,520
                                                                       ============    ============
</TABLE>



        The accompanying notes are an integral part of these statements.


                                      F-5
<PAGE>   56

                                CT HOLDINGS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS




<TABLE>
<CAPTION>
                                                              Years ended
                                                      ----------------------------
                                                      February 29,    February 28,
                                                          2000            1999
                                                      ------------    ------------
<S>                                                   <C>             <C>
NET SALES                                             $  1,292,250    $  4,439,608

COST OF SALES, EXCLUDING DEPRECIATION, AMORTIZATION
     AND WRITE-OFF OF CAPITALIZED SOFTWARE COSTS            61,564         190,461
                                                      ------------    ------------

                 Gross profit                            1,230,686       4,249,147

OPERATING EXPENSES
    Selling, general and administrative expenses         4,334,755       5,817,188
    Provision for uncollectible receivables                     --       1,231,092
    Depreciation and amortization                        1,361,556       1,569,519
    Research and development expense                       392,315         485,275
    Write-off of capitalized software costs                625,336       1,422,697
                                                      ------------    ------------
                                                         6,713,962      10,525,771


                 Operating loss                         (5,483,276)     (6,276,624)

OTHER INCOME (EXPENSE)
    Interest expense                                       (53,340)       (141,806)
    Other                                                    2,551          30,932
    Litigation settlement expense                               --        (822,000)
    Equity in loss of unconsolidated affiliate         (18,122,874)             --
                                                      ------------    ------------
                                                       (18,173,663)       (932,874)

                 Loss before extraordinary item        (23,656,939)     (7,209,498)

EXTRAORDINARY ITEM - FORGIVENESS OF DEBT                        --         459,592
                                                      ------------    ------------

                 Net loss                              (23,656,939)     (6,749,906)

Preferred stock dividend requirement                       (64,493)       (128,956)
                                                      ------------    ------------

Net loss allocable to common stockholders             $(23,721,432)   $ (6,878,862)
                                                      ============    ============

Loss per share-basic and diluted
    Loss before extraordinary item                    $      (0.56)   $      (0.26)
    Extraordinary item                                          --            0.01
                                                      ------------    ------------

       Net loss                                       $      (0.56)   $      (0.25)
                                                      ============    ============

Weighted average shares outstanding                     42,503,070      27,807,748
                                                      ============    ============
</TABLE>



        The accompanying notes are an integral part of these statements.


                                      F-6
<PAGE>   57

                                CT HOLDINGS, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                        Common stock                                           Additional
                                ---------------------------    Preferred         Equity         paid-in
                                   Shares         Amount         stock           notes          capital
                                ------------   ------------   ------------    ------------    ------------
<S>                             <C>            <C>            <C>             <C>             <C>
Balance at March 1, 1998          25,881,327   $    258,813   $         51    $    944,000    $ 16,058,442

Exercise of stock options
   and warrants                   10,943,099        109,431             --              --       3,760,738

Sale of preferred stock -
   2,000 shares of Series D
   and 5,000 shares of
   Series E                               --             --             70              --       2,253,572

Conversion of debt to 253
   shares of Series D
   preferred stock                        --             --              3              --         252,997

Conversions to common stock
   Debt                            1,254,766         12,548             --              --         831,535
   Equity notes and preferred
   stock - 5,000 shares of
   Series C and 253 shares
   of Series D                     1,735,082         17,350            (53)       (794,000)      1,190,466

Redemption of Series E
   preferred stock - 5,000
   shares                                 --             --            (50)             --        (562,450)

Stock options and common
   stock granted as payment
   of liabilities                    445,000          4,450             --              --         345,150

Sale of common stock,
   net of issuance costs
   of $268,855                     3,000,000         30,000             --              --       3,705,000

Stock options granted as
   consideration for
   assumption of debt by
   stockholder                            --             --             --              --         500,000

Equity in sales of common
   stock by subsidiary                    --             --             --              --       4,649,568

Net loss                                  --             --             --              --              --
                                ------------   ------------   ------------    ------------    ------------

Balances at February 28, 1999     43,259,274   $    432,592   $         21    $    150,000    $ 32,985,018
                                ============   ============   ============    ============    ============
</TABLE>

         The accompanying notes are an integral part of this statement.





                                      F-7
<PAGE>   58

                               CT HOLDINGS, INC.

           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED

<TABLE>
<CAPTION>


                                  Accumulated        Treasury           Notes
                                   deficit            stock           receivable          Total
                                --------------    --------------    --------------    --------------
<S>                             <C>               <C>               <C>               <C>
Balance at March 1, 1998        $  (13,473,206)   $   (2,500,239)   $           --    $    1,287,861

Exercise of stock options
   and warrants                 $           --    $           --    $   (1,933,265)   $    1,936,904

Sale of preferred stock -
   2,000 shares of Series D
   and 5,000 shares
   of Series E                              --                --                --         2,253,642

Conversion of debt to 253
   shares of Series D
   preferred stock                          --                --                --           253,000

Conversions to common stock
   Debt                                     --                --                --           844,083
   Equity notes and preferred
   stock - 5,000 shares of
   Series C and 253 shares
   of Series D                        (413,763)               --                --                --

Redemption of Series E
   preferred stock - 5,000
   shares                               (5,000)               --                --          (567,500)

Stock options and common
   stock granted as payment
   of liabilities                           --                --                --           349,600

Sale of common stock,
   net of issuance costs
   of $268,855                              --                --                --         3,735,000

Stock options granted as
   consideration for
   assumption of debt by
   stockholder                              --                --                --           500,000

Equity in sales of common
   stock by subsidiary                      --                --                --         4,649,568

Net loss                            (6,749,906)               --                --        (6,749,906)
                                --------------    --------------    --------------    --------------

Balances at February 28, 1999   $  (20,641,875)   $   (2,500,239)   $   (1,933,265)   $    8,492,252
                                ==============    ==============    ==============    ==============
</TABLE>

         The accompanying notes are an integral part of this statement.


                                      F-8
<PAGE>   59
                                CT HOLDINGS, INC.

           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED

<TABLE>
<CAPTION>
                                        Common stock                                            Additional
                                 ---------------------------    Preferred         Equity         paid-in
                                    Shares         Amount         stock           notes          capital
                                 ------------   ------------   ------------    ------------    ------------
<S>                              <C>            <C>            <C>             <C>             <C>
Balances at March 1, 1999          43,259,274   $    432,592   $         21    $    150,000    $ 32,985,018
Exercise of stock options
   and warrants                     3,652,505         36,526             --              --       1,892,142

Conversions to common stock
   Equity notes                       533,684          5,337             --        (150,000)        194,492
   Preferred stock -
      Series D                      2,081,937         20,819            (20)             --         217,283
   Debt                               400,000          4,000             --              --         193,000

Sale of common stock                  200,000          2,000             --              --         498,000

Shares issued for legal
    settlement                          7,500             75             --              --          21,225

Equity in sales of common
   stock by subsidiary                     --             --             --              --      14,157,466

Repayment of notes receivable              --             --             --              --              --

Forgiveness of note receivable
    issued as payment for the
    exercise of stock options              --             --             --              --              --

Stock-based compensation                   --             --             --              --         285,000

Other                                   1,500             15             --              --         (53,556)

Net loss                                   --             --             --              --              --
                                 ------------   ------------   ------------    ------------    ------------

Balances at February 29, 2000      50,136,400   $    501,364   $          1    $         --    $ 50,390,070
                                 ============   ============   ============    ============    ============
</TABLE>

<TABLE>
<CAPTION>
                                  Accumulated         Treasury           Notes
                                    deficit            stock           receivable          Total
                                 --------------    --------------    --------------    --------------
<S>                              <C>               <C>               <C>               <C>
Balances at March 1, 1999        $  (20,641,875)   $   (2,500,239)   $   (1,933,265)   $    8,492,252
Exercise of stock options
   and warrants                              --                --           (55,860)        1,872,808

Conversions to common stock
   Equity notes                         (49,829)               --                --                --
   Preferred stock -
      Series D                         (238,082)               --                --                --
      Debt                                   --                --                --           197,000

Sale of common stock                         --                --                --           500,000

Shares issued for legal
    settlement                               --                --                --            21,300

Equity in sales of common
   stock by subsidiary                       --                --                --        14,157,466

Repayment of notes receivable                --                --           224,603           224,603

Forgiveness of note receivable
    issued as payment for the
    exercise of stock options                --                --           295,000           295,000

Stock-based compensation                     --                --                --           285,000

Other                                        --                --           134,000            80,459

Net loss                            (23,656,939)               --                --       (23,656,939)
                                 --------------    --------------    --------------    --------------

Balances at February 29, 2000    $  (44,586,725)   $   (2,500,239)   $   (1,335,522)   $    2,468,949
                                 ==============    ==============    ==============    ==============
</TABLE>


         The accompanying notes are an integral part of this statement.

                                      F-9
<PAGE>   60

                                CT HOLDINGS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                            Years ended
                                                                     ----------------------------
                                                                     February 29,    February 28,
                                                                         2000            1999
                                                                     ------------    ------------
<S>                                                                  <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net loss                                                         $(23,656,939)   $ (6,749,906)
    Adjustments to reconcile net loss to net cash used
       by operating activities
          Depreciation and amortization                                 1,361,556       1,569,519
          Equity in loss of unconsolidated affiliate                   18,122,874              --
          Common stock and options issued as payment of expenses           25,482         349,600
          Write-down of software development costs                        625,336       1,422,697
          Extraordinary item                                                   --        (459,592)
          Noncash employee severance expense                              580,000              --
          Provision for losses on accounts receivable
              and sales returns                                                --       1,231,092
          Other                                                            91,999          49,054
    Changes in operating assets and liabilities
       Accounts receivable                                                411,047      (1,261,765)
       Notes receivable                                                   369,603        (102,446)
       Prepaid expenses                                                   129,686        (136,243)
       Inventory                                                           68,059         (91,163)
       Software development costs                                        (649,131)       (895,546)
       Cash overdraft                                                          --         (10,249)
       Accounts payable and accrued expenses                           (1,170,572)        (26,541)
       Payable to affiliate                                                71,299              --
       Other assets                                                       254,072         (97,722)
                                                                     ------------    ------------

                 NET CASH USED IN OPERATING ACTIVITIES                 (3,365,629)     (5,209,211)

CASH FLOWS FROM INVESTING ACTIVITIES
    Capital expenditures                                                  (70,388)       (197,095)
    Reduction in cash due to deconsolidation of Parago, Inc.           (1,176,292)             --
    Capital contributions to unconsolidated affiliate                    (140,786)             --
                                                                     ------------    ------------

                 NET CASH USED IN INVESTING ACTIVITIES                 (1,387,466)       (197,095)

CASH FLOWS FROM FINANCING ACTIVITIES
    Payments on notes payable                                            (149,362)       (355,167)
    Proceeds from notes payable                                            70,226         471,900
    Proceeds from long-term debt                                               --              --
    Repayments on long-term debt                                         (161,812)        (40,659)
    Proceeds from sale of preferred stock                                      --       2,253,642
    Proceeds from sale of equity notes                                         --              --
    Proceeds from sale of common stock                                  2,315,086       5,821,904
    Proceeds from sale of subsidiary stock                                     --       1,200,000
    Redemption of equity notes                                                 --              --
    Redemption of preferred stock                                              --        (567,500)
                                                                     ------------    ------------

                 NET CASH PROVIDED BY FINANCING ACTIVITIES              2,074,138       8,784,120
                                                                     ------------    ------------

Net increase (decrease) in cash                                        (2,678,957)      3,377,814

Cash at beginning of the year                                           3,386,369           8,555
                                                                     ------------    ------------

Cash at end of the year                                              $    707,412    $  3,386,369
                                                                     ============    ============
</TABLE>



        The accompanying notes are an integral part of these statements.


                                      F-10
<PAGE>   61

                                CT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company is an incubator of business-to-business (B2B) Internet companies
that provides Internet-based early stage business-to-business ventures with a
single source of management capital, as well as consulting on operations,
marketing and strategic planning.

The Company began its Internet activities in 1999 with the formation of Parago,
Inc. (formerly How2.com, Inc.). Parago is an application service provider (ASP)
and business process outsourcer (BPO) which provides online promotional
services, online multimedia product information and support services, and online
data aggregation and management services to its business clients. Parago's
comprehensive integrated suite of outsourced customer care solutions includes
manufacturer rebate processing, product information, customer data asset
management and other services that are marketed across multiple industry lines.
At February 29, 2000 and February 28, 1999, the Company had a 45% and 63%
ownership interest in Parago, respectively. See Note G.

In addition to its B2B incubation business, the Company continues to operate its
"Citadel Technology" business line, which is focused on developing and marketing
security and administration software products for both computer networks and
desktop personal computers.

Since its inception the Company has incurred losses, and at February 29, 2000
has an accumulated deficit of $44,586,725. The Company's ultimate success in
fully implementing its new strategy and continuing its existing business line is
dependent on its ability to raise additional capital. While the Company
currently believes that it has the ability to obtain additional equity or debt
financing, the Company has received a commitment from its President to fund up
to $1,500,000 of the expected operating cash flow needs, if any, of the Company
through March 1, 2001 in the event the Company's cash flows from operating,
investing and financing activities are insufficient to meet the expected
operating obligations of the Company as they come due. Additionally, the Company
also plans to sell stock in private equity financings during fiscal year 2001.
The Company expects that its equity investee, Parago, will incur losses in the
foreseeable future as it continues to develop and upgrade its technology and
infrastructure, develop and expand its product and service offerings, and
establish and sustain relationships with manufacturers, retailers and service
organizations. Parago believes that the net proceeds from its private equity
financings will be sufficient to fund its working capital needs for at least the
next 12 months.

Use of Estimates

The preparation of 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 amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Principles of Consolidation

For the year ended February 28, 1999, the consolidated financial statements
include the accounts of the Company and its then 50% or more owned subsidiary,
Parago, Inc. All significant intercompany accounts and transactions were
eliminated in consolidation. For the year ended February 29, 2000, the Company's
investment in Parago, Inc. is presented under the equity method of accounting,
for the Company has the ability to exercise significant influence, but not
control, of the investee. Significant influence generally represents an
ownership interest of the affiliate's voting stock of between 20% and 50%.
Accordingly, under the equity method of accounting, the Company's share of the
investee's earnings or loss is included in the consolidated statements of
operations. The Company records it investments in equity-method investees on the
consolidated balance sheets as "Investment in Unconsolidated Affiliate" and its
share of the investee's earnings or losses in "Equity in Loss of Unconsolidated
Affiliate."


                                      F-11
<PAGE>   62

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED

Under the equity method, when Parago sells its stock to unrelated parties at a
price in excess of its book value, the Company's net investment in that
affiliate increases. The Company records a contribution to additional paid in
capital representing the difference between the carrying value of the Company's
investment and its proportionate share of the underlying net book value of the
affiliate after sales of the affiliate's common stock to unrelated parties.

All other investments for which the Company does not have the ability to
exercise significant influence or for which there is not a readily determinable
market value, are accounted for under the cost method of accounting.

Revenue Recognition

The Company recognizes revenues when persuasive evidence of a sale arrangement
exists, delivery has occurred, the fee is fixed or determinable and
collectibility is probable.

Revenues generated from products sold through traditional channels where the
right of return exist are reduced by reserves for estimated product returns.
Such reserves are based on estimates developed by management. As unused products
in these channels are exposed to rapid changes in consumer preferences or
technological obsolescence due to new operating systems or computing products,
it is reasonably possible that these estimates may change in the future.

Revenues related to significant post-contract support agreements (generally
product maintenance agreements) are deferred and recognized over the period of
the agreements.

Royalty revenues are recognized as earned unless collection of such revenues is
not probable. When collection is not probable, revenues are recognized as
payments are received.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents.

Property, Equipment and Depreciation

Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over estimated useful lives of the assets.

Software Costs

Purchased software is recorded at cost and is amortized by the greater of the
revenue method or the straight-line method over four to seven years.

The Company capitalizes software development costs when technological
feasibility has been established. Software development costs not qualifying for
capitalization are expensed as research and development costs. Research and
development expense totaled $392,315 and $485,275 in 2000 and 1999,
respectively. Capitalized costs are amortized using the greater of the revenue
method or the straight-line method with useful lives ranging from three to five
years. Amortization expense was $1,108,017 and $1,371,402 in fiscal 2000 and
1999, respectively. The Company evaluates the estimated net realizable value of
each software product at each balance sheet date and records write-downs to net
realizable value for any products for which the net book value is in excess of
net realizable value. In the fourth quarters of fiscal 2000 and fiscal 1999,
software costs were written

                                      F-12

<PAGE>   63

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED

down by $625,336 and $1,422,697, respectively. It is reasonably possible that
future events could cause a reduction in the amortization period of software
costs, or additional write downs may be required.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company reviews long-lived assets pertaining to those
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If conditions indicate
an asset might be impaired , the Company estimates the future cash flows
expected to result from the use of the asset and its eventual disposition. The
impairment would be measured by the amount by which the asset exceeds the future
discounted cash flow.

Income Taxes

Deferred income tax expenses are provided based upon estimated future tax
effects of differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
calculated based upon provisions of enacted laws.

Advertising and Marketing Expense

The Company expenses costs associated with advertising and marketing as they are
incurred and includes these costs in selling, general and administrative
expense. Advertising and marketing expense for fiscal year 2000 and fiscal year
1999 was $748,605 and $1,509,758, respectively.

Stock-Based Compensation

The Company has elected to account for stock-based compensation to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair market value of the Company's stock at the date
of the grant over the amount an employee must pay to acquire the stock. See Note
F regarding the pro forma net loss and earnings per share information as
required by the alternative fair value accounting provided for under Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123).

The Company accounts for stock based awards issued to non-employees in
accordance with the fair value method of SFAS 123 and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments with Variable Terms that are
Issued for Consideration other than Employee Services under FASB Statement No.
123." See Note F.

Fair Value of Financial Instruments

The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and long-term obligations are carried at
cost, which approximates fair value due to the short maturity of these
instruments.

Net Loss Per Common Share

Basic loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Basic
loss per share excludes any dilutive effects of options. Diluted


                                      F-13
<PAGE>   64
                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED

loss per common share includes the dilutive effect of options and warrants
calculated using the treasury stock method, and, includes the effect of
convertible preferred stock using the if-converted method. Stock options and
warrants to purchase 5,823,022 shares of common stock have been excluded from
the computation of diluted loss per share, as the effect would be anti-dilutive.
In addition, approximately 9,400 shares (based on the price per share for the
Company's common stock on February 29, 2000), which would be issued upon the
conversion of Series B preferred stock, have been excluded from the computation
of loss per share.

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. It also provides guidance for accounting changes in the fair value
of the derivative (i.e., gains and losses). SFAS 133 is effective for all fiscal
years beginning after June 15, 2000. The Company does not expect the adoption of
SFAS 133 will have a material effect on its financial statements.

In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements". SAB No. 101 summarizes certain of
the SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. It is effective for the second fiscal
quarter beginning after December 15, 1999. We do not expect the adoption of SAB
No. 101 will have a material effect on our results of operation or financial
condition.


NOTE B - PROPERTY AND EQUIPMENT

Major classes of property and equipment and their estimated useful lives are as
follows:




<TABLE>
<CAPTION>
                                                 February 29,    February 28,
                                     Lives           2000            1999
                                  ------------   ------------    ------------
<S>                               <C>            <C>             <C>
Furniture                           5-10 years   $    170,981    $    138,770
Office equipment                     3-7 years         83,935          82,712
Leasehold improvements              Lease term         68,672          68,672
Computer equipment                   3-7 years        643,753         606,798
                                                 ------------    ------------
                                                      967,341         896,952
  Less accumulated depreciation                      (739,239)       (510,051)
                                                 ------------    ------------

Net property and equipment                       $    228,102    $    386,901
                                                 ============    ============
</TABLE>


                                      F-14
<PAGE>   65

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE C - NOTES PAYABLE

Notes payable consist of the following:



<TABLE>
<CAPTION>
                                                                February 29,   February 28,
                                                                    2000           1999
                                                                ------------   ------------
<S>                                                             <C>            <C>
Unsecured notes payable to individuals,
   due at various dates in 1999, bearing
   interest at rates ranging from 0% to 10%; weighted average
   interest rate is approximately 6.1% (1)                      $     27,500   $    192,500

Note payable to banks, bearing interest at 7.35% to 7.45%             55,833        120,833

Other notes payable                                                   27,955         34,091
                                                                ------------   ------------

                                                                $    111,288   $    347,424
                                                                ============   ============
</TABLE>

         (1) Certain of these notes were issued with warrants to purchase common
         stock. The total number of warrants issued was 509,375 with an exercise
         price ranging from $0.32 to $0.89 per share. A note for $400,000 was
         converted into common stock, at $1.075 per share during the year ended
         February 28, 1999. Additionally, a note for $140,000 plus accrued
         interest was converted into 400,000 shares of common stock in fiscal
         year 2000.


NOTE D - LONG-TERM DEBT


<TABLE>
<CAPTION>
                                                                        February 29,   February 28,
                                                                            2000           1999
                                                                        ------------   ------------
<S>                                                                     <C>            <C>
Note payable to Xerox Corporation, non-interest bearing, which
   matured September 1998, interest imputed at 10% (net of
   discount)                                                                 150,000        200,000

Note payable to a bank, payable in monthly installments with interest
   at 9.75%, through January 2000                                                 --        111,812


                                                                        ------------   ------------
                                                                             150,000        311,812
Less current maturities                                                      150,000        311,812
                                                                        ------------   ------------

                                                                        $         --   $         --
                                                                        ============   ============
</TABLE>


                                      F-15
<PAGE>   66

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE E - INCOME TAXES

Following is the reconciliation of the Company's income tax provision with the
amount of tax computed at the statutory rate:




<TABLE>
<CAPTION>
                                                       February 29,    February 28,
                                                           2000            1999
                                                       ------------    ------------
<S>                                                    <C>             <C>
Expense (benefit) computed at federal statutory rate   $ (7,885,000)   $ (2,295,000)
Losses not benefited                                      8,815,000       2,228,000
Other                                                      (930,000)         67,000
                                                       ------------    ------------

                                                       $         --    $         --
                                                       ============    ============
</TABLE>

The significant components of the Company's deferred tax liabilities and assets
are as follows:




<TABLE>
<CAPTION>
                                           February 29,    February 28,
                                               2000            1999
                                           ------------    ------------
<S>                                        <C>             <C>
Deferred tax assets
   Net operating loss carryforwards        $  7,432,000    $  6,044,000
   Accounts receivable                          479,000         410,000
   Investment in subsidiary                    (257,000)             --
   Accounts payable and accrued expenses        (15,000)             --
                                           ------------    ------------
Total deferred tax assets                     7,639,000       6,454,000
Valuation allowance                          (7,639,000)     (6,454,000)
                                           ------------    ------------

       Total deferred tax assets, net      $         --    $         --
                                           ============    ============
</TABLE>

For federal income tax purposes, at February 29, 2000, the Company had a net
operating loss carryforward of approximately $22,500,000. The net operating loss
carryover, which is subject to annual limitations as prescribed by the Internal
Revenue Code, is available to offset future taxable income through 2013. A
valuation allowance has been recorded for the entire amount of the net deferred
tax asset as management does not believe it is more likely than not that the
deferred tax assets will be utilized in future years.


                                      F-16
<PAGE>   67

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE F - STOCKHOLDERS' EQUITY

Preferred Stock

The Company's outstanding Series B preferred stock is convertible into shares of
common stock at 83% of the average market price of the common stock for the five
days preceding conversion. Each share of Series B preferred stock has a
conversion value of $1,000. Dividends accrue at 5%. As of February 29, 2000 all
but 50 shares have been converted into common stock. If the shares had been
converted on February 29, 2000, approximately 9,400 shares of common stock would
be issued.

The Series D preferred stock is convertible into shares of common stock at
$1.075 per share. Dividends accrue at 11%. As of February 29, 2000 all
outstanding shares and accrued dividends have been converted into common stock.

Holders of Series B and Series D convertible preferred stock have voting rights
only to the extent required under Delaware corporate law.

During fiscal 1999, the Company issued and redeemed 5,000 shares of Series E
convertible preferred stock for $452,920 and $567,500, respectively.

Dividends on all series of preferred stock are payable in cash or common stock
at the option of the Company.

Equity Notes

The equity notes are unsecured and are convertible at any time until maturity
into common stock at 80% of the average market price of the Company's common
stock. The equity notes bear interest at 8% and the principal and interest due
at maturity is payable only in common stock. Any unpaid balance past the
maturity date bears interest at 15%. During fiscal year 2000, the remaining
balance of the equity notes were converted to common stock.


                                      F-17
<PAGE>   68

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE F - STOCKHOLDERS' EQUITY - CONTINUED

Stock Options and Warrants

The Company has issued stock options to directors, employees, and others.
Options are granted at no less than fair value at date of grant, as determined
by the board of directors. Generally, the options vest over no more than three
years. Following is a summary of option transactions for the periods beginning
March 1, 1998:



<TABLE>
<CAPTION>
                                                                      Weighted
                                                                       average
                                                                       exercise
                                                          Shares        price
                                                        ----------    ----------
<S>                                                     <C>           <C>
Outstanding at March 1, 1998                             9,796,750    $     0.41
Granted                                                  1,804,088          0.82
Exercised                                               (8,124,181)         0.32
Expired or canceled                                       (514,500)         1.31
                                                        ----------    ----------

Outstanding at February 28, 1999                         2,962,157          0.55

Granted                                                    728,000          4.92
Exercised                                               (2,169,455)         0.47
Expired or cancelled                                      (254,435)         1.06
                                                        ----------    ----------

Outstanding at February 29, 2000                         1,266,267    $     3.07
                                                        ==========    ==========

Exercisable at February 28, 1999                         1,163,170    $     0.63
Exercisable at February 29, 2000                           377,821    $     0.63

Weighted-average fair value of options granted during
   the year ended February 28, 1999 - $0.73

Weighted-average fair value of options granted during
   the year ended February 29, 2000 - $2.88
</TABLE>


At February 29, 2000, $1,335,000 of notes receivable are outstanding in
connection with notes issued in fiscal 1999 for the exercise of certain stock
options. These notes were issued with recourse, bear interest at 5%, and mature
in fiscal year 2001.


                                      F-18
<PAGE>   69

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE F - STOCKHOLDERS' EQUITY - CONTINUED

The following table summarizes other information regarding stock options at
February 29, 2000:



<TABLE>
<CAPTION>
                                                            Outstanding                           Exercisable
                                           -----------------------------------------        ----------------------
                                                             Weighted
                                                              average
                                                             remaining     Weighted                       Weighted
                                                            contractual    average                        average
          Range of                                             life        exercise                       exercise
       exercise prices                        Shares        (in years)       price           Shares        price
       ---------------                     ----------       ----------     --------         ---------    ---------
       <S>                                 <C>              <C>            <C>              <C>          <C>
       $ 0.25 - 0.50                          273,017           4.4         $ 0.31            173,393      $ 0.30
         0.67 - 1.75                          275,250           3.2           0.86            204,428        0.90
         3.00 - 5.00                          718,000           5.0           4.96                 --          --
                                           ----------                       ------          ---------      ------

                                            1,266,267                       $ 3.07            377,821      $ 0.63
                                           ==========                       ======          =========      ======
</TABLE>


The Company has adopted the disclosure provisions of Statement No. 123, as
discussed in Note A, and continues to apply Opinion 25 for stock options granted
to employees. If the Company had recognized compensation expense based upon the
fair value at the grant date for options granted to employees during fiscal
years ended February 29, 2000 and February 28, 1999, the effect on net loss and
loss per share would have been as follows:



<TABLE>
<CAPTION>
                                          Years ended
                               --------------------------------
                                 February 29,     February 28,
                                    2000              1999
                               --------------    --------------
<S>                            <C>               <C>
       Net loss
          As reported          $  (23,656,939)   $   (6,749,906)
          Pro forma               (24,130,110)       (7,194,115)
       Loss per common share
          As reported                    (.56)             (.25)
          Pro forma                      (.57)             (.26)
</TABLE>

The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:



<TABLE>
<CAPTION>
                                                  Years ended
                                      ---------------------------------
                                       February 29,        February 28,
                                          2000                 1999
                                      -------------        ------------
<S>                                   <C>                  <C>
       Expected volatility                   113.5%            134-149%
       Risk-free interest rates                6.0%            4.2-5.6%
       Dividend yield                            0%                  0%
       Expected option lives              1-3 years           1-2 years
</TABLE>


                                      F-19
<PAGE>   70

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE F - STOCKHOLDERS' EQUITY - CONTINUED

The following summarizes the warrant transactions for 2000 and 1999:



<TABLE>
<CAPTION>
                                                        Weighted
                                                        average
                                       Shares        exercise price
                                   --------------    --------------
<S>                                <C>               <C>
Outstanding at March 1, 1998            6,105,138    $         2.00

Issued                                  5,557,383              1.60
Exercised                              (3,400,453)             0.58
Expired or canceled                    (2,222,263)             1.04
                                   --------------    --------------

Outstanding at February 28, 1999        6,039,805              2.82

Issued                                         --                --
Exercised                              (1,483,050)             0.58
Expired or cancelled                           --                --
                                   --------------    --------------

Outstanding at February 29, 2000        4,556,755    $         3.55
                                   ==============    ==============
</TABLE>


During fiscal 1999, the Company issued warrants to purchase:

o        1,750,000 shares of common stock in connection with the sale of common
         stock,

o        150,000 shares of common stock in connection with the sale of preferred
         stock,

o        200,000 shares of common stock as payment of legal fees, and

o        351,125 shares of common stock in other transactions.

Also, the terms of warrants to purchase 2,172,263 shares at $.89 per share were
adjusted pursuant to antidilution provisions of the warrant agreements to
increase the number of warrants to 3,106,258 and reduce the price to $.59 per
share; these warrants have been reflected as cancelled and granted in the table
above for fiscal 1999.

NOTE G. INVESTMENT IN UNCONSOLIDATED AFFILIATE


At February 28, 1999, the Company owned 63% of Parago's common stock and
accounted for its investment under the consolidation method. Through subsequent
sale and distribution by Parago of shares of its common stock, the Company's
ownership was reduced below 50% beginning in July 1999. As a result, beginning
July 1999, the Company began accounting for its remaining investment in Parago
under the equity method of accounting rather than the consolidated method. Prior
to these events, the operating results of Parago were consolidated in the
Company's consolidated financial statements. At February 29, 2000, the Company
owns 45% of Parago's outstanding shares of common stock.

In connection with acquisitions, exercise of stock options and warrants, and
various private placement transactions during the fiscal year 1999 and 2000,
Parago issued 24,207,913 shares of common stock to other


                                      F-20
<PAGE>   71

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE G. INVESTMENT IN UNCONSOLIDATED AFFILIATE - CONTINUED

unrelated parties for a total value of $39,783,832, and at prices ranging from
$0.025 to $10.00 per share. During fiscal year 2000, the Company recorded to
additional paid in capital contributions totaling $14,157,466, which represents
the difference between the carrying value of the Company's investment in Parago
and its proportionate share of the underlying net book value of Parago after the
issuance of Parago's common stock to unrelated parties.

In January 2000, Parago raised $15,000,000 through the issuance of 200,000
shares of Series A Convertible Preferred Stock to Seaboard Ventures, LLC and
100,000 shares of Series B Convertible Preferred Stock to Watershed Capital I,
L.P. At the time of issuance, the Series A and B preferred stock is convertible
into 3,000,000 shares of Parago common stock. Subsequent to fiscal year 2000,
Parago raised $21,500,000 through the issuance of 430,000 shares of Series C
Convertible Preferred Stock to THLee.Putnam Internet Partners LP, Dain Rauscher
Wessels Investors LLC and Watershed Capital I, L.P. At the time of issuance, the
Series C preferred stock is convertible into 4,300,000 shares of Parago common
stock. In connection with the Series A, B, and C financing, the preferred
stockholders were issued 3,300,000 warrants to purchase common stock. The
warrants vest immediately and have a weighted average exercise price of $2.13.

At February 29, 2000, Parago has 16,757,317 stock options outstanding with a
weighted average exercise price of $1.47, and 5,458,813 of the options
outstanding are exercisable at a weighted average exercise price of $0.96.


The following is the condensed financial information of Parago at February 29,
2000 and for the fiscal year then ended.


<TABLE>
<CAPTION>
SUMMARIZED BALANCE SHEET      FEBRUARY 29, 2000
------------------------     ------------------
<S>                          <C>
Current assets               $       18,880,751
Noncurrent assets                    21,931,528
                             ------------------
         Total assets        $       40,812,279
                             ==================

Current liabilities          $       23,870,338
Long-term debt                          623,140
                             ------------------
         Total liabilities           24,493,478
                             ------------------
Redeemable common stock               2,000,000
Shareholders' equity                 14,318,801
                             ------------------
                             $       40,812,279
                             ==================
</TABLE>


<TABLE>
<CAPTION>
                                                     TWELVE MONTHS ENDED
   SUMMARIZED STATEMENT OF OPERATIONS                 FEBRUARY 29, 2000
   ----------------------------------                ------------------
<S>                                                  <C>
         Revenues                                      $   8,293,650
         Gross profit                                      4,807,836
         Sales and marketing expenses                     20,171,534
         Operating loss                                  (40,491,249)
         Net loss                                        (39,307,459)
</TABLE>


                                      F-21
<PAGE>   72

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE G. INVESTMENT IN UNCONSOLIDATED AFFILIATE - CONTINUED

The Company has announced that it intends to distribute to its shareholders,
shares of common stock of Parago upon compliance with Securities and Exchange
Commission (SEC) requirements applicable to CT Holdings and Parago in connection
with the proposed spin-off and upon the expiration of a 180 day lockup agreement
between the underwriters of Parago's proposed initial public offering and
Parago. Compliance with SEC requirements and state law requirements could delay
or prevent the completion of the spin-off. There can be no assurances that CT
Holdings will be able to effect the distribution of the shares of Parago to CT
Holdings' stockholders on a timely basis or at all.

In addition, CT Holdings has agreed to convert certain shares of Parago common
stock issued in connection with certain acquisitions by Parago as well as issued
pursuant to the terms of the stock purchase agreements between Parago and some
of its stockholders into shares of CT Holdings common stock. This could result
in the issuance of up to 500,000 additional shares of CT Holdings common stock
(in connection with Parago's acquisition of 2-Lane Media) and up to 414,000
additional shares of CT Holdings common stock at a conversion price of $3.75 per
share (in connection with the stock purchase agreements), which would have the
effect of diluting CT Holding's stockholders if the market price for CT
Holding's stock is above that price at the time of conversion.


NOTE H - RELATED PARTY TRANSACTIONS

During the year ended February 28, 1999, the Company loaned approximately
$1,525,000, exclusive of financing provided for the exercise of stock options,
to its Chief Executive Officer, Mr. Solomon. At February 29, 2000 and February
28, 1999, $209,000 and $354,000, respectively, remained unpaid.

The Company has contracted with a major shareholder in the Company, Metamor
Software Solutions, a division of Metamor Worldwide, Inc. (Metamor) to provide
various development services for the Company. The Company incurred approximately
$2,000 and $600,000 in expenses related to these services during fiscal years
ended February 29, 2000 and February 28, 1999, respectively. Kenneth R. Johnsen,
one of the Company's former directors, was the Executive Vice President of
Metamor during this time. In June 1999, Mr. Johnsen joined the Company's
subsidiary, Parago, as its President and Chief Operating Officer. In connection
therewith, Mr. Johnsen was granted options to purchase 2,000,000 shares of
Parago common stock at $0.025 per share and options to purchase 1,800,000 shares
at $0.25 per share.

During fiscal years ended February 29, 2000 and February 28, 1999, the Company
and Parago incurred legal fees in the amount of approximately $86,000 and
$140,000, respectively to Wood, Exall & Bonnet, L.L.P. David Wood, a partner of
such firm, is a relative of Mr. Solomon. Subsequent to February 28, 1999, Mr.
Wood joined Parago as its General Counsel.

In August 1998, the Company granted stock options to a stockholder and reduced
the exercise price of certain other stock options in consideration for the
stockholder's assumption of indebtedness of the Company in the principal amount
of $500,000. The transactions resulted in no gain or loss. At February 28, 1999,
the Company had a $125,000 receivable from the stockholder. This outstanding
balance was repaid in full during fiscal 2000.

Richard L. Travis, Jr., the Company's former Chief Operating Officer and Chief
Financial Officer, resigned from the Company and his employment agreement was
terminated effective as of January 14, 2000. In connection with his resignation
from the Company and the termination of his employment agreement, Mr. Travis and
the Company entered into a Settlement and Release Agreement which provides,
among other things, for the payment of an aggregate of $50,001 to Mr. Travis in
three equal monthly installments of $16,667 commencing on the last day of each
of the first three months following Mr. Travis' resignation from the Company.
The Settlement and Release Agreement also provides for Mr. Travis to perform
certain financial consulting services for the Company (as an independent
contractor) until April 14, 2000. Also, in connection with the Settlement and
Release

                                      F-22

<PAGE>   73

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H - RELATED PARTY TRANSACTIONS - CONTINUED

Agreement, the Company agreed to forgive an aggregate of $295,000, plus accrued
interest, of indebtedness owed by Mr. Travis to the Company. In addition, Parago
accelerated certain of the Parago options granted to Mr. Travis, which resulted
in compensation expense of $285,000 to the Company.

On January 7, 1999, the Company acquired 20,000,000 shares of Parago common
stock in an organizational subscription for an aggregate purchase price of
$50,000 and sharing of the Company's resources, including personnel,
administrative and financial resources. The Company continued to provide these
resources to Parago through June 30, 1999. In consideration for these resources,
the Company allocated a portion of its overhead costs related to these services
to Parago. These allocated expenses, totaling approximately $141,000, were
recognized by Parago as a contribution to equity, as the services were provided
in connection with the Company's initial equity investment.

During the fiscal year ended February 29, 2000, the Company borrowed cash from
Parago to cover short-term cash requirements. As a result, Parago issued
promissory notes to the Company for approximately $571,299 for its initial
investment of $50,000 in Parago and sharing of other cash disbursements made to
assist the Company in meeting short-term cash requirements. The promissory notes
are secured by 300,000 shares of Parago common stock, are due on demand, and
bear interest at five percent. In December 1999, the Company paid $500,000 of
its outstanding note balance.

NOTE I - COMMITMENTS AND CONTINGENCIES

The Company leases office space and certain equipment under noncancellable
operating lease agreements expiring at various dates through 2003. Future
minimum lease payments under these leases at February 29, 2000, were as follows:



<TABLE>
<CAPTION>
          Year ending
          February 29,
          ------------
          <S>                                 <C>
              2001                            $   170,085
              2002                                170,085
              2003                                 22,715
                                              -----------

              Total                           $   362,885
                                              ===========
</TABLE>

Rental expense totaled approximately $228,000 and $316,000 for the years ended
February 29, 2000 and February 28, 1999, respectively.

On January 7, 1998, the Company's former Houston landlord filed a lawsuit
against the Company alleging that the Company breached a certain lease covering
the Company's former Houston office space. The suit seeks damages to date of
approximately $486,000, plus attorney's fees, pre and post judgment interest and
court costs. In July 1999, the parties reached an agreement in principle to
settle the suit for $325,000 to be paid over nine months ending in April 2000.

The Company and one of its officers were involved in an arbitration proceeding
with Vestcom Ltd., which claimed compensation and a finder's fee for introducing
the Company to a third party. Vestcom sought damages of the value of 100,000
shares of Company common stock (alleged to be valued at $1,900,000), plus 50% of
additional compensation paid by the Company to the third party. The Company
filed a declaratory judgment action against Vestcom to determine that the
alleged contract was not valid based on its defenses. The case was styled
Citadel Computer Systems, Inc. and Steven B. Solomon v. Vestcom, Ltd., in the
193rd Judicial District Court in Dallas County, Texas. In October 1998, the
Texas court entered a judgment and preliminary injunction in favor of the
Company and its officer that the purported agreement was a forgery. As a result,
the arbitration proceeding was


                                      F-23
<PAGE>   74

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED

dismissed by the American Arbitration Association. The defendant appealed the
decision of the Texas court. In November 1998, Vestcom filed a lawsuit against
the Company in Texas state court styled Vestcom v. Citadel in the 68th Judicial
Court, Dallas County, Texas, reasserting the same basic claims as in the
arbitration proceeding. In January 2000 the parties reached an agreement to
settle the suit for the original amount of the warrants claimed (100,000 shares
with an exercise price of $1.375 per share). This action was dismissed for want
of prosecution on the announcement of settlement by the parties. Assuming
Vestcom received actual or constructive notice of that dismissal near the time
of its entry, the Company believes that the time to seek reinstatement of the
case, a new trial, or review before the Court of Appeals has expired. However,
as of the date of issuance of these financial statements, no binding agreement
has been signed by both parties.

In August 1998, Janssen-Meyers Associates L.P. ("JMA") filed a lawsuit against
us. The suit alleges that we breached a letter of intent dated September 1995
and/or a Placement Agency Agreement dated November 1995 between JMA and Citadel
Computer Systems Incorporated, which merged with a subsidiary of the Company in
February 1996. As its damages, JMA claims that it is entitled to, among other
things, the cash value of 1.8 million $0.89 warrants valued during May 1996.
According to JMA's valuation of those warrants, potential damages are alleged to
exceed $25 million. The Company vigorously disputes that it breached either the
letter of intent or the Placement Agency Agreement or that it is liable to JMA.
The Company has retained a valuation expert to address JMA's valuation claims.
The lawsuit, styled Janssen-Meyers Associates, L.P. v. Citadel Technology, Inc.,
was filed in the Supreme Court of the State of New York, County of New York. We
removed the case to federal court in the Southern District of New York.
Subsequent to November 30, 1999, Janssen-Meyers filed a motion for partial
summary judgment and we filed a motion for summary judgment in the matter. On
March 30, 2000, the court heard the motions for summary judgment and denied the
motions filed by the Company and JMA. The case is scheduled for mediation on
June 27, 2000, and is set for trial on August 14, 2000. In addition to
vigorously defending the claims asserted by JMA, the Company will be filing a
separate lawsuit to recover some potential overpayments to JMA.

At this time, the Company is unable to predict the ultimate outcome of these
suits, the costs associated with defending the claims and pursuing
counterclaims, and monetary compensation awarded, if any.

The Company is also involved in other litigation. Such litigation is not
material to the Company's consolidated financial condition or results of
operations.

At February 29, 2000, the Company had an employment agreement with one of its
officers. The agreement expires in 2002. Parago has an employment agreement with
its chief executive officer, who is also the Company's chief executive officer,
that expires in 2004. Parago has been paying the chief executive officer's
salary since July 1999.

NOTE J - SUPPLEMENTAL CASH FLOW INFORMATION


<TABLE>
<CAPTION>
                                                             Years ended
                                                     ---------------------------
                                                     February 29,   February 28,
                                                         2000           1999
                                                     ------------   ------------
<S>                                                  <C>            <C>
Supplemental disclosures of cash flow information:
   Cash paid during the year for interest            $         --   $         --
   Non-cash investing and financing transactions:
      Notes payable converted to preferred stock               --        253,600
      Payment of dividends in common stock                     --             --
      Conversions to common stock
          Debt                                            197,000        844,083
          Preferred stock and equity notes                437,931      1,956,956
      Common stock and stock options
         issued in satisfaction of debt                        --        849,600
      Common stock sold for notes or subscriptions             --      8,245,265
</TABLE>



NOTE K - EXTRAORDINARY ITEM

The extraordinary item in fiscal 1999 results from gains on debt forgiveness,
which consists principally of a $428,316 reduction in the note payable to Xerox
Corporation (Note D).


                                      F-24
<PAGE>   75

                                CT HOLDINGS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE L - MAJOR CUSTOMERS

The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains an allowance for doubtful
accounts based on the expected collectibility of all trade accounts receivable.
To date, the losses incurred by the Company have not exceeded management's
expectations.

Major customer information is presented based on the aggregate amount of sales
net of any returns. In fiscal year 2000, four customers accounted for
approximately 29% of our net sales, while in fiscal year 1999, four customers
accounted for approximately 54% of net sales.

NOTE M - SUBSEQUENT EVENTS

On May 5, 2000 the Company completed a previously announced transaction whereby
it acquired a significant minority interest in River Logic, Inc., a Delaware
corporation formerly known as iNetze.com, Inc. The Company acquired an aggregate
of approximately 5.9% of the outstanding shares of common stock of River Logic,
Inc. ("River Logic") from Robert C. Whitehair, Tim Collins, and F. Shanahan
McAdoo in exchange for 333,333 shares of the Company's common stock. The Company
also acquired shares of Series A Convertible Preferred Stock from River Logic in
exchange for the contribution by a wholly-owned subsidiary of the Company of
certain assets (the "ESRN Network"), as described below. The acquired preferred
stock, upon conversion, would represent approximately 13.1% of the outstanding
shares of common stock of River Logic as of May 5, 2000. In connection with the
transaction, the Company, River Logic and certain of River Logic's stockholders
entered into a Stockholders Agreement providing for, among other things,
restrictions on the transferability of River Logic securities, rights of first
refusal and co-sale with respect to River Logic securities, and registration
rights with respect to River Logic securities. The Stockholders Agreement also
provides the Company with the right to appoint one member of River Logic's Board
of Directors so long as the Company continues to own at least 10% of River
Logic's capital stock on a fully diluted basis.

In connection with the transaction, the Company also made two $300,000 bridge
loans to River Logic, convertible into 800,000 shares, in the aggregate, of
common stock that would represent approximately 3.8% of the outstanding common
stock of River Logic as of May 5, 2000. Each of the bridge loans (i) bears
interest at a rate of 12% per annum through its first anniversary and at one
percent above the prime rate per annum thereafter, (ii) is secured by certain
assets of River Logic, (iii) is payable upon the Company's demand and (iv) is
prepayable by River Logic commencing on its third anniversary date. As a result
of the transaction, the Company possesses approximately 19% (22.2% in the event
the bridge loans and other securities are converted in full) of the voting power
with respect to River Logic.

The ESRN Assets consist of the EBSCO School Resource Network (ESRN Network), an
educational network catering to kindergarten through 12th grade (K-12). The ESRN
Network is designed to support school administrators, teachers, students and
parents by providing them with a comprehensive set of tools and resources
targeting their specific needs. The ESRN Network is comprised of learning
applications that integrate EBSCO Industries' database of content relating to
K-12. The ESRN Network was acquired by a wholly-owned subsidiary of the Company
from EBSCO Industries in connection with this transaction in exchange for
666,667 shares of the Company's common stock.

We intend to file a resale registration statement relating to the shares of our
common stock issued in connection with this transaction within 90 days of the
closing.

River Logic, headquartered in Beverly, Massachusetts, creates and operates
integrated decision support networks for industries such as K-12 Education. In
addition to K-12 education, River Logic has several other industry-specific
networks in development.

The Company has valued its investment in River Logic at $2,380,000 based on the
fair value of the 1,000,000 shares of common stock issued and will account for
its investment using the cost method.


                                      F-25
<PAGE>   76

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER            DESCRIPTION
-------           -----------
<S>      <C>
2.1      Second Amended and Restated Plan of Merger, dated February 29, 1996, by
         and between LoneStar Hospitality Corporation, LSHC Acquisition, Inc.
         and Citadel Computer Systems Incorporated (without exhibits)
         (incorporated by reference to Exhibit 2.1 of the Company's Current
         Report on Form 8-K dated February 29, 1996).

2.2      Purchase and Sale Agreement, dated March 1, 1996, by and between the
         LoneStar Hospitality Corporation, LS Holding Corp. and Miami Subs USA,
         Inc. (without exhibits) (incorporated by reference to Exhibit 2.2 of
         the Company's Current Report on Form 8-K dated February 29, 1996).

2.3      Technology Transfer Agreement, by and between LoneStar Hospitality
         Corporation and Circuit Masters Software, Inc., dated February 29, 1996
         (without exhibits) (incorporated by reference to Exhibit 2.3 of the
         Company's Current Report on Form 8-K dated February 29, 1996).

2.4      Technology Transfer Agreement, by and between the Company and Bill
         Mulvany, dated February 29, 1996 (without exhibits) (incorporated by
         reference to Exhibit 2.4 of the Company's Current Report on Form 8-K
         dated February 29, 1996).

2.5      Technology Transfer Agreement, by and between the Company and Kim Marie
         Newman, dated February 29, 1996 (without exhibits) (incorporated by
         reference to Exhibit 2.5 of the Company's Current Report on Form 8-K
         dated February 29, 1996).

2.6      Agreement, by and between the Company, Circuit Masters Software, Inc.,
         Patrick William Mulvany and Kim Marie Newman, dated May 16, 1996,
         effective as of February 29, 1996 (incorporated by reference to Exhibit
         2.6 of the Current Report on Form 8-K/A filed with the Securities and
         Exchange Commission on June 10, 1996).

3.1      Certificate of Incorporation (incorporated by reference to the
         registration statement on Form S-1, File No. 33-25462, for Apollo
         Resources, Inc., on November 10, 1988, and declared effective January
         4, 1989).

3.3      Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on June 4, 1990 (incorporated by reference
         to Exhibit 3.2 of the Company's Annual Report on Form 10-KSB for the
         fiscal year ended February 29, 1996).

3.3      Bylaws (incorporated by reference to the registration statement on Form
         S-1, File No. 33-25462, filed with the Securities and Exchange
         Commission on November 10, 1988).

3.4      Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on October 15, 1991 (incorporated by
         reference to the Company's Annual Report on Form 10-KSB for the year
         ended December 31, 1991).

3.5      Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on July 20, 1994 (incorporated by reference
         to the Company's Quarterly Report on Form 10-QSB for the quarter ended
         June 30, 1994).

3.6      Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on December 11, 1995 (incorporated by
         reference to the Company's Quarterly Report on Form 10-QSB for the
         quarter ended December 31, 1995).

3.7      Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on May 1, 1996 (incorporated by reference
         to Exhibit 3.7 of the Company's Annual Report on Form 10-KSB for the
         fiscal year ended February 29, 1996).

3.8      Certificate of Designations of Series A Preferred Stock. (incorporated
         by reference to Exhibit 4 of the Company's Quarterly Report on Form
         10-QSB for the fiscal quarter ended May 31, 1996).
</TABLE>



<PAGE>   77

<TABLE>
<S>      <C>
3.9      Certificate of Designations of Series B Preferred Stock (incorporated
         by reference to Exhibit 4.2 of the Company's Quarterly Report on Form
         10-QSB for the fiscal quarter ended August 31, 1996).

3.10     Certificate of Amendment to Certificate of Incorporation filed with the
         Delaware Secretary of State on February 27, 1998 (incorporated by
         reference to Exhibit 4.2 of the Company's registration statement on
         Form S-8 filed May 20, 1998, File No. 333-53131).

3.11     Certificate of Designations of Series C Preferred Stock (incorporated
         by reference to Exhibit 4.6 of the Company's registration statement on
         Form S-8 filed May 20, 1998, File No. 333-53131).

3.12     Certificate of Designations of Series D Preferred Stock (incorporated
         by reference to Exhibit 4.8 of the Company's registration statement on
         Form S-8 filed May 20, 1998, File No. 333-53131).

3.13     Certificate of Designations of Series E Preferred Stock (incorporated
         by reference to Exhibit 4.7 of the Company's registration statement on
         Form S-8 filed May 20, 1998, File No. 333-53131).

*3.14    Certificate for Renewal and Revival of Charter filed with the Delaware
         Secretary of State on October 29, 1999.

10.1     Employment Agreement dated July 15, 1997, by and between the Company
         and Steven Solomon (incorporated by reference to Exhibit 10.1 to the
         Company's Annual Report on Form 10-KSB for the fiscal year ended
         February 28, 1998).

10.2     Stock Purchase Agreement, dated August 16, 1996, among the Company,
         Kent-Marsh Ltd., Inc., Bob Wesolek and Vance Nesbitt. (incorporated by
         reference to Exhibit 2.1 of the Company's Current Report on Form 8-K
         filed September 3, 1996).

10.3     Stock Purchase Agreement, dated August 16, 1996, among the Company,
         Astonishing Developments, Inc., Bob Wesolek and Vance Nesbitt
         (incorporated by reference to Exhibit 2.2 of the Company's Current
         Report on Form 8-K filed September 3, 1996).

10.4     Agreement, dated April 11, 1997, among the Company, George Sharp and
         Gil Gertner (incorporated by reference to Exhibit 99.1 of the Company's
         Current Report on Form 8-K filed April 11, 1997).

10.5     Form of Offshore Securities Subscription Agreement, Convertible Notes,
         Warrants and Registration Rights Agreement between the Company and
         First Bermuda Securities Limited (incorporated by reference to Exhibits
         99.1 through 99.4 of the Company's Current Report on Form 8-K filed
         March 26, 1997).

10.6     Form of Offshore Securities Subscription Agreement, Convertible Notes,
         Warrants and Registration Rights Agreement between the Company and
         Willora Company Ltd. (incorporated by reference to Exhibits 99.1
         through 99.4 of the Company's Current Report on Form 8-K filed April
         28, 1997).

10.7     Form of Offshore Securities Subscription Agreement, Convertible Notes,
         Warrants and Registration Rights Agreement between the Company and
         Silenus Ltd. (incorporated by reference to Exhibits 99.1 through 99.4
         of the Company's Current Report on Form 8-K filed June 24, 1997).

10.8     Purchase Agreement between the Company and CORESTAFF, Inc., dated
         October 6, 1997 (incorporated by reference to Exhibit 10.10 to the
         Company's Annual Report on Form 10-KSB for the fiscal year ended
         February 28, 1997).

10.9     Warrant to Purchase Common Stock of the Company issued to Worldwide
         PetroMoly Inc. (incorporated by reference to Exhibit 10.11 to the
         Company's Annual Report on Form 10-KSB for the fiscal year ended
         February 28, 1997).

10.10    Series D Preferred Stock Purchase Agreement between the Company and
         METAMOR WORLDWIDE, Inc., dated May 15, 1998 (incorporated by reference
         to Exhibit 10.12 to the Company's Annual Report on Form 10-KSB for the
         fiscal year ended February 28, 1998).
</TABLE>



<PAGE>   78

<TABLE>
<S>      <C>
10.11    Stock Purchase Agreement between the Company and Precision Capital
         Limited Partnership I, dated April 30, 1998 (incorporated by reference
         to Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the
         fiscal year ended February 28, 1998).

10.12    Stock Purchase Agreement between the Company and Icarus Investments I,
         Ltd., dated May 27, 1998 (incorporated by reference to Exhibit 10.14 to
         the Company's Annual Report on Form 10-KSB for the fiscal year ended
         February 28, 1998).

10.13    Stock Purchase Agreement, dated March 11, 1999, among inLighten.com,
         Inc., 2-Lane Media, Inc., and the shareholders of 2-Lane Media,
         Inc.(incorporated by reference to Exhibit 10.15 to the Company's Annual
         Report on Form 10-KSB for the fiscal year ended February 28, 1999).

10.14    Stock Purchase Agreement, dated May 20, 1999, among inLighten.com,
         Inc., Forward Communications, Inc., FCI Services Inc., and the
         shareholders of Forward Communications, Inc. and FCI Services Inc.
         (incorporated by reference to Exhibit 2.1 to the Company's Current
         Report on Form 8-K filed June 3, 1999).

10.15    Agreement and Plan of Reorganization, dated May 20, 1999, among
         inLighten.com, Inc., Forward Freight, Inc., and the shareholders of
         Forward Freight Inc. (incorporated by reference to Exhibit 2.1 to the
         Company's Current Report on Form 8-K filed June 3, 1999).

10.16    Settlement and Release Agreement dated January 14, 2000 by and among
         Richard L. Travis, How2.com, Inc. and the Company (incorporated by
         reference to Exhibit 10.18 to Post-Effective Amendment No. 1 to the
         Company's Registration Statement on Form SB-2 filed March 23, 2000).

10.17    Settlement and Release Agreement dated March 1, 2000 by and among
         Bennett Klein and the Company (incorporated by reference to Exhibit
         10.19 to Post-Effective Amendment No. 1 to the Company's Registration
         Statement on Form SB-2 filed March 23, 2000).

*10.18   Standard Office Lease, dated August 2, 1999, between Arden Realty
         Limited Partnership and How2HQ.com, Inc. (Santa Monica, California).

*10.19   Guaranty of Lease, dated August 2, 1999, by the Company to Arden Realty
         Limited Partnership, with respect to certain obligations of How2HQ.com,
         Inc. under Standard Office Lease.

*10.20   Promissory Note dated September 30, 1999 payable to How2HQ.com, Inc.

10.21    Asset Purchase Agreement dated as of May 5, 2000 by and between EBSCO
         CASIAS, Inc., iNetze.com, Inc., ESRN Acquisition, LLC and the Company
         (incorporated by reference to Exhibit 2.1 to the Company's Current
         Report on Form 8-K filed June 12, 2000).

10.22    Asset Contribution Agreement dated as of May 5, 2000 by and between
         iNetze.com, Inc., ESRN Acquisition, LLC, the Company and the
         stockholders set forth on the signature pages attached hereto
         (incorporated by reference to Exhibit 2.2 to the Company's Current
         Report on Form 8-K filed June 12, 2000).

10.23    Stock Purchase Agreement dated as of May 5, 2000 by and between the
         Company, Tim Collins, F. Shanahan McAdoo and Robert C. Whitehair
         (incorporated by reference to Exhibit 2.3 to the Company's Current
         Report on Form 8-K filed June 12, 2000).

*21      Subsidiaries of the Company.

*23.1    Consent of Ernst & Young LLP.

*23.2    Consent of Grant Thornton LLP.

*27      Financial Data Schedule.
</TABLE>