<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 SEPTEMBER 30, 2001

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

              FOR THE TRANSITION PERIOD FROM _________ TO _________

                                CT HOLDINGS, 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 770, DALLAS, TX 75219
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

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 November 19, 2001

Common Stock, Par value $.01 per share 49,829,608

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

<PAGE>

                                CT HOLDINGS, INC.
                                   FORM 10-QSB
                    QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page

<S>                                                                        <C>
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

     Balance Sheets

          as of September 30, 2001 and December 31, 2000                    3

     Statements of Operations

          for the three and nine months ended September 30, 2001 and 2000   5

     Statements of Cash Flows

          for the nine months ended September 30, 2001 and 2000             6

     Notes to Financial Statements                                          7

Item 2. Management's Discussion and Analysis of Financial
          Condition and Results of Operations                              14

PART II. OTHER INFORMATION


Item 1.      Legal Proceedings                                             27

Item 5.      Other Information                                             27

Signatures                                                                 32
</TABLE>

                                       2





<PAGE>

                         PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                CT HOLDINGS, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                             September 30,   December 31,
                                                                 2001            2000
                                                              (unaudited)
                                                             ------------    -----------
<S>                                                          <C>             <C>
CURRENT ASSETS

 Cash and cash equivalents                                   $     12,352    $    21,647
 Accounts receivable-trade, less                                   76,872         54,794
  allowance of $20,000 and $28,754
 Accounts receivable, other                                        16,854         45,250
 Accounts receivable from affiliate, less
   allowance of $40,000                                            41,337             --
 Notes receivable from related parties                                 --        588,559
 Notes receivable from affiliates                                 130,000        730,000
 Inventory                                                         39,868         42,077
 Prepaid expenses                                                  48,854         94,217
                                                             ------------    -----------

 Total current assets                                             366,137      1,576,544

INVESTMENT IN UNCONSOLIDATED AFFILIATES                         3,063,975      2,613,976

PROPERTY AND EQUIPMENT, net                                        23,472         94,054

PURCHASED SOFTWARE, net of accumulated
 amortization of $1,152,398 and $1,045,696                             --        106,704

CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
 net of accumulated amortization of $1,302,470 and $851,204       177,443        485,221

OTHER ASSETS                                                       57,586         42,095
                                                             ------------    -----------
  TOTAL ASSETS                                               $  3,688,613    $ 4,918,594
                                                             ============    ===========
</TABLE>



  The accompanying notes are an integral part of these statements.

                                       3

<PAGE>

                                CT HOLDINGS, INC.
                           BALANCE SHEETS - CONTINUED

<TABLE>
<CAPTION>
                                                                  September 30,     December 31,
                                                                       2001           2000
                                                                  (unaudited)
                                                                  ------------      ------------
<S>                                                               <C>              <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
 Accounts payable and accrued expenses                              $  1,685,096   $    922,113
 Accrual for legal settlement                                                 --      1,912,500
 Guarantee to equity method subsidiary                                 1,406,472             --
 Payable to affiliate                                                         --        126,028
 Current maturities of long-term debt                                    150,000        150,000
 Notes payable                                                                --         98,425
 Notes payable to related parties                                        692,482             --
                                                                    ------------   ------------

 Total current liabilities                                             3,934,050      3,209,066


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
 Common stock, $.01 par value per share; authorized 60,000,000
  Shares; 53,994,221 and 53,825,317 shares issued                        539,942        538,253
 Preferred stock, $.01 par value per share;
  authorized 1,000,000 shares; 50 shares of Series B convertible
  issued and outstanding (liquidation value $50,000)                           1              1
 Additional paid-in capital                                           56,429,100     56,383,496
 Accumulated deficit                                                 (54,714,241)   (52,711,983)

 Treasury stock, at cost (4,164,613 shares)                           (2,500,239)    (2,500,239)
                                                                    ------------   ------------

 Total stockholders' equity (deficit)                                   (245,437)     1,709,528
                                                                    ------------   ------------

 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)               $  3,688,613   $  4,918,594
                                                                    ============   ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                       4


<PAGE>

                                CT HOLDINGS, INC.
                       UNAUDITED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED               NINE MONTHS ENDED

                                                                            SEPTEMBER 30,                    SEPTEMBER 30,
                                                                        2001            2000            2001            2000
                                                                    -----------     -----------      ----------      ----------
<S>                                                                 <C>             <C>              <C>             <C>
Net sales                                                            $   141,028    $   200,614      $   322,447    $    448,150

Cost of sales, excluding depreciation and
   amortization                                                           20,043          2,316           22,500          12,266

Operating expenses
    Selling, general and administrative
            expense                                                      491,102        458,378        1,631,292       2,600,356
    Research and development expenses                                         --             --               --         238,760
    Accrual for legal settlement                                              --             --               --       1,912,500
    Reversal of accrual for legal settlement                                  --             --       (1,912,500)             --
    Write-off of capitalized software costs                                   --             --               --         625,336
    Depreciation and amortization expense                                154,740        269,335          574,105         883,420
                                                                     -----------    -----------      -----------     -----------
    Total operating expenses                                             645,842        727,713          293,472       6,260,372
                                                                     -----------    -----------      -----------     -----------
    Operating income (loss)                                             (524,857)      (529,415)           7,050      (5,824,488)

Other income (expense)
    Interest expense/income, net                                          26,944         (9,584)          49,649         (31,969)
    Other income                                                          34,242         15,000           40,254          15,000
    Equity in loss of unconsolidated
            affiliate                                                         --       (105,734)      (2,099,211)     (4,658,781)
                                                                     -----------    -----------      -----------     -----------
                                                                          61,186       (100,318)      (2,009,308)     (4,675,750)
                                                                     -----------    -----------      -----------     -----------

Net loss                                                             $  (463,671)     $(629,733)     $(2,002,258)   $(10,500,238)
                                                                     ===========    ===========      ===========     ===========



    Net loss per share - basic and diluted                           $     (0.01)   $     (0.01)     $     (0.04)   $      (0.23)
                                                                     ===========    ===========      ===========     ===========

Weighted average shares outstanding - basic and diluted               49,829,608     48,252,675       49,733,710      47,289,391
                                                                     ===========    ===========      ===========     ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                       5

<PAGE>

                                CT HOLDINGS, INC.
                       UNAUDITED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                                       SEPTEMBER 30,
                                                                    2001          2000
                                                                -----------   ------------
<S>                                                             <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net loss                                                  $(2,002,258)  $(10,500,238)
      Adjustments to reconcile net loss to net cash
           used in operating activities:
                Depreciation and amortization                       574,105        883,420
                Provision for loss on account receivable
                      from affiliate                                 40,000             --
                Equity in loss of unconsolidated affiliate        2,099,211      4,658,781
                Write-down of software development costs                 --        625,336
                Common stock and options issued as payment
                      of expenses                                        --         50,001
                Noncash employee severance expense                       --      1,163,392
      Changes in operating assets and liabilities
           Accounts receivable                                        6,318        529,557
           Accounts receivable from affiliate                       (81,337)            --
           Prepaid expenses                                          45,363         64,501
           Inventory                                                  2,209         67,259
           Accounts payable and accrued expenses                    762,983        (50,385)
           Accrual for legal settlement                          (1,912,500)     1,912,500
           Payable to affiliate                                    (126,028)        28,085
           Other assets                                             (17,793)       166,423
                                                                -----------   ------------
      NET CASH USED IN OPERATING ACTIVITIES                        (609,727)      (401,368)

CASH FLOWS FROM INVESTING ACTIVITIES
      Net payments on notes receivable from related parties         588,559       (357,451)
      Capital contributions due to deconsolidation
           of Parago, Inc.                                               --     (3,167,975)
      Participation in Parago, Inc. guarantee                      (692,739)            --
      Software development costs                                         --       (239,086)
      Notes receivable                                              206,750             --
      Purchase of property and equipment                           (143,489)            --
                                                                -----------   ------------
      NET CASH USED IN INVESTING ACTIVITIES                         (40,919)    (3,291,450)

CASH FLOW FROM FINANCING ACTIVITIES
      Payments on notes payable                                     (98,425)      (699,113)
      Proceeds from notes payable                                        --             --
      Proceeds from sale of common stock                             47,293      6,161,755
      Notes payable to related party                                692,483             --

                                                                -----------   ------------
      NET CASH PROVIDED BY FINANCING ACTIVITIES                     641,351      5,462,642
                                                                -----------   ------------
      Net decrease in cash
        and cash equivalents                                         (9,295)     1,296,943
      Cash and cash equivalents at the beginning
        of the period                                                21,647         14,078
                                                                -----------   ------------
      Cash and cash equivalents at the end
        of the period                                           $    12,352   $  1,310,840
                                                                ===========   ============
</TABLE>


The accompanying notes are an integral part of these statements.

                                       6

<PAGE>

CT HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

DESCRIPTION OF BUSINESS

CT Holdings, Inc. (CT Holdings), develops and markets its Citadel Technology
line of security software, and also acts as a developer of early stage
companies, including Parago and River Logic. CT Holdings' Citadel Technology
Security Software division develops and markets computer security and privacy
software designed to address the need for security inside the firewall. CT
Holdings announced in November 2001 its intention to spin off its Citadel
Security Software division to its shareholders upon effectiveness of required
Securities and Exchange Commission filings and final approval by the Board of
Directors of the terms and conditions of the distribution, including the
assets and liabilities to be distributed and the desirability or requirement
of any shareholder approval.

These products, WinShield SecurePC and NetOff, enable companies to enforce
security policies from a single point of control across multiple operating
systems and platforms. Citadel's software products provide the flexibility and
scalability that security administrators are demanding for managing security
policies within their computing environments. These security policies operate
inside the firewall and are designed to secure computers against unauthorized
configuration changes and software installations, which cause the majority of
system vulnerabilities. Additionally, SecurePC provides hardening of system
files that deliver the first line of defense against viruses, malicious code and
unauthorized access or theft of confidential information. The products
specifically enforce policies recently mandated by the Health Insurance
Portability and Accountability Act (HIPAA) and Gramm-Leach-Bliley legislation,
which impose strict new security and privacy requirements on the health care and
financial industries, respectively. Citadel Technology Security Software clients
include IBM Global Services, Washington Mutual Bank, Merrill Lynch, the U.S.
Navy, and numerous health care, education and corporate clients.

In addition to its current product offerings, CT is also developing additional
security products, including its new "Hercules" vulnerability remediation
software, that it anticipates launching in the fourth quarter of 2001 with
commercial sales beginning in the first quarter of 2002.

CT Holdings has developed technology-based companies and provided early
stage ventures with a single source of management capital, as well as consulting
on operations, marketing and strategic planning. The Company is currently
reviewing strategic alternatives with respect to the addition of operating
companies following the spinoff of the software business to its shareholders.

CT Holdings began its business development activities in 1999 with the formation
of Parago, Inc. (Parago), an application service provider (ASP) and Internet
based business process outsourcer (BPO) that provides an online suite of
offerings designed to increase sales, reduce costs, retain customers and
increase client profitability. These services include online promotional
management, online rebate processing, proactive email, online surveys, and
customer data warehousing, analysis and reporting. Parago's comprehensive
integrated suite of outsourced customer care solutions are marketed across
multiple industry lines.

In May 2000, CT Holdings acquired a minority interest in River Logic, Inc.
(River Logic). River Logic develops decision-support applications for industry.
Using its open and rapid-application development (ORAD) system, developers at
River Logic create applications that enable industry professionals to model
complex enterprises and explore financial relationships on a desktop computer or
laptop. Embedded analytics allow end-users to understand the financial
implications of critical business decisions easily by manipulating graphical
icons that model their enterprise. Headquartered in Beverly, Massachusetts, with
offices in Austin, Dallas, and Portland, River Logic is a privately held
corporation receiving venture capital support from Cardinal Investment, Inc., CT
Holdings, EBSCO CASIAS, eMed Ventures, the Intel 64 Fund, and Mercury Ventures.
River Logic's solutions incorporate several patented technologies and leverages
research originally conducted at University of Massachusetts and the Russian
Academy of Sciences.


                                        7

<PAGE>

Liquidity

The Company has incurred recurring operating losses and has a working capital
deficiency. The Company has used cash in operations of approximately $609,727
during the nine months ended September 30, 2001. The Company has a cash balance
of approximately $12,352 at September 30, 2001 and current liabilities exceed
current assets by approximately $3.6 million. As outlined below, these assets do
not reflect the value that may be realized from our investments in Parago and
River Logic. The Company has been and continues to be dependent upon outside
financing to develop its software products, perform its business development
activities, invest in unconsolidated affiliates and provide for ongoing working
capital requirements.

The Company expects to generate cash from the sale of the Company's software and
will incur costs relating to such operations that may result in a cash
deficiency. Following the spinoff of the Company's software business, revenues
and expenses related to the software business will be recognized by the new
entity. The Company will also continue to incur expenses relating to corporate
overhead and activities related to managing the Company's investments and
considering additional opportunities. The Company may require cash from
financing activities to fund the deficits expected over the next year.

The Company's strategy of continuing to support and expand its business
development activities, in addition to its software activities, requires the
Company to obtain additional capital. The complete implementation of this
element of our strategy will not generate positive cashflow in the foreseeable
future. Achieving positive cashflow is currently highly dependent upon obtaining
liquidity from the Company's investments in unconsolidated affiliates. The
Company estimates it will need to raise additional capital to fund the plan
through the remainder of 2001 and substantially greater funds if the Company
expects to continue to acquire investments, if amounts become due to settle
contingent liabilities, or if the Company is required to fund the balance of its
participation in the Parago guaranty. CT was required to pay $692,740 to
participate in the bridge loan guarantee related to its investment in Parago.
These funds were obtained in part through the repayment of $365,017 owed to CT
Holdings by its Chief Executive Officer and in part by an advance to the Company
of $489,983 from the Chief Executive Officer. In addition, in the event Parago
is unsuccessful in repaying the bridge loan by December 2001, CT Holdings would
be required to advance up to an additional $1,406,472 to pay for its
participation in the bridge loan guarantee participation described below under
Note 2 - Investment in Unconsolidated Subsidiary and Part II -- Item 5 - Other
Information - Parago Bridge Financing. Historically, the Company has obtained
short-term bridge funding from its Chief Executive Officer or Directors of the
Company. One of the Company's directors loaned $250,000 to the company in the
third quarter. The loan bears interest at 8% and is payable on demand. While
this may occur in the future there can be no assurance that such financing will
be available or if available based on terms that the Company would be willing to
accept.

Since 1999, we have made investments in two companies that we believe may
provide liquidity to the Company in the long term. Our first investment in
Parago we believe has been successful in that it has grown from the original
$50,000 of equity provided by the Company and no revenue, to net revenue of
approximately $7.6 million for the three months ended September 30, 2001
(unaudited). As expected in an early stage company, Parago has not been
profitable and has experienced cash flow deficiencies as it implements its
business plan. We believe, however, that our Parago investment of 20,000,000
common shares, and warrants to purchase 28,874.90 shares of Series A-3 Preferred
Stock, convertible into 2,887,490 shares common stock at an exercise price of
$0.01 per share, may ultimately provide an appropriate return. These warrants
only become exercisable in the event the Company fulfills all of its obligations
under the Participation Agreement or Parago repays the bridge loan. Until we are
able to create liquidity from the Company's investments through sale to a
strategic investor, an initial public offering or some other activity, or
sufficient revenues from its operating activities, the Company will continue to
require working capital to fund its own operating expenses.

Similarly, the Company's investment in River Logic we believe has also been
successful. Since our initial investment, River Logic has made substantial
progress in executing its strategy through its development and introduction of
new products and establishment of new customer relationships. In addition,
during April 2001 River Logic obtained a significant strategic investment from a
subsidiary of Intel, Cardinal Investments, eMed Ventures, and Mercury Ventures.
As part of that round, the Company converted $450,000 of demand notes receivable
into River Logic Series C Preferred Stock, the same equity instruments purchased
by the other investees. The remainder of our note receivable totaling
approximately $200,000 was paid in April 2001. Similar to the investments into
Parago, the Company recognized that these investments would be initially
illiquid. While we are pleased with the performance of Parago and River Logic to
date, there can be no assurance that the Company will ever achieve liquidity for
its investments.

There can be no assurance that management's plans will be successful or what
other actions may become necessary. Although the Company has been successful
raising capital in the past, if the Company is unable to raise capital, it may
be required to sell assets or reduce the level of its operations. Such actions
could have a material adverse effect on the Company's business and operations
and result in charges that could be material to the Company's business and
results of operations.

BASIS OF PRESENTATION

The accompanying condensed financial statements of CT Holdings have been
prepared in accordance with accounting


                                        8

<PAGE>

principles generally accepted in the United States for interim financial
information. The condensed financial statements of CT Holdings as of September
30, 2001 and for the three and nine month periods ended September 30, 2001 and
2000 are unaudited and, in the opinion of management, contain all adjustments
necessary for the fair presentation of the financial position and results of
operations for the interim period. These condensed financial statements should
be read in conjunction with the Financial Statements and notes thereto included
in CT Holdings' Form 10-KSB for the ten months ended December 31, 2000. The
results of operations for the three and nine month periods ended September 30,
2001 are not necessarily indicative of the results to be expected for the entire
year (see Part I. Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition - Risk Factors). The condensed balance sheet
as of December 31, 2000 has been derived from the Company's audited financial
statements as of that date and does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.

Principles of Accounting for Ownership Interests in Investees / Investment in
Unconsolidated Affiliates

For the three and nine months ended September 30, 2001 and the year ended
December 31, 2000, the ownership interests that the Company holds in Parago and
River Logic have been accounted for under the equity method for Parago and the
cost method for River Logic. The Company records its investments in
equity-method and cost- method investees on its balance sheets as Investment in
Unconsolidated Affiliates and its share of the equity-method investee's losses
in Equity in Loss of Unconsolidated Affiliate. All significant intercompany
accounts and transactions have been eliminated.

For the three and nine months ended September 30, 2001 and the year ended
December 31, 2000, the Company's investment in Parago is presented under the
equity method of accounting. Under the equity method of accounting, the
Company's share of the investee's income or losses is included in the statements
of operations. Under the equity method, when Parago sells its common stock to
unrelated parties at a price in excess of its book value, the Company's net
investment in that affiliate increases. If the carrying value of the Company's
net investment falls below zero, the Company discontinues applying the equity
method until the carrying value of the net investment rises above zero. In
addition, in the event the value of the Company's equity investment rises above
zero, the Company will resume applying the equity method and will recognize an
investment in Parago after the Company's share of net losses not recognized
during the period the equity method was suspended of approximately $18.9 million
(unaudited) are recovered by income or an increase in equity. In the quarter
ended June 30, 2001, the Company participated in the Parago bridge loan guaranty
and as a result was required under the equity method to recognize equity in
losses equal to its participation of $692,739 and an additional $1,406,472 as a
result of the participation in the bridge loan guarantee. The total equity in
losses of unconsolidated affiliate of $2,099,211 recorded for the nine months
ended September 30, 2001 reduces the amount of net losses not recognized during
the periods the equity method was suspended. The Company continues to hold
20,000,000 shares of common stock of Parago at September 30, 2001, representing
approximately 45% of Parago's outstanding common stock at September 30, 2001, as
well as warrants to purchase 28,874.90 shares of Series A-3 Preferred Stock,
convertible into 2,887,490 shares of Parago common stock, acquired in connection
with the guarantee participation. These warrants only become exercisable in the
event the Company fulfills all of its obligations under the Participation
Agreement or Parago repays the bridge loan.

Because the Company owned less than 20% of the ownership interest in River Logic
at September 30, 2001, the investment has been accounted for under the cost
method of accounting, and the carrying value of the investment is recorded at
the original acquisition costs. Under this method, the Company's share of the
income or losses of River Logic is not included in the Company's statements of
operations. The investment in unconsolidated affiliate at September 30, 2001 of
approximately $3.1 million represents the investment in River Logic as the
investment in Parago was reduced to zero as discussed above.

The Company periodically evaluates the investment in River Logic for impairment
based upon the prospects of the entity and the value of the investment when
compared to other investments in the entity from other unrelated parties. If
these two factors indicate that an other than temporary impairment exists, then
the Company will write down the value of the investment to its realizable value.
However, no such indications were identified at September 30, 2001 and the
investment in River Logic is stated at its original acquisition cost.

Net Loss Per Common Share

Basic loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Basic
loss per share excludes any dilutive effects of options. Diluted loss per common
share includes the dilutive effect of options and warrants calculated using the
treasury stock method, and, includes the effect of convertible preferred stock
using the if-converted method. Stock options and warrants to purchase 11,947,000
shares of common stock have been excluded from the computation of diluted loss
per share, as the effect would be anti-dilutive. In addition, approximately
9,400 shares (based on the price per share for the Company's common stock on
September 30, 2001), which would be issued upon the conversion of Series B
preferred stock, have been excluded from the computation of loss per share.


                                        9

<PAGE>

NOTE 2. INVESTMENT IN UNCONSOLIDATED AFFILIATE

Parago Investment

In the quarter ending May 31, 1999, the Company accounted for its investment in
Parago under the consolidation method. Through subsequent sale and distribution
by Parago of shares of its common stock, the Company's ownership was reduced
below 50% beginning in July 1999. As a result, beginning July 1999, the Company
began accounting for its remaining investment in Parago under the equity method
of accounting. Prior to these events, the operating results of Parago were
consolidated in the Company's consolidated financial statements. At September
30, 2001, the Company owns 20,000,000 of Parago's outstanding shares of common
stock, and warrants to purchase 28,874.90 shares of Series A-3 Preferred Stock,
convertible into 2,887,490 shares of Parago common stock. These warrants only
become exercisable in the event the Company fulfills all of its obligations
under the Participation Agreement or Parago repays the bridge loan. The Company
believes that any additional financing by Parago in the current market
environment will materially dilute the equity ownership interest held by the
Company.

From January to March 2000, Parago raised an aggregate of $36,500,000, including
$21,500,000 through the issuance of 430,000 shares of Series C Convertible
Preferred Stock to THLee.Putnam Internet Partners LP, Dain Rauscher Wessels
Investors LLC and Watershed Capital I, L.P. At the time of issuance, the Series
C preferred stock is convertible into 4,300,000 shares of Parago common stock.
In addition, in September 2000, Parago sold an additional $15,000,000 in Series
D Preferred Stock to THLee.Putnam and Watershed Capital. In connection with the
Series A, B, C, and D preferred stock financings, the preferred stockholders
were issued approximately 5,618,000 warrants to purchase common stock. The
warrants vest immediately and have a weighted average exercise price of $1.25.

The following is the unaudited condensed financial information of Parago at
September 30, 2001 and December 31, 2000 and for the three and nine months ended
September 30, 2001 and 2000.

  SUMMARIZED BALANCE SHEET    SEPTEMBER 30, 2001  DECEMBER 31, 2000

  Current assets                     $27,476,521        $29,369,901
  Noncurrent assets                   23,316,748         27,988,337
                                     -----------        -----------

   Total assets                      $50,793,269        $57,358,238
                                     ===========        ===========

  Current liabilities                $37,006,116        $31,002,400
  Long-term debt and capital
   lease obligations                   2,231,065          3,490,910
                                     -----------        -----------
   Total liabilities                  39,237,181         34,493,310
                                     -----------        -----------
  Redeemable common stock                     --          2,000,000
  Shareholders' equity                11,556,088         20,864,928
                                     -----------        -----------
                                     $50,793,269        $57,358,238
                                     ===========        ===========



SUMMARIZED STATEMENT        THREE MONTHS ENDED   NINE MONTHS ENDED
 OF OPERATIONS            SEPTEMBER 30, 2001       SEPTEMBER 30, 2001
---------------------------------------------------------------------
  Revenues                         $ 7,640,087        $ 19,767,098
  Cost of revenues                   1,940,765           5,833,477
  Operating expenses                10,391,710          32,403,974
  Loss on sale of assets               (12,498)               2005
  Operating loss EBITDA               (368,634)         (5,480,727)
  Net loss                          (4,612,180)        (15,280,620)


                                       10

<PAGE>

Parago has incurred recurring operating losses and has a working capital
deficiency. Parago had a net operating loss, before interest, taxes,
depreciation and amortization, of approximately $368,634 and $5.5 million during
the three and nine months ended September 30, 2001, respectively, and a working
capital deficiency of $11.5 million as of September 30, 2001. Consequently,
Parago is seeking to raise additional capital to repay the bridge loan described
below and to execute its business plans. The Parago financial information does
not include any adjustments that might result from the outcome of this
uncertainty regarding Parago's liquidity and capital resources.

In May 2001, Parago obtained a Term Loan from Comerica Bank--Texas (Comerica) in
the principal amount of $8.0 million. The funds derived from the Term Loan were
necessary to enable Parago to continue operations, as Parago's cash resources
were depleted. Parago intends to repay the Term Loan with proceeds from a
contemplated sale of shares of a new series of preferred stock, the terms of
which have not yet been established (the Series E Stock). As a condition to the
extension of the Term Loan, Comerica required a guarantee of Parago's
obligations under the Term Loan from certain affiliates of TH Lee.Putnam
Internet Partners, L.P. (collectively, TH Lee), which own shares of Parago's
Series C Convertible Preferred Stock (Series C Stock) and Series D Convertible
Preferred Stock (Series D Stock), common stock and certain warrants.

TH Lee executed the Guaranty in consideration of its receipt of 110,000 warrants
to purchase shares of Parago's Series A-3 Preferred Stock, convertible into
11,000,000 shares of Parago common stock, a new series of preferred stock that
was created in connection with the bridge loan and guaranty transaction, and, in
the event that TH Lee is called upon to make payment under the Guaranty, its
receipt of shares of Series A-1 Stock and Series A-2 Stock, two new series of
preferred stock the issuance of which could have the effect of substantially
diluting Parago's existing stockholders, including CT Holdings, in the event
such holders do not participate in the guaranty as described below.

Parago securityholders (including CT Holdings) who met the required suitability
criteria were offered the opportunity to participate in the Guaranty through a
Pro Rata Participation Interest. In the event that TH Lee is required to pay all
or a portion of the Term Loan under the Guaranty, those offerees who have
participated in the offering and pay their pro rata portion of the Guaranty when
it is due will maintain their percentage equity ownership in Parago, while those
offerees who do not participate in the offering, and those participants who fail
to make their Guaranty payments when due, will be substantially diluted. If
offerees holding a significant portion of Parago's current equity ownership fail
to make their Guaranty payments when due, if they become due, then TH Lee may
gain a controlling interest in Parago as a result of the transactions. See Risk
Factors--The issuance of the securities will result in dilution of existing
Parago stockholders and possibly a change in control of Parago. The terms of the
participation offering are described in greater detail under Part II--Item
5--Other Information--Parago Bridge Financing. CT Holdings has participated in
this offering, although there can be no assurance that CT Holdings will be able
to make the remaining guaranty payments when due, in the event Parago is unable
to repay the bridge loan.

The Company has also agreed to convert shares of Parago common stock issued in
connection with a 1999 acquisition by Parago into up to 500,000 of the Company's
common shares at the option of the acquired entity's shareholders. Pursuant to
the terms of the subscription agreements between Parago and some of its
stockholders, the Company may be required at the option of such stockholders to
issue up to 414,000 shares of the Company's common stock. In consideration of
certain of its directors' funding of the Company's participation in the Parago
bridge loan, the Company has agreed to permit the directors to exchange up to
5,000,000 Parago shares into up to 6,000,000 shares of the Company's common
stock.

RIVER LOGIC INVESTMENT

In May 2000, the Company acquired approximately 1.19 million, or 5.9%, shares of
common stock of River Logic from several of its existing shareholders in
exchange for 333,333 shares of the Company's common stock. The Company also
acquired shares of Series A Convertible Preferred Stock from River Logic in
exchange for the contribution of assets acquired from a third party by the
Company through exchange of 666,667 shares of the Company's common stock. The
acquired shares of River Logic's preferred stock are convertible into shares of
common stock that represented approximately 13.1% of the currently outstanding
shares of capital stock of River Logic on a post conversion basis as of May 5,
2000.

In connection with the investment in River Logic, the Company also made two
$300,000 convertible bridge loans to River Logic. In April 2001, River Logic
received a venture capital investment from the Intel 64 Fund, Cardinal
Investment, Inc, eMed Ventures and Mercury Ventures, and the Company converted
$450,000 of the principal amount of the notes into shares of the Series C
Preferred Stock, and the remainder was paid in cash in April, 2001. As a result
of the transactions, the Company owns as of September 30, 2001 approximately 10%
of the capital stock of River Logic.

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<PAGE>

Altogether, the carrying value of the River Logic investment includes the fair
value of 1,000,000 shares of the Company's common stock exchanged to acquire the
interest in River Logic. The carrying value also includes legal fees paid in
connection with the investment and 50,000 shares of the Company's common stock
granted to a consultant for identifying the investment. The total value of the
1,050,000 shares granted equated to $2,486,917. Soon after the closing of the
transaction the consultant that identified the investment became President and
Chief Operating Officer of River Logic, and was granted 100,000 fully vested
stock options to purchase the Company's stock at $5 per share.

NOTE 3. CONTINGENCIES

The plaintiffs in the previously disclosed lawsuit by Janssen Meyers Associates
L.P. (JMA) refiled their lawsuit with the federal court, and we filed a motion
to dismiss the case because the plaintiffs lacked the required diversity
jurisdiction to pursue the claims in federal court and the court granted our
motion. In November 2001, the plaintiffs refiled the lawsuit in the state court
and added a claim seeking to enforce the settlement term sheet described below
in the Supreme Court of New York, that state's trial court, in a case styled
Roan Meyers v. CT Holdings. We intend to vigorously defend against this lawsuit
and file a counterclaim. In July 2000, we entered into a settlement term sheet
to resolve the disputes between us and Janssen-Meyers Associates L.P. (JMA),
pursuant to which we and JMA tentatively agreed to settle the lawsuit for an
aggregate of $3 million, in a combination of $1.5 million in cash and 300,000
shares of common stock with a guaranteed value of $5 per share as of January,
April and October 2001 (with respect to 100,000 of the shares for each period).
The settlement was subject to execution of definitive settlement documents and
approval of the boards of directors of the companies. As a result, we recorded
approximately $1,912,500 as a nonrecurring charge related to the settlement of
the litigation during 2000. However, the Company and JMA were unable to
negotiate the final definitive settlement agreement. On March 27, 2001, the
Court hearing the JMA lawsuit issued a Summary Order that denied JMA's motion to
enforce the settlement term sheet and confirmed the prior dismissal of the
lawsuit. The Court further ruled that JMA would either have to bring an action
on the proposed settlement or move to re-open the dismissed case. The Court
stated that it did not express any view with respect to the merits of the
settlement that brought about the dismissal of the case. Given these recent
events, including the dismissal of the lawsuit and the failure of the plaintiffs
to refile a lawsuit for more than one year after the date of the dismissal, the
Company has determined to reverse the nonrecurring charge that the Company had
recorded related to the settlement of the lawsuit.

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

At this time, the Company is unable to predict the ultimate outcome of some of
these suits, the costs associated with defending the claims and pursuing
counterclaims, and monetary compensation awarded, if any. The Company has, when
appropriate, recorded its current estimate of the amounts necessary to settle
the litigation.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

We develop and market our Citadel Technology Security Software line of desktop
and network security software, and we also have developed early stage companies,
including Parago and River Logic. Our Citadel Technology software division
develops and markets computer security and privacy software for one of the
fastest growing segments today - security inside the firewall. Our products,
Winshield SecurePC and NetOff, enable companies to enforce security policies
from a single point of control across multiple operating systems and platforms.
Citadel's software products, provide the flexibility and scalability that
security administrators are demanding for managing security policies within
their computing environments. These security policies operate inside the
firewall and are designed to secure computers against unauthorized configuration
changes and


                                       12

<PAGE>

software installations, which cause the majority of system vulnerabilities.
Additionally, SecurePC provides hardening of system files that deliver the first
line of defense against viruses, malicious code and unauthorized access or theft
of confidential information. The products specifically enforce policies recently
mandated by the Health Insurance Portability and Accountability Act (HIPAA) and
the Gramm-Leach-Bliley legislation, which impose strict new security and privacy
requirements on the health care and financial industries, respectively. Our
Citadel Technology clients include IBM Global Services, Washington Mutual Bank,
Merrill Lynch, the U.S. Navy, and numerous health care, education and corporate
clients.

In addition to its current product offerings, we are also developing additional
security products, including our new "Hercules" vulnerability remediation
software, that we anticipate launching in the fourth quarter of 2001 with
commercial sales expected to commence in the first quarter of 2002.

Our Hercules software includes both real time network security vulnerability
assessments and remediation capabilities for corporate and government
environments, and we believe it is the only solution that will automatically
identify and deploy the appropriate patches and fixes, repair the problem, and
secure the environment.

This solution aggregates vulnerability information from key resources throughout
the Internet and provides customers with real-time remediation updates, allowing
system administrators and security officers to quickly select and deploy
resolutions for the vulnerabilities that are found. We believe that the software
will save significant IT labor and management resources that were previously
needed to examine each computer and apply the necessary fix manually.

Along with those vulnerabilities introduced through external sources, major
security exposures are also being introduced "inside the firewall" by users
tampering with desktop configurations, downloading applications and accessing
unauthorized applications and information.

Capabilities of the Hercules software include:

 . Allows the systems administrators and security officers to select and deploy
resolutions for vulnerabilities automatically.

 . Automated system allows remediation to be scheduled during non-peak hours.

 . Provides full reporting on status of the deployment process.

 . Integrates with leading vulnerability scanning solutions.

 . Designed to run on Microsoft Windows 9x, ME, NT, 2000 and XP, with future
support for Unix/Linux and wireless devices.

 . Supported by the Hercules Server, which coordinates the real-time receipt of
updated vulnerability information from Citadel and provides a centralized
repository for deploying selected vulnerability resolutions to the targeted host
computers.

We announced in November 2001 our intention to spin off the shares of our
Citadel Technology Security Software to our shareholders upon effectiveness of
required Securities and Exchange Commission filings. We anticipate that we will
file a Registration Statement on Form 10-SB with respect to the spin off
transaction in the fourth quarter of 2001.

We also assist in the development of technology-based companies and we provide
early stage ventures with management capital, as well as consulting on
operations, marketing and strategic planning. In addition, we may pursue
acquisitions of complementary companies that fit our business strategy. Our
business model is designed to enable the companies with whom we partner to
become market leaders in their industries. We believe that by focusing on
technology companies, we are positioned to identify the latest trends and
opportunities and attract promising companies and talent in this industry. We
may also pursue business opportunities in markets other than technology for
companies with compelling valuations and strong business models. Our strategy is
to leverage the expertise of our management and affiliates and to capitalize
upon opportunities to cross- pollinate the strongest qualities among the
companies we assist. We believe that the anticipated growth in technology and
e-commerce creates strong opportunities for us to increase shareholder value by
investing in well-positioned early stage ventures.

OVERVIEW OF PARAGO SUBSIDIARY

We began our business development activities in January 1999 with the formation
of Parago, Inc., an application service provider (ASP) and Internet based
business process outsourcer (BPO) that provides a suite of technology offerings
(including PromoCenter, ValueRewards and KnowledgeCenter) designed to increase
sales, reduce costs, and retain customers for retailers, manufacturers and
service organizations. Parago's continuous customer interaction services include
online promotional management (including online rebate processing), proactive
email, online surveys, and customer data analysis and reporting. Parago's
comprehensive integrated suite of outsourced customer care solutions are
marketed across multiple industry lines. Parago's preliminary unaudited results
for the three months ended September 30, 2001 included revenues of approximately
$7.6 million. Through June 2001, Parago had received approximately $81.3 million
in private equity financing from venture capital investors including
THLee.Putnam Internet Partners, Dain Rauscher Wessels Investors, Watershed
Capital and Seaboard Ventures, as well as angel investors. CT Holdings continues
to hold 20 million shares of Parago common stock, and warrants to purchase
28,874.90 shares of Series A-3 Preferred Stock, convertible into 2,887,490
shares of Parago common stock. These warrants only become exercisable in the
event the Company fulfills all of its obligations under the Participation
Agreement or Parago repays the bridge loan.

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

Parago's online solutions provide a new vehicle for its clients to conduct
targeted marketing to customers with whom they have traditionally lost contact
subsequent to the point of purchase.

Parago is developing proprietary software that will provide an online mechanism
for customers, many of whom have immediate purchasing power in the form of
promotional proceeds, to apply those proceeds towards the purchase of additional
products or services. Parago's solutions also capture valuable customer
information that can help its clients better understand customer behavior.
Parago plans to provide fee-based customer specific or aggregated data analyses
to assist clients in designing future promotions.

Parago's solutions also enable businesses to improve operating efficiencies by
allowing them to analyze the results of their


                                       13

<PAGE>

promotions and manage these promotions on a real time basis. Parago markets its
solutions to retailers, manufacturers and service providers across multiple
industries. Parago provided its online solutions to approximately 180 clients as
of December 31, 2000, an increase of more than 38.5% over last year.

At September 30, 2001, we owned 20,000,000 shares of the common stock of Parago,
representing less than 50% of the outstanding common stock of Parago, as well as
warrants to purchase 28,874.90 shares of Series A-3 Preferred Stock, convertible
into 2,887,490 shares of Parago common stock. These warrants only become
exercisable in the event the Company fulfills all of its obligations under the
Participation Agreement or Parago repays the bridge loan. As a result, we
account for our ownership interest in Parago using the equity method of
accounting. Since its inception, Parago has incurred net losses and now has a
substantial accumulated deficit, which have had an impact upon and are reflected
in our financial statements. For example, for the three and nine months ended
September 30, 2001, we recorded an equity in loss of unconsolidated affiliate of
$0 and $2,099,211, respectively, and for the nine months ended September 30,
2000, we recorded an equity in loss of unconsolidated affiliate of $4,553,047.
In the quarter ended June 30, 2001, the Company participated in the Parago
bridge loan guaranty described below and as a result was required under the
equity method to recognize equity in losses equal to its participation of
$692,739 and an additional $1,406,472 as a result of the participation in the
bridge loan guaranty. The total equity in losses of unconsolidated affiliate of
$2,099,211 recorded for the three months ended June 30, 2001 reduces the amount
of net losses not recognized during the periods the equity method was suspended.
In addition, in the event Parago is unsuccessful in repaying the bridge loan by
December 2001, CT Holdings would be required to advance up to an additional
$1,406,472 to pay for its participation in the bridge loan guarantee. We
understand that Parago expects to incur net losses for the foreseeable future.

In May 2001, Parago obtained a Term Loan from Comerica Bank--Texas (Comerica) in
the principal amount of $8,000,000. The funds derived from the Term Loan were
necessary to enable Parago to continue operations, as Parago's cash resources
were depleted. Parago intends to repay the Term Loan with proceeds from a
contemplated sale of shares of a new series of preferred stock, the terms of
which have not yet been established (the Series E Stock). As a condition to the
extension of the Term Loan, Comerica required a guarantee of Parago's
obligations under the Term Loan from certain affiliates of TH Lee.Putnam
Internet Partners, L.P. (collectively, TH Lee), which own shares of Parago's
Series C Convertible Preferred Stock (Series C Stock) and Series D Convertible
Preferred Stock (Series D Stock), common stock and warrants to purchase shares
of common and Series A-3 Preferred Stock.

TH Lee executed the Guaranty in consideration of its receipt of 110,000 warrants
to purchase shares of Parago's Series A-3 Stock, convertible into 11,000,000
shares of Parago common stock, a new series of preferred stock that was created
in connection with the bridge loan and guaranty transaction, and, in the event
that TH Lee is called upon to make payment under the Guaranty, its receipt of
shares of Series A-1 Stock and Series A-2 Stock, two new series of preferred
stock the issuance of which would have the effect of substantially diluting
Parago's existing stockholders, including CT Holdings.

Parago and TH Lee also entered into a Participation Agreement, pursuant to which
Parago securityholders (including CT Holdings) who met the required suitability
criteria were offered the opportunity to participate in the Guaranty through a
Pro Rata Participation Interest, by paying one third of their guaranty amount
into escrow and agreeing to pay the remaining two thirds in December 2001 in the
event Parago is unable to repay the bridge loan. In the event that TH Lee is
required to pay all or a portion of the Term Loan under the Guaranty, those
offerees who participate in the offering will maintain their percentage equity
ownership in Parago upon the payment of their remaining two thirds guaranty
payment, while those offerees who do not participate in the offering will be
substantially diluted. If offerees holding a significant portion of Parago's
current equity ownership fail to make their payments when due in December 2001
in the event Parago is unable to repay the bridge loan, then TH Lee may gain a
controlling interest in Parago as a result of the transactions. See Risk
Factors--The issuance of the securities will result in dilution of existing
Parago stockholders and possibly a change in control of Parago. The terms of the
participation offering are more fully described under Part II--Item 5-- Parago
Bridge Financing. CT Holdings participated in this offering and may be required
to advance additional funds in the event Parago is unable to repay the bridge
loan. The warrants to purchase shares of Series A-3 Stock are immediately
exercisable with respect to the warrants received by TH Lee and are exercisable
upon the earlier to occur of the repayment of the bridge loan or the payment of
all remaining guaranty amounts by the other participating stakeholders at $1.00
per share and the Series A-3 Stock to be acquired upon exercise is convertible
into 11 million shares of Parago common stock.

OVERVIEW OF RIVER LOGIC

In May 2000, CT Holdings acquired a minority interest in River Logic, Inc.
(River Logic). River Logic develops decision-support applications for industry.
Using its open and rapid-application development (ORAD) system, developers at
River Logic create applications that enable industry professionals to model
complex enterprises and explore financial relationships on a desktop computer or
laptop. Embedded analytics allow end-users to understand the financial
implications of critical business decisions easily by manipulating graphical
icons that model their enterprise. Headquartered in Beverly, Massachusetts, with


                                       14

<PAGE>

offices in Austin, Dallas, and Portland, River Logic is a privately held
corporation receiving venture capital support from Cardinal Investment, Inc., CT
Holdings, EBSCO CASIAS, eMed Ventures, the Intel 64 Fund, and Mercury Ventures.
River Logic's solutions incorporate several patented technologies and leverages
research originally conducted at University of Massachusetts and the Russian
Academy of Sciences.

In May 2000, the Company acquired approximately 1.19 million shares, or 5.9%, of
common stock of River Logic from several of its existing shareholders in
exchange for 333,333 shares of the Company's common stock. The Company also
acquired shares of Series A Convertible Preferred Stock from River Logic in
exchange for the contribution of assets acquired from a third party by the
Company through exchange of 666,667 shares of the Company's common stock. The
acquired shares of River Logic's preferred stock are convertible into shares of
common stock that represented approximately 13.1% of the currently outstanding
shares of capital stock of River Logic on a post conversion basis as of May 5,
2000.

In connection with the investment in River Logic, the Company also made two
$300,000 convertible bridge loans to River Logic. In April 2001, River Logic
received a strategic investment from the Intel 64 Fund, Cardinal Investment,
Inc, eMed Ventures and Mercury Ventures, and the Company converted $450,000 of
the principal amount of the notes into shares of the Series C Preferred Stock,
and River Logic repaid the $216,000 balance of these notes as of April 2001. As
a result of the transactions, the Company owns as of September 30, 2001
approximately 10% of the capital stock of River Logic.

Altogether, the carrying value of the River Logic investment includes the fair
value of 1,000,000 shares of the Company's common stock exchanged to acquire the
interest in River Logic. The carrying value also includes legal fees paid in
connection with the investment and 50,000 shares of the Company's common stock
granted to a consultant for identifying the investment. Soon after the closing
of the transaction this consultant became President and Chief Operating Officer
of River Logic, and was granted 100,000 fully vested stock options to purchase
the Company's stock at $5 per share.

FORWARD-LOOKING STATEMENTS

The following discussion contains forward-looking statements that involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others things, those risk factors set forth in this
section and elsewhere in this report. We identify forward-looking statements by
words such as may, will, should, could, expects, plans, anticipates, believes,
estimates, predicts, potential, or continue or similar terms that refer to the
future. We cannot guarantee future results, levels of activity, performance or
achievements.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

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

In addition to the other information in this Report, the following factors
should be considered carefully in evaluating the Company and its business. This
disclosure is for the purpose of qualifying for the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. It contains factors that could
cause results to differ materially from such forward-looking statements. These
factors are in addition to any other cautionary statements, written or oral,
which may be made or referred to in connection with any such forward-looking
statement.

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

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


                                       15

<PAGE>

We cannot guarantee future results, levels of activity, performance or
achievements. Please refer to our annual report on Form 10-KSB for the ten
months ended December 31, 2000 for further discussion of these and other risk
factors related to the CT Holdings and its subsidiaries. The trading price of
our common stock could decline due to any of these risks, and you may lose all
or part of your investment.

GENERAL RISKS

WE HAVE A HISTORY OF NET LOSSES AND WILL NEED ADDITIONAL FINANCING TO CONTINUE
AS A GOING CONCERN.

We have incurred recurring operating losses and have a working capital
deficiency. We have used cash in operations of approximately $609,727 during the
nine months ended September 30, 2001. We have a cash balance of approximately
$12,352 at September 30, 2001 and current liabilities exceed current assets by
approximately $3.6 million. As outlined below, these assets do not reflect the
value that may be realized from our investments in Parago and River Logic. We
have been and continue to be dependent upon outside financing to develop our
software products, perform our business development activities, invest in
unconsolidated affiliates and provide for ongoing working capital requirements.
During the nine months ended September 30, 2001, substantially all of this
financing has been provided by related parties.

We expect to generate cash from the sale of our software and will incur costs
relating to such operations that may result in a cash deficiency. Following the
spinoff of the Company's software business, revenues and expenses related to the
software business will be recognized by the new entity. We will also continue to
incur expenses relating to corporate overhead and activities related to managing
our investments and considering additional opportunities.

Our strategy of continuing to support and expand our business development
activities requires us to obtain additional capital. The complete implementation
of this element of our strategy will not generate positive cashflow in the
foreseeable future. Achieving positive cashflow is currently highly dependent
upon obtaining liquidity from our investments in unconsolidated affiliates. We
estimate we will need to raise additional capital to fund the plan through the
remainder of 2001 and substantially greater funds if we expect to continue to
acquire investments, if amounts become due to settle contingent liabilities, or
we are required to fund the remaining $1.4 million of our Parago guaranty.
Historically, we have obtained any short-term bridge funding from our Chief
Executive Officer or Directors. In order to participate in the bridge loan
guaranty participation offering by Parago, we received $365,017 from our CEO as
repayment of indebtedness and an advance from our CEO of $489,983. One of the
Company's directors loaned $250,000 to the Company in the third quarter. The
loan bears interest at 8% and is payable on demand. While this may occur in the
future there can be no assurance that such financing will be available, or if
available on terms that we would be willing to accept.

As expected in an early stage company, Parago has not been profitable and has
experienced cash flow deficiencies as it implements its business plan. Until we
are able to create liquidity from our investments through sale to a strategic
investor, an initial public offering or some other activity, we will continue to
require working capital to fund our own operating expenses. While we are pleased
with the performance of Parago and River Logic to date, there can be no
assurance that we will ever achieve liquidity for our investments.

There can be no assurance that management's plans will be successful or what
other actions may become necessary. Although we have been successful raising
capital in the past, any inability to raise capital may require us to sell
assets or reduce the level of our operations. Such actions could have a material
adverse effect on our business and operations and result in charges that could
be material to our business and results of operations.

WE ARE INVOLVED IN LEGAL PROCEEDINGS THAT COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS

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

OUR EARNINGS AND STOCK PRICE ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

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


                                       16

<PAGE>

IF WE LOSE THE SERVICES OF ANY OF OUR KEY PERSONNEL, INCLUDING OUR CHIEF
EXECUTIVE OFFICER OR OUR DIRECTORS, OUR BUSINESS MAY SUFFER.

We are dependent on our key officers and directors, including Steven B. Solomon,
our Chairman and Chief Executive Officer, our directors, and our key employees
in our finance, technology, sales and marketing operations. Our business could
be negatively impacted if we were to lose the services of one or more of these
persons.

WE HAVE INVESTED IN EARLY STAGE VENTURES; AND THERE CAN BE NO ASSURANCE THAT OUR
INVESTMENTS WILL PROVE TO BE FINANCIALLY ATTRACTIVE.

We have developed and invested in Parago, Inc. and River Logic, Inc. Inasmuch as
Parago and River Logic are early stage ventures, it is difficult to judge their
future prospects.

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

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

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

Moreover, we may incur tax liabilities when we sell assets. We may also be
unable to purchase additional investment securities that may be important to our
operating strategy. If we decide to acquire non-investment security assets, we
may not be able to identify and acquire suitable assets and businesses.

RISKS RELATED TO OUR CITADEL TECHNOLOGY BUSINESS

WE MAY NOT BE ABLE TO EFFECT THE DISTRIBUTION OF CITADEL TECHNOLOGY SECURITY
SOFTWARE SHARES.

We previously announced that we intend to distribute shares of Citadel
Technology Security Software common stock to our shareholders upon compliance
with the Securities and Exchange Commission (SEC) requirements applicable in
connection with the proposed distribution. If there are problems associated with
compliance with SEC requirements or state law, then the distribution of Citadel
Technology Security Software shares may be delayed or may not occur. There can
be no assurance that we will complete the distribution on the proposed terms or
at all. We anticipate that we will file a Registration Statement on Form 10-SB
with resect to the proposed spin-off in the fourth quarter of 2001.

FOLLOWING THE SPINOFF OF OUR CITADEL TECHNOLOGY SOFTWARE BUSINESS, WE WILL NOT
HAVE ACCESS TO REVENUES FROM THE SOFTWARE BUSINESS AND WILL BE DEPENDENT ON
OUTSIDE SOURCES OF FUNDS, AND THERE CAN BE NO ASSURANCE THAT WE WILL BE ABLE TO
ACQUIRE AN OPERATING ENTITY.

If we are successful in completing our previously announced distribution of all
of the shares of Citadel Technology Security Software common stock to our
shareholders, we will no longer have access to the revenues of the Citadel
Technology business to fund our operations. Our investments in Parago and River
Logic do not currently provide us with operating funds. While we intend to
acquire an operating business in connection with or following the spin off,
there can be no assurances that we will be successful, and we may be dependent
on outside sources of funds. Any failure to obtain such funds would have a
material adverse effect on our business and results of operations, and
shareholders may suffer material dilution in connection with any such
financings, if available.


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

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

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

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

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

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

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

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

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

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

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

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

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

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

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

 . reduced demand for any given product;

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

 . the market's transition between operating systems.

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

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WE MAY BE UNSUCCESSFUL IN UTILIZING NEW DISTRIBUTION CHANNELS.

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

PRODUCT RETURNS MAY AFFECT OUR NET REVENUES.

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

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

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

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

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

THE RESULTS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE UNCERTAIN.

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

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

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

WE MUST MANAGE AND RESTRUCTURE OUR OPERATIONS EFFECTIVELY.

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

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

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

WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.

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

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

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

SOFTWARE DEFECTS AND PRODUCT LIABILITY.

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

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

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

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WE RELY ON MICROSOFT AND NOVELL TECHNOLOGY.

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

RISKS RELATED TO OUR INTERNET SUBSIDIARY, PARAGO, INC.

The following are some risks related to the business of Parago, Inc., our
Internet subsidiary, and should be considered in addition to the other risk
factors described in this Report. Any of these factors could have a material
adverse effect on us, as we owned 20,000,000 of the outstanding shares of common
stock, and warrants to purchase 28,874.90 shares of Series A-3 Preferred Stock,
convertible into 2,887,490 shares of common stock, of Parago at September 30,
2001. These warrants only become exercisable in the event the Company fulfills
all of its obligations under the Participation Agreement or Parago repays the
bridge loan.

THE ISSUANCE OF THE GUARANTY SECURITIES CONTEMPLATED BY PARAGO WILL RESULT IN
DILUTION OF EXISTING PARAGO STOCKHOLDERS INCLUDING CT HOLDINGS AND POSSIBLY A
CHANGE IN CONTROL OF PARAGO.

Offerees who do not participate in the Guaranty described in Part II, Item 5 --
Other Information--Parago Bridge Financing will experience dilution of their
ownership interest in Parago as a result of the grant of 110,000 warrants to
purchase Series A-3 Stock, convertible into 11,000,000 shares of Parago common
stock, to TH Lee and the participating offerees. Non-participating offerees, and
participants who fail to pay the remaining two thirds of their guaranty payment
if it is required in the event that Parago is unable to repay the bridge loan,
will experience further substantial dilution upon the issuance of Series A-1
Stock and Series A-2 Stock, which will occur if repayment of the Term Loan under
the Guaranty is required. Additionally, TH Lee will receive that portion of the
Warrants, Series A-1 Stock and Series A-2 Stock to which current Parago
securityholders who do not satisfy the criteria to, or choose not to,
participate in the offering or do not perform all of their obligations under the
Participation Agreement are entitled. Hence, TH Lee's percentage ownership of
Parago will increase as a result of the transactions, and if a substantial
portion of offerees do not participate or participating offerees do not perform
their obligations, then TH Lee may gain a controlling interest in Parago as a
result of the transactions. CT Holdings may suffer dilution with respect to its
holdings in Parago. CT Holdings has participated in the proposed transactions by
making its one-third escrow payment but may be required to advance additional
funds of up to $1,406,472 in order to maintain its equity interest.

In addition, in the event Parago is successful in its proposed private placement
of Series E Stock, its current shareholders, including CT Holdings, will suffer
material dilution. Any material change in the conversion price of the Series D
Stock issued to TH Lee and Watershed , or the issuance of the Series E Stock at
a low valuation, would result in material dilution to the holders of Parago's
securities, including CT Holdings, and could possibly result in change in
control of Parago.

PARAGO MAY NOT BE ABLE TO REPAY THE BRIDGE LOAN, WHICH WILL RESULT IN PAYMENTS
UNDER THE GUARANTY BEING REQUIRED FROM TH LEE AND THE PARTICIPATING OFFEREES,
AND SUBSTANTIAL DILUTION TO PARAGO SHAREHOLDERS WHO FAIL TO PARTICIPATE.

Parago intends to repay the Term Loan with proceeds from the sale of shares of
its Series E Stock. There is no guarantee that the Series E round of financing
will occur, or that it will raise adequate capital to repay the Term Loan in
full. If Parago is unable to repay the Term Loan in full, TH Lee and the
participating offerees will be required to pay Comerica under the Guaranty.
Parago is fully reliant on external sources of financing for repayment of the
principal under the Term Loan, as any cash generated from operations will not be
adequate to fund such repayment. If Parago is unable to raise funds to repay the
bridge loan, we would be required to pay an additional $1,406,472 to Comerica to
repay our Pro Rata portion of the bridge loan. If we are unable to raise these
funds, we will suffer substantial dilution.

IF A PARTICIPATING OFFEREE DOES NOT PAY THE REMAINDER OF ITS PRO RATA PERCENTAGE
OF LIABILITY UNDER THE GUARANTY, IT WILL FORFEIT THE BENEFITS OF PARTICIPATION
AND MAY BE SUBJECT TO A COLLECTION ACTION.

A participating offeree who does not pay the remainder of its Pro Rata
Percentage under the Guaranty will forfeit the escrowed funds deposited under
the Escrow Agreement and the Warrants it received will be cancelled and reissued
to TH Lee. Further, Parago may pursue collection of the remainder of such a
participating offeree's Pro Rata Percentage portion that is due, and even if
such amount is delinquently collected, Parago will not be obligated to issue any
shares of Series A-1 Stock or Series A-2 Stock in exchange therefore.

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<PAGE>

AS ALMOST ALL PARTICIPATING OFFEREES WILL ONLY BE ENTITLED TO RECEIVE SERIES A-2
STOCK, AND WARRANTS TO PURCHASE SERIES A-3 STOCK, AND BECAUSE THE SERIES A-2
STOCK AND SERIES A-3 STOCK WILL HAVE A LIQUIDATION PREFERENCE JUNIOR TO THAT OF
THE SERIES A-1 STOCK AND ALL CURRENTLY EXISTING SERIES OF PREFERRED STOCK, IF A
LIQUIDATION EVENT WERE TO OCCUR, THE HOLDERS OF COMMON STOCK, SERIES A-2 STOCK
AND SERIES A-3 STOCK MAY RECEIVE LITTLE OR NOTHING FOR THEIR SHARES.

CT Holdings currently owns only shares of Parago common stock and warrants to
purchase shares of Series A-3 Preferred Stock, so in the event that a payment is
made under the Guaranty, CT Holdings will receive shares of Series A-2 Stock
rather then Series A-1 Stock. The Series A-1 Stock and Series A-2 Stock are
similar, except that the Series A-2 Stock will have a liquidation preference
junior to that of the Series A-1 Stock and all currently existing series of
preferred stock, but pari passu with that of the Series A-3 Stock. This means
that in the event of a liquidation, dissolution or winding up of Parago (which
is also defined to include a merger, acquisition, sale, consolidation or other
form of corporate reorganization of Parago in which Parago's stockholders prior
to such event do not own 50% of the voting interest in Parago following such
event), then the holders of Parago's Series A-1 Stock and the other existing
series of preferred stock of Parago shall be entitled to receive all payments
and distributions up to the respective liquidation preferences (defined as their
issue prices) of their shares of preferred stock prior to and in preference to
any payment or distribution being made to holders of the Series A-2 Stock or
Series A-3 Stock, including CT Holdings. As of September 30, 2001, this senior
priority liquidation preference amounted to approximately $51.5 million. In
addition, the Series E Stock, if any is issued, would have a senior liquidation
preference to the Series A-2 Stock and Series A- 3 Stock. As a consequence,
where limited assets remain following a liquidation event (including
reorganization events), holders of Parago's Common Stock, Series A-2 Stock and
Series A-3 Stock, including CT Holdings, may receive little or no payment or
distribution for their shares.

TO CONTINUE ITS OPERATIONS AND BUSINESS, PARAGO MUST RAISE ADDITIONAL FINANCING.

Even if Parago successfully completes a round of financing of its Series E
Stock, Parago may need to raise additional funds in the future. Further, if
Parago fails to complete the Series E round and TH Lee and the participating
offerees are called upon to repay the Term Loan, it is highly likely that Parago
will require further additional funds in order to continue operations. In
addition, Parago has a $1.5 million term loan from Comerica (the Previous Loan)
that requires Parago to meet certain financial covenants. Among other things,
these financial covenants require Parago to raise at least $6.5 million in its
proposed private placement of Series E Stock, prior to August 31, 2001, or to
maintain cash in the amount of the outstanding balance under the Previous Loan
as cash collateral. Accordingly, if Parago is unable to complete its Series E
Stock private placement prior to December 15, 2001, Parago may be required to
use a portion of the Term Loan as cash collateral for the Previous Loan and the
proceeds of the Term Loan would not be sufficient to fund Parago's operations
until it generates positive cashflow, and Parago would be required to raise
additional funds to continue its operations. There can be no assurance that
Parago will be able to obtain additional financing on favorable terms, if at
all. If Parago cannot raise funds on acceptable terms, if and when needed, its
business will suffer and could be discontinued.

Parago's ability to maintain and grow its business is dependent on its access to
sufficient funds to support its working capital and capital expenditure needs.
If Parago does not raise additional funds, its business and results of
operations will be seriously harmed, and its assets and share price would be
materially and adversely impacted. This additional financing may not be
available to Parago on a timely basis if at all, or, if available, on terms
acceptable to Parago. Moreover, additional financing may cause material and
immediate dilution to existing stockholders including CT Holdings.

THERE CAN BE NO ASSURANCE THAT PARAGO WILL COMPLETE AN INITIAL PUBLIC OFFERING.

There can be no assurance that Parago will complete an initial public offering.
The delay or complete abandonment of the contemplated initial public offering
could have a material adverse effect on our stock price due to our substantial
equity interest in Parago. You cannot be assured that the initial public
offering will occur in the near future or ever at all. In addition, we have
agreed to convert the shares of Parago common stock issued in connection with
the acquisition of 2-Lane Media by Parago into up to 500,000 of our shares at
the option of the 2-Lane Media shareholders. Pursuant to the terms of the
subscription agreements between Parago and some of its stockholders, we may be
required to issue up to 414,000 shares of our common stock based on a conversion
price of $3.75 per share (above the fair market value on the dates of issuance)
at the option of such stockholders. These provisions could have the effect of
diluting our stockholders if the market price for our stock is above that price
at the time of conversion. In consideration of certain of its directors' funding
of the Company's participation in the Parago bridge loan, the Company has agreed
to permit the directors to exchange up to 5,000,000 Parago shares into up to
6,000,000 shares of the Company's common stock.

                                       22

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

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

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

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

 . acquired its rebates operation in May 1999;

 . launched its Web site in September 1999; and

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

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

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

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

Parago had a net loss of approximately $4.6 million (unaudited) for the three
months ended September 30, 2001 and an accumulated deficit of approximately $85
million (unaudited) at September 30, 2001. Parago anticipates that its operating
expenses will continue at least their current levels for the foreseeable future.
In addition, because its expense levels are based, in part, on expectations of
its future revenues, any decline in its revenues below its expectations would
have a material adverse impact on its operating results and cash flow.
Accordingly, Parago expects to incur additional losses for the foreseeable
future. If its revenues do not grow as Parago anticipates, Parago may never be
profitable.

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

Because of Parago's relationship with us, and because we owned 20,000,000 of its
outstanding shares of common stock at September 30, 2001, and because of our
interlocking directors and officers, who collectively owned 16.7% of Parago's
outstanding shares of common stock as of September 30, 2001, Parago and we are
likely to face potential conflicts of interest relating to each other.

Executives, employees and consultants associated with us assisted in the
development of Parago's business model. Steven B. Solomon, our CEO and
President, was the founder, Chairman and CEO of Parago during its formative
stages. In addition, Lawrence Lacerte and Steven B. Solomon serve as directors
of both Parago and CT Holdings.

Some of Parago's executive officers, key employees and directors also
beneficially own, or hold options or warrants to purchase, approximately 30.4%
of our outstanding common stock as of September 30, 2001. Steven B. Solomon
owned approximately 10.0% of our common stock as of September 30, 2001.

Accordingly, conflicts of interest may arise from time to time between Parago
and us, particularly with respect to the pursuit of overlapping business or
financing opportunities. Neither Parago nor CT Holdings has adopted any formal
plan or arrangement to address these potential conflicts of interest and each
company intends to review related-party transactions on a case-by-case basis.
Because Parago has interlocking directors and officers with CT Holdings, there
may be inherent conflicts of interest for

                                       23

<PAGE>

these directors and officers related to transactions between Parago and us.
Directors may be required to abstain from voting with respect to matters
involving both us and Parago. Parago may lose valuable management input from the
directors and officers who have conflicts.

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2000

NET SALES

During the quarter ended September 30, 2001, the Company had net sales of
$141,028, a decrease of $59,586 or 29.7%, from net sales of $200,614 during the
quarter ended September 30, 2000. For the nine months ended September 30, 2001,
the Company had net sales of $322,447, a decrease of $125,703 or 28.0%, over net
sales of $448,150 during the nine months ended September 30, 2000. We attribute
the decrease in our software product revenues for the quarter and nine months
ended September 30, 2001 to our redesign and relaunch of our software products
for new markets created by the current marketplace, including the Health
Insurance Portability and Accountability Act (HIPAA) and the Gramm-Leach-Bliley
regulations relating to security and privacy requirements in the health care and
finance industries.

COST OF SALES, EXCLUDING DEPRECIATION AND AMORTIZATION

The costs and expenses incurred in connection with producing the Company's
products were $20,043 during the quarter ended September 30, 2001, a increase of
$17,727 or 88.4%, from cost of sales of $2,316 for the same period last year.
For the nine months ended September 30, 2001, cost of sales were $22,500, a
increase of $10,234 or 45.5%, over cost of sales of $12,266 for the nine months
ended September 30, 2000. The decrease in our cost of sales can be attributed to
the overall decrease in revenues due to our shift in focus to new product lines.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the quarter ended September 30,
2001 were $491,102 as compared to $458,378 for the quarter ended September 30,
2000, or an increase of $32,724 or 6.6%. For the nine months ended September 30,
2001, selling, general and administrative expenses decreased $968,489 or 37.2%
to $1,631,867 for the nine month period ended September 30, 2001 as compared to
$2,600,356 for the same period in the prior year. The increase in our selling,
general and administrative expenses for the quarter ended September 30, 2001
resulted primarily from an increase in headcount as a result of our expanded
efforts with respect to sales of Citadel software. We expect that these expenses
will increase in future periods as we commence sales through distribution
channels and strategic alliances, and we add additional headcount.

RESEARCH AND DEVELOPMENT EXPENSE

For the nine month period ended September 30, 2001, research and development
costs charged to expense were $0 as compared to $238,760 for the same period
last year, or a decrease of $238,760, or 100%. The decrease in costs for the
three months ended September 30, 2001 related primarily to the reduction of
development work on products due to decreases in headcount. We anticipate that
these costs will increase as we increase our headcount in future periods as we
continue our software development.

REVERSAL OF ACCRUAL FOR LEGAL SETTLEMENT

Operating income and expense for the quarter and nine month period ended
September 30, 2001 included income of $0 and $1,912,000, respectively, related
to the reversal of an accrual for a proposed litigation settlement described
below. Operating income and expense for the quarter and nine month period ended
September 30, 2000 included expense of $0 and $1,912,000, respectively, related
to the accrual for a proposed legal settlement.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization expense decreased $114,595, or 42.6%, to $154,740
for the quarter ended September 30, 2001 from $269,335 for the quarter ended
September 30, 2000. For the nine months ended September 30, 2001, depreciation
and amortization expense was $574,105 compared to $883,420 for the same period
in prior year, or a decrease of $309,315, or 35.01%. The decrease in
depreciation and amortization is primarily due to the decrease in the Company's
depreciable asset base. This decrease in assets is due to the company not
acquiring any new property and equipment over the last 22 months, not developing
any new software products over the last 15 months, and writing off approximately
$856,000 of unrecoverable capitalized software costs over the last 18 months.

<PAGE>

OTHER INCOME (EXPENSE)

Interest expense for the three and nine month periods ended September 30, 2001
were $23,694 and $15,815, respectively as compared to $352 and $39,358 for the
same periods in the prior year. This decrease in expense resulted primarily from
having less interest bearing debt during these periods than we did in the same
periods last year. Equity in loss of unconsolidated affiliate was $2,099,211 for
the three and nine months ended September 30, 2001 as compared to $105,734 and
$4,658,781 for the same periods in the prior year. The significant increase in
the equity in loss of unconsolidated affiliate is due the Company applying the
equity method to the amount invested in the participation of the guarantee due
to our share of Parago's accumulated losses being less than the carrying value
of our investment in Parago. For further discussion of our application of the
equity method see Note 1 in the financial statements. We expect that these
losses would continue to be significant for at least the foreseeable future as
Parago continues to develop its business services.

Interest income of $3,250 during the quarter ended September 30, 2001 primarily
represents interest income earned on notes receivable from River Logic and
PerClick during the quarter.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents at September 30, 2001 were $12,352.

The net cash used in operations of $609,727 for the nine months ended September
30, 2001 is principally a result of the net loss of $2,002,258, and the reversal
of the accrual for legal settlement of $1,912,500, partially offset by non-cash
charges including $574,105 of depreciation and amortization and the equity in
loss of unconsolidated affiliate of $2,099,211 and the increase in account
payable and accrued expenses. The net cash used in operations of $401,368 for
the nine months ended September 30, 2000 is principally a result of the net loss
of $10,500,238, partially offset by non-cash charges including $4,658,781
associated with equity in losses of unconsolidated affiliate, $883,420 of
depreciation and amortization and other non-cash charges totaling $625,336.

Cash flows used by investing activities was $40,919 for the nine months ended
September 30, 2001, as compared to cash used in investing activities of $600,000
for the nine months ended September 30, 2000. The change in investing activities
is primarily due to the Company not investing as much cash in unconsolidated
subsidiaries in the nine months ended September 30, 2001. Cash flows provided by
financing activities were $641,351 for the nine months ended September 30, 2001,
primarily resulting from funds borrowed from the Company's CEO and other related
parties as compared to cash provided by financing activities of $5,760,928 for
the nine months ended September 30, 2000 primarily resulting from sales of the
Company's common stock.

As a result of the aforementioned factors, cash and cash equivalents decreased
by $9,295 for the nine months ended September 30, 2001, versus an increase of
$1,296,943 for the same period last year.

The Company has incurred recurring operating losses and has a working capital
deficiency. The Company has used cash in operations of approximately $609,727
during the quarter nine months ended September 30, 2001. The Company had a cash
balance of approximately $12,352 at September 30, 2001 and current liabilities
exceed current assets by approximately $3.6 million. As outlined below, these
assets do not reflect the value that we believe may be realized from our
investments in Parago and River Logic. The Company has been and continues to be
dependent upon outside financing to develop its software products, perform its
business development activities, invest in unconsolidated affiliates and provide
for ongoing working capital requirements. During the three months ended
September 30, 2001, substantially all of this financing has been provided by
related parties.

The Company expects to generate cash from the sale of the Company's software and
will incur costs relating to such operations that may result in a cash
deficiency. Following the spinoff of the Company's software business, revenues
and expenses related to the software business will be recognized by the new
entity. The Company will also continue to incur expenses relating to corporate
overhead and activities related to managing the Company's investments and
considering additional opportunities. The Company may require cash from
financing activities to fund the deficits expected over the next year, as well
as the remaining payments under the Parago guaranty participation, if Parago is
unable to repay the bridge loan when due.

The Company's strategy of continuing to support and expand its business
development activities, in addition to its core focus on its software
activities, requires the Company to obtain additional capital. The complete
implementation of this element of our strategy will not generate positive
cashflow in the foreseeable future. Achieving positive cashflow is currently
highly dependent upon obtaining liquidity from the Company's investments in
unconsolidated affiliates. The Company estimates it will need to raise
additional capital to fund the plan through the remainder of 2001 and
substantially greater funds if the Company expects to continue to acquire
investments, as well as the remaining payments under the Parago guaranty

                                       25

<PAGE>

participation, if Parago is unable to repay the bridge loan when due, or if
amounts become due to settle contingent liabilities. Historically, the Company
has obtained any short-term bridge funding from its Chief Executive Officer or
Directors of the Company. While this may occur in the future there can be no
assurance that such financing will be available or if available based on terms
that the Company would be willing to accept.

Since the development of our new focus on businesses development activities we
have made investments in two companies that we believe may provide liquidity to
the Company in the long term. Our first investment in Parago we believe has been
successful in that it has grown from the original $50,000 of equity provided by
the Company and no revenue, to net revenue of approximately $7.6 million for the
three months ended September 30, 2001 (unaudited). As expected in an early stage
company, Parago has not been profitable and has experienced cash flow
deficiencies as it implements its business plan. We believe, however, that our
investment of 20,000,000 common shares and warrants to purchase 28,874.90 shares
of Series A-3 Preferred Stock of Parago, convertible into 2,887,490 shares of
Parago common stock, may ultimately provide an appropriate return. These
warrants only become exercisable in the event the Company fulfills all of its
obligations under the Participation Agreement or Parago repays the bridge loan.
Until we are able to create liquidity from the company's investments through
sale to a strategic investor, an initial public offering or some other activity,
the Company will continue to require working capital to fund its own operating
expenses.

Similarly, the Company's investment in River Logic we believe has also been
successful. Since our initial investment, River Logic has made substantial
progress in executing its strategy through its development and introduction of
new products and establishment of new customer relationships. In addition,
during April, 2001 River Logic obtained a significant strategic investment from
a subsidiary of Intel, Cardinal Investments, eMed Ventures, and Mercury
Ventures. As part of that round, the Company converted $450,000 of demand notes
receivable into River Logic Series C Preferred stock, the same equity
instruments purchased by the other investees. The remainder of our note
receivable totaling approximately $200,000 was paid in April 2001. Similar to
the investments into Parago, the Company recognized that these investments would
be initially illiquid. While we are pleased with the performance of Parago and
River Logic to date, there can be no assurance that the Company will ever
achieve liquidity for its investments.

There can be no assurance that management's plans will be successful or what
other actions may become necessary. Although the Company has been successful
raising capital in the past, the inability of the Company to raise capital may
require the Company to sell assets or reduce the level of its operations. Such
actions could have a material adverse effect on the Company's business and
operations and result in charges that could be material to the Company's
business and results of operations.

CONTINGENT LIABILITY

The plaintiffs in the previously disclosed lawsuit by Janssen Meyers Associates
L.P. (JMA) refiled their lawsuit with the federal court, and we filed a motion
to dismiss the case because the plaintiffs lacked the required diversity
jurisdiction to pursue the claims in federal court and the court granted our
motion. In November 2001, the plaintiffs refiled the lawsuit in the state court
and added a claim seeking to enforce the settlement term sheet described below
in the Supreme Court of New York, that state's trial court, in a case styled
Roan Meyers v. CT Holdings. We intend to vigorously defend against this lawsuit
and file a counterclaim. In July 2000, we entered into a settlement term sheet
to resolve the disputes between us and Janssen-Meyers Associates L.P. (JMA),
pursuant to which we and JMA tentatively agreed to settle the lawsuit for an
aggregate of $3 million, in a combination of $1.5 million in cash and 300,000
shares of common stock with a guaranteed value of $5 per share as of January,
April and October 2001 (with respect to 100,000 of the shares for each period).
The settlement was subject to execution of definitive settlement documents and
approval of the boards of directors of the companies. As a result, we recorded
approximately $1,912,500 as a nonrecurring charge related to the settlement of
the litigation during 2000. However, the Company and JMA were unable to
negotiate the final definitive settlement agreement. On March 27, 2001, the
Court hearing the JMA lawsuit issued a Summary Order that denied JMA's motion to
enforce the settlement term sheet and confirmed the prior dismissal of the
lawsuit. The Court further ruled that JMA would either have to bring an action
on the proposed settlement or move to re-open the dismissed case. The Court
stated that it did not express any view with respect to the merits of the
settlement that brought about the dismissal of the case. Given these recent
events, including the dismissal of the lawsuit and the failure of the plaintiffs
to refile a lawsuit for more than one year after the date of the dismissal, the
Company has determined to reverse the nonrecurring charge that the Company had
recorded related to the settlement of the lawsuit.

                           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.

                                       26

<PAGE>

ITEM 1. LEGAL PROCEEDINGS

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

The plaintiffs in the previously disclosed lawsuit by Janssen Meyers Associates
L.P. (JMA) refiled their lawsuit with the federal court, and we filed a motion
to dismiss the case because the plaintiffs lacked the required diversity
jurisdiction to pursue the claims in federal court and the court granted our
motion. In November 2001, the plaintiffs refiled the lawsuit in the state court
and added a claim seeking to enforce the settlement term sheet described below
in the Supreme Court of New York, that state's trial court, in a case styled
Roan Meyers v. CT Holdings. We intend to vigorously defend against this lawsuit
and file a counterclaim. In July 2000, we entered into a settlement term sheet
to resolve the disputes between us and Janssen-Meyers Associates L.P. (JMA),
pursuant to which we and JMA tentatively agreed to settle the lawsuit for an
aggregate of $3 million, in a combination of $1.5 million in cash and 300,000
shares of common stock with a guaranteed value of $5 per share as of January,
April and October 2001 (with respect to 100,000 of the shares for each period).
The settlement was subject to execution of definitive settlement documents and
approval of the boards of directors of the companies. As a result, we recorded
approximately $1,912,500 as a nonrecurring charge related to the settlement of
the litigation during 2000. However, the Company and JMA were unable to
negotiate the final definitive settlement agreement. On March 27, 2001, the
Court hearing the JMA lawsuit issued a Summary Order that denied JMA's motion to
enforce the settlement term sheet and confirmed the prior dismissal of the
lawsuit. The Court further ruled that JMA would either have to bring an action
on the proposed settlement or move to re-open the dismissed case. The Court
stated that it did not express any view with respect to the merits of the
settlement that brought about the dismissal of the case. Given these recent
events, including the dismissal of the lawsuit and the failure of the plaintiffs
to refile a lawsuit for more than one year after the date of the dismissal, the
Company has determined to reverse the nonrecurring charge that the Company had
recorded related to the settlement of the lawsuit.

At this time, the Company is unable to predict the ultimate outcome of some of
these suits, the costs associated with defending the claims and pursuing
counterclaims, and monetary compensation awarded, if any. The Company has, when
appropriate, recorded its current estimate of the amounts necessary to settle
the litigation.

ITEM 5. OTHER INFORMATION

Changes in Certifying Accountant

On October 30, 2001, the Audit Committee of the Company's Board of Directors
determined to dismiss the Company's current independent public accountants,
Ernst & Young LLP ("Ernst & Young LLP"), and engage a new accounting firm for
fiscal year 2001. This decision was made as a result of the Company's changes in
its business model and the Company's focus on operating efficiencies and
reductions in cost. The Audit Committee has determined that the engagement of a
different firm as the Company's independent public accountants would be in the
best interests of the Company at this time.

The reports of Ernst & Young LLP on the Company's financial statements for the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles except for the addition of an explanatory paragraph
regarding the Company's ability to continue as a going concern. In connection
with the audits of the Company's financial statements for each of the two fiscal
periods ended December 31, 2000 and February 28, 2000 and in the subsequent
interim period, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
Ernst & Young LLP would have caused Ernst & Young LLP to make reference to the
matter in their report. The Company filed a Current Report on Form 8-K on
November 6, 2001 including a letter from Ernst & Young LLP to the effect that it
agreed with the above statements.

On November 14, 2001, the Audit Committee of our Board of Directors determined
to engage King Griffin & Adamson P.C. (KGA) as our independent public
accountants for fiscal year 2001.

We have been advised by KGA that neither the firm nor any of its associates has
any material relationship with us or any affiliate of ours. During our two most
recent fiscal years and the subsequent interim periods prior to engaging KGA, we
have has not consulted KGA regarding either: (i) the application of accounting
principles to a specific transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements, for which
advice was provided that KGA concluded was an important factor considered by us
in reaching a decision as to an accounting, auditing or financial reporting
issue; or (ii) any matter that was either the subject of a disagreement (as
defined in paragraph (a)(1)(iv) of Regulation S-K Item 304) or a reportable
event (as described in paragraph (a)(1)(v) of Regulation S-K, Item 304).

                                       27

<PAGE>

We filed a Current Report on Form 8-K on November 19, 2001 related to the
engagement of KGA as its independent public accountants for fiscal year 2001.

Parago Bridge Financing

In May 2001, Parago obtained a Term Loan from Comerica Bank--Texas (Comerica) in
the principal amount of $8,000,000. The funds derived from the Term Loan were
necessary to enable Parago to continue operations, as Parago's cash resources
were depleted. Parago intends to repay the Term Loan with proceeds from a
contemplated sale of shares of a new series of preferred stock, the terms of
which have not yet been established (the Series E Stock). As a condition to the
extension of the Term Loan, Comerica required a guarantee of Parago's
obligations under the Term Loan from certain affiliates of TH Lee.Putnam
Internet Partners, L.P. (collectively, TH Lee), which own shares of Parago's
Series C Convertible Preferred Stock (Series C Stock) and Series D Convertible
Preferred Stock (Series D Stock), common stock and certain warrants.

TH Lee executed the Guaranty in consideration of its receipt of 110,000 Warrants
to purchase shares of Parago's Series A-3 Stock, convertible into 11,000,000
shares of Parago common stock, a new series of preferred stock that was created
in connection with the bridge loan and guaranty transaction, and, in the event
that TH Lee is called upon to make payment under the Guaranty, its receipt of
shares of Series A-1 Stock and Series A-2 Stock, two new series of preferred
stock the issuance of which could have the effect of substantially diluting by
up to approximately 90% Parago's existing stockholders, including CT Holdings.

Parago reached a further understanding with TH Lee pursuant to which Parago
securityholders (including CT Holdings) who met the required suitability
criteria were offered the opportunity to participate in the Guaranty through a
Pro Rata Participation Interest. In the event that TH Lee is required to pay all
or a portion of the Term Loan under the Guaranty, those offerees who participate
in the offering and perform all of their obligations under the Participation
Agreement will maintain their percentage equity ownership in Parago, while those
offerees who do not participate in the offering or do not perform all of their
obligations under the Participation Agreement will be substantially diluted by
approximately 90%. If offerees holding a significant portion of Parago's current
equity ownership elect not to participate in the offering or fail to fully
perform their obligations under the Participation Agreement, then TH Lee may
gain a controlling interest in Parago as a result of the transactions. See Risk
Factors--The issuance of the securities will result in dilution of existing
Parago stockholders and possibly a change in control of Parago. CT Holdings
participated in this participation offering and was required to pay $692,740,
although there can be no assurance that CT Holdings will be able to fully
perform its remaining payment obligations, including the payment of up to
approximately $1,406,472 in the event Parago is unable to repay the bridge loan.

The terms of an investment in a Participation Interest, including the terms of
issuance of the related Warrants and Shares of Series A-1 Stock and Series A-2
Stock, and the assumption of a Pro Rata Percentage of the indebtedness under the
Term Loan, are further described below.

Terms

The opportunity to participate in the Guaranty, as set forth in the
Participation Agreement, was extended to Parago shareholders on the following
terms:

1. Participation in the Guaranty. Parago and TH Lee entered into a Participation
Agreement to which offerees who on or before June 15, 2001 elected to
participate were added, including CT Holdings. TH Lee will be liable for all
obligations owed to Comerica under the Guaranty, while each participating
offeree, including CT Holdings, will only be liable to Parago to the extent of
its Pro Rata Percentage of all amounts paid by TH Lee under the Guaranty.

2. Pro Rata Calculations. A participating offeree's Pro Rata Percentage is
determined based on a fraction, the numerator of which is the sum of the
participating offeree's shares of Parago common stock and shares of Parago
common stock into which any other shares of Parago preferred stock, Parago
warrants or Parago options held by such offeree that would vest on or before
December 31, 2001 are convertible or exercisable (Common Stock Equivalents), and
the denominator of which is all outstanding shares of Parago common stock and
all Common Stock Equivalents, in each case as of June 15, 2001. Because it was
not expected that Parago's outstanding securities would change in any material
respect before June 15, 2001, and as the Warrants to purchase shares of Series
A-3 Stock were not issued until after June 15, 2001, they were not be included
in making pro rata ownership calculations. In determining pro rata amounts for
TH Lee for all calculations made under the Participation Agreement, TH Lee
assumed not only its pro rata share based upon its current percentage ownership
of Parago, but also the pro rata share of those of Parago securityholders who do
not meet the criteria to participate in the Guaranty (because they do not meet
the suitability criteria), as well as the pro rata share of those offerees who
elected not to participate and those offerees who do not perform all of their
obligations under the Participation Agreement.

                                       28

<PAGE>

3. Subscription and Deposit of Escrow Amounts. Simultaneous with its entry into
the Participation Agreement, each participating offeree also became a party to
an Escrow Agreement. Comerica has agreed to act as escrow agent under the Escrow
Agreement. On or before June 15, 2001, each participating offeree was required
to deliver its fully completed and executed subscription booklet, along with the
participating offeree's Escrow Amount in immediately available funds, which was
equal to 33% of such participating offeree's Pro Rata Percentage of $8,000,000,
and CT Holdings was required to pay approximately $693,000. At such time, TH Lee
also delivered cash to the escrow agent in an amount equal to 33% of its Pro
Rata Percentage of $8,000,000. As further described below, the escrowed funds
contributed by participating offerees are being held, and may be applied
against, amounts paid by TH Lee pursuant to the Guaranty.

4. Relationship of Escrow Funds to Guaranty Payment Obligations. The escrow
agent will hold the funds deposited in escrow until such time as either payment
of the loan is made in full by Parago or payment under the Guaranty is required.
In the event that the Term Loan is fully repaid by Parago, then the escrow funds
(including any accrued interest) will be released back to each respective
participating offeree and TH Lee. In the event that repayment of the Term Loan
is made under the Guaranty but the amount of such repayment is less than the
amount of the escrow funds, then a pro rata portion of such excess amount will
be returned to each respective participating offeree and to TH Lee. In the event
that TH Lee repays the Term Loan to Comerica under the Guaranty, and the amount
repaid exceeds the escrow funds, then each participating offeree will be
required under the terms of the Participation Agreement to pay to Parago by
December 31, 2001 its Pro Rata Percentage of such excess amount, which amounts
Parago will deliver to TH Lee. This amount is not limited to the $8,000,000 in
principal amount of the Term Loan, but would also include any additional unpaid
interest, fees and expenses that may be imposed by Comerica, which each
participant would have to bear based on its Pro Rata Percentage of these
additional amounts.

5. The Warrants to Purchase Shares of Series A-3 Stock. As consideration to TH
Lee for executing the Guaranty and to the participating offerees for executing
the Participation Agreement, Parago issued Warrants to purchase shares of its
Series A-3 Stock, with a Common Stock Equivalent exercise price of $0.01 per
share. Parago granted a total of 110,000 Warrants (or 11,000,000 common shares
on a Common Stock Equivalent basis) to the participating offerees and TH Lee,
with the participating offerees each receiving their Pro Rata Percentage of the
total number of Warrants granted and TH Lee receiving the balance. The Series
A-3 Stock is a series of preferred stock that has a conversion ratio of 1 to
100. The shares of Series A-3 Stock will be convertible into 11,000,000 shares
of Parago common stock and will have terms substantially similar to Parago's
Series D Stock, except that (A) the conversion ratio will not be subject to
price protection, (B) a majority vote will be required for certain amendments
and approvals rather than the two-thirds vote required by the Series D Stock,
and (C) the holders of Series A-3 Stock will not have the preemptive,
information, voting or co-sale rights that holders of the Series D Stock have by
virtue of their current stockholder agreements. In addition, the Series A-3
Stock will have a liquidation preference that is on a par with the Series A-2
Stock, but junior to that of the Series D Stock, the Series A-1 Stock and all of
Parago's other currently existing series of preferred stock. The liquidation
preference of the Series A-3 Stock will be equal to $1.77 per common equivalent
share, or, in the event that Parago is successful in issuing the Series E Stock
to repay the Term Loan, the per common equivalent share price of the Series E
Stock. The Warrants will be immediately exercisable by TH Lee, but will not be
exercisable by the participating offerees until the earlier of (a) January 1,
2002 or (b) the date on which the Term Loan has been fully repaid by Parago, and
will be exercisable only by either (i) participating offerees who fully perform
their obligations under the Participation Agreement or (ii) all participating
offerees in the event Parago repays the Term Loan in full. If Parago does not
fully repay the Term Loan, and any participating offeree fails to fully perform
its obligations under the Participation Agreement, those Warrants issued to such
participating offeree will automatically be cancelled, and Parago will reissue
those Warrants to TH Lee. The Warrants may be exercised through the earlier to
occur of Parago's initial public offering or January 9, 2004.

6. Events Relating to Required Performance Under the Guaranty. In the event that
TH Lee is required to repay any portion of the Term Loan pursuant to the
Guaranty, Parago will issue to TH Lee a convertible promissory note (the
Convertible Note) in a principal amount equal to such amount paid by TH Lee less
the escrow funds contributed by participating offerees that are received by TH
Lee pursuant to the terms of the Escrow Agreement. The Convertible Note will be
convertible into shares of Series A-1 Stock and Series A-2 Stock on the basis
indicated below. Immediately after TH Lee's payment under the Guaranty, and
assuming the amount of that payment exceeds the escrow funds, Parago will send a
notice to all participating offerees requiring that the participating offerees
send their remaining Pro Rata Percentage portion of the amount in excess of the
escrow balance to Parago by December 31, 2001, which amounts Parago will forward
to TH Lee. These payments will be credited against the principal amount of the
Convertible Note in order to accurately reflect the net amount TH Lee has
expended in repaying the Term Loan pursuant to the Guaranty. In the event that a
participating offeree fails to timely pay the balance of its Pro Rata Percentage
due for amounts paid under the Guaranty, then the amounts it deposited into the
escrow fund will be forfeited, the Warrants the offeree received will be
cancelled, the offeree will not be entitled to receive any shares of Series A-1
Stock or Series A-2 Stock and may be subject to a collection action by Parago
for the balance of its Pro Rata Percentage. In this case, all current equity
holdings in Parago (including the shares held by CT Holdings) would be diluted
to approximately one-tenth of the fully-diluted current percentage ownership
that they currently represent. CT Holdings would be required to pay up to
approximately $1.4 million in the event Parago is unable to repay the bridge
loan.

                                       29

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7. Full Repayment of the Term Loan Under the Guaranty. In the event that the
entire principal amount of the Term Loan is repaid pursuant to the Guaranty, TH
Lee and each participating offeree who performs under the Participation
Agreement will receive as consideration for the payment of such amount shares of
either Series A-1 Stock or Series A-2 Stock. TH Lee and participating offerees
who currently own shares of Parago's preferred stock will be entitled to receive
shares of Series A-1 Stock, the number of which will be determined based on TH
Lee's and each participating offeree's relative ownership of preferred stock as
a percentage of their total Common Stock Equivalent ownership. TH Lee and
participating offerees who currently own shares of Parago common stock or the
right to purchase common stock (including CT Holdings) will be entitled to
receive shares of Series A-2 Stock, the number of which will be determined based
on TH Lee's and each participating offeree's relative ownership of common stock
or the right to purchase common stock as a percentage of their total Common
Stock Equivalent ownership. In addition to the Shares of Series A-1 Stock and
Series A-2 Stock that TH Lee will receive based upon its current percentage
ownership of Parago, TH Lee will also receive shares of Series A-1 Stock related
to the pro rata share of those of those securityholders of Parago who are not
eligible to participate in the offering, those offerees who do not participate
in the offering and those participating offerees who do not perform all of their
obligations under the Participation Agreement. The combined amount of Series A-1
Stock and Series A-2 Stock issued by Parago to TH Lee and the participating
offerees in the event that the amount paid under the Guaranty equals or exceeds
the principal amount of the Term Loan will be an amount such that the Common
Stock Equivalents of Parago as of June 15, 2001 (excluding the Warrants to
purchase shares of Series A-3 Stock) will equal approximately 10% of Parago's
total capitalization (excluding the warrants) after the issuance of such shares
of Series A-1 Stock and Series A-2 Stock.

8. Partial Repayment of the Term Loan. If less than the entire principal amount
of the Term Loan is repaid pursuant to the Guaranty, TH Lee and each
participating offeree who performs under the Participation Agreement will
receive as consideration for the payment of such amount their pro rata share of
either Series A-1 Stock and/or Series A-2 Stock. The manner of allocating the
Series A-1 Stock and the Series A-2 Stock would be similar to that described in
the preceding paragraph. The combined amount of Series A-1 Stock and Series A-2
Stock issued by Parago to TH Lee and the participating offerees in the case of a
partial payment of the Term Loan pursuant to the Guaranty will be an amount
computed using the following formula:

                             X =  (A)      - A
                                 ---------
                                 (1-(.9B))


X = the total amount of Series A-1 Stock and Series A-2 Stock, expressed on an
as-converted basis as Common Stock Equivalents

A = the total number of shares of Parago common stock and Common Stock
Equivalents as of June 15, 2001 (excluding the Warrants to purchase shares of
Series A-3 Stock)

B = a percentage equal to the quotient of (i) the portion of the Term Loan
repaid pursuant to the Guaranty and (ii) the total amount, including fees and
expenses, required to be paid to Comerica at the maturity of the Term Loan.

9. Terms of Series A-1 and Series A-2 Stock. The Series A-1 Stock and Series A-2
Stock will each have terms, similar to Parago's existing Series D Stock,
provided that the Series A-1 Stock will have a liquidation preference senior to
the Series A-2 Stock and the Series A-3 Stock, and pari passu with all of
Parago's other currently existing series of preferred stock, while the Series A-
2 Stock will have a liquidation preference junior to that of the Series A-1
Stock and all currently existing series of preferred stock and pari passu with
that of the Series A-3 Stock.

10. Cross-Default of the Term Loan Due to TH Lee Actions. The foregoing
description of the terms and procedures relating to participation in the
Guaranty is subject in all respects to the following description of other terms
and procedures that would be followed in the event that certain actions or
inactions by TH Lee resulted in a default under the Term Loan.

In some circumstances, an action or inaction by TH Lee could cause a default of
the Term Loan. If this were to occur, then TH Lee is required to immediately pay
the entire outstanding balance of the Term Loan, at which time Parago will
effectively become indebted to TH Lee rather than to Comerica on similar but not
identical terms (the TH Lee Debt). Parago would be entitled to prepay the TH Lee
Debt at any time on or prior to December 15, 2001, the original maturity date of
the Term Loan (the Original Maturity Date), in which event the escrowed funds
(including accrued interest) would be released in full back to TH Lee and each
participating offeree, the Warrants previously granted would become fully
exercisable and no shares of Series A-1 Stock or Series A-2 Stock would be
issued. If, however, the TH Lee Debt is not fully repaid by the Original
Maturity Date, then the rights and obligations of all parties would operate in a
fashion similar to the case where TH Lee had made a payment under the Guaranty
at the time of maturity of the Term Loan, as more fully described in Paragraphs
6-8 above. In such

                                       30

<PAGE>

circumstances, the TH Lee Debt, as evidenced by the Convertible Note, would be
reduced by the amount of escrowed funds contributed by participating offerees
and by the payment by participating offerees of the balance of their respective
Pro Rata Percentages of the outstanding amount due under the Convertible Note.
Following payment of the balance of their respective Pro Rata Percentage of the
amounts due under the Convertible Note, participating offerees would receive
shares of Series A-1 Stock or Series A-2 Stock, allocated in a manner similar to
that set forth in Paragraph 7 above. In the event that a participating offeree
fails to timely pay the balance of its Pro Rata Percentage of the outstanding
amount due under the Convertible Note, then the amounts that the participating
offeree deposited into the escrow fund will be forfeited, the Warrants that the
participating offeree received will be cancelled, the offeree will not be
entitled to receive any shares of Series A-1 Stock or Series A-2 Stock and the
offeree may be subject to a collection action by Parago for the balance of its
Pro Rata Percentage obligation. In this case, all current equity holdings
(including those of the participating offerees who fail to perform timely their
obligations to provide the additional funds) in Parago would be diluted to
approximately ten percent (10%) of the fully-diluted current percentage
ownership that they represent.

11. Investors' Rights Agreements. Parago has executed an Investors' Rights
Agreement for the benefit of TH Lee and each participating offeree with respect
to the Series A-3 Stock and related shares of common stock that may be acquired
upon conversion of the Series A-3 Stock. In addition, a similar Investors'
Rights Agreement will also be executed in the event of the issuance of the
Series A-1 Stock and Series A-2 Stock at the time of issuance of such stock. The
Investors' Rights Agreements will provide TH Lee and each participating offeree,
beginning 180 days following an initial public offering by Parago, the right to
(a) piggyback registrations on registration statements filed by Parago and (b)
subject to certain restrictions, one demand registration on Form S-3 in any
twelve (12)-month period. All expenses of any such registrations, other than
underwriting discounts and commissions incurred, shall be borne by Parago. TH
Lee and each participating offeree are bound by the terms of the Investors'
Rights Agreements to hold their common stock for a period to be determined by
Parago and its underwriter in an initial public offering for a period of no more
than 180 days following such initial public offering. TH Lee's and the
participating offeree's registration rights described above expire four (4)
years following an initial public offering.

12. Waivers Obtained. Parago has obtained waivers from its preferred
stockholders and warrantholders and from Comerica of certain anti-dilution and
preemptive rights with respect to the issuance of the Warrants, the Series A-1
Stock, the Series A-2 Stock and the Series A-3 Stock to TH Lee and the
participating offerees. Parago has also obtained waivers of anti-dilution,
preemptive and voting rights in connection with our proposed issuance of a new
series of preferred stock (the Series E Stock) in its next round of financing
assuming such round is on the same terms as Parago's Series D Stock and at a
valuation of at least $60,000,000. In the event Parago is unable to obtain a
valuation of at least $60,000,000, the consent of the holders of the existing
preferred stock would be required to issue securities on a par with or senior to
the existing preferred stock.

13. Increase of Authorized Capital Stock. Parago has obtained the approval of a
majority of the shares owned by its stockholders to amend its Certificate of
Incorporation to authorize the additional shares of common stock and preferred
stock.

                                       31



<PAGE>

SIGNATURES

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

CT HOLDINGS, INC.
(REGISTRANT)

Date: November 19, 2001    By: /s/ STEVEN B. SOLOMON
                             -----------------------
                             Steven B. Solomon, President and Chief
                             Executive Officer (Duly Authorized Signatory and
                             Principal Executive and Financial Officer)