<PAGE>
                                       
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                       
                                 FORM 10-QSB

                                 (MARK ONE)
           [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                                          
                   FOR THE QUARTERLY PERIOD ENDED MAY 31, 1998

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

                       COMMISSION FILE NUMBER:  0-08718


                           CITADEL TECHNOLOGY, INC.
      (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED 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
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                (214) 520-9292
                         (ISSUER'S TELEPHONE NUMBER)


              (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, 
                        IF CHANGED SINCE LAST REPORT)


Indicate by check mark whether the issuer (1) has filed all reports required 
to be filed  by Section 13 or 15(d) of the Exchange Act during the past 12 
months (or for  such shorter period the registrant was required to file such 
reports), and  (2) has been subject to such filing requirements for the past 
90 days.   Yes  X     No 
               ---       ---

Indicate the number of shares outstanding of each of the issuer's classes of 
common equity, as of the latest practicable date. 

              Class                                 Outstanding at July 15, 1998
--------------------------------------              ----------------------------
Common Stock, Par value $.01 per share                      26,318,884



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

<PAGE>
                         PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS 

The Financial Statements of the Company are found after the signature page.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 

The statements contained in this Report that are not historical facts, 
including, but not limited to, statements found in this Item 2 - 
"Management's Discussion and Analysis," are forward-looking statements and as 
such 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: 
general economic conditions; competition; the market for network software 
products; seasonality of product sales; the Company's capital requirements 
and the uncertainty of additional funding; the Company's inconsistent 
revenues and the uncertainty of future profitability; costs and risks related 
to integration of acquisitions; uncertainties related to new product 
development and market acceptance of new products; costs, expenses and delays 
in sales related to the implementation of new sales methods; software  
development costs; 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.  

RESULTS OF OPERATIONS 

During the three months ended May 31, 1998, the Company had net sales of 
$1,034,195, an increase of $541,921, or 110.1% over net sales of $492,274 
during the three months ended May 31, 1997.  The Company attributes the sales 
increase to increased industry recognition of its products and the recent 
partnering relationships with System Plan, in Japan and Guildsoft, Ltd., in 
England and its bundling arrangements with Microsoft and Compaq.

During the quarter, as mentioned previously, the Company entered into 
partnering relationships related to the distribution of the Company's 
products overseas with Guildsoft Ltd., in England, and System Plan, in Japan. 
In addition, during the quarter the Company entered into additional bundling 
arrangements with Microsoft and Compaq related to its Winshield and 
Folderbolt products.

The Company launched its WinShield NT and Network products during the quarter 
and is in beta testing on its CPR and FolderBolt 95 and NT products.  The 
Company expects to launch these products during the second and third quarters 
of fiscal 1999.  The Company also expects to launch its Citadel Secure 
Desktop product and other new products and upgrades that will provide 
ease-of-use security solutions for Internet and intranet applications on 
Microsoft and Novell platforms in the future quarters of fiscal 1999. 

The costs and expenses incurred in connection with producing the Company's 
products were $70,331 during the quarter, an increase of $60,900 or 547.1% 
over cost of sales of $9,411 for the same period last year.  As a percentage 
of sales, the Company's cost of sales for the quarter increased from 1.9% for 
the three months ended May 31, 1997 to 6.8% for the three months ended May 
31, 1998. The increase in cost of sales for the current quarter over the same 
quarter last year can be attributed to a change in the product sales mix, 
during the quarter, to lower priced products sold on an individual unit basis 
and the establishment of a reserve for potential product returns.  Both 
factors can be attributed to the Company's recent entry into the retail sales 
channel, which the Company was not engaged in during the same period last 
year.  In addition, and partly due to its entry into the retail channel, the 
Company completely updated its packaging and collateral pieces to give all 
its products a common look.  This also tended to increase the Company's cost 
of sales on a per unit basis.  The impact of the aforementioned was offset, 
to some degree, by the increase in the Company's bundling revenues over the 
same quarter last year, which tends to reduce the cost of sales on a 
percentage basis. 

Research and development costs charged to expense for the quarter were 
approximately $104,724 versus $150,524 for the same period last year, or a 
decrease of $45,800 or 30.4%.  Development costs of $498,503 and $145,911 
for the quarters ended May 31, 1998 and 1997, respectively, were capitalized. 
The increase in capitalized costs relates to the increased level of 
development activity during the quarter.  The Company, through its 
association with Metamor Worldwide Inc., was able to devote substantially 
more resources this quarter to development activities than 
                                       
                                       2
<PAGE>
                                       
was possible in previous quarters.  The Company, as it continues to upgrade 
and expand its product offerings, expects that its level of development 
activity in future quarters will continue to exceed its levels of comparable 
past quarters. The Company expects to launch additional new products and 
upgrades in the future quarters of fiscal 1999 that will provide for ease of 
security solutions for Internet and intranet applications on Microsoft and 
Novell platforms.

Selling and marketing expenses increased from $307,629 for the quarter ended 
May 31, 1997 to $471,394 for the quarter ended May 31, 1998, or 53.2%.  
However, as a percentage of sales, selling and marketing expenses for the 
quarter decreased from 62.5% to 45.6%.  The Company expects that it will 
continue to allocate additional resources to selling and marketing expenses 
in the future. Therefore, the Company would expect that in the future, these 
expenses will continue to increase on a dollar basis, but as sales increase 
these expenses should continue to decrease as a percentage of sales.

General and administrative expenses decreased $228,499, or 39.1% from 
$583,838 for the quarter ended May 31, 1997 to $355,339 for the quarter ended 
May 31, 1998.  This resulted primarily from the Company's restructuring and 
cost control programs implemented during the second quarter of last year.  As 
a percentage of sales, these expenses decreased from 118.6% in 1997 to 34.3% 
in 1998.  The Company would expect that as revenues increase these expenses 
would continue to decrease as a percentage of sales.

Depreciation and amortization expense increased $78,254 or 28.5%, to  
$352,426 from $274,172 for the three months ended May 31, 1998 and 1997, 
respectively. This increase resulted from the commencement of amortization on 
certain capitalized research and development costs relating to products that 
became available for sale during the quarter.  The Company would expect these 
expenses to continue to increase in the future as additional products become 
available for sale.

Interest expense for the three months ended May 31, 1998 increased to 
$51,204, an increase of $29,978 or 141.2% over interest expense of $21,226 
during the same period last year.  This resulted primarily from the Company 
having more interest bearing debt in place during this quarter than during 
the quarter ended May 31, 1997.

As a result of the foregoing, the Company, for the three months ended May 31, 
1998, reported a net loss before extraordinary items of $371,223, compared to 
a net loss of $861,119 for the same period last year.

During the quarter, the Company recognized a gain on the settlement of debts 
of $527,221 relating primarily to the restructuring of a certain note payable 
to Inxight, a division of Xerox.  In connection with the restructuring, 
Inxight agreed to reduce a certain note and accrued interest due from the 
Company by $520,816.  In exchange, the Company agreed to a shorter maturity 
on the note and the issuance of 250,000 shares of the Company's Common Stock 
to Inxight (valued at $92,500 as of the date of the transaction). The value 
of the stock has been treated as a reduction in the gain associated with the 
transaction.   The remaining balance relates to miscellaneous gains 
recognized by the Company associated with the settlement of balances due 
various vendors during the quarter.

As a result of the aforementioned, the Company, for the three months ended 
May 31, 1998, reported a net profit of $155,998, compared to a net loss of 
approximately $861,119 for the same period last year.

LIQUIDITY AND CAPITAL RESOURCES 

The Company's cash and cash equivalents at May 31, 1998 were $1,247,569. 

Cash flow from operations was a negative $3,272,821 for the three months 
ended May 31, 1998, compared to negative $408,270 for the three months ended 
May 31, 1997.  This increase was primarily due to an increase in the 
Company's trade receivables, which increased due to the increase in the 
Company's revenues during the quarter; this was offset by a decrease in the 
net loss of the Company due to factors previously discussed.  In addition to 
the aforementioned, the Company's operational cash flow was impacted by a 
receivable the Company recorded of $2,500,000, which related to a certain 
Common Stock sale transaction at the end of the Company's quarter.  The 
Company, subsequent to the end of the quarter, received the funds.

Cash used in investing activities was approximately $507,872 for the three 
months ended May 31, 1998, compared to approximately $279,232 for the same 
period last year.  This increase was due to an increase in development 
expenses resulting from increased development activities on new products and 
product upgrades. 

                                       3
<PAGE>
                                       
Cash provided by financing activities was $5,019,707 for the three months 
ended May 31, 1998, compared to $709,906 for the three months ended May 31, 
1997. This increase was due primarily to more capital being raised during 
this quarter compared to the same quarter last year. 

As a result of the aforementioned factors, cash and cash equivalents 
increased by $1,239,014 for the three months ended May 31, 1998 versus an 
increase of approximately $22,404 for the same period last year. 

On April 13, 1998, the Company received a loan in the amount of $250,000 from 
an individual. The loan bears interest at 10% per annum and is payable in 
full on or before July 13, 1998.  On May 26, 1998, the individual exercised 
his option and converted this debt into shares of the Company's Series D 
Convertible Redeemable Preferred Stock.  See Part II, Item 2 - "Recent Sales 
Of Unregistered Securities During The Quarter."

On April 30, 1998, the Company and Precision Capital Investors Limited 
Partnership I ("Precision") entered into a Securities Purchase Agreement (the 
"Purchase Agreement") pursuant to which Precision purchased shares of 6% 
Series E Convertible Redeemable Preferred Stock for $500,000. See Part II, 
Item 2 -"Recent Sales Of Unregistered Securities During the Quarter."  The 
Company, on June 30, 1998, exercised its option and redeemed in full this 
issuance.

On May 15, 1998, the Company and Metamor Worldwide, Inc. (formerly CORESTAFF, 
Inc.) ("Metamor") entered into a Stock Purchase Agreement (the "Stock 
Purchase Agreement") pursuant to which Metamor purchased 2,000 shares of 
Citadel's 11% Series D Convertible Redeemable Preferred Stock for proceeds of 
$2,000,000. See Part II, Item 2 - "Recent Sales Of Unregistered Securities 
During The Quarter."

On May 26, 1998, the Company and Icarus Investments I, Ltd. ("Icarus") 
entered into a Stock Purchase Agreement pursuant to which Icarus purchased 
2,000,000 shares of Citadel's Common Stock for proceeds of $2,500,000.  See 
part II, Item 2 - "Recent Sales Of Unregistered Securities During The 
Quarter."  On June 30, 1998, Icarus purchased an additional 1,000,000 shares 
of Citadel's Common Stock for proceeds of $1,500,000."  See Part II, Item 5 - 
"Other Information."

                          PART II.  OTHER INFORMATION

Except as listed below, all information required by Part II is omitted 
because the items are inapplicable or the answer is negative. 

ITEM 1. LEGAL PROCEEDINGS 

A former employee of LoneStar (the Company's predecessor) 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, 
were obligated to pay the exercise price for certain stock options, and 
breached a purported agreement to register certain stock held by the 
plaintiff. The plaintiff is seeking damages of approximately $2,300,000, plus 
attorneys' fees, pre- and post-judgement interest and costs of the lawsuit.  
The Company and the individual believe such claims are without merit and 
intend to vigorously defend against the claims and are considering filing 
counter-claims.  The Company has filed an answer in the case, styled HEREDIA 
V. CITADEL, ET. AL., in the 298th Court of Dallas County, Texas. 

Two former employees of the Company have lawsuits pending against the Company 
demanding payment of a promissory note issued in connection with the 
acquisition of Kent-Marsh and Astonishing Developments, Inc. and are seeking 
damages in excess of $400,000.  The Company recently reached a settlement 
with one of the employees under the terms of a promissory note and agreed 
judgement. The court severed the claims of the remaining party, who amended 
his claims to include amounts allegedly owing under an employment agreement 
(in the amount of approximately $168,000). The Company believes it has 
defenses to payment under the note and employment agreement and intends to 
vigorously defend against the lawsuit and pursue counterclaims.  The Company 
has filed an answer in the case, styled NESBITT & WESOLEK  V. CITADEL, in the 
193rd District Court of Dallas County, Texas. 

On January 7, 1998, the Company's former Houston landlord filed a lawsuit 
against the Company, styled LENHNDORFF FOUR OAKS PLACE JOINT VENTURE V. 
CITADEL, in the 11th Judicial District Court of Harris County, Texas, 
alleging that the Company breached a certain lease covering the Company's 
former Houston office space.  The suit seeks damages to date of approximately 
$180,000, plus attorney's fees, pre- and post-judgment interest and court 
costs.  The Company believes that it has viable defenses against such a claim 
and is in the process of filing a counter-suit against the plaintiff.

                                       4
<PAGE>
                                       
The Company and its president are involved in an arbitration proceeding, 
styled VESTCOM LTD. V. CITADEL COMPUTER SYSTEMS, INCORPORATED before the 
American Arbitration Association in Los Angeles, California. Vestcom claims 
it is entitled to compensation and a finder's fee for introducing the Company 
to a third party and is seeking damages of $100,000 in shares of the 
Company's Common Stock plus 50% of additional consideration paid by the 
Company to such a third party.  The Company and its president believe they 
have defenses to such claim. Vestcom  agreed to stay the arbitration 
proceeding pending a decision on one of the Company's defenses in Texas state 
court.  The case is styled CITADEL COMPUTER SYSTEMS, INC. AND STEVEN B. 
SOLOMON V. VESTCOM, LTD., in the 193rd Judicial District Court in Dallas 
County, Texas.  In June 1998, the Texas state court made an oral ruling in 
favor of the Company and its president that the purported agreement was a 
forgery.  In the event the court issues a written opinion in accordance with 
its oral ruling, the arbitration proceedings should be permanently enjoined.  
The Company intends to vigorously defend against the claim.

On October 12, 1998, five former employees of the Company filed a lawsuit 
against the Company and one current and one former officer and director.  The 
suit alleges that the Company and/or the individuals owe the plaintiffs free 
trading stock options in lieu of certain amounts claimed to be due to them 
for salary, bonus or override compensation, and seeks damages, attorney's 
fees, pre-and post-judgment interest and costs allegedly in excess of 
$4,000,000.  The Company and the individuals believe such claims are without 
merit and intend to vigorously defend against the claims.  The lawsuit is 
styled MARKS, MARKS, RANSHAW, COLQUITT & LAURATIS V. CITADEL COMPUTER 
SYSTEMS, INC., et al., in the 189th Judicial District Court of Harris County, 
Texas.

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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

RECENT SALES OF UNREGISTERED SECURITIES DURING THE QUARTER

In January 1998, the Company received a loan in the amount of $400,000 from 
Thomas E. Oxley.  In connection with the loan, Mr. Oxley received warrants to 
purchase 200,000 shares of common stock at $.32 per share (the then fair 
market value of the Company's common stock at the date of the transaction). 
The warrants vested immediately and expire on January 5,1999. In May 1998, 
Mr. Oxley converted this debt into shares of the Company's Common Stock. Such 
securities were not registered under the Securities Act of 1933, as amended 
(the "Securities Act"), in reliance upon Section 4(2) of the Securities Act 
and Rule 506 of Regulation D thereunder.  No underwriters were involved in 
connection with the sale of the securities.

In April 1998, the Company received a loan in the amount of $250,000 from 
Edward Coppola.  The loan bore interest at 10% per annum and is payable in 
full on or before July 13, 1998.  In connection with the loan, the Company 
issued warrants to purchase 100,000 shares of the Company's Common Stock at 
$.50 per share (the fair market value of the Company's Common Stock at the 
date of the transaction). The warrants vest immediately and expire on April 
1, 2001. Mr. Coppola has the right to convert this debt into shares of the 
Company's Series D Convertible Redeemable Preferred Stock (the terms of which 
are described below). Such securities were not registered under the 
Securities Act, in reliance upon Section 4(2) of the Securities Act and Rule 
506 of Regulation D thereunder.  No underwriters were involved in connection 
with the sale of the securities.  On May 26, 1998, Mr. Coppola converted this 
debt into shares of the Company's Series D Convertible Redeemable Preferred 
Stock.

On April 30, 1998, the Company and Precision Capital Investors Limited 
Partnership I ("Precision") entered into a Securities Purchase Agreement (the 
"Purchase Agreement") pursuant to which Precision purchased shares of 6% 
Series E Convertible Redeemable Preferred Stock for $500,000.  The Series E 
Preferred Stock was redeemed by the Company at a redemption price in cash 
equal to 112.5% of the original issue price, plus accrued and unpaid 
dividends to the redemption date. In connection with the transaction, the 
Company also issued warrants to purchase up to 100,000 shares of the 
Company's common stock at $0.75 per share (above the fair market value of the 
Company's common stock at the date of the transaction), which expire on April 
30, 2001.  Such securities were not registered under the Securities Act, in 
reliance upon 

                                       5

<PAGE>
                                       
On May 15, 1998, the Company and Metamor Worldwide, Inc. (formerly Corestaff, 
Inc.) ("Metamor") entered into a Stock Purchase Agreement (the "Stock 
Purchase Agreement") pursuant to which Metamor purchased 2,000 shares of 
Citadel's 11% Series D Convertible Redeemable Preferred Stock for proceeds of 
$2,000,000.  The preferred shares are convertible into Common Stock of the 
Company at the election of the holder at a conversion price equal to 150% of 
the twenty day average of the closing bid price of the Company's Common Stock 
prior to the closing of the purchase ($1.07 per share).  The preferred shares 
will automatically convert into shares of Common Stock upon (i) the closing 
of an underwritten public offering that values the Company at a minimum 
equity value of $20,000,000 with proceeds to the Company of a minimum of 
$10,000,000 before expenses, or (ii) the date at which the Company's Common 
Stock maintains a closing bid price that is 100% greater than the conversion 
price for at least 20 consecutive days.  Such shares were not registered 
under the Securities Act, in reliance upon Section 4(2) of the Securities Act 
and Rule 506 of Regulation D thereunder.  No underwriters were involved in 
connection with the sale of the shares under the Stock Purchase Agreement.  
Beginning one year from the date of closing, the Company may redeem all or 
part of the unconverted preferred shares based on a redemption price equal to 
120% of the issuance price if redeemed prior to two years after the closing, 
115% of the issuance price if redeemed prior to three years after the 
closing, or 100% of the issuance price if redeemed prior to four years after 
the closing.

On May 26, 1998, the Company and Icarus Investments I, Ltd. ("Icarus") 
entered into a Stock Purchase Agreement pursuant to which Icarus purchased 
2,000,000 shares of Citadel's Common Stock for proceeds of $2,500,000.  Such 
shares were not registered under the Securities Act, in reliance upon Section 
4(2) of the Securities Act and Rule 506 of Regulation D thereunder.  In 
connection with the transaction, the Company issued warrants to purchase 
500,000 shares of the Company's Common Stock at $4.00 per share and 500,000 
at $5.00.  No underwriters were involved in connection with the sale of the 
shares under the Stock Purchase Agreement.

ITEM 5. OTHER INFORMATION

On June 30, 1998, the Company and Icaurs Investments I, Ltd. ("Icarus") 
entered into a Stock Purchase Agreement pursuant to which Icarus purchased 
1,000,000 shares of Citadel's Common Stock for proceeds of $1,500,000.  Such 
shares were not registered under the Securities Act, in reliance upon Section 
4(2) of the Securities Act and Rule 506 of Regulation D thereunder.  No 
underwriters were involved in connection with the sale of the shares under 
the Stock Purchase Agreement. 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 

(a)   EXHIBITS 

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

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

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

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

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

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

10.14 Stock Purchase Agreement between Citadel and Icarus Investments I, 
Ltd., dated May 27, 1998 (incorporated by reference to Exhibit 10.14 of the 
Company's Annual Report on Form 10-KSB for the year ended February 28, 1998).
                                       
                                       6
<PAGE>
                                       
REPORTS ON FORM 8-K. 

The Company filed no Current Reports on Form 8-K during the quarter ended May 
31, 1998.
                                       


                                  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 TECHNOLOGY, INC.
                                 (REGISTRANT)

<TABLE>
<S>                     <C>
Date: July 15, 1998     By: /s/ Steven B. Solomon
                            --------------------------
                        Steven B. Solomon, President and Chief Executive Officer
                        (Duly Authorized Signatory and Principal Executive Officer) 

                        By: /s/ Richard L. Travis, Jr. 
                            --------------------------
                        Richard L. Travis, Jr., Chief Operating and Financial Officer
                        (Duly Authorized Signatory and Principal Financial Officer) 
</TABLE>



                                       7



<PAGE>

                             CITADEL TECHNOLOGY, INC.

                            CONSOLIDATED BALANCE SHEETS

<TABLE>
                                                                MAY 31,       FEBRUARY 28,
                           ASSETS                                1998             1998
                                                             ------------     ------------ 
<S>                                                          <C>              <C>
CURRENT ASSETS
  Cash                                                       $  1,247,569     $     8,555
  Accounts receivable, less allowance for returns and
    doubtful accounts of $629,000 and $681,000                  1,140,375         435,615
  Notes receivable from related parties                           378,100         376,487
  Subscription receivable                                       2,500,000             -  
  Inventories                                                     113,308          57,512
  Other                                                           337,426          71,981
                                                             ------------     ------------ 
      Total current assets                                      5,716,778         950,150

PROPERTY AND EQUIPMENT, NET                                       350,737         387,923

PURCHASED SOFTWARE, net of accumulated
  amortization of $2,020,000 and $1,788,000                     3,229,902       3,462,879

CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
  net of accumulated amortization of $223,000 and $150,000      1,437,041       1,011,432

OTHER ASSETS                                                      183,387         350,650
                                                             ------------     ------------ 
                                                             $ 10,917,845     $ 6,163,034
                                                             ------------     ------------ 
                                                             ------------     ------------ 
</TABLE>

The accompanying notes are an integral part of these statements.


                                       8

<PAGE>

                             CITADEL TECHNOLOGY, INC.

                      CONSOLIDATED BALANCE SHEETS - CONTINUED

<TABLE>
                                                                           MAY 31,     FEBRUARY 28,  
          LIABILITIES AND STOCKHOLDERS' EQUITY                              1998           1998     
                                                                        ------------   ------------  
<S>                                                                     <C>            <C>
CURRENT LIABILITIES

  Cash overdraft                                                        $        -     $     10,249  
  Current maturities of long-term debt                                     1,177,781      1,270,565  
  Notes payable                                                              416,093        842,174  
  Accounts payable and accrued expenses                                    2,266,914      2,274,141  
                                                                        ------------   ------------  
      Total current liabilities                                            3,860,788      4,397,129  

LONG-TERM LIABILITIES
  Debt, less current liabilities                                              74,910        478,044  
                                                                        ------------   ------------  
      Total liabilities                                                    3,935,698      4,875,173  

COMMITMENTS AND CONTINGENCIES                                                    -              -  

STOCKHOLDERS' EQUITY
  Common stock, $.01 par value per share; authorized
    60,000,000 shares; issued, 29,180,800 shares
    at 5/31/98 and 25,881,328 shares at 2/28/98                              291,808        258,813  
  Preferred stock, $.01 par value per share;
    authorized 1,000,000 shares; issued and outstanding
      Series B convertible, 50 shares (liquidation value $50,000)                  1              1  
      Series C convertible, 4,250 shares at 5/31/98 and 5,000 shares              43             50  
        at 2/28/98 (liquidation value $425,000 and $500,000)
      Series D convertible, 2,253 shares (liquidation value $2,253,000)           23            -    
      Series E convertible, 5,000 shares (liquidation value $500,000)             50            -    
  Equity Notes                                                               944,000        944,000  
  Additional paid-in capital                                              21,663,669     16,158,442  
  Accumulated deficit                                                    (13,417,208)   (13,573,206) 
  Unrealized loss on securities available for sale                                       -              -  
  Treasury stock, at cost (4,164,613 shares)                              (2,500,239)    (2,500,239) 
                                                                        ------------   ------------  
      Total stockholders' equity                                           6,982,147      1,287,861  
                                                                        ------------   ------------  
                                                                        $ 10,917,845     $6,163,034  
                                                                        ------------   ------------  
                                                                        ------------   ------------  
</TABLE>

The accompanying notes are an integral part of these statements.


                                       9
<PAGE>

                              CITADEL TECHNOLOGY, INC.
                                          
                       CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
                                                              THREE MONTHS ENDED
                                                                    MAY 31,
                                                               1998          1997
                                                           ------------   ------------ 
<S>                                                        <C>            <C>
Gross sales                                                $  1,076,426   $    498,069  
  Less returns and allowances                                    42,231          5,795  
                                                           ------------   ------------  
Net sales                                                     1,034,195        492,274  

Cost of sales                                                    70,331          9,411  
                                                           ------------   ------------  
      Gross profit                                              963,864        482,863  

Operating expenses
  Research and development expenses                             104,724        150,524  
  Selling and marketing expenses                                471,394        307,629  
  General and administrative expenses                           355,339        583,838  
                                                           ------------   ------------  
                                                                931,457      1,041,991  
                                                           ------------   ------------  
  Operating income (loss) before depreciation
    and amortization                                             32,407       (559,128)

Depreciation and amortization expense                           352,426        274,172   
                                                           ------------   ------------  
  Operating income (loss)                                      (320,019)      (833,300)  

Other income (expense)
  Interest expense                                              (51,204)       (21,226)  
  Other                                                             -           (6,593)  
                                                           ------------   ------------  
                                                                (51,204)       (27,819)  
                                                           ------------   ------------  
      Net loss before extraordinary item                       (371,223)      (861,119)  

Extraordinary item - gain on settlement of debt                 527,221            -     
                                                           ------------   ------------  
      Net income (loss)                                    $    155,998   $   (861,119)  
                                                           ------------   ------------  
                                                           ------------   ------------  
Basic and diluted earnings (loss) per share data
  Net loss before extraordinary item                       $      (0.02)  $      (0.06)  
  Extraordinary item                                       $       0.02   $        -     
                                                           ------------   ------------  
  Net income (loss) per share                              $       0.01   $      (0.06)  
                                                           ------------   ------------  
                                                           ------------   ------------  
Shares used in computing earnings (loss) per share
  Basic                                                      21,989,756     15,420,384  
                                                           ------------   ------------  
                                                           ------------   ------------  
  Diluted                                                    27,471,985     15,420,384
                                                           ------------   ------------  
                                                           ------------   ------------  

</TABLE>

The accompanying notes are an integral part of these statements.


                                      10

<PAGE>

                       CITADEL COMPUTER SYSTEMS INCORPORATED

                       CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
                                                         THREE MONTHS ENDED
                                                               MAY 31,
                                                         1998           1997
                                                     ------------   ------------ 
<S>                                                  <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                  $    155,998   $   (861,119)
  Adjustments to reconcile net loss to net cash
    used by operating activities
      Depreciation and amortization                       352,426        274,172
      Gain on settlement of debt                         (527,221)           -  
  Changes in operating assets and liabilities
    Accounts receivable                                  (704,760)       (93,917)
    Notes receivable from related parties                  (1,613)       (92,968)
    Other current assets                                 (265,445)       (81,942)
    Inventories                                           (55,796)           -  
    Bank overdraft                                        (10,249)      (167,256)
    Accounts payable and accrued expenses                 116,576        616,792
    Other assets                                          167,263         (2,032)
    Subscription receivable                            (2,500,000)           -  
                                                     ------------   ------------  
  NET CASH USED BY OPERATING ACTIVITIES                (3,272,821)      (408,270)

CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                     (9,369)      (133,321) 
  Development of software                                (498,503)      (145,911) 
                                                     ------------   ------------  
  NET CASH USED BY INVESTING ACTIVITIES                  (507,872)      (279,232) 

CASH FLOW FROM FINANCING ACTIVITIES
  Net change in notes payable                             (76,081)       (11,240) 
  Repayments of long-term debt                                -          (67,280) 
  Proceeds from the sale of preferred stock             2,701,388            -    
  Proceed from the sale of equity notes                       -          695,000  
  Proceeds from sale of common stock                    2,394,400         93,426  
                                                     ------------   ------------  
  NET CASH PROVIDED BY FINANCING ACTIVITIES             5,019,707        709,906  
                                                     ------------   ------------  
  Net increase (decrease) in cash                       1,239,014         22,404  
  Cash at the beginning of the period                       8,555         15,100  
                                                     ------------   ------------  
  Cash at the end of the period                      $  1,247,569   $     37,504  
                                                     ------------   ------------  
                                                     ------------   ------------  
</TABLE>


The accompanying notes are an integral part of these statements.


                                      11
<PAGE>

                              CITADEL TECHNOLOGY, INC.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - BASIS OF PRESENTATION

GENERAL:

The financial information presented herein should be read in conjunction with 
the financial statements and footnotes included in the Company's Annual 
Report on Form 10-KSB for the period ended February 28, 1998.  The balance 
sheet as of February 28, 1998 has been derived from the audited financial 
statements at that date.

The accompanying unaudited financial statements have been prepared in 
accordance with generally accepted accounting principles for interim 
financial information and have been presented on the basis that the Company 
is a going concern, which contemplates the realization of assets and 
satisfaction of liabilities in the normal course of business.  Accordingly, 
they do not include all of the information and footnotes required by 
generally accepted accounting principles for complete financial statements.  
In the opinion of management, all adjustments considered necessary for a fair 
presentation, consisting of those of a normal recurring nature, are reflected 
in the accompanying financial statements.

RECLASSIFICATIONS:

Certain amounts for the quarter ended May 31, 1997 have been reclassified to 
conform to the quarter ended May 31, 1998 presentation.

NOTE B - STOCKHOLDERS' EQUITY

During the period from March 1, 1998 through May 31, 1998, the Company's 
stockholders' equity reflected the following changes:
<TABLE>
     <S>                                           <C>
     Balance at February 28, 1998                  $1,287,861
     
     Issuance of preferred stock, net               2,701,388
     Conversion of debt to equity                     442,500
     Issuance of Common Stock, net                  2,369,400
     Exercise of options                               25,000
     Net income                                       155,998
                                                   ----------
     Balance at May 31, 1998                       $6,982,147
                                                   ----------
                                                   ----------
</TABLE>
NOTE C - COMMITMENTS AND CONTINGENCIES

A former employee of LoneStar (the Company's predecessor) 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, 
were obligated to pay the exercise price for certain stock options, and 
breached a purported agreement to register certain stock held by the 
plaintiff. The plaintiff is seeking damages of approximately $2,300,000, plus 
attorneys' fees, pre- and post-judgement interest and costs of the lawsuit.  
The Company and the individual believe such claims are without merit and 
intend to vigorously defend against the claims and are considering filing 
counter-claims.  The Company has filed an answer in the case, styled HEREDIA 
V. CITADEL, ET. AL., in the 298th Court of Dallas County, Texas.

                                       12

<PAGE>

                              CITADEL TECHNOLOGY, INC.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C - COMMITMENTS AND CONTINGENICIES CONTINUED

Two former employees of the Company have lawsuits pending against the Company 
demanding payment of a promissory note issued in connection with the 
acquisition of Kent-Marsh and Astonishing Developments, Inc. and are seeking 
damages in excess of $400,000.  The Company recently reached a settlement 
with one of the employees under the terms of a promissory note and agreed 
judgement. The court severed the claims of the remaining party, who amended 
his claims to include amounts allegedly owing under an employment agreement 
(in the amount of approximately $168,000). The Company believes it has 
defenses to payment under the note and employment agreement and intends to 
vigorously defend against the lawsuit and pursue counterclaims.  The Company 
has filed an answer in the case, styled NESBITT & WESOLEK  V. CITADEL, in the 
193rd District Court of Dallas County, Texas.

On January 7, 1998, the Company's former Houston landlord filed a lawsuit 
against the Company, styled LENHNDORFF FOUR OAKS PLACE JOINT VENTURE V. 
CITADEL, in the 11th Judicial District Court of Harris County, Texas, 
alleging that the Company breached a certain lease covering the Company's 
former Houston office space.  The suit seeks damages to date of approximately 
$180,000, plus attorney's fees, pre- and post-judgment interest and court 
costs.  The Company believes that it has viable defenses against such a claim 
and is in the process of filing a counter-suit against the plaintiff.

The Company and its president are involved in an arbitration proceeding, 
styled VESTCOM LTD. V. CITADEL COMPUTER SYSTEMS, INCORPORATED before the 
American Arbitration Association in Los Angeles, California. Vestcom claims 
it is entitled to compensation and a finder's fee for introducing the Company 
to a third party and is seeking damages of $100,000 in shares of the 
Company's Common Stock plus 50% of additional consideration paid by the 
Company to such a third party.  The Company and its president believe they 
have defenses to such claim. Vestcom  agreed to stay the arbitration 
proceeding pending a decision on one of the Company's defenses in Texas state 
court.  The case is styled CITADEL COMPUTER SYSTEMS, INC. AND STEVEN B. 
SOLOMON V. VESTCOM, LTD., in the 193rd Judicial District Court in Dallas 
County, Texas.  In June 1998, the Texas state court made an oral ruling in 
favor of the Company and its president that the purported agreement was a 
forgery.  In the event the court issues a written opinion in accordance with 
its oral ruling, the arbitration proceedings should be permanently enjoined.  
The Company intends to vigorously defend against the claim.

On October 12, 1998, five former employees of the Company filed a lawsuit 
against the Company and one current and one former officer and director.  The 
suit alleges that the Company and/or the individuals owe the plaintiffs free 
trading stock options in lieu of certain amounts claimed to be due to them 
for salary, bonus or override compensation, and seeks damages, attorney's 
fees, pre-and post-judgment interest, and costs allegedly in excess of 
$4,000,000.  The Company and the individuals believe such claims are without 
merit and intend to vigorously defend against the claims.  The lawsuit is 
styled MARKS, MARKS, RANSHAW, COLQUITT & LAURATIS V. CITADEL COMPUTER 
SYSTEMS, INC., et al., in the 189th Judicial District Court of Harris County, 
Texas.

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.

                                       13

<PAGE>

                              CITADEL TECHNOLOGY, INC.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE D - CAPITAL TRANSACTIONS

The Company issued 2,253 shares of 11% series D Convertible Redeemable 
Preferred Stock during the quarter.  The preferred shares are convertible 
into Common Stock of the Company at the election of the holders at a 
conversion price equal to 150% of the 20 day average of the closing bid price 
of the Company's Common Stock prior to the closing of the purchase ($1.075 
per share).  The Preferred Stock will automatically convert into shares of 
Common Stock upon (i) the closing of an underwriting public offering that 
values the Company at a minimum equity value of $20,000,000 with proceeds to 
the Company of a minimum of $10,000,000 before expenses, or (ii) the date at 
which the Company's Common Stock maintains a closing bid price that is 100% 
greater than the conversion price for at least 20 consecutive days.  Such 
shares were not registered under the Securities Act, in reliance upon Section 
4(2) of the Securities Act and Rule 506 of Regulation D thereunder.  No 
underwriters were involved in connection with the sale of the shares under 
the Stock Purchase Agreement.  Beginning one year from the date of closing, 
the Company may redeem all or part of the unconverted preferred shares based 
on a redemption price equal to 120% of the issuance price if redeemed prior 
to two years after the closing, 115% of the issuance price if redeemed prior 
to three years after the closing, or 100% of the issuance price if redeemed 
prior to four years after the closing.

The Company also issued 5,000 shares of 6% Series E Convertible Redeemable 
Preferred Stock during the quarter. The preferred shares are convertible into 
Common Stock of the Company at the election of the holder at any time after 
90 days following the date of issuance, at a conversion price equal to the 
lesser of (i) seventy-five percent (75%) of the consecutive five-day average 
closing bid price for the Company's Common Stock prior to the conversion 
date, or (ii) 115% of the closing market price as of the closing date of the 
issuance of the Series E Preferred Stock ($.79 per share). At any time after 
the date of issuance of the Series E Preferred Stock, and prior to the 90th 
day following the date of original issuance, this Company may redeem some or 
all of the outstanding Series E Preferred Stock at a redemption price in cash 
equal to 107.5% of the original issue price if redeemed within 30 days of 
issuance, 112.5% of the original issue price if redeemed between 31 and 60 
days of issuance, and 117.5% of the original issue price if redeemed between 
61 and 90 days of issuance, plus accrued and unpaid dividends to the 
redemption date.

On May 26, 1998, the Company and Icarus Investments I, Ltd. ("Icarus") 
entered into a Stock Purchase Agreement pursuant to which Icarus purchased 
2,000,000 shares of Citadel's Common Stock for proceeds of $2,500,000.  Such 
shares were not registered under the Securities Act, in reliance upon 
Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder.  
In connection with the transaction, the Company issued warrants to purchase 
500,000 shares of the Company's Common Stock at $4.00 per share and 500,000 
at $5.00.  No underwriters were involved in connection with the sale shares 
under the Stock Purchase Agreement.  The Company paid an individual a 
commission of $175,000 in connection with the transaction.

NOTE E - SUBSEQUENT EVENTS

On June 30, 1998, the Company exercised its 30 - 60 day redemption option 
relating to a certain 6% Series E Convertible Redeemable Preferred Stock 
issuance and redeemed the 5,000 outstanding shares for $562,500 plus accrued 
dividends.  The Company thought this was a prudent business decision given 
the difference between the Company's current Common Stock market price and 
the $.79 conversion price of the issuance.

On June 30, 1998, the Company and Icaurs Investments I, Ltd. ("Icarus") 
entered into a Stock Purchase Agreement pursuant to which Icarus purchased 
1,000,000 shares of Citadel's Common Stock for proceeds of $1,500,000.  Such 
shares were not registered under the Securities Act, in reliance upon Section 
4(2) of the Securities Act and Rule 506 of Regulation D thereunder.   No 
underwriters were involved in connection with the sale of the shares under 
the Stock Purchase Agreement.

                                       14


<PAGE>

                              CITADEL TECHNOLOGY, INC.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE F - EARNINGS PER SHARE CALCULATION

<TABLE>
<CAPTION>

                                           FOR THE QUARTER ENDED MAY 31, 1998
                                        INCOME           SHARES        PER SHARE
                                      (NUMERATOR)    (DENOMINATOR)      AMOUNT
                                      ----------     -------------     ---------
<S>                                   <C>            <C>               <C>
Income after extraordinary item        $155,998
Less:  Preferred stock dividends        (18,830)
                                       --------

BASIC EPS
Income available to common 
   stockholders                         137,168       21,989,756          $.01
                                                                          ----
                                                                          ----

EFFECT OF DILUTIVE SECURITIES
Warrants                                               3,033,565
Convertible preferred stock              18,830        1,771,742
Convertible debt                          4,159          676,923
                                       --------       ----------          
DILUTED EPS
Income available to common 
   stockholders + assumed conversions  $160,157       27,471,985          $.01
                                       --------       ----------          ----
                                       --------       ----------          ----
</TABLE>
NOTE F - RELATED PARTY TRANSACTIONS

The Company contracted with Metamor Software Solutions, a division of Metamor 
Worldwide, Inc. ("Metamor") (formerly CORESTAFF, Inc.) to provide various 
development services for the Company.  The Company incurred $498,502 in 
expenses related to these services during the quarter ended May 31, 1998.  
Mr. Johnsen, one of the Company's directors, is executive vice president of 
Metamor.

                                       15