<PAGE>
                                                                              
 

                      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 28, 1997

  [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934
  
                        Commission file number: 0-08718
                             
                      CITADEL COMPUTER SYSTEMS INCORPORATED
               (Exact 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 600, DALLAS, TX  75219-4421
(Address of principal executive office)

(214) 520-9292
Issuer's telephone number)

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

Securities registered under Section 12(g) of the Act:
                             
                             Common Stock, par value $.01
                                  (Title of class)
                             
Check whether the issuer (1) has 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        No  X   
                                                               ---       ---  

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:.............$5,290,000

As of October 14, 1997, the average bid and ask price of the Company's stock
was $0.75 per share.  The aggregate market value of the voting stock held by
non-affiliates of the Company was $9,043,718.  As of October 14, 1997, there
were 18,536,902 shares of common stock, $.01 par value, outstanding.

Transitional Small Business Disclosure Format.             Yes        No  X  
                                                               ---       --- 


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UNLESS OTHERWISE INDICATED, SHARE AND PER SHARE INFORMATION CONTAINED IN THIS 
REPORT REFLECT THE COMPANY'S ONE-FOR-FIVE REVERSE STOCK SPLIT, EFFECTIVE AS 
OF DECEMBER 11, 1995, THE ONE-FOR-TWO STOCK DIVIDEND PAID ON FEBRUARY 2, 
1996, AND THE ONE-FOR-TWO REVERSE STOCK SPLIT EFFECTIVE AS OF MAY 1, 1996.
                             
                          PART I
                             
ITEM 1. DESCRIPTION OF BUSINESS

This report includes a number of forward-looking statements which reflect the 
Company's current views with respect to future events and financial 
performance. These forward-looking statements are subject to certain risks 
and uncertainties, including those discussed below, that could cause actual 
results to differ materially from historical results or those anticipated. In 
this report, the words "anticipates", "believes", "expects", "estimates", 
"intends", "future", and similar expressions identify forward-looking 
statements. Readers are cautioned not to place undue reliance on these 
forward-looking statements, which speak only as of the date hereof. See 
"Business Risks" on page 14 of this Report.

THE COMPANY

Citadel Computer Systems Incorporated ("Citadel" or the "Company") is a 
developer and marketer of computer software products including security and 
management utilities for networks and personal computers.  The Company's 
products are designed to secure and manage personal computers ("PCs") and 
local area networks ("LANs") and enable network administrators to more 
efficiently manage the networks.  The market demand for the Company's 
products is driven by the rapidly increasing complexity and importance of 
LANs and PCs within organizations.  Network administrators must manage both 
the proliferation of client workstations and desktop applications and the 
increasing access to mission-critical information by a growing number of PC 
users.  The failure to maintain the security of data and the integrity and 
operations of networks can result in a significant loss of productivity and 
in substantial costs for many organizations.

RECENT DEVELOPMENTS FOR THE COMPANY

Fiscal 1997 was a period of significant change for the Company.  The Company 
closed its Houston offices and consolidated its operations in Dallas, Texas. 
The Company also incurred a reduction in force through May 1997, which 
included the Company's President and Chief Executive Officer, Vice President 
of Sales, Vice President of Channel Sales and several other officers.  In 
April 1997, the Company appointed its former Chief Operating Officer, Steven 
B. Solomon, as its new President and Chief Executive Officer, and appointed 
Richard L. Travis, Jr., its Chief Financial Officer, to the additional post 
of Chief Operating Officer. In April 1997, the Company's former Chief 
Executive Officer, George T. Sharp, agreed to terminate his employment 
agreement with the Company in connection with the Company's restructuring 
plans.  Additionally, several key appointments were made to the finance and 
sales, marketing, and engineering functions. In December 1995, Carl Banzhof 
joined the Company and was appointed Vice President -Engineering.  In July 
1997, Mr. Marks the Company's Chief Technology Officer resigned his position 
with the Company and Mr. Banzhof assumed the role of Chief Technology Officer 
of the Company. The new management team began significantly restructuring the 
sales and marketing departments to focus on strategic relationships and OEM 
relationships rather than the telemarketing operations, and changing the 
Company's research and development focus.  Additionally, the Company has 
focused on controlling expenses and as a result of the restructuring, the 
Company estimates that operating expenses have been reduced by at least  
$300,000 per month. Management believes that due to these changes, revenues 
for the first nine months of fiscal 1998 will be lower than for comparable 
prior periods.

In April 1997, the Company entered into an Asset Sale Agreement with Messrs. 
Gertner and Sharp, two of the Company's directors (the "Purchasers"). At the 
date of the agreement, the Purchasers owned approximately 31% of the 
Company's outstanding Common Stock.  The Company sold to the Purchasers, 
$3,750,000 of trade accounts receivable and forgave indebtedness owed by the 
Purchasers to the Company in the amount of $72,000.  The carrying value of 
the receivables at February 28, 1997, net of allowance, was $1,877,000. 
Consideration received consisted of 3,900,000 shares of the Company's Common 
Stock, with a market value of approximately $2,750,000, as of the date of the 
transaction (for accounting purposes, the stock was valued at approximately 
$1,950,000).  The shares acquired represent approximately 23% of the 
Company's then issued and outstanding shares and are held as treasury shares. 
 Pursuant to the participation interest, Citadel will retain a profits 
participation interest in the Assets in the event the Purchasers collect in 

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excess of $2,250,000 of the accounts receivable (after expenses of 
collection), in which case the Purchasers shall pay to Citadel 50% of such 
amounts collected in excess of $2,250,000.  The transaction will result in no 
gain or loss to the Company.

On October 6, 1997, the Company entered into a definitive purchase agreement 
with CORESTAFF, Inc. ("CORESTAFF") whereby CORESTAFF purchased 2.5 million 
shares of the Company's Common Stock for $750,000 and other valuable 
consideration with warrants to purchase an additional 2 million shares (1 
million at $4.00 per share and 1 million at $5.00 per share).  As part of the 
agreement, CORESTAFF will provide development support for the Company, and 
each Company will cross-sell each others products, with Citadel being the 
exclusive distributor of CORESTAFF's "First Step" software program, a 
peer-to-peer system that enables users to easily access multiple systems 
requiring different user codes. CORESTAFF is one of the largest providers of 
information technology and staffing services in the U.S.  CORESTAFF'S 
development division, Millennium Computer Corporation, has in excess of 100 
programmers and will provide development support services to the Company, as 
needed.        

OVERVIEW

The Company's products are designed to reduce clients' costs, improve the 
accuracy of clients' information, maintain the operation of the network, 
secure the network from fraud or unauthorized use and generally enable the 
administrator to devote more time to improving the service to the network 
rather than focusing on operational details.  Citadel's network software 
products operate on operating systems designed by Novell, Microsoft, IBM and 
Apple. Citadel's focus is on the two largest, Novell and Microsoft, whose 
NetWare and Windows NT software control in excess of 70% of the market for 
network operating systems.

The Company's primary products include the Citadel Network Recovery System 
(NRS), NetOFF, TabWorks, Server Sentry, Phantom of the Console, Server Cam, 
WinShield, FolderBolt, NightWatch and C:\More!.  See "--Products." Citadel's 
clients include many Fortune 2000 companies and government agencies.

Citadel's strategy is to develop long-term client relationships and to 
maintain a high level of lifetime client satisfaction, which Citadel believes 
will result in additional recurring revenues from new products and upgrades 
on existing software products.  Citadel has focused its development efforts 
on the client-server LAN market due to the rapid growth of this market as 
companies, government agencies and educational users shift from mainframes to 
client server networks and intranets.  Citadel believes its products are 
positioned to capitalize on this trend.

The Company intends to achieve its strategic goals in part by entering into 
strategic alliances with industry leaders.  In August 1996, the Company 
entered into a strategic relationship with the XSoft division of Xerox 
Corporation ("Xerox"), in which the Company obtained the TabWorks products 
and obtained a license to incorporate XSoft's Summarizer technology for 
bundling in the Company's products.  In December 1996, Microsoft announced 
that it would include the Company's WinShield product in a software bundle 
distributed to the K-12 education market.  In June 1997, Compaq Computer 
Corporation announced that it will include WinShield on certain of their 
Presario personal computers sold in the education markets.  In October 1997, 
the Company entered into a strategic alliance with CORESTAFF with respect to 
CORESTAFF's investment in Citadel and certain joint research and development, 
technology, licensing and marketing activities.  The Company is in 
negotiations to enter into OEM relationships with other industry leaders. The 
Company believes these strategic relationships will result in an increase in 
market penetration, brand recognition, and sales and marketing channels.

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<PAGE>

In February 1996, Citadel acquired Circuit Masters Software, Inc., the 
developer of Server Sentry, Phantom of the Console and Server Cam.  In August 
1996, the Company acquired the Kent-Marsh Group, the companies that developed 
WinShield, FolderBolt and NightWatch.  In August 1996, the Company also 
acquired the TabWorks and related product lines from the XSoft division of 
Xerox, as well as all of the outstanding stock of DanaSoft Corporation 
("DanaSoft"), a maker of specialized software products for Cabletron Spectrum 
modules.  The Company believes that further opportunities may exist to expand 
its product lines by acquiring businesses, products and technologies that 
complement those of the Company.

The Company is the successor to a Delaware corporation (also known as Citadel 
Computer Systems Incorporated ("Old Citadel")) that was formed and began 
operations in June 1992.  References in this Report to "Citadel" or the 
"Company" shall include Citadel and Old Citadel unless the context requires 
otherwise.  On February 29, 1996, a wholly-owned subsidiary of LoneStar 
Hospitality Corporation, the Company's predecessor, merged with Old Citadel 
(the "Merger").  This Merger has been accounted for as a reverse acquisition. 
Accordingly, in discussions in this Report of previous operations and 
pre-merger transactions, the Company is referred to as "LoneStar".

The Company maintains its principal executive offices at 3811 Turtle Creek 
Blvd., Suite 600, Dallas, Texas  75219-4421; the telephone number of this 
office is (214) 520-9292.  The Company maintains a site on the World Wide Web 
at http://www.citadel.com.

INDUSTRY BACKGROUND

Over the last decade, the increasing power, ease of use and low cost of 
personal computers ("PCs") have resulted in extensive use of PCs by 
businesses and organizations.  The computing environment of many businesses 
evolved from a single-vendor mainframe orientation to multi-vendor 
environments with a large number of PCs and workstations.  In response to 
this, organizations have invested in local area networks ("LANs") and 
"intranets" to realize the cost and productivity benefits of sharing 
applications, files, data and peripherals (such as printers) among PC users 
across a workgroup, department or entire enterprise. Client/server networks 
and intranets have become dominant business computing platforms as more PCs 
and workstations have become connected to networks and companies have 
downsized mainframe applications to client/server architectures. As a result 
of the downsizing of mainframe applications to client/server LANs and 
intranets, mission critical functions are increasingly performed over 
client/server networks.  These functions include electronic funds transfers, 
airline, hotel and rental car reservation systems, and telemarketing and 
order entry functions.

Unauthorized access to, or destruction of, the mission critical information 
could have adverse effects on the network or intranet users.  These mission 
critical functions and the continued proliferation of higher speed PCs and 
workstations place increased demands for security and ease of administration 
on the networks transmitting or processing the data.  As a result, 
client/server networks demand additional security and administrative 
functions.  Networks are required to provide greater security to provide 
greater utility and performance to accommodate these improvements and provide 
the greatest benefits to the end user. As increasing numbers of businesses 
use client/server LANs and intranets, the security of data transmission, 
communication and processing over the networks has become critical.

Management believes that the market for network security and administration 
systems and software products has grown over the last several years due to an 
increase in the use of computer networks and the vulnerability of data which 
is transmitted over these networks.  Remote access to proprietary corporate 
information has increased substantially due to the proliferation of LANs and 
WANs in corporations and institutions.  With the increasing use of public and 
private communications networks and the ability of different types of 
computers to communicate with each other, data integrity and security have 
gained increased importance. 


                                       4
<PAGE>

Unrestricted access to computer networks subjects the owner of the network to 
unauthorized interception, electronic vandalism or terrorism and alteration.  
The increased use of networked computers also increases risk, both by 
multiplying the number of access points to valuable data and the number of 
personal computers which can be utilized to obtain unauthorized information.  
The Company believes that the use of computer networks such as the Internet 
and corporate intranets will continue to expand and that, as reliance on 
these networks grows, organizations will become more dependent on the 
integrity and security of the network.  Therefore, the Company believes that 
protecting information on networks such as the Internet and the intranet is 
likely to offer future business growth opportunities.

THE CITADEL SOLUTION

Citadel offers a family of software products that are designed to address a wide
range of network and desktop security and administration requirements.  The
Company's products offer the following benefits:

     BROAD INTEGRATED SOLUTION.  The Company offers an integrated network and 
     desktop security and administration solution that provides the following 
     tools: automatic logoff, configuration protection, encryption, 
     notification of network administrators in the event of system failure 
     and orderly logoff that saves open files and applications.
  
     EASE OF USE.  The Company's products are designed to plug and play 
     within the Citadel Network Administrator so additional functions can be 
     added at low cost.  The look and feel of the interface is designed to be 
     intuitive to the network or PC user and compatible with the operations 
     of desktop and network operating systems, including Windows, Windows NT 
     and NetWare.

     CENTRALIZED CONTROL.  From one console, a LAN administrator can 
     monitor, configure and change the network resources available to network 
     users.

     COST EFFECTIVENESS.  The Company believes its products can reduce the 
     cost of overall system support and maintenance by ensuring an orderly 
     backup, reducing license fees by logging off inactive users, and 
     reducing the personnel resources required to administer the LAN.

CITADEL STRATEGY 

The Company's objective is to become one of the leading suppliers of security
and administration software products for networks and PCs.  The Company seeks to
achieve this objective through the following strategies:
  
     ESTABLISH KEY STRATEGIC RELATIONSHIPS.  The Company intends to 
     leverage its technology and products by entering into strategic 
     relationships with other technology companies.  In August 1996, the 
     Company entered into a strategic relationship with the XSoft division of 
     Xerox to obtain a license to incorporate XSoft's Summarizer technology 
     for bundling in the Company's products.  In December 1996, the Company's 
     WinShield product was included in a Microsoft Corporation ("Microsoft") 
     software bundle distributed to the K-12 education market. In June 1997, 
     Compaq Computer Corporation announced that it will include WinShield on 
     certain of their Presario personal computers sold in the education 
     markets.  In October 1997, the Company entered into a strategic alliance 
     with CORESTAFF with respect to CORESTAFF's investment in Citadel and 
     certain joint research and development, technology, licensing and 
     marketing activities.  The Company is currently involved in ongoing 
     negotiations to enter into OEM relationships with other industry leaders. 
     The Company believes these strategic relationships will result in an 
     increase in market penetration, brand recognition and sales and marketing 
     channels.


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     PROVIDE CLIENTS WITH A BROAD RANGE OF NETWORK AND PC SECURITY AND 
     ADMINISTRATION SOFTWARE PRODUCTS.  The Company has developed a product 
     line designed to enhance the security of data on networks and on the 
     desktop and to enhance the productivity of network administrators in 
     managing networks or intranets.  The Company's products provide a broad 
     array of solutions to problems faced by network administrators and are 
     designed to be compatible with all major network operating systems, 
     including NetWare and Windows NT.
       
     MAINTAIN TECHNOLOGY LEADERSHIP.  The Company intends to maintain its 
     high standards in the design and development of network security and 
     administrative software and providing products that address the security 
     and administration requirements of network administrators and PC users.  
     The Company is committed to the continued development of new and 
     enhanced security software products that incorporate advanced 
     technologies.  The Company has established a research and development 
     team and employs highly skilled technical personnel.
     
     EXPAND SALES AND MARKETING ACTIVITIES. The Company has recently 
     established an Enterprise Sales Group to target larger corporate 
     accounts to supplement the activities of, and to follow up on leads 
     generated by, the Company's inside sales force.  The Company believes 
     that the Enterprise Sales Group will permit larger sales of Company 
     products to large users that can use several Citadel products.  In 
     addition, the Company maintains a site on the World Wide Web at 
     http://www.citadel.com to provide information regarding the Company and 
     to permit users to sample the Company's products over the Internet.
     
     EXPAND THROUGH ACQUISITIONS.  In addition to the Company's internal 
     product development activities, the Company has in the past expanded, 
     and expects in the future to expand, its product line and technologies 
     (including a greater number of software products and applications) 
     through acquisitions of companies or technologies complementary to the 
     Company's current business.  In February 1996, the Company acquired 
     Circuit Masters Software, Inc., the software company that developed 
     Server Sentry, Phantom of the Console and Server Cam.  In August 1996, 
     the Company acquired the Kent-Marsh Group, the company that developed 
     WinShield, FolderBolt and NightWatch.  In August 1996, the Company also 
     acquired the TabWorks and related product lines from the XSoft division 
     of Xerox, and acquired all of the outstanding stock of DanaSoft.  The 
     Company believes that further opportunities may exist to expand its 
     product lines by acquiring businesses, products and technologies that 
     complement those of the Company.

PRODUCT DESIGN STANDARDS

STANDARDS COMPLIANCE.  The Company's policy is to offer products that operate on
network and desktop operating systems that are in wide use.  This provides the
Company's customers with assurance that Company products will function
effectively on their networks.

NETWORK COMPATIBILITY.   The Company's products are typically compatible with
the leading network and desktop operating systems, including Novell's NetWare
and Microsoft's Windows NT network operating systems.  This provides the
Company's customers with assurance that Company products will function
effectively on their networks.

EASE OF USE.  The Company believes that users of its products, while concerned
that their networks are secure, do not wish to be required to take additional
actions to achieve secure status.  Therefore, the Company's products are
designed to function without extensive user involvement, thus offering a high
level of ease of use.


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EASE OF ADMINISTRATION.  The Company has extended its ease-of-use concept to the
central management of a secure network with a product known as the 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.

PRICE PERFORMANCE CRITERIA.  The Company provides products at a price and
performance level that the Company believes offers superior network and PC
security and management options at affordable prices. 

CITADEL PRODUCTS

CITADEL NETWORK RECOVERY SYSTEM.  Citadel introduced its Network Recovery System
("NRS") in August 1996 to provide a network security and administrative solution
that incorporates key features of several of Citadel's products.  The NRS allows
fully unattended shutdown and restart of servers and workstations in the event
of a crash or other catastrophic network event, such as a power outage.  The NRS
is made up of four primary modules that perform the task of detecting fatal
server problems, recovering network servers and giving a microscopic view into
why the network server failed.  The NRS is composed of the Server Sentry,
NetOFF, Phantom of the Console and Server Cam products described below.  These
NRS modules work together to help the network administrator or user to keep
servers up and running by automatically recovering when servers crash.  The NRS
comprehensively initiates and manages the recovery process from the first sign
of a problem through crash analysis and enables the user to reduce downtime and
have the answers to the questions that arise when the network crashes. 
Citadel's NRS provides an integrated solution to help eliminate downtime and
meet service level requirements for mission-critical networks.

NETOFF.  NetOFF is a network management security and utility program designed to
protect a network by shutting down unattended computers automatically when a
user leaves a computer logged on while the user is away from the terminal for a
specified length of time. Network administrators may also set a time for NetOFF
to shut down computers on the network in order to complete a clean backup.  The
program ensures an orderly shut down by automatically closing all open files and
applications on the computer and saving the information.  The latest release of
NetOFF, NetOFF Version 5.0, is available for Windows 95, Windows 3.1,  Windows
NT, and NetWare Versions 3.11 and 4.11 operating environments.  NetOFF provides
three major benefits:

    ENHANCES NETWORK SECURITY.  Unattended computers subject the computer and
    the network to computer theft of confidential files and information. 
    NetOFF logs off unattended computers and helps to secure the network by
    preventing unauthorized use of unattended terminals.
  
    CONSERVES RESOURCES.  Software licenses often require payment for software
    running on the network.  Many companies pay excess license fees for
    programs that are left open on unattended computers.  NetOFF may help
    customers reduce costs by logging off unattended computers.

    PROVIDES A CLEAN BACK-UP.  To further protect corporate information,
    corporations typically employ a back-up system.  The back-up system is a
    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 fed back
    into the computer in a matter of minutes, thereby saving the company
    hundreds of hours required to reenter lost data.  However, the back-up
    system only backs up computers that are logged off from the network.  If a
    computer is logged on during the process, the data from that computer can
    be corrupted or omitted from the back-up tape.  NetOFF eliminates these
    problems by automatically logging off network client stations at a time
    selected by the network administrator.
  

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TABWORKS.  The Company acquired the TabWorks technology in August 1996 from the
XSoft division of Xerox.  TabWorks was developed at the Xerox PARC Research
Laboratory in Palo Alto, California, by an advanced research team.  TabWorks is
a personal document management tool for Windows 95 and 3.1 users that makes it
easier to manage documents and applications, such as spreadsheets, letters,
databases and graphics, by project, customer, function, time frame or other
methods.  TabWorks automatically creates a computerized "book" that lets the
user organize and find documents and applications in a way the user determines,
using familiar organizational tools such as Notebook Tabs, a Table of Contents
and an Index.  TabWorks enables the user to quickly organize and find documents
by automatically creating a Table of Contents that lists the tabbed sections and
all items in the Tab, plus an Index that lists items alphabetically and by
location.  TabWorks updates the Index and Table of Contents when changes are
made to the Tabs.

For example, the user can set up a tabbed section for the "X Account" and put
the related materials, including spreadsheets, letters, reports, schedules,
databases, graphics and documents relevant to the account, together with the
related software applications, on the pages in the tabbed section.  For
security, the user can lock the Tab so that the Tab is tamper proof.  Later,
when the user needs to work on the Account, the user may open the TabWorks book,
using the password, and flip to the X Account tab.  All applications are
immediately available.

SUMMARIZATION. The summarization technology, as used in our newly developed
C:\More! product, parses a file and automatically, through artificial
intelligence, produces a summary of its contents.  The summarized form of the
document contains a definable number of key sentences along with key words that
will allow a user to easily recognize a file's content.  In order to produce the
summarized form, the technology utilizes word proximity, word structure, and
advanced lexicography.

SERVER SENTRY.  The Company believes Server Sentry is the first network
protection system that automatically restarts the file server in the event of a
system crash. Server Sentry automatically notifies network personnel, produces
downtime reports and captures all information available to enable the network
administrator to avoid recurrences.

PHANTOM OF THE CONSOLE.  Phantom operates as a "virtual user" that automates
certain daily server tasks for network file servers, permitting network
administrators to increase LAN productivity. The software automatically executes
commands and runs programs at any set time, day or night, without the need for
an operator at the console.  Phantom preserves server cache memory and improves
overall server performance by scheduling the unloading, loading and execution of
Network Loadable Modules ("NLMs") that must be unloaded for backup to proceed.

SERVER CAM.  Server Cam is a software program that emulates a time-lapse video
recorder connected to the network.  Server Cam captures events as they occur,
which allows network personnel to track down network intruders and vandals. 
Server Sentry may also be used to re-create critical events for training
sessions.

WINSHIELD.  The Company acquired the WinShield product line in connection with
its acquisition of Kent-Marsh and ADI in August 1996.  WinShield is designed to
give the user the power to administer or share computing resources without
losing them.  The program permits the user to control and prevent or protect the
use of diskettes, CD-ROMs and peripheral devices such as printers and to
preserve settings in the desktop appearance, configuration and initialization
files.  WinShield maintains control of the Windows 95 or Windows 3.1 desktop
environment without sacrificing ease of use.  The product prevents accidental or
deliberate configuration damage, protects valuable applications and controls the
use of peripherals.  The program protects against piracy and unsupervised
surfing on the Internet.  The user can govern access to CD-ROM or disk drives
and control the specific CDs that can be mounted.  The user can simplify and
easily protect the desktop environment by shielding the use of Explorer icons
and implementing a wide variety of 


                                     8
<PAGE>


system restrictions.  The user can also toggle between several setup 
environments depending on the persons with whom the computer will be shared. 
The WinShield product has been included in Compaq's and Microsoft's software 
bundles for the education markets.

FOLDERBOLT AND FOLDERBOLT-PRO.  The Company acquired the FolderBolt product line
in connection with its acquisition of Kent-Marsh and ADI in August 1996.  The
product permits the user to lock entire directories and configure shared user
files.

NIGHTWATCH.  The Company acquired the NightWatch product line in connection with
its acquisition of Kent-Marsh and ADI in August 1996.

C:\MORE!.  C:\More! is intelligent media management software that enables 
both individual and networked computer users to quickly and easily find all 
of their computer directories and files, regardless of location. C:\More! 
automatically scans and catalogs the data from virtually all forms of 
computer media, including hard drives, as well as floppy, Iomega-TM-, 
SyQuest-TM-, and Imation-TM- disks - and even CDs.  C:\More! has been 
endorsed and approved as an Iomega-Ready software product. The technology's 
advanced file and tracking capabilities enable users to search for documents 
even among removable media not inserted into the computer.  Currently 
designed for Windows 95 and Windows NT platforms, other platforms will 
include Mac-PC and Windows 3.1 in the near future.  Compatible with all 
popular word processors, office product suites, and graphic formats, C:\More! 
was introduced in September 1997 and will be ready for shipment in November 
1997.
  
Additional Company products include:  (1) NetConsole, which is designed to 
automate input tasks at the server console so that commands can be scheduled 
at an unattended server.  For example, a network administrator will want all 
NLMs unloaded and all users logged off.  NetConsole enables the network 
administrator to schedule these tasks at a time just prior to system backup; 
(2) NetPurge, which automatically searches for old or unused files and moves 
them to archival storage.  Because disk storage on large networks is scarce, 
network administrators must carefully monitor and eliminate inactive files to 
free up space.  NetPurge automates this function; (3) NetQ, which enables 
network users to manage facility queues, such as those for printing, 
archiving, or custom applications.  NetQ constantly updates queuing displays 
so that network administrators can manage queue assignments in real time; and 
(4) NetWatch, which detects and corrects unowned network files.  An unowned 
file is one to which no user has been assigned.  For example, if a user is 
deleted from a network (because of promotion, termination or other reason), 
all files previously owned by that user will be designated as "unowned" by 
the network. Consequently, if an unowned file is modified by a new user, 
NetWare cannot update it, and hours of modifications may be lost.  NetWatch 
eliminates this problem by assigning all unowned files to a supervisor ID or 
other user-specified ID.

SALES AND MARKETING

To address a broad range of sales and marketing opportunities, the Company uses
a multi-channel distribution strategy that includes a combination of direct and
indirect sales and marketing.

SALES.  In 1997, Citadel changed the focus of its selling efforts from a
telemarketing direct sales force to a multi-channel distribution strategy that
includes an enterprise sales group, OEM distribution arrangements, VAR and
dealer channels, direct sales channels, strategic alliances with industry
leaders, and trade shows.

The Enterprise Sales Group is a direct sales force that focuses on end users
that have, or are installing, large, sophisticated enterprise-wide networks. 
These end users may place larger orders for a range of the Company's products. 
The Company recently implemented a value-added reseller program and is also
exploring joint marketing and licensing arrangements with other companies. 
Certain of the Company's products are currently distributed through distributors
(and indirectly, VARs, other resellers, systems integrators and retail outlets),
and the Company expects to rely increasingly on distributors to market its 


                                       9
<PAGE>

other products.  There can be no assurance, however, that such distributors, 
VARs, other resellers, systems integrators and retail outlets will be able to 
market the Company's products effectively. 

Citadel's inside sales operations meet the needs of first-time buyers or 
existing customers making follow-on purchases, which typically purchase small 
volumes, upgrades or special promotions.  The inside sales force provides a 
direct link to the end user, allowing Citadel to develop products and 
services that specifically meet the needs of the network and intranet markets 
and PC users.

MARKETING.  The marketing department is responsible for assessing market 
opportunities, product planning and specific sales support.  In addition, the 
marketing organization is actively involved in obtaining input from potential 
and existing clients, product development, sales and client services and 
support.  As a result of this involvement, the marketing department helps to 
define the scope, features and functionality of new products and product 
upgrades.  Citadel's marketing efforts include display advertising in 
industry publications, direct mail, card deck ads and lead generation at 
industry trade shows.

PRODUCT DEVELOPMENT

Citadel believes that its success will depend largely upon its ability to 
enhance existing products and develop new products that meet the needs of a 
rapidly evolving marketplace and increasingly sophisticated and demanding 
customers.  The Company intends to expand its product offerings and to 
introduce new products for customers seeking additional network and PC 
security and administration features.  While the Company intends to primarily 
develop the products internally, it may, based on timing and cost 
considerations, acquire technologies or products from third parties.

Citadel recently introduced C:\More! and its Network Recovery System, and 
plans to introduce upgrades for its NetOFF, Phantom of the Console, Server 
Sentry, Server Cam, TabWorks and WinShield during the third and fourth 
quarters of fiscal 1998.  The Company also intends to introduce additional 
products and upgrades to address current and future end user needs.

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

The Company accounts for software development costs in accordance with SFAS 
No. 86 issued by FASB, under which the Company is 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.  
Subsequently, capitalized costs are 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.  The Company evaluated the estimated net 
realizable value of each software product at each balance sheet date and 
records write-downs to net realizable value for any product for which the net 
book value is in excess of its net realizable value.  It is reasonably 
possible that future events may cause a reduction in the amortization period 
of software costs.

The Company anticipates that it will continue to commit substantial resources 
to research and development in the future. 


                                      10
<PAGE>

CLIENT SUPPORT AND WARRANTIES

The Company's products are generally warranted to be free of defects in 
materials and workmanship for 90 days.  During and after the expiration of 
the basic warranty period, the Company offers yearly maintenance contracts on 
most of its software and basic technical support and replacement of defective 
media.

MANUFACTURING AND SUPPLIERS

The Company prepares master software disks, user manuals and packaging for 
certain products and out- sources production of other products.  Certain of 
the Company's disk duplication, as well as its product packaging, is 
performed by the Company at its offices, while the other disk duplication and 
product packaging and printing of user manuals and related materials is 
performed to the Company's specifications by outside sources.  During peak 
demand, the Company may use outside sources to perform disk duplication and 
product packaging services.  To date, the Company has not experienced any 
material difficulties or delays in manufacture through an interruption in its 
own production or the production of any suppliers.  Because of the generally 
short cycle between order and shipment, Citadel does not believe that its 
backlog as of a particular date is indicative of future sales.

CUSTOMERS

The Company's customers include many Fortune 2000 companies, and there 
appears to be a strong need for the Company's products within this market 
segment.  There are no assurances that these companies will continue to 
utilize the Company's products in the future.

Citadel believes that a necessary element of its future success will be the 
retention of its customer base.  Therefore, the Company is dedicated to the 
highest level of customer support and satisfaction.  The Company attempts to 
ensure that its sales employees are committed to ensuring the highest level 
of customer satisfaction.  The Company encourages its sales employees who 
interact with the Company's customers to take innovative approaches towards 
ensuring that the customers' needs are met.

The Company's specialized information systems further facilitate the 
Company's goal of total customer satisfaction by allowing the Company's 
representatives to enter comments regarding customers' orders, as well as 
comments regarding feedback, both positive and negative, which the customer 
has given to the Company's representatives.  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.

COMPETITION

The LAN security and administration software industry is intensely 
competitive and rapidly changing.  The Company competes against large 
companies (such as Novell, Microsoft, Cheyenne Software, Inc. and others) 
that offer network and desktop security and administration software as a 
segment of their businesses.  The Company also competes with a large number 
of small companies that offer network security and administration software as 
a major 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 the Company's 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 the Company. Further, many competitors 
have established relationships with customers of the Company and end users of 
the Company's 

                                       11
<PAGE>


products.  The Company's competitors could, in the future, introduce products 
with more features and lower prices than the Company's product offerings.  
These companies could also bundle existing or new products with other, more 
established products in order to compete with the Company.

As the LAN and PC markets develop, a number of companies with significantly 
greater resources than the Company could attempt to increase their presence 
in this market by acquiring or forming strategic alliances with competitors 
of the Company or by introducing products specifically designed for the LAN 
and PC markets.  In addition, Novell or Microsoft, the dominant suppliers of 
operating systems for LANs and PCs, could include, in NetWare or Windows NT 
or other operating systems, functionality similar to that of the Company's 
existing or future products.

The Company and its competitors 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, the Company believes that it has competed 
effectively to date.  The Company expects competition to increase, which 
could result in price reductions and loss of market share for the Company.  
The Company must continue to introduce new products and enhancements to its 
existing products in a timely manner in order to remain competitive.  
However, even if the Company introduces new and enhanced products in a timely 
manner, it may not be able to compete effectively because of the 
significantly larger resources available to many of its competitors.  There 
can be no assurance that the Company will be able to compete successfully or 
that competition will not have a material adverse effect on the Company's 
business.

INTELLECTUAL PROPERTY

The Company's success has been and will be dependent in part on its ability 
to protect its proprietary technology.  The Company relies primarily upon 
trade secrecy and confidentiality agreements to establish and protect its 
rights in its proprietary technology.  The Company does not have any patents 
or statutory copyrights on any of its proprietary technology which the 
Company believes to be material to its future success, and the Company 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 the Company and its employees 
will provide meaningful protection of the Company's proprietary information 
in the event of any unauthorized use or disclosure of such proprietary 
information.

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

EMPLOYEES

As of February 28, 1997, the Company employed 72 individuals, including 22  
in sales  and marketing, 10  in product research and development, 4 in 
production and operations, 10 in customer service and technical support and 
20 in administration, finance and MIS.  The Company believes that its ability 
to recruit and retain highly skilled technical and other management personnel 
will be critical to its ability to execute its business plans.  None of the 
Company's employees are represented by a labor union or are subject to a 
collective bargaining agreement.  The Company believes that its relations 
with its employees are good. 


                                       12
<PAGE>

As part of the Company's restructuring, the Company, by identifying areas for 
greater operational efficiencies  and out-sourcing certain functions 
previously performed in-house, has significantly reduced the number of its 
employees.  As of October 14, 1997, the Company had 24 employees (8 in sales 
and marketing, 5 in product research and development, 1 in production and 
operations, 3 in customer service and technical support and 7 in 
administration, finance and MIS).  The Company anticipates adding some 
additional employees in the sales and marketing and research and development 
areas as resources and need dictate.

GOVERNMENT REGULATION

Government regulation has not had a material effect on the Company's conduct of
its business to date.

SALE OF RESTAURANT ASSETS

As of March 1, 1996, LoneStar consummated the sale of its restaurants in the 
Dallas, Texas area and related development rights to Miami Subs USA, Inc. 
("Miami Subs"), the franchiser of the restaurants. Miami Subs also assumed 
LoneStar's indebtedness of $1,500,000 to Stephens Diversified Leasing, Inc. 
d/b/a Stephens Franchise Finance ("Stephens").  LoneStar received 1,325,000 
shares of Miami Subs' common stock (the "Miami Subs Stock"), and Miami Subs 
has filed a registration with the Securities and Exchange Commission (the 
"SEC") covering the Miami Subs Stock. During the six months following the 
closing, LoneStar cannot sell any of the Miami Subs Stock, except with Miami 
Subs' consent, and Miami Subs has the right to acquire the Miami Subs Stock 
for $2.50 per share.  LoneStar will thereafter be able to sell the Miami Subs 
Stock in private transactions, or in open market transactions not to exceed 
240,000 shares per calendar quarter, or 20,000 shares per week.  All sales by 
the Company are subject to a right of first refusal by Miami Subs. Miami Subs 
has assumed no liabilities of LoneStar, except for LoneStar's loan from 
Stephens and certain restaurant and equipment leases. LoneStar has also 
issued to Miami Subs a promissory note in the principal amount of $1,500,000. 
The note is secured by the Miami Subs Stock and does not bear interest.  The 
maturity date of the note was extended to July 1, 1996, as a result of 
LoneStar's principal payment of $50,000.   The parties have operated under a 
series of standstill agreements and are currently in negotiations with 
respect to the Note.  In June 1997, the Company tendered the stock to Miami 
Subs as payment for the $1,250,000 note payable to Miami Subs.  In addition, 
the Company received 200,000 shares of unrestricted Miami Subs stock and the 
assumption, by Miami Subs, of certain of the Company's restaurant operations 
liabilities.  The Company sold the shares of Miami Subs stock in fiscal 1998.

HISTORICAL BACKGROUND

Effective February 29, 1996, Old Citadel merged into LSHC Acquisition, Inc., 
a wholly owned Delaware subsidiary of LoneStar, pursuant to a Second Amended 
and Restated Agreement and Plan of Merger, dated February 29, 1996 (the 
"Merger Agreement").  Pursuant to the terms of the Merger Agreement, and as 
adjusted for the one-for-two reverse stock split effected on May 1, 1996, 
each stockholder and warrant holder of Citadel received 2.25 shares or share 
equivalents of common stock, par value $.01 per share (the "Common Stock"), 
of the Company for each share of Common Stock of Citadel held by such 
stockholder. Former stockholders of Old Citadel now own approximately 60% of 
the issued and outstanding shares of Common Stock of the Company on a fully 
diluted basis.  On May 1, 1996, after the effective date of the Merger, the 
Company changed its name from LoneStar Hospitality Corporation to Citadel 
Computer Systems Incorporated to better reflect the Merger and effected a 
one-for-two reverse split.

In July 1994, pursuant to another acquisition consummated in March 1994, the
Company changed its name to LoneStar Hospitality Corporation.  From March 1994
until February 1996, the Company owned and operated franchised restaurants in
the Dallas, Texas area.


                                       13
<PAGE>

FORWARD-LOOKING INFORMATION

The statements contained in this Report that are not historical facts, 
including, but not limited to, statements found in this Item 1. "Description 
of Business" and in Item 6. "Management's Discussion and Analysis," are 
forward-looking statements and involve a number of risks and uncertainties.  
The actual results of the future events described in such forward-looking 
statements in this Report could differ materially from those stated in such 
forward-looking statements.  Among the factors that could cause actual 
results to differ materially are:  integration of acquired technology and 
companies, transition of selling and distribution methods, consolidation of 
operations into the Company's Dallas offices, the availability of capital on 
terms acceptable to the Company, general economic conditions, competition, 
the market for the network software products, software development costs and 
possible future litigation, as well as the risks and uncertainties discussed 
in this Report, including, without limitation, the portions referenced above, 
and the uncertainties set forth from time to time in the Company's other 
public reports and filings and public statements.

BUSINESS RISKS 

UNCERTAINTY OF SUCCESS IN SOFTWARE MARKET

The future success of the Company is highly dependent on its ability to 
generate significant revenue from its software product offerings. However, 
the software market is characterized by rapid technological growth and 
intense competition. There can be no assurance that the Company has the 
resources, both financial and personnel, to effectively achieve success in 
this market.

EXPANSION OF DISTRIBUTION CHANNELS

Historically, the Company used primarily a direct sales model, complemented 
with a telesales force, for the sale of its software products. In fiscal 
1997, the Company began to expand its distribution efforts to include third 
party resellers in both the United States and internationally. The Company's 
growth will require it to expand its direct sales force and add distributors 
to market, sell, and support the Company's software products. The Company 
will be increasingly dependent upon distributors for domestic and 
international sales. The Company has only limited experience in marketing its 
products through distributors. The expansion of the Company's distribution 
network and its direct sales force will require the expenditure of 
substantial resources which will be funded primarily through the Company's 
operations. There can be no assurance that the Company will be able to expand 
its distribution channels successfully.

INTENSE COMPETITION

The Company experiences intense competition from other software companies. 
The Company believes that its ability to compete successfully depends on a 
number of factors, including the performance, price, and functionality of its 
products relative to those of its competitors. Most of the Company's 
competitors are larger and have greater financial, technical, marketing, 
support, and other resources than the Company. In addition, the software 
industry is characterized by low barriers to entry. There can be no assurance 
that the Company will be able to compete successfully in the future, or that 
the competition will not have a material adverse effect on the Company's 
operating results and financial condition.

NEED FOR ADDITIONAL FINANCING; GOING CONCERN MATTERS

The Company currently funds product development and the expansion of 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 

                                       14


<PAGE>

available funds prove to be insufficient to fund the Company's presently 
anticipated operations, the Company will be required to seek additional 
financing.  In October 1997, the Company sold 2,500,000 shares of its Common 
Stock to CORESTAFF for $750,000 and other valuable consideration.  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 the Company's then-current 
shareholders.  The Company's auditors have included, in their report on the 
Company's consolidated financial statements, a paragraph regarding the 
ability of the Company to continue as a going concern.  Further reference is 
made to Note C to the Company's consolidated financial statements for 
additional discussion on this matter.

LEGAL PROCEEDINGS

The Company is involved in certain legal proceedings as described in "Item 3. 
Legal Proceedings."  While the Company intends to defend such lawsuits, 
adverse decisions could have a material adverse effect on the Company.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company leases its office premises located at 3811 Turtle Creek Blvd., 
Suite 600, Dallas, Texas, pursuant to a lease that expires in 2001 with two 
five-year renewal options.   The Company believes that these facilities are 
adequate for its current needs and that suitable additional or alternative 
space will be available in the future on commercially reasonable terms as 
needed.

The Company maintains its principal executive offices at 3811 Turtle Creek 
Blvd., Suite 600, Dallas, Texas 75219-4421; the telephone number of this 
office is (214) 520-9292.  The Company maintains a site on the World Wide Web 
at http://www.citadel.com.

ITEM 3.  LEGAL PROCEEDINGS

A former employee of Old LoneStar filed a lawsuit against the Company and one 
of its officers and directors alleging that the Company and/or the individual 
owe the plaintiff additional stock options and seeking damages of $2,600,000. 
The Company and the individual director believe such claims are without 
merit and intend to vigorously defend against the claim and are considering 
filing counterclaims.  The Company has filed an answer in the case, styled 
HEREDIA V. CITADEL, ET AL., in the 298th Court of Dallas County, Texas.

One current and one former employee of the Company have filed a lawsuit 
against the Company demanding payment of a promissory note issued in 
connection with the acquisition of Kent-Marsh and ADI and seeking damages in 
excess of $400,000. The Company believes it has defenses to payment under the 
note.  The Company is currently involved in negotiations with respect to the 
settlement of the case. In the event the settlement negotiations are 
unsuccessful, the Company intends to vigorously defend against the lawsuit.  
The Company has filed an answer in the case, styled NESBITT & WESOLEK  V. 
CITADEL, in the 193rd District Court of Dallas County, Texas.

The Company is involved in an arbitration proceeding with Vestcom,  a group 
that claims it is entitled to compensation and a finder's fee for introducing 
the Company to a third party.  The Company believes it has defenses to such 
claim.  Vestcom has agreed to stay the arbitration proceeding pending a 
decision on one of the Company's defenses in Texas state court.  The Company 
intends to vigorously defend against the claim.

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 routine litigation from time to time.  Such 
litigation is not material to the Company's consolidated financial condition 
or results of operations.

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

During the fourth quarter of the year ended February 28, 1997, no matter was 
submitted to a vote of security holders, through the solicitation of proxies 
or otherwise. 

                                  15
<PAGE>

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 

MARKET INFORMATION

The Company's Common Stock is currently traded on the OTC Bulletin Board 
under the symbol NOFF.  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.  Such prices have been adjusted to 
reflect the one-for-five reverse stock split effected in December 1995, the 
one-for-two stock dividend distributed in February 1996, and the one-for-two 
reverse stock split effected on May 1, 1996. The quotations reflect 
inter-dealer prices, without retail mark-up, mark-down or commission and may 
not represent actual transactions. The Common Stock was traded under the 
symbol LSHO from December 15, 1995, to May 3, 1996, and under the symbol LSHC 
prior to December 15, 1995. 

 FISCAL YEAR                            Bid                      Ask
                                        ---                      ----
                                 High          Low        High         Low
                                 ----          ---        ----         ---
 1996
 ---- 
 1st Quarter                     2.50          .84        9.26         4.16
 2nd Quarter                     5.00          .84        8.34         4.16
 3rd Quarter                     4.58          .75        8.33         2.80
 4th Quarter                     3.88          .50        4.38         2.41


 1997
 ----
 1st Quarter                    18.38         3.50       19.00         4.00
 2nd Quarter                    13.75         3.00       14.00         3.50
 3rd Quarter                     4.63         1.13        4.75         1.19
 4th Quarter                     1.88          .84        1.94          .91


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.  If the Company 
issues preferred stock, the Board of Directors will have the right to 
establish the rights, designations and preferences thereof, including 
preferences as to payment of dividends and liquidation proceeds.

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 in Item 1. 
Business--Forward-Looking Information.  On February 29, 1996, a wholly-owned 
subsidiary of the Company merged with Citadel Computer Systems Incorporated 
(the "Merger").  See "Historical  Background" in Item 1 of this Report. The 
Merger has been accounted for as a reverse acquisition. Accordingly, except 
where noted otherwise, the discussion herein relates to the results of 
operations and liquidity of Citadel, rather than of the pre-Merger operations 
of the Company. 


                                      16
<PAGE>

RESULTS OF OPERATIONS

YEAR ENDED FEBRUARY 28, 1997, AS COMPARED WITH YEAR ENDED DECEMBER 31, 1995 

During the fiscal year ended February 28, 1997, the Company had net sales of 
$5,326,192, an increase of $3,371,353, or 172%, over net sales of $1,954,839 
during the fiscal year ended December 31, 1995.  The Company realized 
additional sales as a result of increased market awareness of its NetOFF, 
Server Sentry and Phantom of the Console products, as well as the addition of 
new vertical marketing channels and an increase in its sales and marketing 
efforts through the expansion of the Company's sales and marketing 
department. 

During the fiscal 1997, the Company has also increased its efforts to enter 
into OEM and joint venture relationships with strategic partners to increase 
its sales channels.  In December 1996, the Company's WinShield product was 
selected by Microsoft for inclusion in a bundled software product targeted 
for the education market.  Additionally, during the second quarter of fiscal 
1998, the Company signed a bundling agreement with Compaq relating to its 
WinShield product.  In October 1997, the Company entered into a strategic 
alliance with CORESTAFF in which CORESTAFF purchased 2,500,000 shares of 
Citadel's common stock and the parties agreed to certain joint research and 
development, technology licensing, and marketing activities.  The Company is 
continuing to explore similar arrangements with other market leaders in the 
technology industry and expects to finalize additional alliances in the 
second and third quarters of fiscal 1998.  The Company expects this channel 
to represent a significant percentage of the Company's revenue in the future.

In addition, the Company has recently started to market its products 
internationally.  While delays in specific country localization of its 
products have resulted in anticipated sales being delayed into future 
quarters, the Company's products are being extremely well received 
internationally, and the Company expects this channel will also represent a 
significant percentage of the Company's revenues in the future.

The Company introduced NetOFF 5, a 32-bit Net Ware and Windows NT product, 
early in the fourth quarter of fiscal 1997 and has recently introduced its 
C:\More! product and expects to launch its new Network Recovery System 
product in the third quarter of fiscal 1998.  The Company also is beta 
testing a Windows 95 32-bit upgrade to its WinShield product line and expects 
to launch additional new products and upgrades in future quarters of fiscal 
1998 that will provide ease-of-use security solutions for Internet and 
intranet applications on Microsoft and Novell platforms.

During the first and second quarter of fiscal year 1998, the Company, as part 
of its restructuring, changed from its mainly telemarketing and trade-show 
model to a more traditional VAR, reseller, OEM and joint venture model.  
While the Company believes the newly adopted strategies will better position 
the Company for the future and will eventually result in increased sales, the 
Company believes that its sales for at least the first two quarters of fiscal 
1998 were below the corresponding level of sales for fiscal 1997.

The costs and expenses incurred in connection with producing the Company's 
products were $304,436 during the fiscal year ended February 28, 1997, an 
increase of $176,853, or approximately 139%, from costs of sales of $127,583 
incurred in the previous fiscal year.  As a percentage of net sales, costs of 
sales decreased in the fiscal year ended February 28, 1997, to 5.7% from 6.5% 
in the prior period.  The decreases in cost of sales, on a percentage basis, 
was primarily the result of greater efficiencies from the higher level of 
sales and the company bringing the fulfillment of orders during the year 
in-house versus out-sourcing these services as it had done in the past.  The 
Company, as part of its restructuring, has recently started to out-source a 
significant portion of its order fulfillment.  Therefore, the Company would 
expect that these expenses may increase, as a percentage of sales, in future 
periods.  However, as an increasing percentage of the Company's sales are 
sold through strategic alliances, electronic commerce, site licensing, etc., 
the actual impact of this on the Company's operating performance is expected 
to be minimal.    


                                       17
<PAGE>

Selling, general and administrative expenses for the fiscal year ended 
February 28, 1997, were $5,939,099, an increase of $4,423,965, or 292%, over 
selling, general and administrative expenses during the prior fiscal year.  
Such expenses increased primarily due to the Company's growth, which included 
the addition of key management and implementation of corporate 
infrastructure; the hiring of sales and marketing, development, and 
administrative personnel; trade show and marketing expenses; the introduction 
of new products and the establishment of the enterprise and VAR and sales 
groups; expenses related to its status as a publicly traded company; its 
continued efforts to expand its product offerings; and the expansion and 
consolidation of its offices.   While, as part of the plan of restructuring 
mentioned earlier, the Company expects selling, general and administrative 
expenses to decrease during the first three quarters of fiscal year 1998.  
The Company expects as revenues increase, it will allocate additional 
resources to selling and marketing activities, thus these expenses may be 
expected to increase in future periods.

Provision for uncollectible accounts increased $1,174,325, or 145%, from 
$809,788 to $1,984,113 for fiscal years ended December 31, 1995 and February 
28, 1997, respectively.  The Company generally delivers its products to 
customers on a 30-day trial basis following receipt of a signed trial 
agreement from customers.  The Company only recognizes revenue if the product 
has not been returned within the 30 days in accordance with the terms and 
conditions of the trial agreement.  Numerous disagreements have arisen 
between the Company and its customers regarding the customer's obligation to 
pay for products delivered.  As a result, a significant portion of the 
Company's sales have not been collected as of February 28, 1997. 

The Company believes these agreements are legally binding contracts and 
intends to continue to pursue the collection thereof.  However, the Company 
has provided an allowance for returns and doubtful accounts of $2,500,000 as 
of February 28, 1997 to cover the potential for uncollectible accounts.
  
Effective April 1997, the Company modified its sales methods and agreements, 
which the Company believes will significantly reduce potential conflicts with 
its customers and should result in a higher rate of collection.  As a result 
of this change, the Company expects sales to decrease for at least the first 
nine months of its fiscal year 1998 and expects sales for the fourth quarter 
to be at or above prior years' levels.
 
Depreciation and amortization expense increased to $942,166 in the fiscal 
year ended February 28, 1997, from $153,224, or an increase of 515% over the 
fiscal year ended December 31, 1995.  This increase is due to the acquisition 
of certain companies and products during the fiscal year. 

Research and development expenses charged to operations for the year ended 
February 28, 1997 were $3,336,523 compared to $136,355 for the year ended 
December 31, 1995, or an increase of $3,200,168.  During fiscal year ended 
February 28, 1997, and in connection with certain acquisitions, the Company 
wrote-off approximately $3,268,040 of purchased in-process research and 
development costs that had not reached the working model stage and for which 
there was no alternative use.  For fiscal year 1997, the Company capitalized 
$456,976 in software development costs which will be amortized over the 
estimated useful lives of the underlying products. As mentioned earlier, the 
Company introduced NetOFF 5, a Windows NT 32-bit product, early in the fourth 
quarter of fiscal 1997 and launched its C:\More! product in September 1997 
and expects to launch its Network Recovery System product in October 1997.  
The Company expects to launch additional new products and upgrades in the 
future quarters of fiscal 1998 that will provide for ease of security 
solutions for Internet and intranet applications on Microsoft and Novell 
platforms. 

During the fiscal year ended February 28, 1997, the Company had a net loss on 
sales of marketable securities of $451,280.  This resulted from a $1,000,000 
charge related to the write-down of the Miami Subs Stock pursuant to the sale 
of the restaurants, offset by a $548,720 gain on the sale of certain 
marketable securities during the year.


                                       18
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents at February 28, 1997 were $15,100.

Cash flows from operations were a negative $6,706,035 for the fiscal year ended
February 28, 1997, compared to negative $1,165,990 for the fiscal year ended
December 31, 1995.  The increase was due principally to the increased net loss
of the Company for the year and the increase in receivables related to the
increased sales. 

Cash used in investing activities was $1,562,464 in the fiscal year ended
February 28, 1997, compared to $156,255 in the prior year.  This increase was
due to the acquisition of businesses and software and an increase in capital
expenditures related to the expansion and development of the Company's
infrastructure.

Cash flows provided by financing activities were $8,158,034 in the fiscal year
ended February 28, 1997, compared to $1,376,067 in the fiscal year ended
December 31, 1995.  This increase was due primarily to the proceeds from the
sale of the Company's common stock, preferred stock, equity notes and proceeds
from the issuance of debt, less repayments. 
 
In fiscal 1997, the Company announced a share repurchase program whereby the
Company is authorized to repurchase up to 500,000 shares of its outstanding
Common Stock in the open market through February 1998.  During the year ended
February 28, 1997, the Company repurchased approximately 85,000 shares for an
aggregate purchase price of approximately $209,787.

As a result of the aforementioned factors, cash and cash equivalents decreased
by $110,465 in the fiscal year ended February 28, 1997.

The Company has recently completed a restructuring which the Company expects 
has resulted in operating expenses being reduced by at least $300,000 per 
month.  In addition, the Company is working with various vendors and lenders 
to restructure payables and debt that is currently owed.  However, even if 
the Company is successful with these endeavors, the Company does not believe 
that the current funds available will be sufficient to fund the Company's 
operations through the end of the year.  As a result, the Company is seeking 
additional capital to fund its operations for the remainder of the year, 
after which the Company believes its operations will be self-sufficient. In 
October 1997, the Company received cash proceeds of $750,000 and other 
valuable consideration from CORESTAFF in connection with the sale of 
2,500,000 shares of Citadel Common Stock.  While the Company has been 
successful in the past in raising additional capital when needed, there can 
be no assurance, however, that the Company will be successful in raising 
capital in the future.  The Company is continuing to look for other sources 
of capital.

On March 11, 1997, the Company had an initial closing with respect to $1,000,000
which is part of a private placement of up to $1,500,000 of 5% Redeemable
Convertible Notes due February 2000 (before fees and expenses).  The Notes were
sold to certain offshore accredited investors pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and Regulation S.  The Company used the
proceeds to retire certain outstanding indebtedness and for working capital. 
The agreement contains certain conversion restrictions as to the percentage of
Notes that may be converted and when such conversions may be made.  The
principal amounts of the Notes may be converted, at the holders option, into
Common Stock of the Company at an exercise price between 80% and 75% of the
average bid price for the five trading days prior to the date of conversion,
depending on the date of conversion.  No conversions are allowed prior to 41
days from the date of closing.  The Company had previously announced its
intention to raise approximately $3 million from a 


                                     19
<PAGE>

private placement during its fourth quarter.  To date, an aggregate of 
$1,000,000 of the notes, as disclosed above, were sold in the private 
placement.  The Company determined to postpone the sale of the remaining 
amounts, but may consider other financing alternatives in the future.

On April 11, 1997, the Board of Directors of the Company authorized the 
redemption of all or a portion of its Redeemable Convertible Notes due in the 
year 2000 and Series B Convertible Preferred Stock upon notice of conversion. 
The Board has initially authorized up to $1.5 million for redemption in 
amounts, and at times, depending on market conditions.

The Company also completed a private placement of $500,000 of 8% Redeemable 
Convertible Notes as of April 11, 1997, due April 11, 2000.  The notes were 
sold to certain offshore accredited investors pursuant to Section 4(2) of the 
Securities Act of 1933, as amended, and Regulation S.  The Company used the 
proceeds to retire certain outstanding indebtedness and for working capital. 
The agreement contains certain redemption provisions which allow the Company 
to redeem all or a portion of the Notes at a certain premium, depending on 
the date of redemption.  The principal amounts of the Notes may be converted, 
after 45 days and at the holders option, into Common Stock of the Company at 
an exercise price of 75% of the average bid price for the five trading days 
prior to the date of conversion.
       
On June 9, 1997, the Company had a closing with respect to $1,125,000 of 8% 
Redeemable Convertible Notes due June 9, 2000 (before fees and expenses).  
The Notes were sold to certain offshore accredited investors pursuant to 
Section 4(2) of the Securities Act of 1933, as amended, and Regulation S.  
The Company used the proceeds to retire certain Convertible Notes and for 
working capital. The agreement contains certain redemption provisions which 
allow the Company to redeem all or a portion of the Notes at a certain 
premium, depending on the date of redemption.  The principal amounts of the 
Notes may be converted, after 45 days and at the holders option, into Common 
Stock of the Company at an exercise price of 75% of the average bid price for 
the five trading days prior to the date of conversion.  In connection with 
this transaction, the Company's Chairman of the Board pledged stock of 
Worldwide PetroMoly, Inc. to secure up to $500,000 of the indebtedness. 

See the Independent Auditors Report and Note C to the Notes to Financial 
Statements to this Report regarding the continued existence of the Company as 
a going concern.

INFLATION

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

ACCOUNTING STANDARDS NOT ADOPTED

In February 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."  SFAS 
No. 128 is not expected to have a material effect on the computation of loss 
per share.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," 
which establishes standards for reporting and display of comprehensive income 
and its components, as defined.  SFAS No. 130 requires that all items that 
must be recognized under accounting standards as components of comprehensive 
income be reported in a financial statement displayed with the same 
prominence as other financial statements.  Adoption of SFAS No. 130 is not 
expected to have a material effect on the Company's financial statements.

In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which requires public
enterprises to report certain financial and descriptive information about
operating segments, as defined, in annual financial statements and selected
information 

                                  20
<PAGE>

in condensed financial statements for interim periods issued to shareholders, 
if practical.  The effect of SFAS No. 131 on disclosures in the Company's 
financial statements has not been determined.

All of the aforementioned accounting standards are effective for years beginning
after December 15, 1997. 


ITEM 7.   FINANCIAL STATEMENTS

The Financial Statements for the fiscal year ended February 28, 1997, are found
following the signature page of this Report.


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

There has been no change in the principal accountant of the Company during the
Company's two most recent fiscal years.

Grant Thornton LLP is the Company's principal accountant.  Old Citadel's former
principal accountant was BDO Seidman, LLP.  BDO Seidman, LLP had audited the
financial statements of Old Citadel for the fiscal year ended December 31, 1994.
                             
                         PART II
                             
ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 

DIRECTORS AND EXECUTIVE OFFICERS

The following table contains information about the Company's directors and 
executive officers. The Company expects that these persons will serve as 
directors until the next annual meeting or until their respective successors 
are duly elected and qualified.  There is currently one vacancy on the Board 
of Directors.

NAME                        AGE   POSITION
----                        ---   --------

Gilbert Gertner              73   Chairman of the Board
George T. Sharp              54   Vice Chairman and Director
Steven B. Solomon            32   President, Chief Executive Officer, Secretary
                                   and Director
Richard L. Travis, Jr.       41   Chief Financial Officer and Chief Operating
                                   Officer
Stuart B. Marks              33   Former Chief Technology Officer
Carl E. Banzhof              30   Chief Technology Officer
Victor K. Kiam, II           72   Director
Mark Rogers                  34   Director
Chris A. Economou            41   Director
Axel Sawallich               53   Director


                                       21
<PAGE>

GILBERT GERTNER has been Chairman of the Company since February 29, 1996, and 
was chairman of Old Citadel from its inception in July 1992 until the Merger. 
From 1990 to 1995, Mr. Gertner was president of Gertner Investments, an 
investment firm specializing in identifying, capitalizing and developing 
high-tech companies. Mr. Gertner served as a director of Microtel 
International, Inc. (formerly known as CXR Telecom Corp.) from 1986 to 1994, 
and as a director of Data Systems and Software, Inc. (formerly known as 
Defense Software and Systems, Inc.) from 1991 to 1994.  Mr. Gertner also 
serves as chairman of the board of directors of Worldwide PetroMoly, Inc., a 
public company involved in the manufacturing and marketing of synthetic 
petroleum products.

GEORGE T. SHARP, Vice Chairman of the Company since May 1997, had served as 
President, Chief Executive Officer and a director of the Company from 
February 29, 1996, through April 25, 1997, and was president of Old Citadel 
from its inception in June 1992.  Prior to founding Citadel, Mr. Sharp was 
president of Matrix Systems Incorporated, which developed software programs 
that provided accounting systems, contact management systems and reporting 
systems to independent insurance companies nationwide.

STEVEN B. SOLOMON has been the President and Chief Executive Officer since 
May 1997 and served as Chief Operating Officer, Secretary and a director of 
the Company from February 29, 1996, through April 25, 1997.  He was the 
president and a director of LoneStar from its inception in February 1992 
until February 1996 and chairman of the Board of Directors from December 1994 
until February 1996. Mr. Solomon also served as developer and executive 
producer of SportsWaves!, a division of LoneStar that produced syndicated 
television programs covering the National Football League and collegiate and 
professional sports. From November 1991 to September 1992, Mr. Solomon served 
as vice president of corporate development for Europa Cruises Corporation. He 
also served as a business advisor and as a development and corporate finance 
consultant. From May 1990 to November 1991, Mr. Solomon served as president 
of Solomon Associates, a firm which offered consulting services relating to 
investments and acquisitions in the shipping industry and venture capital 
projects.

RICHARD L. TRAVIS, JR., Chief Operating Officer and Chief Financial Officer, 
joined Citadel in December 1996 and has almost 20 years of financial 
experience in the manufacturing, financial services, real estate, 
construction and telecommunications industries.  Mr. Travis served for ten 
years as executive vice president and chief financial officer of Texwood 
Industries, Inc., a manufacturing and distribution company.  Prior to joining 
Texwood Industries, Inc., Mr. Travis was senior audit manager from 1983 to 
1986 at Grant Thornton LLP, an accounting firm providing audit, tax and 
management consulting services, where he managed the firm's Dallas Savings 
and Loan practice.  Mr. Travis received a B.S./B.B.A. with honors in 
Accounting from Florida Atlantic University in 1977, and he earned his 
Certified Public Accountant designation in 1978.

STUART B. MARKS, former Chief Technology Officer, joined Citadel in November 
1994.  Mr. Marks has more than 17 years of experience designing and 
developing application software for commercial and entertainment markets, 
including political, real estate, construction, education and financial 
markets.  He has extensive experience in systems integration and is the 
author of Citadel's most recent upgrade of NetOFF.  Mr. Marks was president 
of Marcor, Inc., a software development and consulting group he founded in 
1985, until it was acquired by Citadel in November 1994.  Mr. Marks resigned 
his position with the Company effective July 1997.

CARL E. BANZHOF, present Chief Technology Officer, former Vice President 
-Development of Network Products, joined the Company in February 1996 in 
connection with the Company's acquisition of Circuit Masters Software, Inc. 
Mr. Banzhof has more than 15 years of experience in the software industry, 
including designing, developing and marketing software products; building 
software development teams and organizations and managing products in Network 
Management and PC DESKTOP markets.  He was the founding partner of Circuit 
Masters Software, Inc., a software company which developed and marketed 


                                     22
<PAGE>

network management utilities for Novell NetWare environments, where he served 
as vice president of software engineering from 1992 to 1995.  Prior to 
joining Circuit Masters Software, Inc., Mr. Banzhof was lead software 
developer from 1988 to 1992 at Fluor Daniel Engineering, a software 
development and worldwide engineering company.  He also served as a software 
developer for Micro Computer Business Systems from 1986 to 1987 and for 
Southwest Manufacturing from 1983 to 1986.     

KENNETH JOHNSEN was elected to the board in October 1997.  Mr. Johnsen is 
President of Information Technology Services Group of CORESTAFF and an 
Executive Vice President of CORESTAFF, one of the largest providers of 
information technology and staffing services in the U.S.  Prior to his 
employment with CORESTAFF in May 1997, Mr. Johnsen worked with IBM for 22 
years, as president of worldwide commercial operations for its personal 
computer business and as general manager for IBM's Hong Kong operations from 
1991 to 1993.

VICTOR K. KIAM, II was elected to the Board of Directors in July 1996.  Mr. 
Kiam is chairman of Remington Products, L.L.C., a manufacturer, distributor 
and marketer of electrical shavers and other consumer products based in 
Bridgeport, Connecticut.  Mr. Kiam also serves on the boards of directors of 
several other consumer product companies.

MARK ROGERS was elected to the Board of Directors in July 1996.  Mr. Rogers 
manages NFT Ventures, Inc., the venture capital fund established by Ray 
Noorda, the founder of Novell, Inc.  Through NFT, Mr. Rogers works with 
several computer software companies in Silicon Valley, Texas and Utah, 
ranging from start-up phase through sale of the company.  Mr. Rogers also 
serves on the boards of directors of several other high technology firms.

CHRIS A. ECONOMOU was elected to the Board of Directors of the Company on 
February 29, 1996, and has been a director of LoneStar since June 1993. He 
has been engaged in the private practice of law in Fort Lauderdale, Florida, 
in the areas of real estate, business and corporate law for more than ten 
years. He served as executive vice president, secretary, general counsel and 
director of Miami Subs Corporation from August 1992 until June 1994.  He is 
also a director of Z-Communications, Inc., a privately-held electronic parts 
manufacturer. 

DR. AXEL SAWALLICH has been a director of the Company since February 1996 and 
a director of LoneStar since March 1993.  Dr. Sawallich is in the business of 
providing investment advisory services in Vienna, Austria. Since 1993, Dr. 
Sawallich has been the managing partner of Global Invest, an investment firm 
located in Vienna, Austria, since 1994.  From 1991 until 1994, he was 
employed by SERCO Investment Counseling Corporation, an investment firm 
located in Vienna, and was its executive director from 1992 until 1993.  From 
November 1989 to November 1990, Dr. Sawallich was the general manager and 
director of the Vienna, Austria, regional branch of Allegmeine Sparkasse Bank 
AG, Linz, a banking firm. From May 1985 to November 1989, Dr. Sawallich was 
with Bank fur Arbeit und Wirtschaft AG, a Vienna, Austria banking firm, 
serving as the deputy head of the credit department until 1986 and as the 
executive vice president of the Bank's Bureau for Commercial Customers, 
thereafter.  Dr. Sawallich received a Doctor of Law from the University of 
Vienna.

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

BOARD COMMITTEES AND MEETINGS

During the fiscal year ended February 28, 1997, the Board of Directors held 
two meetings and took action by unanimous consent on one occasion.  Each 
director attended at least 75% of the number of meetings of the Company's 
Board of Directors and committees on which he served. 

Following the Merger, the Board of Directors established an executive 
committee consisting of Messrs. Gertner, Sharp and Solomon.  During the 
fiscal year ended February 28, 1997, the executive committee held    
three meetings and took action by unanimous consent on eight occasions.


                                 23
<PAGE>


COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires 
that the Company's officers, directors and persons who own more than ten 
percent (10%) of a registered class of the Company's equity securities file 
reports of ownership and changes in ownership with the Securities and 
Exchange Commission (the "SEC").  Officers, directors and greater than ten 
percent (10%) shareholders are required by SEC regulations to furnish the 
Company with copies of all Section 16(a) forms they file.  Based solely on 
its review of the copies of such forms received by it, or written 
representations from certain reporting persons that no Form 5s were required 
for those persons, the Company believes that during the fiscal year ended 
February 28, 1997, Mr. Solomon filed Form 4s late.  Such Form 4s related to 
grants to, or extensions of, exercise periods or reductions in exercise 
prices of options held by such persons.

ITEM 10.  EXECUTIVE COMPENSATION

The total compensation for the three fiscal years ended February 28, 1997, 
for George T. Sharp, the Company's former Chief Executive Officer; Steven B. 
Solomon, the Company's current Chief Executive Officer (and the chief 
executive officer of LoneStar prior to the Merger); Stuart B. Marks, the 
Company's former Chief Technology Officer; and Carl E. Banzhof, the Company's 
present Chief Technology Officer (the "Named Executive Officers"), is set 
forth below in the following Summary Compensation Table.  No other person 
received cash compensation in excess of $100,000 during the fiscal year ended 
February 28, 1997.

                SUMMARY COMPENSATION TABLE

                             Fiscal    Annual     Compensation      All Other
     Name and Position        Year     Salary        Bonus        Compensation
     -----------------        ----     ------        -----        ------------
 George T. Sharp,             1997    150,000        42,727        11,400 /1/
  Vice Chairman               1996*    20,833          0                0
                              1995     81,947        45,433             0

 Steven B. Solomon,           1997    120,000        66,496         18,846 /1/
  President, Chief            1996+   110,000          0            13,150 /2/
  Executive Officer           1995     91,923          0            23,900 /3/
  and Secretary               

 Stuart B. Marks,             1997     108,330        1,000             0
  Former Chief                1996      83,162         0                0
  Technolog Officer           1995      34,664 /4/     0                0

 Carl E. Banzhof,             1997     103,228       1,000              0
  Present Chief               1996      15,600 /5/     0                0
  Technology                  1995        0            0                0
  Officer

 ___________________________

 *  Transition period
 +  April 1, 1995 - February 29, 1996


                                       24
<PAGE>

/1/ Mr. Sharp received a car allowance of $950 per month during fiscal year 
ended February 28, 1997.  Mr. Solomon received a car allowance of $950 per 
month and life and disability insurance during fiscal year ended February 28, 
1997.
                             
/2/  Mr. Solomon received a car allowance of $650 per month through June 1995 
and $950 per month after July 1, 1995, life insurance and disability 
insurance during the fiscal year ended February 29, 1996.
                             
/3/  Mr. Solomon received a car allowance of $650 per month during the fiscal 
year ended March 31, 1995.  He also received approximately $15,000 in 
connection with his efforts to raise capital during that fiscal year and 
disability insurance.
                             
/4/ Mr. Marks started to work for the Company in November 1994.  Mr. Marks 
resigned his employment with the Company effective July 1997.
                             
/5/ Mr. Banzhof started to work for the Company in December 1996.
                             
OPTION/SAR GRANTS IN LAST FISCAL YEAR
                             
During the fiscal year ended February 28, 1997, no options were granted to 
the Named Executive Officers.
                             
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR 
VALUES
                             
The following table describes, for each of the Named Executive Officers, 
options exercised and the potential values for their unexercised in-the-money 
options at February 28, 1997:
                             

<TABLE> 
                                                                                                                Value of
                                                                                   Number of                   Unexercised
                                                                              Unexercised Options/           Options/SARs at
                                    Shares                Value                SARs at FY-End(#)               FY-End ($)
                                  Acquired on            Realized                 Exercisable/                Excercisable/
        Name                      Exercise (#)             ($)                   Unexercisable                Unexercisable
--------------------             -------------           --------             -------------------            --------------
<S>                              <C>                     <C>                  <C>
 George T. Sharp                        0                  0                     1,125,000 / 0                 457,031 / 0
 George T. Sharp                        0                  0                       337,500 / 0                   5,484 / 0
 Steven B. Solomon                      0                  0                     1,584,461 / 0                  25,593 / 0
 Stuart B. Marks                        0                  0                        33,345 / 0                     542 / 0

</TABLE>

COMPENSATION OF DIRECTORS
                             
Directors are not compensated for any services provided as directors but are 
reimbursed reasonable expenses incurred in connection with attendance at 
meetings of the Board or committees.
                             
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS 
                             
In March 1996, the Board of Directors approved employment agreements between 
the Company and Messrs. Sharp and Solomon and a consulting agreement between 
the Company and Mr. Gertner.  In April 1997, in connection with the discharge 
of a certain indebtedness due the Company by GGS Investment Company (see also 
"Certain Relationships and Related Transactions"), Mr. Sharp agreed to the 
termination of his 


                                      25
<PAGE>

employment agreement. The following is a brief description of Mr. Sharp's 
prior contract, Mr. Gertner's consulting agreement and Mr. Solomon's 
employment agreement. 
                             
Mr. Sharp's employment agreement, dated December 1, 1995, had an initial term 
through November 30, 2000, with automatic renewals annually unless otherwise 
extended or terminated in writing.  Mr. Sharp's employment agreement provided 
for an annual base salary and permitted bonuses at the discretion of the 
Board. The base salary was $150,000 during the first year of the agreement, 
$165,000 during the second year, $181,500 during the third year, $199,644 
during the fourth year and $219,600 during the fifth year.  If Mr. Sharp was 
unable to perform his duties during the term because of personal injury, 
disability or illness, the Company was required to pay his salary during the 
full term of the agreement.  In consideration of certain intellectual 
property that Mr. Sharp contributed to the Company in the past, the Company 
could not terminate his employment for any reason during the initial 
five-year term of the agreement. If, however, the Company elected to 
terminate the employment agreement for any reason during the initial 
five-year term, the balance of the base salary during the balance of that 
initial term would be accelerated and payable immediately.  This contract was 
terminated in April 1997.

Mr. Gertner's consulting agreement, dated December 1, 1995, has an initial 
term expiring November 30, 2000, with automatic renewals annually unless 
terminated in writing or otherwise extended.  Mr. Gertner's consulting 
agreement provides for an annual compensation, with additional compensation 
at the discretion of the Board.  The compensation was $120,000 during the 
first year of the consulting agreement, $132,000 during the second year and 
$144,000 during remaining three years of the consulting agreement. If Mr. 
Gertner's consulting contract is terminated, other than for death or 
disability, he shall be entitled to any unpaid compensation and additional 
compensation, and any options to purchase Company securities exercisable 
during the term of the consulting agreement would become immediately 
exercisable.
                             
Mr. Solomon's employment agreement is dated as of March 1, 1996, and its 
initial term expires on February 28, 2001.  The agreement will be 
automatically renewed annually unless terminated in writing or otherwise 
extended.  Mr. Solomon's employment agreement provides for an annual base 
salary and permits the award of bonuses at the discretion of the Board.  The 
base salary is $120,000 during the first year of the employment agreement and 
will be $132,000 during the second year and $144,000 during the remaining 
three years of the employment agreement. If Mr. Solomon is terminated other 
than for cause, he will be entitled to a severance payment equal to the 
greater of the remaining payments due under the employment agreement or any 
extension thereof, discounted at 6%, or 24 months' base salary in effect at 
the time of such termination.
                             
The Company shall provide life insurance in the amount of $1,000,000 on the 
life of Mr. Solomon, in addition to key man life insurance policy on Mr. 
Solomon maintained by the Company for its benefit.  The Company also provides 
disability insurance for Mr. Solomon.  The Company shall provide Mr. Solomon 
with an automobile allowance of $950 per month and automobile liability 
insurance.
                             
REPRICING OF OPTIONS
                             
In June 1995, the board of directors of LoneStar approved the reduction in 
the exercise price of several outstanding options and warrants from their 
existing exercise prices to $.33-1/3 per share.  Among the options with 
respect to which exercise prices were lowered were certain options held by 
directors or former directors of LoneStar and included an option to purchase 
9,461 shares of Common Stock held by each of Mr. Solomon and three other 
persons.  See Item 12. "Certain Relationships and Related Transactions." In 
its action, the LoneStar board reduced the exercise price from $3.98 per 
share to $.33-1/3 per share for the period from June 27, 1995, until October 
15, 1995, at which time the exercise price reverted to $3.98 per share.


                                       26
<PAGE>
                             
The LoneStar board approved the reduction for two principal reasons.   First, 
the board wished to provide its investors, including members of the LoneStar 
board, with an opportunity to bring their basis in their investment in 
LoneStar to a level that was closer to the then-current market price of  
LoneStar's common stock.  Second, the LoneStar board wanted to encourage 
these persons to increase their investment in LoneStar at a time when 
additional funds were needed in connection with the operation and growth of 
LoneStar's business.  Mr. Solomon elected not to exercise the aforementioned 
option at the reduced exercise price.
                             
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 
                             
The following information is submitted as of October 14, 1997, with respect 
to the Company's voting securities owned beneficially by each person known by 
the Company owning more than five percent (5%) of the Common Stock of the 
Company (the only class of voting securities now outstanding) and by all 
directors and executive officers of the Company, individually and as a group. 
 Unless otherwise indicated, the number of shares and percentage of ownership 
of Common Stock for each of the named stockholders assumes that shares of 
Common Stock that the stockholder may acquire within 60 days of the Record 
Date are outstanding. As of October 14, 1997, the Company had 18,536,902 
shares of Common Stock outstanding.
                                                                    
                                                               APPROXIMATE
NAME AND ADDRESS                       NUMBER OF SHARES     PERCENT OF CLASS
----------------                       ----------------     ----------------

Gilbert Gertner                           2,744,000 /1/            13.6%
1300 Post Oak Blvd., 9th Floor
Houston, Texas  77056
                             
George T. Sharp                           1,762,500 /1/             8.8%
1300 Post Oak Blvd., 9th Floor
Houston, Texas  77056
                             
Steven B. Solomon                         3,803,000 /2/            18.5%  
3811 Turtle Creek Blvd., Suite 600
Dallas, Texas  75219-4421
                             
Richard L. Travis, Jr.                      671,500 /3/             3.5%
3811 Turtle Creek Blvd., Suite 600
Dallas, Texas  75219-4421
                             
Carl Banzhof                                233,151 /4/             1.3%
3811 Turtle Creek Blvd., Suite 600
Dallas, Texas  75219-4421
                             
Chris A. Economou                           274,400 /5/             1.5%
150 North Federal Highway, Suite 210
Fort Lauderdale, Florida  33301 

Kenneth Johnsen                                   0                   *
CORESTAFF, Inc.
4400 Post Oak Parkway
Suite 2000
Houston, Texas 77027

Victor K. Kiam, II                          472,500 /6/             2.5%
RPI Corporation
350 Fifth Avenue, Suite 5408
New York, New York 10018


                                            27
<PAGE>


Mark Rogers                                 200,000 /7/              1.1%
NFT Ventures, Inc.
751 Laurel Street, No. 119
San Carlos, California 94070
                             
Axel Sawallich                              269,461 /8/              1.4%
Rudolfplatz 10
A-1080 Vienna, Austria

CORESTAFF, Inc.                           4,500,000 /9/             21.9%
4400 Post Oak Parkway
Suite 2000
Houston, Texas 77027

All officers and directors as a group               
(10 persons):                            10,430,512 /10/            41.8%

---------------
*Less than one percent.
                             
/1/  Includes 1,462,500 shares presently issuable pursuant to an option to 
purchase Common Stock.  The number of shares held by Mr. Gertner also 
includes warrants to purchase 150,000 shares held by Worldwide PetroMoly, 
Inc., a company controlled by Mr. Gertner.
                             
/2/  Includes 2,075,000 shares presently issuable pursuant to options to
purchase Common Stock.
                             
/3/  Includes 650,000 shares presently issuable pursuant to options to purchase
Common Stock.

/4/  Includes 50,000 shares presently issuable pursuant to options to purchase 
Common Stock.

/5/  Includes 100,000 shares presently issuable pursuant to options to 
purchase Common Stock.

/6/  Includes 262,500 shares presently issuable pursuant to options to purchase
Common Stock.
                             
/7/  Includes 200,000 shares presently issuable pursuant to options to purchase
Common Stock.
                             
/8/  Includes 112,500 shares held by Dr. Sawallich as trustee, over which he has
voting and dispositive power and 50,000 shares presently issuable pursuant to 
options to purchase Common Stock.

/9/  Includes 2,000,000 shares presently issuable pursuant to warrants to 
purchase Common Stock owned by CORESTAFF and 2,500,000 shares owned by 
CORESTAFF.

/10/ Includes all shares presently issuable pursuant to presently exercisable
options held by Messrs. Gertner, Sharp, Banzhof, Solomon, Travis, Kiam, 
Rogers, Economou, and Sawallich.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
                             
In connection with a $1,125,000, 8% Redeemable Convertible Note offering 
dated June 9, 1997, the Company's Chairman of the Board pledged stock of a 
company controlled by him to secure the repayment of up to $500,000 of this 
indebtedness.
                             
In April 1997, the Company entered into an Asset Sale Agreement with Messrs. 
Gertner and Sharp, two of the Company's directors (the "Purchasers"). At the 
date of the agreement, the Purchasers owned approximately 31% of the 
Company's outstanding Common Stock.  The Company sold to the Purchasers, 
$3,750,000 of trade accounts receivable and forgave indebtedness owed by the 
Purchasers to the Company in the amount of $72,000.  The carrying value of 
the receivables at February 28, 1997, net of allowance, was $1,877,000. 
Consideration received consisted of 3,900,000 shares of the Company's Common 
Stock, with a market value of approximately $2,750,000, as of the date of the 
transaction (for accounting purposes, the stock was valued at approximately 
$1,950,000).  The shares acquired represent approximately 23% of the 
Company's then issued and outstanding shares and are held as treasury shares. 
 Pursuant to the participation interest, Citadel will retain a profits 
participation interest in the Assets in the event the Purchasers collect in 
excess of $2,250,000 of the accounts receivable (after expenses of 

                                    28
<PAGE>

collection), in which case the Purchasers shall pay to Citadel 50% of such 
amounts collected in excess of $2,250,000.  The transaction will result in no 
gain or loss to the Company.
                             
At various times during the year ended February 28, 1997, Messrs. Gertner, 
Sharp and Solomon, or their affiliates, personally guaranteed or pledged 
securities to secure the repayment of various obligations of the Company, 
including the personal guarantees of Messrs. Gertner and Sharp and the pledge 
by Messrs. Gertner and Solomon of stock to secure the repayment of certain 
loans.  At various times during the year ended February 28, 1997, Messrs. 
Gertner, Sharp and Solomon, or their affiliates, advanced funds to Citadel to 
fund various short-term obligations of Citadel.  See Item 6. "Management's 
Discussion and Analysis."
                             
In December 1996, Worldwide PetroMoly, Inc., a company controlled by Mr. 
Gertner, Chairman of the Board of the Company, made a loan to Citadel in the 
original principal amount of $500,000.  In connection with the loan, Citadel 
granted warrants to purchase 150,000 shares of Citadel Common Stock at an 
exercise price of $2.00 per share (the exercise price was reduced to $.59 per 
share in connection with Mr. Gertner's assumption of this indebtedness in 
connection with the discharge of a certain GGS joint venture note due the 
Company as discussed below).  The loan was secured by a pledge of 732,375 
shares of Citadel Common Stock owned by Mr. Solomon, a director and officer 
of the Company.  The loan bears interest at ten percent (10%) per annum and 
had a one-month term.  The Company made a payment of $250,000 in March 1997, 
and Mr. Gertner and Mr. Sharp agreed to assume the balance of the remaining 
indebtedness pursuant to the discharge of the joint venture's indebtedness 
due the Company, as detailed below.  Although Messrs. Gertner and Sharp 
agreed to assume the Citadel note, obtain the release of Citadel and the 
return of Mr. Solomon's shares, Worldwide PetroMoly has not yet signed a 
release or returned the shares.

In November 1996, the Company made a one-year, $625,000, 8% loan to GGS 
Investment Company ("GGS"), a joint venture owned by Mr. Gertner, Chairman of 
the Board of the Company, Mr. Sharp, former Chief Executive Officer of the 
Company and Steven B. Solomon, former Chief Operating Officer of the Company, 
who were also directors and owned an aggregate of approximately 6,800,000 
shares of the Company's outstanding Common Stock, at that time.  The purpose 
of the joint venture was to invest in securities for short-term profits.  The 
loan agreement provided that interest would be waived for the first six 
months in consideration of 100% of the net profits, during that period, being 
paid to the Company.  The loan was guaranteed by each of the officers, and 
the guaranty was secured by a pledge of 754,000 shares of the Company's 
Common Stock, valued at approximately $1,282,000 as of the date of the 
transaction.
                             
The joint venture was not profitable, and the loan was discharged subsequent 
to February 28, 1997 in the following manner: Mr. Solomon forgave $78,000 of 
accrued compensation due him, Mr. Gertner and Mr. Sharp assumed debt of 
approximately $275,000 (including accrued interest) due to a company 
controlled by him, Mr. Sharp received a credit against the loan of $200,000 
as consideration for agreeing to terminate his noncancellable employment 
contract, and approximately $72,000 was forgiven in connection with the Asset 
Sale Agreement discussed above.

In February 1996, LoneStar issued to Chris A. Economou, Steven R. Leipsner, 
David S. Lundeen and James E. Bradshaw, each being a member of the Board of 
Directors, as then constituted, options to acquire 25,000 shares of Common 
Stock at $3.50 per share until May 31, 1996.
                             
During the fiscal year ended February 29, 1996, Axel Sawallich, a director of
the Company, received options to purchase 75,000 shares of Common Stock as
compensation for his assistance in the placement of securities to investors in
Europe.


                                        29
<PAGE>
                             
Chris A. Economou, a director of the Company, provided legal services to
LoneStar. During the fiscal year ended February 29, 1996, Mr.  Economou agreed
to receive 105,500 shares of Common Stock in lieu of $35,000 as legal fees for
legal services performed for the Company.

Lawrence E. Steinberg, a director of LoneStar until February 29, 1996, is of
counsel to Jenkens & Gilchrist, a Professional Corporation, a Dallas law firm
that performs legal services for LoneStar.  During the year ended February 29,
1996, LoneStar had incurred legal fees totaling $418,784 to Jenkens & Gilchrist.
                             
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 
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 Citadel Computer Systems 
Incorporated 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 Citadel Computer Systems 
Incorporated 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 Citadel Computer Systems, Inc.; Circuit 
Masters Software, Inc.; Patrick William Mulvany and Kim Marie Newman, dated 
May 16, 1996, but 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)


                                       30
<PAGE>

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-K SB 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)
                             
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)
                             
10.1   Employment Agreement dated December 1, 1995, by and between Citadel 
Computer Systems Incorporated and George Sharp. (incorporated by reference to 
Exhibit 10.3 of the Company's Annual Report on Form 10-KSB for the fiscal 
year ended February 29, 1996)
                             
10.2   Consulting Agreement dated December 1, 1995, by and between Citadel 
Computer Systems Incorporated and Gilbert Gertner. (incorporated by reference 
to Exhibit 10.4 of the Company's Annual Report on Form 10-KSB for the fiscal 
year ended February 29, 1996)
                             
10.3   Employment Agreement dated March 1, 1996, by and between Citadel 
Computer Systems Incorporated and Steven B. Solomon. (incorporated by 
reference to Exhibit 10.5 of the Company's Annual Report on Form 10-KSB for 
the fiscal year ended February 29, 1996)
                             
10.4   Stock Purchase Agreement, dated August 16, 1996, among Citadel 
Computer Systems Incorporated, 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)
                             
10.5   Stock Purchase Agreement, dated August 16, 1996, among Citadel 
Computer Systems Incorporated, 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)
                             
10.6   Agreement, dated April 11, 1997, among Citadel, 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)
                             
10.7 Form of Offshore Securities Subscription Agreement, Convertible Notes, 
Warrants and Registration Rights Agreement between Citadel Computer Systems 
Incorporated 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)


                                      31
<PAGE>

10.8 Form of Offshore Securities Subscription Agreement, Convertible Notes, 
Warrants and Registration Rights Agreement between Citadel Computer Systems 
Incorporated 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)

10.9 Form of Offshore Securities Subscription Agreement, Convertible Notes, 
Warrants and Registration Rights Agreement between Citadel Computer Systems 
Incorporated 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)
                             
*10.10 Purchase Agreement between Citadel and CORESTAFF, Inc., dated
October 6, 1997.
                                
*10.11 Warrant to Purchase Common Stock of Citadel issued to 
Worldwide PetroMoly Inc.

*21    Subsidiaries of the Company.

*23.1  Consent of Grant Thornton LLP.

*27    Financial Data Schedule.

-----------------
* Filed as part of the Form 10-KSB for fiscal year ended February 28, 1997.

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 28, 1997.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the Registrant has duly caused this report to be signed 
on its behalf by the undersigned thereunto duly authorized.

CITADEL COMPUTER SYSTEMS INCORPORATED

/s/ Steven B. Solomon
---------------------------------------
Steven B. Solomon
President and Chief Executive Officer 
Dated: October 16, 1997

                                         32
<PAGE>

In accordance with the Exchange Act, this report has been signed below by the 
following persons on behalf of the Registrant and in the capacities and on 
the dates indicated:

Name and Title                                                Date
--------------                                                ----

-------------------------------------                    October 16, 1997
Gilbert Gertner
Chairman of the Board of Directors

/s/ George T. Sharp
-------------------------------------                    October 16, 1997
George T. Sharp
Vice Chairman and Director

/s/ Steven B. Solomon
-------------------------------------                    October 16, 1997
Steven B. Solomon
President, Chief Executive Officer, Secretary and
Director (Principal Executive Officer)

/s/ Richard L. Travis, Jr.
-------------------------------------                    October 16, 1997
Richard L. Travis, Jr.
Chief Financial Officer and Chief Operating Officer
(Principal Accounting Officer)

/s/ Victor K. Kiam, II
-------------------------------------                    October 16, 1997
Victor K. Kiam, II
Director


-------------------------------------                    October 16, 1997
Mark Rogers
Director

/s/ Chris A. Economou
-------------------------------------                    October 16, 1997
Chris A. Economou
Director 

/s/ Dr. Axel Sawallich
-------------------------------------                    October 16, 1997
Dr. Axel Sawallich
Director


------------------------------------                     October 16, 1997
Ken Johnsen
Director




                                         33
<PAGE>

                        INDEX TO FINANCIAL STATEMENTS

Report of Independent Certified Public Accountants                       F-2
Consolidated Balance Sheets                                              F-3
Consolidated Statements of Operations                                    F-5
Consolidated Statement of Stockholders' Equity (Deficit)                 F-6
Consolidated Statements of Cash Flows                                    F-7
Notes to Consolidated Financial Statements                               F-8


                                      F-1

<PAGE>



                REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                                       


Board of Directors
Citadel Computer Systems, Incorporated


We have audited the accompanying consolidated balance sheets of Citadel 
Computer Systems, Incorporated as of February 28, 1997, February 29, 1996 and 
December 31, 1995 and the related consolidated statements of operations, 
stockholders' equity (deficit), and cash flows for the year ended February 
28, 1997, the two months ended February 29, 1996 and the year ended December 
31, 1995.  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 audits.

We conducted our audits in accordance with generally accepted auditing 
standards.  Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement.  An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements.  
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe our audits provide 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 Citadel 
Computer Systems, Incorporated as of February 28, 1997, February 29, 1996 and 
December 31, 1995, and the consolidated results of their operations and their 
consolidated cash flows for the year ended February 28, 1997, the two months 
ended February 29, 1996 and the year ended December 31, 1995, in conformity 
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming the Company 
will continue as a going concern.  As discussed in Note C to the financial 
statements, the Company had a net loss of $7,515,607 for the year ended 
February 29, 1997, losses have continued through June 30, 1997, and the 
Company does not have adequate cash to support its operations.  Management's 
plans with regard to these matters are discussed in Note C.  These matters 
raise substantial doubt about the Company's ability to continue as a going 
concern.  The financial statements do not include any adjustments that might 
result from the outcome of this uncertainty.



GRANT THORNTON LLP

Dallas, Texas
August 29, 1997 (except for the last
  paragraph of Note Q,
  as to which the date is
  October 6, 1997)

                                       F-2

<PAGE>
                                       
                    CITADEL COMPUTER SYSTEMS, INCORPORATED
                                       
                         CONSOLIDATED BALANCE SHEETS



<TABLE>
                                                            February 28,    February 29,
                     ASSETS                                     1997           1996     
                                                            -----------     -----------
<S>                                                         <C>             <C>
CURRENT ASSETS
  Cash                                                      $    15,100     $  125,565
  Accounts receivable, less allowance for returns and 
    doubtful accounts of $625,000 and $325,000                  727,422        484,336
  Notes receivable from related parties                         870,000              -  
  Marketable securities available for sale                    1,250,000              -  
  Assets under contract of sale                                       -      2,605,772
  Other                                                          57,106         82,405
                                                            -----------     ----------
    Total current assets                                      2,919,628      3,298,078

ACCOUNTS RECEIVABLE - NONCURRENT, less allowance 
    for returns and doubtful accounts of $1,875,000           1,875,000              -

PROPERTY AND EQUIPMENT, NET                                     696,459        110,327

PURCHASED SOFTWARE, NET OF ACCUMULATED
  AMORTIZATION OF $854,000 AND $188,000                       4,396,398      2,622,000

CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
  NET OF ACCUMULATED AMORTIZATION OF $19,000 AT
  FEBRUARY 28, 1997                                             573,388        135,412

OTHER ASSETS                                                    263,220        249,046
                                                            -----------     ----------
                                                            $10,724,093     $6,414,863
                                                            -----------     ----------
                                                            -----------     ----------
</TABLE>



                                       F-3
<PAGE>

                     CITADEL COMPUTER SYSTEMS, INCORPORATED
                                       
                    CONSOLIDATED BALANCE SHEETS - CONTINUED



<TABLE>
                                                            February 28,    February 29,
          LIABILITIES AND STOCKHOLDERS' EQUITY                  1997           1996     
                                                            -----------     -----------
<S>                                                         <C>             <C>
CURRENT LIABILITIES
  Cash overdraft                                            $   167,256     $        - 
  Current maturities of long-term debt                          804,141              -  
  Notes payable                                               2,456,087      4,034,214
  Accounts payable and accrued expenses                       2,253,481      2,030,800
                                                            -----------     ----------
    Total current liabilities                                 5,680,965      6,065,014

LONG-TERM LIABILITIES
  Debt, less current maturities                               1,770,905              -  
  Accounts payable                                                    -         34,360
                                                            -----------     ----------
    Total long-term liabilities                               1,770,905         34,360
                                                            -----------     ----------
    Total liabilities                                         7,451,870      6,099,374

COMMITMENTS AND CONTINGENCIES                                         -              -  

STOCKHOLDERS' EQUITY
  Common stock, $.01 par value per share; authorized, 
    30,000,000 shares; issued, 16,501,980 shares
    in 1997 and 11,509,126 shares in 1996                       165,020        115,091
  Preferred stock, $.01 par value per share; authorized,
    1,000,000 shares; issued and outstanding, 545 shares of 
    Series B convertible (liquidation value of $545,000)              5              -  
  Equity notes                                                  300,000              -  
  Additional paid-in capital                                 13,370,627      2,405,144
  Accumulated deficit                                        (9,854,067)    (2,204,746)
  Unrealized loss on securities available for sale             (355,772)             -  
  Treasury stock, at cost (264,613 shares)                     (353,590)             -  
                                                            -----------     ----------
    Total stockholders' equity                                3,272,223        315,489
                                                            -----------     ----------
                                                            $10,724,093     $6,414,863
                                                            -----------     ----------
                                                            -----------     ----------
</TABLE>


        The accompanying notes are an integral part of these statements.



                                       F-4
<PAGE>

                    CITADEL COMPUTER SYSTEMS, INCORPORATED
                                       
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                       



<TABLE>
                                                               Two months 
                                                Year ended        ended       Year ended   
                                                February 28,   February 29,   December 31, 
                                                   1997           1996           1995      
                                                -----------    -----------    -----------
<S>                                             <C>            <C>            <C>
REVENUES
  Sales                                         $ 5,824,553    $  301,781     $ 2,562,530
  Less returns for allowances                       498,361        34,703         607,691
                                                -----------    ----------     -----------
      Net sales                                   5,326,192       267,078       1,954,839

COST OF SALES                                       304,436        24,308         127,583
                                                -----------    ----------     -----------
      Gross profit                                5,021,756       242,770       1,827,256

OPERATING EXPENSES
  Selling, general and administrative expenses    5,939,099       507,325       1,515,134
  Provision for uncollectible receivables         1,984,113        76,398         809,788
  Depreciation and amortization                     942,166        29,199         153,224
  Research and development expense                3,336,253        32,842         136,355
                                                -----------    ----------     -----------
                                                 12,201,631       645,764       2,614,501
                                                -----------    ----------     -----------

      Operating loss                             (7,179,875)     (402,994)       (787,245)

OTHER INCOME (EXPENSE)
  Interest expense                                 (253,557)      (31,579)       (250,525)
  Write-down of marketable securities            (1,000,000)            -               -  
  Gain on sales of marketable securities            548,720             -               -  
  Other                                             369,105        45,036         (71,878)
                                                -----------    ----------     -----------
                                                   (335,732)       13,457        (322,403)
                                                -----------    ----------     -----------

      NET LOSS                                  $(7,515,607)   $ (389,537)    $(1,109,648)
                                                -----------    ----------     -----------
                                                -----------    ----------     -----------

Loss per share                                        $(.56)        $(.06)          $(.17)
                                                      -----         -----           -----
                                                      -----         -----           -----

Weighted average shares outstanding              13,721,032     6,750,000       6,570,284
                                                -----------    ----------     -----------
                                                -----------    ----------     -----------
</TABLE>



        The accompanying notes are an integral part of these statements.



                                       F-5
<PAGE>
               CITADEL COMPUTER SYSTEMS, INCORPORATED         
      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
                                                                     Unrealized
                                                                      loss on
                               Common stock                          securities  Additional  
                            -----------------  Preferred    Equity    available    paid-in     Accumulated  Treasury
                             Shares    Amount    stock      notes     for sale     capital       deficit     stock          Total
                           ----------  -------  -------     ------   -----------  ----------   -----------  --------     -----------
<S>                        <C>         <C>        <C>      <C>       <C>          <C>          <C>          <C>          <C>        
Balance at January 1,         
  1995                          2,895  $     29 $   -     $       -  $      -     $   825,485  $  (705,561) $     -     $   119,953
Issuance of common         
  stock                           105         1     -             -         -          55,519           -         -          55,520
1,000-for-1 stock split,                                                                                                           
  effective in the form                                                                                                            
  of a stock dividend       2,997,000    29,970     -             -         -         (29,970)          -         -             - 
Net loss                           -         -      -             -         -             -     (1,109,648)       -      (1,109,648)
                           ----------  -------- ------    ----------- ----------- -----------  -----------  --------   ------------
Balance at December 31, 
  1995                      3,000,000    30,000     -             -         -         851,034   (1,815,209)       -        (934,175)
Recapitalization of 
  Citadel Computer 
  Systems, Incorporated
  and merger with 
  LoneStar Hospitality 
  Corp.                     8,138,756    81,388     -             -         -        (442,187)          -         -        (360,799)
Acquisition of business       370,370     3,703     -             -         -       1,996,297           -         -       2,000,000 
Net loss                           -         -      -             -         -             -       (389,537)       -        (389,537)
                           ----------  -------- ------    ----------- ----------- -----------  -----------  --------   ------------
Balance at February 29,
  1996                     11,509,126   115,091     -             -         -       2,405,144   (2,204,746)       -         315,489 
Exercise of stock options                                                                                                        
  and warrants                240,282  $  2,403 $   -     $       -   $     -     $   639,259  $        -   $     -    $    641,662
Sale of preferred stock -                                                                                                        
  3,490 shares, net of                                                                                                           
  issuance costs of 
  $565,118                         -         -      35            -         -       2,924,847           -         -       2,924,882
Sale of equity notes, 
  net of issuance costs 
  of $527,434                      -         -      -       4,550,000       -        (527,434)          -         -       4,022,566
Conversions to common                                                                                                            
  stock                     3,633,623    36,337    (30)    (4,250,000)      -       4,213,693           -         -            - 
Payment of dividends                                                                                                             
    Preferred stock            75,296       753     -             -         -          54,225      (54,978)       -            - 
    Equity notes               45,947       459     -             -         -          78,277      (78,736)       -            - 
Notes payable converted                                                                                                          
  to warrants                      -         -      -             -         -         734,000           -         -         734,000
Stock options issued for                                                                                                          
  services                         -         -      -             -         -          70,040           -         -          70,040
Sale of common stock, net                                                                                                        
  of issuance costs of 
  $87,059                     357,706     3,577     -             -         -         845,775           -         -         849,352
Unrealized loss on 
  securities available 
  for sale                         -         -      -             -    (355,772)          -            -          -        (355,772)
Purchase of treasury                                                                                                             
  stock - 84,613 shares            -         -      -             -         -             -            -     (209,787)     (209,787)
Sale of subsidiary for                                                                                                           
  common stock -                                                                                                                  
  180,000 shares                   -         -      -             -         -             -            -     (143,803)     (143,803)
Acquisition of businesses     640,000     6,400     -             -         -       1,932,801          -          -       1,939,201
Net loss                           -         -      -             -         -             -     (7,515,607)       -      (7,515,607)
                           ----------  -------- ------    ----------- ---------   -----------  -----------  ---------  ------------
Balance at February 28, 
  1997                     16,501,980  $165,020 $    5    $   300,000 $(355,772)  $13,370,627  $(9,854,067) $(353,590) $  3,272,223
                           ----------  -------- ------    ----------- ---------   -----------  -----------  ---------  ------------
                           ----------  -------- ------    ----------- ---------   -----------  -----------  ---------  ------------
</TABLE>

       The accompanying notes are an integral part of these statements.       

                                       F-6
<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED
                                                          
                    CONSOLIDATED STATEMENTS OF CASH FLOWS 
<TABLE>
<CAPTION>
                                                                         Two months 
                                                            Year ended      ended       Year ended 
                                                           February 28,  February 29,  December 31,
                                                               1997          1996          1995    
                                                           -----------   -----------   ------------
<S>                                                        <C>           <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES                                                               
  Net loss                                                 $(7,515,607)  $  (389,537)  $(1,109,648)
  Adjustments to reconcile net loss to net cash used                                               
      by operating activities                                                                      
         Acquisition of in-process research and development  3,268,040             -             -  
         Write-down of available for sale securities         1,000,000             -             -  
         Depreciation and amortization                         942,166        29,199       153,224 
         Stock and options issued for services                  70,040             -         5,520 
         Gain on sale of securities                           (548,720)            -             -  
         Loss on disposal of asset                                  -              -        47,900 
         Provision for losses on accounts receivable                                               
           and sales returns                                 2,482,474       132,802       410,314 
  Changes in operating assets and liabilities                                  
    Accounts receivable                                     (4,489,829)     (165,122)     (706,725)
    Other receivables                                         (870,000)        5,998       (83,002)
    Other current assets                                        48,400       (53,850)     (139,299)
    Software development costs                                (457,321)            -             - 
    Cash overdraft                                             167,256             -        (6,272)
    Accounts payable and accrued expenses                     (442,733)       97,353       261,998
    Other assets                                              (360,201)            -             -  
                                                           -----------   -----------   -----------
      NET CASH USED BY OPERATING ACTIVITIES                 (6,706,035)     (343,157)   (1,165,990)
CASH FLOWS FROM INVESTING ACTIVITIES                                                               
  Purchase of available for sale securities                 (7,032,397)            -             -  
  Sales of available for sale securities                     7,581,117             -             -  
  Capital expenditures                                        (763,824)     (100,998)     (158,355)
  Proceeds from sale of assets                                      -              -         2,100 
  Acquisition of businesses and software                    (1,347,360)     (200,000)            -  
                                                           -----------   -----------   -----------
      NET CASH USED BY INVESTING ACTIVITIES                 (1,562,464)     (300,998)     (156,255)
CASH FLOWS FROM FINANCING ACTIVITIES                                                                  
  Payments on notes payable                                $(1,439,127)  $  (227,107)  $  (742,000)
  Proceeds from notes payable                                       -        943,005     1,850,595
  Net proceeds from factor                                          -              -       267,472
  Proceeds from long-term debt                               1,583,522             -             - 
  Repayments on long-term debt                                (215,036)            -             - 
  Proceeds from sale of preferred stock                      2,924,882             -             - 
  Proceeds from sale of equity notes                         4,022,566             -             - 
  Proceeds from sale of common stock                         1,491,014             -             - 
  Purchase of treasury stock                                  (209,787)            -             - 
                                                           -----------   -----------   -----------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                8,158,034       715,898     1,376,067
                                                           -----------   -----------   -----------
Net increase (decrease) in cash                               (110,465)       71,743        53,822
Cash at beginning of the period                                125,565        53,822             - 
                                                           -----------   -----------   -----------
Cash at end of the period                                  $    15,100   $   125,565   $    53,822
                                                           -----------   -----------   -----------
                                                           -----------   -----------   -----------

</TABLE>
           The accompanying notes are an integral part of these statements.

                                       F-7
<PAGE>
                        CITADEL COMPUTER SYSTEMS, INCORPORATED
                                           
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                           
              February 28, 1997, February 29, 1996 and December 31, 1995
                                           

NOTE A - BASIS OF PRESENTATION

     Effective February 29, 1996, Citadel Computer Systems, Incorporated (the 
     Company), successor to Citadel Computer Systems, Incorporated, a 
     Delaware corporation (Old Citadel), merged with LSHC Acquisition, Inc., 
     a wholly-owned subsidiary of LoneStar Hospitality Corporation 
     (LoneStar).  Pursuant to the terms of the merger agreement, each 
     stockholder of the Company received 2.25 shares of LoneStar common stock 
     for each share of the Company's common stock.

     Immediately after the merger, the stockholders of Old Citadel owned 
     approximately 60% of the outstanding common stock of the Company. 
     Therefore, the merger has been accounted for as a reverse merger, 
     whereby Old Citadel is deemed to have acquired LoneStar.

     As discussed in Note N, LoneStar entered into an agreement in 
     February 1996 to sell substantially all of its assets and 
     operations in exchange for common stock of Miami Subs USA, Inc.  
     The sale was consummated on March 1, 1996, and LoneStar is no 
     longer an operating company.

     As a result of the merger, (i) stockholders' equity of the Company 
     was decreased by $360,799, which represents the stockholders' 
     deficit of LoneStar at the date of the merger, and (ii) the Company 
     has been "recapitalized" to reflect the outstanding shares of 
     LoneStar, the legal acquiror.

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

     NATURE OF BUSINESS

     The Company develops and markets, throughout the United States, 
     computer network management, security and utility software.  To 
     date, the Company's activities have primarily been limited to 
     marketing and selling software products directly to end users 
     through telemarketing and trade shows. Effective April 1997, the 
     Company changed its sales and marketing approach to focus more on 
     establishing key business relationships with value-added resellers, other
     resellers, original equipment manufacturers, and joint venture partners
     as the preferred method for the distribution of its products. 

     CHANGE OF NAME

     On May 6, 1996, LoneStar changed its name to Citadel Computer 
     Systems, Incorporated.

                                       F-8

<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED          

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED  

          February 28, 1997, February 29, 1996 and December 31, 1995

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

     USE OF ESTIMATES

     In preparing financial statements in conformity with generally 
     accepted accounting principles, management is required to make 
     estimates and assumptions that affect the reported amounts of 
     assets and liabilities, the 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.

     REVENUE RECOGNITION

     The Company generally delivers its products to customers on a thirty 
     (30) day trial basis following receipt of a signed trial agreement 
     from the customer.  The Company only recognizes revenue if the 
     product has not been returned within 30 days in accordance with the 
     terms and conditions of the trial agreement.  Numerous 
     disagreements have arisen between the Company and its customers 
     regarding the customer's obligation to pay for the products 
     delivered.  As a result, a significant portion of the Company's 
     sales have not been collected as of February 28, 1997.

     The Company believes that these agreements are legally binding 
     contracts and intends to continue to pursue the collection thereof. 
     The Company has, however, provided an allowance for returns and 
     doubtful accounts of $2,500,000 as of February 28, 1997 to cover 
     potential uncollectible accounts.

     Effective April 1997, the Company modified its sales methods and 
     agreements, which the Company believes will significantly reduce 
     potential conflicts with its customers and should result in a 
     higher rate of collection.  As a result of this change, the Company 
     expects sales to decrease for at least the first two quarters of 
     its fiscal year ending February 28, 1998.

     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 
     straight-line method over five 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 $3,336,253 , $32,842, and $136,355 for the year ended 
     February 28, 1997, the two months ended February 29, 1996 and  the 
     year ended December 31, 1995,  

                                       F-9

<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED          

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED  

          February 28, 1997, February 29, 1996 and December 31, 1995

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

     respectively.  Included in fiscal 1997 expense is $3,268,040  
     representing amounts written off in connection with the 
     acquisitions referred to in Notes F and G.  Capitalized costs are 
     amortized on a product-by-product basis, based on the greater 
     amount computed by using (a) the ratio that current gross revenue 
     for a product bears to the total of current and anticipated future 
     gross revenues for that product, or (b) straight-line amortization 
     using useful lives ranging from 3 to 7 years.  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.

     It is reasonably possible that future events could cause a reduction 
     in the amortization period of software costs.

     STOCK-BASED COMPENSATION

     Statement of Financial Accounting Standards No. 123, "Accounting for 
     Stock-Based Compensation" ("Statement No. 123") is effective for 
     the year ended February 28, 1997.  Statement No. 123 establishes a 
     fair value based method of accounting for employee stock options, 
     but permits continued application of the accounting method 
     prescribed by Accounting Principles Board Opinion No. 25 ("Opinion 
     25"), "Accounting for Stock Issued to Employees." Entities that 
     continue to apply the provisions of Opinion 25 are required to make 
     pro forma disclosures of net income and earnings per share as if 
     the fair value based method of accounting had been applied.  Refer 
     to Note L.

     INVESTMENT SECURITIES

     The Company classifies investments as available for sale.  
     Securities classified as available for sale are reported at fair 
     value, with unrealized gains and losses excluded from earnings and 
     reported as a separate component of stockholders' equity.  
     Permanent declines in value are reported in the statements of 
     operations.

     Realized gains and losses for securities classified as available for 
     sale are reported in earnings in year of sale.

     RECLASSIFICATIONS

     Certain amounts for 1996 and 1995 have been reclassified to conform 
     to the 1997 presentation.
 
     LOSS PER SHARE

     The computation of loss per share is based upon the weighted average 
     number of outstanding common shares during the periods.  The 
     weighted average number of shares outstanding in 1995 was 
     calculated by giving retroactive effect to the 1,000-for-1 stock 
     split of Old Citadel shares, the shares issued in the merger of Old 
     Citadel and LoneStar, and the 1-for-2 reverse stock split in May 
     1996 (Note L).  No effect has been 

                                       F-10

<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED          

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED  

          February 28, 1997, February 29, 1996 and December 31, 1995

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

     given to stock options, warrants and conversion rights of 
     noteholders and preferred stockholders, because the effect of 
     assumed exercises or conversions is anti-dilutive.

NOTE C - GOING CONCERN MATTERS

     OVERVIEW

     The accompanying financial statements of the Company have been 
     presented on the basis that the Company is a going concern, which 
     contemplates the realization of assets and the satisfaction of 
     liabilities in the normal course of business.  The Company reported 
     a net loss of $7,515,607 for the year ended February 28, 1997 and 
     net losses of $389,537 and $1,109,648 for the two months ended 
     February 29, 1996 and the year ended December 31, 1995, 
     respectively.  Additionally, at February 28, 1997, the Company has 
     a working capital deficit of $2,761,337 and funds used in operations 
     were $6,706,035 for the year then ended.  Through June 30, 1997, 
     the Company has continued to incur losses, and the Company does not 
     have adequate cash to support its operations.

     CURRENT DEVELOPMENTS

     The Company, in April 1997, commenced an aggressive restructuring 
     program and put in place budgetary controls covering all areas of 
     its operations. As part of this program, the Company consolidated 
     its Houston operations into its Dallas location; eliminated its 
     outside sales offices; reduced its workforce by 70%; significantly 
     reduced its overhead, marketing and general and administrative 
     expenses; and changed its overall sales strategy.  The Company 
     estimates that the aforementioned items have reduced operating 
     expenses by a minimum of $300,000 per month.  In addition, the 
     Company is working with various vendors and lenders to restructure 
     payables and debt that are currently owed.

     The Company has shifted its sales strategy from its traditional 
     telemarketing approach to a concentration on resellers and value 
     added resellers, original equipment manufacturers and joint venture 
     partners. The Company anticipates that, due to the change in sales 
     strategy, fiscal year 1998 sales will be below prior year levels 
     for at least the first two quarters.  However, it expects that 
     sales under the new strategy will be collected within the Company's 
     normal terms of 30 days and thus the resulting impact on the 
     Company's cash flow should be minimal.  However, no assurances can 
     be provided that the resulting sales volume will be below prior 
     year's levels for only the first two quarters, that the sales under 
     the new strategy be collected in 30 days or, as such, the resulting 
     impact of the new strategy on the Company's cash flow will be 
     minimal.

                                       F-11

<PAGE>

                    CITADEL COMPUTER SYSTEMS, INCORPORATED          

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED  

          February 28, 1997, February 29, 1996 and December 31, 1995

NOTE C - GOING CONCERN MATTERS - CONTINUED

     The Company has recently signed several strategic alliances with 
     some of the leading companies in the technology industry and 
     expects to finalize additional alliances during the second and 
     third quarters of its current fiscal year.  The Company anticipates 
     sales through these alliances will represent a significant 
     percentage of the Company's revenue in the future.  However, the 
     Company can provide no assurance that significant revenues will be 
     generated from these new alliances.

     The Company has released, and expects to release, new products and 
     improved versions of current products.  The Company anticipates 
     that the potential revenue stream from these products could be 
     quite substantial.  However, the Company can provide no assurances 
     that significant revenues will be generated from these products.

     OVERALL

     While management continues to explore further ways to cut its 
     operating costs, form new strategic alliances and introduce new 
     products, the Company's continued existence will be dependent upon 
     its ability to raise additional capital.  The Company believes that 
     it will be successful in raising additional capital through private 
     placement offerings or other means (Note Q).  Historically, the 
     Company has been successful in raising funds from outside sources.  
     However, there can be no assurances the Company will be successful 
     in the future.

     All of the above matters raise substantial doubt about the Company's 
     ability to continue as a going concern.  The accompanying financial 
     statements do not include any adjustments that might result from 
     the outcome of these uncertainties.

NOTE D - MARKETABLE SECURITIES

     The Company received 1,325,000 shares of Miami Subs U.S.A., Inc. 
     (Miami Subs) common stock valued at $2,567,187 as consideration for 
     the sale of its restaurants on March 1, 1996 (Note M).  Based on 
     events occurring after the sale of the restaurants, the Company 
     concluded that it could no longer recover the carrying value of the 
     Miami Subs stock and wrote the investment down by a charge to 
     earnings of $1,000,000.  At February 28, 1997, a valuation 
     allowance of $355,772 has been made by a charge to stockholders' 
     equity.  In June 1997, the Company tendered the stock to Miami Subs 
     as payment for the $1,250,000 note payable to Miami Subs (Note I).

                                       F-12
<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED          

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED  

          February 28, 1997, February 29, 1996 and December 31, 1995

NOTE E - PROPERTY AND EQUIPMENT

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

                                                February 28,    February 29,
                                      Lives        1997            1996     
                                    ----------  -----------     ------------
        Furniture                   5-10 years  $ 228,433        $  24,158
        Office equipment             3-7 years    132,205           48,661
        Leasehold improvements      Lease term     15,000               - 
        Computer equipment           3-7 years    547,900           76,377
                                                ---------        ---------
                                                  923,538          149,196
          Less accumulated depreciation          (227,079)         (38,869)
                                                ---------        ---------
        Net property and equipment              $ 696,459         $110,327
                                                ---------        ---------
                                                ---------        ---------
NOTE F - ACQUISITIONS

     Effective February 29, 1996, the Company acquired substantially all 
     of the assets of Circuit Masters Software, Inc. (Circuit Masters) 
     in a transaction accounted for as a purchase.  Consideration 
     consisted of 370,370 shares of common stock valued at $2,000,000, 
     cash of approximately $200,000 and assumption of certain 
     liabilities of approximately $50,000.

     In August 1996, the Company acquired Kent Marsh Ltd., Inc. and 
     Astonishing Developments, Inc. (the ADI Group), which develops 
     security software for stand alone personal computers, for a total 
     consideration of approximately $2,200,000, consisting of 360,000 
     shares of common stock valued at $1,200,000 (subject to sales 
     restrictions for two years), $600,000 in cash and $400,000 in 
     short-term notes.

     In August 1996, the Company acquired Danasoft, Inc. which develops 
     and markets software for Internet and Intranet applications, for a 
     total consideration of $294,000, consisting of 100,000 shares of 
     common stock valued at $264,000 and $30,000 in cash.

     In August 1996, the Company acquired MicroVault Corporation, a data 
     security software provider, for a total consideration of $550,000, 
     consisting of 180,000 shares of common stock valued at $475,000 and 
     $75,000 in cash.  There was a disagreement between the parties and, 
     in February 1997, the Company sold MicroVault Corporation back to 
     its former owner for the 180,000 shares of stock.

     Each acquisition has been accounted for by the purchase method.  In 
     connection with the acquisition of the ADI Group and MicroVault 
     Corporation, the Company wrote off approximately $1,711,000 of 
     purchased research and development technology that had not reached 
     the working model stage and for which there is not an alternate 
     use. 

                                       F-13

<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED
                                       
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                       
          February 28, 1997, February 29, 1996 and December 31, 1995
                                       

NOTE F - ACQUISITIONS - CONTINUED

   The following unaudited pro forma summary of results of operations gives
   effect to the acquisitions of Circuit Masters and the ADI Group (the effect
   of the acquisition of Danasoft, Inc. was not material) as though the
   acquisitions had been made as of the beginning of the previous fiscal year
   (January 1, 1995):
 
                                              Two months
                                Year ended       ended         Year ended
                               February 28,   February 29,    December 31,
                                   1997          1996             1995
                              -------------   ------------    ------------

       Revenues               $ 5,732,406      $ 406,744      $ 3,410,580
       Net loss                (6,479,902)      (454,360)      (3,273,504)
       Net loss per share            (.47)          (.06)            (.47)

   The fiscal 1997 pro forma data excludes the write-off of $1,236,000 (.09
   per share) of purchased research and development related to the ADI Group
   acquisition.  Such write-off has been included in the fiscal 1995 data and
   was equal to $.19 per share.

   The unaudited pro forma summary results of operations are not necessarily
   indicative of results of operations that would have occurred had the
   transactions taken place as of January 1, 1995 or of the  future results of
   operations of the combined businesses.


NOTE G - PURCHASE OF SOFTWARE

   On August 29, 1996, the Company acquired certain technologies from Xerox
   Corporation (Xerox) for a total consideration of $1,957,000, consisting of
   a note payable of $1,350,000 ($1,207,000 after discounting for imputed
   interest, and to be reduced by $100,000 if paid within one year) and cash
   of $750,000.  In addition, royalties of up to $1,250,000 will be payable to
   Xerox based upon future sales.  The total consideration was allocated
   between purchased software ($400,000) and in-process research and
   development costs ($1,557,000), which was written off at the date of
   purchase.

   In connection with the acquisitions of the ADI Group, and Danasoft, Inc.
   (Note F), the Company acquired software valued at approximately $1,406,000
   and $177,000, respectively.
   
   
NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS

   The Company's financial instruments consist of cash, marketable securities,
   notes receivable, accounts receivable, accounts and notes payable, and 
   long-term debt. Marketable securities are carried at fair value.  The 
   Company estimates the fair value of long-term debt approximates its carrying
   value. The other instruments' carrying values approximate fair value because
   of their short-term maturities.

                                      F-14
<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED
                                       
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                       
          February 28, 1997, February 29, 1996 and December 31, 1995


NOTE I - NOTES PAYABLE

   Notes payable consist of the following:
<TABLE>
                                                                     February 28,   February 29,
                                                                         1997           1996
                                                                     ------------   ------------
<S>                                                                  <C>            <C>
     Unsecured notes payable to individuals, including $430,000 
       in 1997 and $141,488 in 1996 to related parties, due at 
       various dates in 1997, bearing interest at rates ranging 
       from 0% to 10%; weighted average interest rate is 
       approximately 4.0% (1)                                         $  722,500    $1,624,493
   
     Note payable to factor, collateralized by receivables                     -       267,472
   
     Note payable to officer, non-interest bearing and due upon 
       demand                                                             36,809       117,722
   
     Note payable to commercial finance company; note was replaced
       in March 1996 by a note to Miami Subs USA, Inc. (2)             1,250,000     1,467,039
   
     Notes payable to individuals, bearing interest at 12%, due 
       July 1996 (3)                                                           -       557,488
   
     Note payable to a corporation, bearing interest at 10%, 
       past due (4)                                                      250,000             -
   
     Note payable to bank, bearing interest at 11.50%, past due          150,000             -
   
     Note payable to a commercial finance company, bearing interest
       at 11.5%, due April, 1997                                          20,555             -
   
     Other notes payable                                                  26,223             -
                                                                      ----------    -----------

                                                                      $2,456,087    $4,034,214
                                                                      ----------    -----------
                                                                      ----------    -----------
</TABLE>

(1) Certain of these notes have warrants to purchase common stock.  The
    aggregate number of such warrants at February 28, 1997 is 365,625 with
    an exercise price of $.89 per share.
(2) Note is noninterest bearing and was due in July 1996.  Note was liquidated
    in June 1997 by transferring collateral to Miami Subs USA, Inc. (Note D).
(3) These notes had  warrants to purchase 105,000 shares of common stock at
    $2.00 per share.
(4) Payee is controlled by the Company's Chairman of the Board.  Note is
    collateralized by pledge of Company shares owned by an officer of the
    Company.  See Note N regarding assumption of the note by the Chairman
    of the Board in April 1997.  In connection with the loan, the Company 
    granted warrants to purchase 150,000 shares of common stock at an exercise 
    price of $2.00 per share (the exercise price was reduced to $.59 in 
    connection with the discharge of the GGS loan discussed in Note N).

                                      F-15
<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED
                                       
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                       
          February 28, 1997, February 29, 1996 and December 31, 1995


NOTE J - LONG-TERM DEBT  

<TABLE>
                                                              February 28,   February 29,
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
   Redeemable convertible notes, interest at 5% payable  
     in common stock, due in March 2000 (1)                    $1,000,000       $   -  

   Note payable to Xerox Corporation, non-interest bearing, 
     due September 1998, interest imputed at 10% (net of 
     discount of $143,440)                                      1,075,918           -  
 
   Note payable to a bank, payable $4,063 per month plus 
     interest at 10.5%, through August 2000                       178,693           -  
             
   Capital lease obligations, payable in varying monthly 
     installments through 2001, collateralized by the 
     related equipment and guaranteed by certain officers 
     of the Company                                               374,434           -  
                                                               ----------       -------
                                                                2,629,045           -  

   Less amounts representing interest on capital lease 
      obligations, imputed at rates ranging from 7.02% 
      to 23.78%                                                   (53,999)          -  
                                                               ----------       -------
                                                                2,575,046           -  
   Less current maturities                                        804,141           -  
                                                               ----------       -------

                                                               $1,770,905       $   -  
                                                               ----------       -------
                                                               ----------       -------
</TABLE>
   (1)   These notes are convertible into common stock at the lesser of $1.50
   per share or a percentage, which ranges from 75 to 80% of the average
   market price for the five days preceding conversion.  The notes are
   payable, at the option of the Company, in cash or common stock.  However,
   in the event of a transfer of 50% of the voting rights of the common stock,
   the note holder can demand payment in cash for unconverted notes at 125% of
   the principal amount.
   
   Aggregate maturities of long-term debt for the five years following
   February 28, 1997, are as follows:

          Year ending
          February 28,
          ------------

             1998                          $  804,141
             1999                             611,744
             2000                             143,805
             2001                           1,014,133
             2002                               1,223
                                           ----------
                                 
                                           $2,575,046
                                           ----------
                                           ----------

                                      F-16
<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED
                                       
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                       
          February 28, 1997, February 29, 1996 and December 31, 1995


NOTE K - INCOME TAXES
               
   Following is a reconciliation of the Company's income tax provision with
   the amount of tax computed at the statutory rate:

<TABLE>
                                                                     Two months 
                                                        Year ended      ended         Year ended
                                                       February 28,   February 29,   December 31,
                                                           1997          1996           1995
                                                      ------------   -------------   ------------
<S>                                                   <C>            <C>            <C>
   Tax benefit at statutory rate                      $  2,555,000    $  133,000    $   377,000
   Write-off of purchased research and development        (582,000)           -              -
   Change in valuation allowance, net of amounts
     that relate to acquired business ($219,000) and
     unrealized losses on securities available for
     sale ($121,000) in 1997                            (2,005,000)     (132,000)      (375,000)
   Other                                                    32,000        (1,000)        (2,000)
                                                      ------------    ----------    -----------

                                                      $          -    $        -    $        - 
                                                      ------------    ----------    -----------
                                                      ------------    ----------    -----------

   Significant components of deferred income tax assets and liabilities are as
     follows:

                                       February 28,   February 29,   December 31,
                                           1997          1996            1995
                                      -------------  -------------  -------------
   Deferred tax assets
     Net operating loss carryovers    $  1,560,000   $  634,000     $  368,000
     Accounts receivable                   923,000      111,000        168,000
     Marketable securities                 461,000            -              -
     Property and equipment                 32,000            -              -
     Accounts payable and accrued 
      expenses                             103,000            -              -
     Other                                  11,000            -         77,000
                                      ------------   ----------     ----------
                                         3,090,000      745,000        613,000

   Valuation allowance                  (3,090,000)    (745,000)      (613,000)
                                      ------------   ----------     ----------

        Net deferred tax asset        $          -   $       -      $        -
                                      ------------   ----------     ----------
                                      ------------   ----------     ----------
</TABLE>

   The Company has net operating loss carryovers of approximately $4,500,000,
   at February 28, 1997.  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 2012.

                                       F-17
<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED
                                       
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                       
          February 28, 1997, February 29, 1996 and December 31, 1995


NOTE L - STOCKHOLDERS' EQUITY

   PREFERRED STOCK

   The Company's outstanding Series B preferred stock is convertible at the
   option of the holder 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 preferred stock has a conversion value of $1,000.  Any shares
   outstanding at September 24, 1998 will be automatically converted. 
   Dividends accrue at 5% and are payable in common stock.
    

   EQUITY NOTES

   During fiscal 1997, the Company issued $4,550,000 of equity notes.  These
   notes are unsecured and are convertible into common stock at 80% of the
   average market price of the common stock for the five days preceding
   conversion.  Notes outstanding at maturity (July 1997) are automatically
   converted into common stock.  Interest at 8% is payable only in common
   stock.  At February 28, 1997, $4,250,000 of the notes had been converted. 
   The outstanding balance of $300,000 is classified on the balance sheet as a
   component of stockholders' equity.

   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 one year.  Following is a summary of option transactions for the
   periods beginning January 1, 1995:

                                                              Weighted
                                                               average
                                                              exercise
                                                 Shares        price
                                               ---------     ---------
     Outstanding at January 1, 1995                   -      $    -
     Granted                                   4,887,500        0.81
                                               ---------      -------

     Outstanding at December 31, 1995          4,887,500        0.81
     Options of LoneStar outstanding at
       date of merger                            249,378        3.94
                                               ---------      -------

     Outstanding at February 29, 1996          5,136,878        0.96
     Granted                                   1,602,000        5.24
     Exercised                                  (153,499)       2.74
     Expired or canceled                        (662,694)       2.84
                                               ---------      -------

     Outstanding at February 28, 1997          5,922,685     $  1.86
                                               ---------      -------
                                               ---------      -------

                                      F-18
<PAGE>
                    CITADEL COMPUTER SYSTEMS, INCORPORATED
                                       
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                       
          February 28, 1997, February 29, 1996 and December 31, 1995


NOTE L - STOCKHOLDERS' EQUITY - CONTINUED
 
                                                         Weighted
                                                         average 
                                                         exercise
                                             Shares       price
                                           ---------     --------
   Exercisable at February 28, 1997        5,054,685      $1.16
   Exercisable at February 29, 1996        5,136,878        .96
                                                       
   Weighted-average fair value of                      
     options granted during the year                   
     ended February 28, 1997                              $1.77
                                                          -----
                                                          -----

   The following table summarizes information about stock options at 
February 28, 1997:

<TABLE>
                                         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>
       $ .50 -  .89        4.631,845        2.81        $ .79      4,591,845    $ .79
        1.50 - 1.75          165,000        5.60         1.61         75,000     1.75
        3.50 - 3.93          197,840        3.68         3.59        187,840     3.59
        5.00                  10,000        4.42         5.00             -       N/A
        6.00                 118,000        2.75         6.00             -       N/A
        7.00                 800,000        5.08         7.00        200,000     7.00
                           ---------                    -----      ---------    -----

                           5,922,685                    $1.86      5,054,685    $1.16
                           ---------                    -----      ---------    -----
                           ---------                    -----      ---------    -----
</TABLE>

                                         F-19
<PAGE>
                        CITADEL COMPUTER SYSTEMS, INCORPORATED
                                           
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                           
              February 28, 1997, February 29, 1996 and December 31, 1995
                                           

NOTE L - STOCKHOLDERS' EQUITY - CONTINUED

   The Company has adopted the disclosure provisions of Statement No. 123, as
   discussed in Note B, 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 the year ended February 28, 1997, the two months ended
   February 29, 1996 and the year ended December 31, 1995, the effect on net
   loss and loss per share would have been as follows:
               
                                                  Two months 
                                   Year ended        ended         Year ended
                                   February 28,   February 29,     December 31,
                                      1997            1996            1995    
                                  -------------   ------------     ------------
                
       Net loss
            As reported           (7,515,607)       (389,537)      (1,109,648)
            Pro forma             (9,539,474)       (425,486)      (1,132,497)
       Loss per common share
            As reported                 (.56)           (.06)            (.17)
            Pro forma                   (.70)           (.06)            (.17)
               
   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:  expected volatility of 145-185%; risk-free interest rate of
   6-6.5%; no dividend yield; and expected lives of 1-4 years.
               
   The pro forma amounts presented are not representative of the amounts that
   will be disclosed in the future because they do not take into effect pro
   forma expenses related to grants before 1995.
   



                                         F-20
<PAGE>
                        CITADEL COMPUTER SYSTEMS, INCORPORATED
                                           
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                           
              February 28, 1997, February 29, 1996 and December 31, 1995


NOTE L - STOCKHOLDERS' EQUITY - CONTINUED

    In connection with the issuance of debt, the Company has issued warrants to
    purchase common stock.  The following summarizes the warrant transactions
    for 1995 and 1996:

                                                    Shares       Exercise Price
                                                    ------       --------------

         Outstanding at January 1, 1995                 -        $          -  
         Issued                                   3,395,250         .44 - 1.78
                                                  ---------      -------------

         Outstanding at December 31, 1995         3,395,250         .44 - 1.78
         Warrants of LoneStar outstanding at
              date of merger                        105,000               2.00
                                                  ---------      -------------

         Outstanding at February 29, 1996         3,500,250         .44 - 2.00

         Issued                                     540,822        1.25 - 4.00
         Exercised                                 (167,721)        .89 - 3.50
         Expired                                    (38,362)              3.50
                                                  ---------      -------------
         Outstanding at February 28, 1997         3,834,989      $  .89 - 4.00
                                                  ---------      -------------
                                                  ---------      -------------


   In connection with the Merger, all outstanding options and warrants to
   purchase shares of Old Citadel became options and warrants to purchase
   shares of the Company's common stock.  

   Substantially all warrants are exercisable at February 28, 1997.  

   REVERSE STOCK SPLIT

   The Board of Directors approved a 1-for-2 reverse stock split in May 1996. 
   All share data in the financial statements and notes has been adjusted to
   reflect the split.

                                       F-21
<PAGE>
                        CITADEL COMPUTER SYSTEMS, INCORPORATED
                                           
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                           
              February 28, 1997, February 29, 1996 and December 31, 1995


NOTE M - SALE OF ASSETS BY LONESTAR

    On March 1, 1996, LoneStar consummated the sale of its restaurants and
    related development rights to Miami Subs USA, Inc. (Miami Subs), the
    franchiser of the restaurants, pursuant to an agreement entered into in
    February 1996.  These assets are carried on the balance sheet at February
    29, 1996 as assets under contract of sale and are stated at contract price. 
    LoneStar received 1,325,000 shares of Miami Subs' common stock (the Miami
    Subs Stock), which was valued at $2,605,772 as consideration for the sale. 
    LoneStar is permitted to sell the Miami Subs Stock in private transactions,
    or in open market transactions not to exceed 240,000 shares per calendar
    quarter, or 20,000 shares per week.  All sales are subject to a right of
    first refusal by Miami Subs at $2.50 per share.  Miami Subs has assumed
    certain indebtedness of LoneStar (Note I), and LoneStar issued to Miami
    Subs a nonrecourse note in the principal amount of $1,467,039 which is
    secured by the Miami Subs Stock.  


NOTE N - RELATED PARTY TRANSACTIONS

    JOINT VENTURE
    
    In November 1996, the Company made a one-year, $625,000, 8% loan to GGS
    Investment Company (GGS), a joint venture owned by Gilbert Gertner,
    Chairman of the Board of the Company, George Sharp, Chief Executive Officer
    of the Company and Steven B. Solomon, Chief Operation Officer of the
    Company, who were also directors and owned approximately 46% of the
    Company's outstanding common stock at that time.  The purpose of the joint
    venture was to invest in securities for short-term profits.  The loan
    agreement provided that interest would be waived for the first six
    months in consideration of 100% of the net profits, during that period, 
    being paid to the Company.
    
    The loan was guaranteed by each of the officers, and the guaranty was
    secured by the pledge of a total of 754,000 shares of the Company's common
    stock, valued at approximately $1,282,000 as of the date of the
    transaction.
    
    The joint venture was not profitable, and the loan was discharged by GGS
    subsequent to February 28, 1997 in the following manner: Mr. Solomon 
    forgave $78,000 due from the Company to him; Mr. Gertner assumed debt of 
    the Company to a corporation controlled by Mr. Gertner in the principal 
    amount of $250,000 plus accrued interest of approximately $25,000; 
    Mr. Sharp received a credit against the loan of $200,000 as consideration
    for agreeing to terminate his noncancellable employee contract aggregating 
    approximately $700,000 through November 2000; and $72,000 of the loan was 
    forgiven in connection with the asset sale agreement discussed below. 

                                       F-22
<PAGE>
                        CITADEL COMPUTER SYSTEMS, INCORPORATED
                                           
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                           
              February 28, 1997, February 29, 1996 and December 31, 1995


NOTE N - RELATED PARTY TRANSACTIONS - CONTINUED

    ASSET SALE AGREEMENT
    
    In April 1997, the Company entered into an asset sale agreement with its
    Chief Executive Officer and its Chairman of the Board (the Purchasers)
    jointly.  At the date of the agreement, the Purchasers owned approximately
    31% of the Company's outstanding common stock at that date.  The Company
    sold to the Purchasers, $3,750,000 of trade accounts receivable and forgave
    indebtedness owed by the Purchasers to the Company in the amount of
    $72,000.  The carrying value of the receivables at February 28, 1997, net
    of allowance, was $1,875,000.  Consideration received consisted of
    3,900,000 shares of the Company's common stock with a market value of
    approximately $2,750,000 as of the date of the transaction.  For accounting
    purposes, the Company has valued the shares at approximately $1,950,000. 
    The agreement provides that the Company will also receive 50% of the
    proceeds in excess of $2,250,000 from collection of the receivables.  The
    transaction will result in no gain or loss. 


NOTE O - COMMITMENTS AND CONTINGENCIES

    The Company leases office space under noncancellable operating lease
    agreements expiring at various dates through 2002.  Future minimum lease
    payments under these leases at February 28, 1997, were as follows:

        Year ending
        February 28,
        -----------
            1998                                $  305,000
            1999                                   324,000
            2000                                   330,000
            2001                                   301,000
            2002                                   303,000
                                                ----------
            Total                               $1,563,000
                                                ----------

    Excluded from the above are future minimum lease obligations totaling
    approximately $1,353,000 on former office space in two buildings that has
    been vacated by the Company.  The Company is presently in default on both
    leases and is negotiating with both landlords for a release from its
    obligations thereunder.  The Company has provided a reserve of $195,000 as
    of February 28, 1997, to cover its estimated costs relating to termination
    of the leases.
    
    Rental expense totaled approximately $352,000 for the year ended February
    28, 1997, $7,600 for the period ended February 29, 1996 and $54,000 for the
    year ended December 31, 1995.

                                      F-23
<PAGE>
                        CITADEL COMPUTER SYSTEMS, INCORPORATED
                                           
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                           
              February 28, 1997, February 29, 1996 and December 31, 1995


NOTE O - COMMITMENTS AND CONTINGENCIES - CONTINUED
               
    A former employee of Old LoneStar filed a lawsuit against the Company and
    one of its officers and directors alleging that the Company and/or the
    individual owe the plaintiff additional stock options and seeking damages
    of $2,600,000.  The Company believes such claims are without merit and
    intends to vigorously defend against the claim.
    
    An unrelated company has filed a lawsuit against the Company and one of its
    officers and directors alleging that the Company and/or the officer owe the
    plaintiff a finder's fee and is seeking $100,000 of the Company's common
    stock.  The Company believes such claims are without merit and intends to
    vigorously defend against the claim.
    
    The Company is also involved in various legal actions arising in the normal
    course of business.  Management is of the opinion that their outcome will
    not have a material adverse effect on the Company's financial position or
    results of operations.
    
    At February 28, 1997, the Company has employment agreements with two of its
    officers and a consulting agreement with its Chairman.  These agreements
    expire in 2000 to 2001 and, with respect to one officer, become accelerated
    in the event of death or termination.  As discussed in Note O, one of the
    employment agreements was terminated subsequent to February 28, 1997.
               
               
NOTE P - SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
                                                                        Two months
                                                         Year ended        ended        Year ended
                                                         February 28,   February 29,   December 31,
                                                             1997          1996            1995
                                                         ------------   ------------   -------------
<S>                                                      <C>            <C>            <C>
Supplemental disclosures of cash flow information:
   Cash paid during the year for interest                $  239,508       $    -         $234,212
   Non-cash investing and financing transactions:                       
      Issuance of common stock in exchange for certain                  
       assets                                                    -             -           50,000
      Notes payable converted to warrants                   734,000            -               -  
      Payment of stock dividends                           (133,714)           -               -  
      Conversions to common stock                         4,213,693            -               -  
      Acquisition of software  and in-process research 
       and development for notes payable                  1,206,560            -               -  

</TABLE>
                                       F-24
<PAGE>
                        CITADEL COMPUTER SYSTEMS, INCORPORATED
                                           
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                           
              February 28, 1997, February 29, 1996 and December 31, 1995


NOTE P - SUPPLEMENTAL CASH FLOW INFORMATION - CONTINUED

<TABLE>
                                                                    Two months
                                                     Year ended       ended         Year ended   
                                                     February 28,   February 29,   December 31, 
                                                         1997          1996           1995         
                                                     ------------   ------------  -------------
<S>                                                  <C>            <C>           <C>
 Merger with LoneStar Hospitality Corporation,
  accounted for as a reverse acquisition:
    Assets acquired
       Assets under contract of sale                 $        -     $ 2,605,772    $       -  
       Other assets                                           -         401,650            -  
    Liabilities assumed
       Notes payable                                          -      (2,142,249)           -  
       Accounts payable                                       -      (1,225,972)           -  
                                                     ------------   ------------   -----------

       Excess of liabilities assumed over assets 
        acquired                                     $        -     $  (360,799)   $       -  
                                                     ------------   ------------   -----------
                                                     ------------   ------------   -----------
 Acquisition of businesses:
    In-process research and development acquired     $  1,711,480   $         -    $       -  
    Assets acquired                                     2,051,135     2,250,000            -  
    Liabilities assumed                                (1,226,054)      (50,000)           -  
    Common stock issued                                (1,939,201)   (2,000,000)           -  
                                                     ------------   ------------   -----------

    Cash paid, net                                   $    597,360   $   200,000    $       -  
                                                     ------------   ------------   -----------
                                                     ------------   ------------   -----------
</TABLE>

NOTE Q - SUBSEQUENT EVENTS
               
    In March 1997, the Company sold $1,000,000 of 5% redeemable convertible
    notes due February 2000.  The notes were sold to offshore accredited
    investors pursuant to Section 4(2) of the Securities Act of 1933, as
    amended, and Regulation S.  The Company used the proceeds to retire certain
    outstanding indebtedness and for working capital.
    
    The Company, in April 1997, completed a private placement of $500,000 of 8%
    convertible redeemable debentures which mature on April 11, 2000.  The
    Company used the proceeds to retire certain outstanding indebtedness and
    for working capital.

                                       F-25

<PAGE>
                        CITADEL COMPUTER SYSTEMS, INCORPORATED
                                           
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                           
              February 28, 1997, February 29, 1996 and December 31, 1995


NOTE Q - SUBSEQUENT EVENTS - CONTINUED
               
    In June 1997, the Company sold $1,125,000 of 8% redeemable convertible
    notes due June 9, 2000.  The notes were sold to offshore accredited
    investors pursuant to Section 4(2) of the Securities Act of 1933, as
    amended, and Regulation S.  The Company used the proceeds to retire certain
    convertible notes and for working capital.
    
    On October 6, 1997, the Company consummated a purchase agreement with 
    CORESTAFF, whereby CORESTAFF purchased 2.5 million shares of the Company's
    common stock for $750,000 and other non-monetary consideration and received
    Warrants to purchase an additional 2 million shares of stock at $4 to $5 
    per share.  CORESTAFF is one of the largest providers of information
    technology and staffing services in the U.S.  As part of the agreement,
    CORESTAFF will provide development support for the Company.  In addition,
    Citadel will become the exclusive distributor of CORESTAFF's "First Step"
    software program, a peer-to-peer system that enables users to easily access
    multiple systems requiring different user codes.
    
               
NOTE R - FOURTH QUARTER ADJUSTMENTS
               
    In the fourth quarter of 1997, adjustments were recorded to reflect the
    following:
    
                                                                       Income  
                                                                      (expense)
                                                                     ----------
         Reallocation of purchased research and development
         costs relating to the acquisitions described in Note F      $ 446,900
 
        Increase in allowance for doubtful accounts                   (732,800)

        Adjustment of interest expense                                 133,800
                                                                     ---------
         Increase in net loss                                        $(152,100)
                                                                     ---------
                                                                     ---------

                                      F-26