<PAGE>

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-QSB/A
                                 AMENDMENT NO. 1

 (Mark One)
     [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
          For the quarterly period ended November 30, 1997

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

                         Commission file number: 0-08718

                            CITADEL TECHNOLOGY, INC.
                      (Exact name of small business issuer 
                          as specified in its charter)

          DELAWARE                                     75-2432011
     (State or other jurisdiction of              (I.R.S. Employer
     incorporation or organization)               Identification No.)

     3811 TURTLE CREEK BLVD., SUITE 600, DALLAS, TX 75219
     (Address of principal executive offices)

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

                   ----------------------------------------
   (Former name, former address and former fiscal year, if changed since last
   report)

     Check 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     
     ---      --- 

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

     Common Stock, par value $.01       18,942,902 
                                        ----------
     Outstanding at January 14, 1998               
     
     Transitional Small Business Disclosure Format Yes [ ] No [X]

                                       1

<PAGE>

                        PART I.  FINANCIAL INFORMATION

     ITEM 1. FINANCIAL STATEMENTS

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

     ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

          The statements contained in this Report that are not historical 
facts, including, but not limited to, statements found in this Item 2  - 
"Management's Discussion and Analysis," are forward-looking statements and, 
as such, involve a number of risks and uncertainties.  The actual results of 
the future events described in such forward-looking statements in this Report 
could differ materially from those stated in such forward-looking statements. 
 Among the factors that could cause actual results to differ materially are:  
general economic conditions; competition; the market for network and desktop 
software products; seasonality of product sales; the Company's capital 
requirements and the uncertainty of additional funding; the Company's 
inconsistent revenues and the uncertainty of future profitability; costs and 
risks related to integration of acquisitions; uncertainties related to new 
product development and market acceptance of new products developed; costs, 
expenses and delays related to the implementation of new sales strategies; 
software development costs; litigation; as well as the risks and 
uncertainties discussed in this Report, including, without limitation, the 
portions referenced above, and the uncertainties set forth from time to time 
in the Company's other public reports and filings and public statements. 

RECENT DEVELOPMENTS

     PRODUCTS:      The Company's C:\MORE! product, a file management utility,
                    was recently featured by IOMEGA at Comdex and was a cover
                    story in their online magazine.  Crash Protection and
                    Recovery (CPR) was also featured at the Comdex trade show in
                    the Novell booth.  The interest in both products at the show
                    and subsequent thereto has been outstanding.  Both these
                    products have been featured in several local and national
                    reviews targeted at technology professionals and consumers. 
                    The Company has also recently completed development on its
                    Winshield 95 product and plans to introduce a Winshield
                    NT/Network version during the first quarter of fiscal 1999. 
                    This release will substantially increase the potential
                    customer base for the Winshield product.  In addition, the
                    Company plans to introduce upgrades for its Enterprise
                    products including support for the NT platform for:  CPR,
                    Phantom of the Console, Server Sentry, Server Cam and
                    Tabworks products during the fourth quarter of fiscal 1998
                    and first quarter of fiscal 1999.  The Company expects to
                    launch additional new products and upgrades in future
                    quarters of fiscal 1999 that will provide ease-of-use
                    security for Internet and intranet applications on Microsoft
                    and Novell platforms. 

     SALES &
     MARKETING:     With the introduction of new products, a revised sales model
                    and the launch of the Company's authorized reseller program,
                    the Company will leverage a broad range of sales and
                    marketing opportunities that will target direct and indirect
                    customers.  In fiscal year 1998, the Company changed the
                    focus of its selling efforts from a telemarketing/direct
                    sales strategy to a multi-channel sales strategy that
                    includes an enterprise sales group, tele-marketing group,
                    channel group, OEM/Vendor relations group and a VAR
                    recruitment and management group.  The channel group has
                    successfully penetrated several retail accounts and
                    continues to broaden its reach.  Each of these sales groups
                    have exposure to software 

                                       2
<PAGE>
                    buyers and end users and will provide valuable feedback 
                    that will help determine new product features and direction.
                    PR activities have increased substantially with the release
                    of the new products and continues to provide the Company 
                    with additional exposure.

     OPERATIONS:    The Company has recently filled two key management
                    positions.  Bennett Klein joined the Company as Vice
                    President of Business Development and Jack Doxey joined the
                    Company as Vice President of Sales and Marketing.  Klein
                    joins the Company from Iomega, where he was part of the
                    original marketing team that brought Zip and Jaz removable
                    storage to the mass market.  He has over 15 years experience
                    in marketing management with several technology companies,
                    including Cheyenne Software and IBM.  Doxey's software sales
                    and marketing experience includes over 10 years of extensive
                    work with retail and value-added resellers in the
                    distribution channel, including Attachmate, MicroHelp, DCA,
                    Technology Advancement Corporation and MindShare Associates.
                    Other marketing positions have been filled and the marketing
                    department now creates all marketing materials internally. 
                    The Company has started its initial staffing of the internal
                    sales group and VAR management group and expects to continue
                    to grow the sales and marketing departments in future
                    quarters.

RESULTS OF OPERATIONS

     During the three months ended November 30, 1997, the Company had net 
sales of $269,344, a decrease of $1,231,926 or 82.1% from net sales of 
$1,501,270 for the three months ended November 30, 1996.  During the nine 
months ended November 30, 1997, the Company had net sales of $1,107,712, a 
decrease of $3,282,496, or 74.8% from net sales of $4,390,208 for the nine 
months ended November 30, 1996. 

      During the first three quarters of this fiscal year, the Company was 
integrally involved with completing its corporate plan of restructuring, 
which included the consolidation of its Houston operations into its Dallas 
location; the elimination of outside sales offices; the outsourcing of 
certain functions previously performed in-house; the reduction of its 
workforce by approximately 70%; the identification of areas for greater 
operational efficiencies to enable the Company to significantly reduce its 
overhead and administrative expenses; and development and implementation of 
new sales and marketing strategies.  The new sales and marketing strategies 
focus the Company's efforts more toward the traditional VAR, reseller, OEM 
and joint venture model and less towards the Company's historical 
telemarketing and trade-show model.  The Company believes these changes 
attributed to its sales decrease during these quarters and believes that 
sales will continue to be below last years numbers through the end of the 
current fiscal year.  The Company does believe, however, that these newly 
adopted strategies will better position the Company for strong future growth 
and anticipates revenues for fiscal year 1999 to be significantly above 
fiscal year 1998.

     The Company, during the past nine months, has entered into strategic 
alliances with several market leaders in the industry and expects to continue 
to explore similar arrangements in the future. The Company recently signed a 
strategic alliance with CORESTAFF, Inc. ("CORESTAFF"), whereby both companies 
have agreed to cross-sell each other's products, with the Company being the 
exclusive distributor of CORESTAFF's "First Step" software program, a 
peer-to-peer system that enables users to easily access multiple systems 
requiring different user codes.  In addition, the alliance provides that 
CORESTAFF's Software Services Unit, Millennium, with a development staff of 
over 150, will provide development support to the Company.   The Company's 
OEM/Vendor relationship currently includes partnerships or relationships with 
Microsoft, IOMEGA, Novell and Compaq.  These relationships not only give the 
Company another channel of distribution, but also endorsements that are used 
by the Enterprise group to add credibility to the Company's products.  In the 
coming year the Company will continue to partner-up with other market leaders 
in the industry.

     During the fourth quarter, the Company started shipments of its  IOMEGA 
endorsed C:\MORE! product and its Winshield 95 product to various retail and 
VAR channels.  The initial response on both these products has been 
outstanding and the Company expects both products to represent a significant 
portion of its revenue in fiscal 1999.  In 

                                       3
<PAGE>

addition, the Company is currently in BETA testing on its Crash Protection 
Recovery ("CPR"), Winshield NT and Winshield Enterprise ( a network version 
of its Winshield 95 product) products and expects a full release of these 
products during the first quarter of fiscal 1999.  The Company expects to 
launch additional new products and upgrades in future quarters of fiscal 1999 
that will provide ease-of-use security for Internet and intranet applications 
on Microsoft and Novell platforms. 

     The costs and expenses incurred in connection with producing the 
Company's products decreased from $91,224, or  6.1% of net sales for the 
three months ended November 30, 1996, to $11,469, or 4.3% for the three 
months ended November 30, 1997. The costs and expenses incurred in connection 
with producing the Company's products decreased from $246,413, or 5.6% of net 
sales for the nine months ended November 30, 1996, to $35,255, or 3.2% for 
the nine months ended November 30, 1997.  On an overall basis, these expenses 
have decreased, as a percentage of sales, as a result of the Company 
performing a large portion of its order fulfillment in-house versus 
outsourcing this service as it had done during the previous fiscal year.  In 
addition, as an increasing percentage of the Company's sales are made through 
strategic alliances, electronic commerce, site licensing, or other channels, 
the costs and expenses incurred in connection with producing the Company's 
products will continue to decrease as a percentage of sales. During the 
second and third quarters, as part of the Company's restructuring, the 
Company outsourced a large percentage of its order fulfillment services.  
Therefore, these expenses increased, as a percentage of sales, over the first 
quarter of this fiscal year, but still remain below prior years' numbers.  
This is in part due to the fact, as mentioned earlier, that as the percentage 
of the Company's sales that are sold through strategic alliances, electronic 
commerce, site licensing, or other channels increases, the costs and expenses 
incurred in connection with producing the Company's products, as a percentage 
of sales, will decrease.  Due to volume and quality control related 
considerations, the Company recently resumed performing a large portion of 
its order fulfilment services in-house.  The Company may, in the future 
however, as volume or resources dictate, determine it to be in its best 
interest to once again out-source these service.  In addition, a change in 
the Company's sales mix, as a percentage, to its lower priced retail 
products, will result in these expenses, as a percentage of sales, to 
increase.  Therefore, these expenses may be expected to increase in future 
periods, as a percentage of sales.   

     Selling, general and administrative expenses for the three months ended 
November 30, 1997, were $1,115,225, a decrease of $809,329, or 42.5%, over 
selling, general and administrative expenses of $1,924,554 for the three 
months ended November 30, 1996.  Selling, general and administrative expenses 
for the nine months ended November 30, 1997, were $2,900,778, a decrease of 
$2,225,475, or 43.4%, over selling, general and administrative expenses of 
$5,126,253 for the nine months ended November 30, 1996.  Such expenses 
decreased primarily due to the Company's savings as a result of its 
reorganization, a decrease in the provision for uncollectible accounts and a 
decrease in the Company's trade-show activities as a result of the change in 
the Company's sales approach. These decreases were offset by start-up and 
marketing expenses associated with its new sales approach and new product 
introductions, the addition of new sales and marketing executives,  and its 
continued efforts to expand its product offerings.   The Company expects as 
revenues increase, it will allocate additional resources to selling and 
marketing activities.  Thus these expenses may be expected to increase in 
future periods;  however, as a percentage of sales these expenses should 
remain relatively constant.  The Company did, during the quarter, provide an 
addition of $250,000 to its reserve for uncollectible accounts, relating to 
prior year's uncollected sales.  The Company anticipates that,  as a 
continued part of its restructuring and as relating to these sales, it may 
take a similar charge in the fourth quarter of this fiscal year.

     Research and development costs charged to expense for the three months 
ended November 30, 1997, were $28,183 versus $0 for the same period last 
year.  Research and development costs charged to expense for the nine months 
ended November 30, 1997 were $82,162 versus $4,007,792 for the same period 
last year, or a decrease of $3,925,630 or 97.9%.  Research and development 
costs for the nine months ended November 30, 1996 included approximately 
$3,959,000 of  research and development costs written off by the Company in 
connection with certain acquisitions and the purchase of technology from 
Xerox.  In addition, as a result of the development activity on two of the 
Company's new products (C:\MORE! and CPR),  the Company capitalized research 
and development costs of approximately $75,000 and $372,000 for the three and 
nine months ended November 30, 1997, respectively, versus approximately 
$170,000 and $330,000 for the three and nine months ended November 30, 1996, 
respectively. The Company expects to continue to increase development staff 
and expects to launch additional new products and upgrades in the fourth 
quarter of fiscal 1998 and in future periods that will provide for ease of 
security 

                                       4
<PAGE>

solutions for Internet and intranet applications on Microsoft and Novell 
platforms.  During the quarter, the Company entered into a software 
development agreement with Millennium Computer Corporation ("Millennium"), a 
software development division of CORESTAFF, whereby the Company will 
out-source certain development activities to Millennium.  The Company 
believes that its relationship with Millennium could represent, to the 
Company, a significant strategic advantage over other competitors in the 
industry.  The Company believes that this alliance will significantly 
increase the speed and quality in which the Company is able to introduce new 
products and upgrades to existing products to the marketplace and it will 
enable the Company to stay on the cutting edge of technology.

     Depreciation and amortization expense increased to $302,620 for the 
three months ended November 30, 1997, from $257,915, or an increase of 17.3% 
over the prior period.  Depreciation and amortization expense increased to 
$924,948 for the nine months ended November 30, 1997, from $598,420, or 54.6% 
over the same period last year.   The increases resulted from depreciation 
and amortization of certain acquisitions and products in these periods that 
were not present in the same period last year and the commencement of 
amortization on certain capitalized research and development costs relating 
to products that are available for sale.

     Interest expense for the three and nine months ended November 30, 1997, 
was $13,617 and $64,345, respectively, versus $113,420 and $292,329 for the 
same periods last year.  The decrease resulted from the Company having less 
interest bearing indebtedness in place this fiscal year compared to last 
fiscal year.

          During the three months ended November 30, 1996, the Company had a 
net gain on security transactions of $786,895 and  a net  loss of $451,280 for 
the nine months ended November 30, 1996, versus no security transactions for 
the three months  ended November 30, 1997 and a net loss on security 
transactions of $199,672 for the nine months  then ended.  The security loss 
for the nine months ended November 30, 1997, related to the realization of 
$355,772 of previously unrealized security losses, net of security gains of 
$156,100.  Both these transactions related to the settlement and liquidation 
of the Miami Subs stock discussed in the Company's Form 10-KSB for the fiscal 
year ended February 28, 1997.

     As a result of the aforementioned, the Company for the three and nine 
months ended November 30, 1997, reported a net loss of $1,196,246 and 
$2,992,601, respectively, compared to a net profit of $111,895 for the three 
months ended November 30, 1996 and a net loss of $5,846,133 for the nine 
months ended November 30, 1996.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash and cash equivalents at November 30, 1997 were 
$160,500.

     Cash flows from operations were a negative $1,779,366 for the nine 
months ended November 30, 1997, compared to negative $4,990,232 for the nine 
months ended November 30, 1996.  The decrease was due principally to a 
decrease in the net loss of the Company due to factors previously discussed 
in this Report and an increase in the Company's accounts payable and accrued 
expenses due to the Company's limited cash resources.  

     Cash used in investing activities was $351,481 for the nine months ended 
November 30, 1997, compared to $1,713,114 for the same period last year.  
This decrease resulted from a decrease in net securities and business 
purchases and a decrease in capital expenditures, offset by an increase in 
capitalized costs associated with the development of the Company's software 
products.

     Cash flows provided by financing activities were $2,276,247 for the nine 
months ended November 30, 1997, compared to $6,824,934 for the nine months 
ended November 30, 1996.  This decrease was due primarily to less capital 
being raised during this period compared to the same period last year and 
less debt financing.

     As a result of the aforementioned factors, cash and cash equivalents 
increased by  $145,400 for the six months ended November 30, 1997 versus an 
increase of $121,588 for the same period last year.

                                       5
<PAGE>

     As previously discussed, the Company has completed a plan of 
restructuring which has reduced the Company's overhead considerably.  In 
addition, the Company is continuing to work with various vendors and lenders 
to restructure payables and debt that is currently owed.  However, even if 
the Company is successful with these endeavors, the Company does not believe 
that the current funds available will be sufficient to fund the Company's 
operations through the end of its current fiscal year.  As a result, the 
Company is seeking additional capital to fund its operations for fiscal year 
1999, after which the Company believes its operations will be 
self-sufficient.  In October 1997, the Company received cash proceeds of 
$750,000 and other valuable consideration from CORESTAFF in connection with 
the sale of 2.5 million shares of the Company's common stock. The Company 
also during the quarter completed a $500,000 Regulation D Series C preferred 
stock offering.  In addition, the Company has entered into arrangement with 
Hoak Breedlove Wesneski & Co., a Dallas based investment banking firm, to 
work with the Company.  While the Company has been successful, in the past, 
in raising capital when needed, no assurances can be made that the Company 
will be successful in raising any such capital in the future; and that if 
successful, such will not result in a dilution to existing shareholders.  

                           PART II.  OTHER INFORMATION

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

ITEM 1. LEGAL PROCEEDINGS

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

     One current and one former employee of the Company have filed a lawsuit 
against the Company demanding payment of a promissory note issued in 
connection with the acquisition of Kent-Marsh and ADI and seeking damages in 
excess of $400,000.  The Company believes it has defenses to payment under 
the note.  The Company is currently involved in negotiations with respect to 
the settlement of the case.  In the event the settlement negotiations are 
unsuccessful, the Company intends to vigorously defend against the lawsuit.  
The Company has filed an answer in the case, styled NESBITT & WESOLEK V. 
CITADEL, in the 193rd District Court of Dallas County, Texas.  The Company 
has reached a settlement with the former employee.  The remaining suit seeks 
damages in excess of $240,000.

     The Company is involved in an arbitration proceeding with Vestcom,  a 
group that claims it is entitled to compensation and a finder's fee for 
introducing the Company to a third party.  The Company believes it has 
defenses to such arbitration claim.  The Company intends to vigorously defend 
against the claim.

     Five former employees of the Company filed a lawsuit against the Company 
and one current and one former officer and director alleging that the Company 
and/or the individuals owe the plaintiffs stock options in lieu of certain 
amounts claimed to be due to them for salary, bonus or override compensation, 
and seeking damages, attorney's fees, pre- and post-judgment interest, and 
costs allegedly in excess of $4,000,000.  The Company and the individuals 
believe such claims are without merit and intend to vigorously defend against 
the claims.  The lawsuit was filed October 27, 1997 and is styled Marks, 
Marks, Ranshaw, Colquitt & Lauratis v. Citadel Computer Systems, Inc., et 
al., in the 189th Judicial District Court of Harris County, Texas.

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

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

ITEM 2.  CHANGES IN SECURITIES

     The Company during the quarter, pursuant to Regulation D, issued 5,000 
shares of convertible Series C preferred stock to Lakeshore International, 
Ltd. McGinn, Smith & Co., Inc. served as the placement agent for the 
issuance. These shares are convertible, at the option of the holder, after a 
4 month lock-up period, into shares of common stock of the Company, at 
conversion rates ranging from between 70% to 80% of the average market price 
of the common stock for five days preceding conversion, depending on the date 
of conversion. Each share of preferred stock has a conversion value of $100 
and warrants for five years to purchase 10 shares of common stock, of the 
Company, at a price of $1.00 per share. Dividends accrue at 8% and are 
payable, at the option of the Company, in cash or common stock at the time of 
conversion.
                                       6
<PAGE>

ITEM 5.  OTHER INFORMATION

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

     In connection with the purchase by CORESTAFF, CORESTAFF appointed one 
member to the Company's Board of Directors. Mr. Kenneth Johnsen, President of 
the Information Technology Services Group of CORESTAFF and an Executive Vice 
President of CORESTAFF, was elected to the Company's board in October 1997. 

     ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

          (a). EXHIBITS

          10.10     Purchase Agreement between Citadel and CORESTAFF, Inc.,
                    dated September 22, 1997 (incorporated by reference to
                    Exhibit 10.10 of the Company's Current Report on Form 10-KSB
                    for the year ended February 28, 1997).

          (b)  REPORTS ON FORM 8-K.  

                    On October 6,1997, the Company filed a Form 8-K with respect
                    to the purchase by CORESTAFF, Inc. of 2.5 million shares of
                    the Company's common stock and related matters. 


                              SIGNATURES

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

                         CITADEL TECHNOLOGY, INC.
                         (REGISTRANT)


Date: May 20, 1998      By:      /s/  Steven B. Solomon
                                 -----------------------------------------------
                        Steven B. Solomon, President and Chief Executive Officer
                        (Duly Authorized Signatory and Principal Executive 
                        Officer) 

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

                                       7
<PAGE>

                          PART 1. FINANCIAL INFORMATION
                         
                          ITEM 1. FINANCIAL STATEMENTS
                         
                      CITADEL COMPUTER SYSTEMS INCORPORATED
                         
                         








                                        8
<PAGE>

                      CITADEL COMPUTER SYSTEMS INCORPORATED

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
                                                              NOVEMBER 30,   FEBRUARY 28,
                         ASSETS                                  1997           1997
                                                              -----------    ------------
<S>                                                           <C>             <C>
CURRENT ASSETS
     Cash                                                     $  160,500      $  15,100 
     Accounts receivable, less allowance for returns and
      doubtful accounts of $705,144 and $625,000                 434,687        727,422 
     Notes receivable from related parties                       398,922        870,000 
     Marketable securities available for sale                          -      1,250,000 
     Other                                                       303,425         57,106 
                                                              ----------    -----------
     Total current assets                                      1,297,534      2,919,628 

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

PROPERTY AND EQUIPMENT, NET                                      413,572        696,459 

PURCHASED SOFTWARE, NET OF ACCUMULATED
     AMORTIZATION OF $1,569,809 AND $854,000                   3,680,591      4,396,398 

CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
     NET OF ACCUMULATED AMORTIZATION
     OF $94,375 AND $19,000                                      870,675        573,388 

OTHER ASSETS                                                     267,508        263,220 
                                                              ----------    -----------
                                                              $6,529,880    $10,724,093 
                                                              ----------    -----------
                                                              ----------    -----------
</TABLE>

The accompanying notes are an integral part of these statements.
     
                                             9
<PAGE>

                      CITADEL COMPUTER SYSTEMS INCORPORATED

                     CONSOLIDATED BALANCE SHEETS - CONTINUED

<TABLE>
                                                              NOVEMBER 30,   FEBRUARY 28,
     LIABILITIES AND STOCKHOLDERS' EQUITY                         1997           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
CURRENT LIABILITIES
     Cash overdraft                                           $    82,110    $   167,256 
     Current maturities of long-term debt                         847,781        804,141 
     Notes payable                                                876,700      2,456,087 
     Accounts payable and accrued expenses                      2,317,682      2,253,481 
                                                              -----------    -----------
     Total current liabilities                                  4,124,273      5,680,965 

LONG-TERM LIABILITIES
     Debt, less current maturities                              1,335,918      1,770,905 
                                                              -----------    -----------
     Total liabilities                                          5,460,191      7,451,870

COMMITMENTS AND CONTINGENCIES                                           -              -

STOCKHOLDERS' EQUITY
     Common stock, $.01 par value per share; authorized
      30,000,000 shares; issued, 22,968,900 shares
      at 11/30/97 and 16,501,980 shares at 2/28/97                229,689        165,020
     Preferred stock, $.01 par value per share;
      authorized 1,000,000 shares; issued and 
      outstanding, 545 shares and 5 shares of Series B 
      convertible at 2/28/97 and 11/30/97, respectively 
      (liquidation value of $545,000) 
      and 5,000 shares of Series C convertible at 11/30/97 
      (liquidation value of $500,000).                                 50              5 
     Equity notes                                                 994,000        300,000 
     Additional paid-in capital                                15,078,739     13,370,627 
     Accumulated deficit                                      (12,846,668)    (9,854,067)
     Unrealized loss on securities available for sale                   -       (355,772)
     Treasury stock, at cost (4,164,613 shares at 11/30/97                               
      and 264,613 shares at 2/28/97)                           (2,386,121)      (353,590)
                                                              -----------    -----------
     Total stockholders' equity                                 1,069,689      3,272,223 
                                                              -----------    -----------
                                                              $ 6,529,880    $10,724,093 
                                                              -----------    -----------
                                                              -----------    -----------
</TABLE>

The accompanying notes are an integral part of these statements.

                                          10
<PAGE>

                      CITADEL COMPUTER SYSTEMS INCORPORATED
                                       
                      CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>

                                                 THREE MONTHS ENDED           NINE MONTHS ENDED
                                                     NOVEMBER 30,                NOVEMBER 30,
                                                1997           1996           1997           1996
                                            -----------    -----------    -----------    -----------
<S>                                         <C>            <C>            <C>            <C>
Net sales                                   $   269,344    $ 1,501,270    $ 1,107,712    $ 4,390,208
                                                                                         
Cost of sales                                    11,469         91,224         35,255        246,413
                                            -----------    -----------    -----------    -----------
       Gross profit                             257,875      1,410,046      1,072,457      4,143,795
                                                                                         
Operating expenses                                                                       
    Selling, general and                                                                 
      administrative expenses                 1,115,225      1,924,554      2,900,778      5,126,253
    Depreciation and amortization               302,620        257,915        924,948        598,420
    Research and development costs               28,183              -         82,162      4,007,792
                                            -----------    -----------    -----------    -----------
                                              1,446,028      2,182,469      3,907,888      9,732,465
                                            -----------    -----------    -----------    -----------
    Operating income (loss)                  (1,188,153)      (772,423)    (2,835,431)    (5,588,670)
                                                                                         
Other income (expense)                                                                   
    Interest expense                            (13,617)      (113,420)       (64,345)      (292,329)
    Other                                         5,524        210,843        106,847        468,146
    Gain (loss) on marketable securities              -        786,895       (199,672)      (451,280)
                                            -----------    -----------    -----------    -----------
                                                 (8,093)       884,318       (157,170)      (275,463)
                                            -----------    -----------    -----------    -----------
                                                                                         
       Net income (loss)                    $(1,196,246)   $   111,895    $(2,992,601)   $(5,864,133)
                                            -----------    -----------    -----------    -----------
                                            -----------    -----------    -----------    -----------

Per share data                                                                           
    Net income (loss) per share             $     (0.07)       $  0.01    $     (0.19)   $     (0.46)
                                            -----------    -----------    -----------    -----------
                                            -----------    -----------    -----------    -----------

Weighted average shares outstanding          17,815,626     19,906,008     15,850,155     12,654,926
                                            -----------    -----------    -----------    -----------
                                            -----------    -----------    -----------    -----------
</TABLE>

The accompanying notes are an integral part of these statements.

                                       11
<PAGE>
                      CITADEL COMPUTER SYSTEMS INCORPORATED 

                      CONSOLIDATED STATEMENTS OF CASH FLOWS 
<TABLE>
                                                                   NINE MONTHS ENDED
                                                                      NOVEMBER 30, 
                                                                 1997                1996
                                                             ------------        ------------
<S>                                                          <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES    
     Net loss                                                $(2,992,601)        $(5,864,133)
     Adjustments to reconcile net loss to net cash                      
       used by operating activities
               Depreciation and amortization                     926,791             598,420 
               Net loss on marketable securities                 199,672             451,519 
               Research and development expenses acquired
                 with stock                                            -           3,959,069 
               Provision for uncollectible accounts              250,000           1,100,000 
     Changes in operating assets and liabilities                        
          Accounts receivable                                    (13,765)         (2,749,385)
          Other receivables                                     (153,922)         (1,169,295)
          Other current assets                                  (246,319)           (105,852)
          Bank overdraft                                         (85,146)               -   
          Accounts payable and accrued expenses                  340,211            (914,119)
          Other assets                                            (4,287)             41,402
          Other liabilities                                            -            (337,858)
                                                             ------------        ------------
     NET CASH USED BY OPERATING ACTIVITIES                    (1,779,366)         (4,990,232)
          
CASH FLOWS FROM INVESTING ACTIVITIES                                    
     Capital expenditures                                       (134,919)         (1,102,665)
     Securities transactions - net                               156,100             548,481
     Purchase of business                                              -            (658,543)
     Development of software                                    (372,662)           (330,073)
     Purchase of treasury stock                                        -            (170,314)
                                                             ------------        ------------
     NET CASH USED BY INVESTING ACTIVITIES                      (351,481)         (1,713,114)

CASH FLOW FROM FINANCING ACTIVITIES                                     
     Net change in notes payable                                 284,421          (1,767,509)
     Proceeds from sale of stock & convertible notes           1,991,826           8,592,443 
                                                             ------------        ------------
     NET CASH PROVIDED BY FINANCING ACTIVITIES                 2,276,247           6,824,934 
                                                             ------------        ------------
     Net increase (decrease) in cash                             145,400             121,588 

     Cash at the beginning of the period                          15,100             125,565
                                                             ------------        ------------

     Cash at the end of the period                           $   160,500         $   247,153
                                                             ------------        ------------
                                                             ------------        ------------
</TABLE>

The accompanying notes are an integral part of these statements. 

                                      12
<PAGE>

                        CITADEL COMPUTER SYSTEMS INCORPORATED

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - BASIS OF PRESENTATION

     The financial information presented herein should be read in conjunction
with the financial statements and footnotes included in the Company's Annual
Report on Form 10-KSB for the period ended February 28, 1997.  The balance sheet
as of February 28, 1997 has been derived from the audited financial statement at
that date.

     The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and have been presented on the basis that the Company is a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business.  See Note C to the Notes to
Financial Statements contained in the Company's Form 10-KSB for the year ended
February 28, 1997.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments considered
necessary for a fair presentation, consisting of those of a normal recurring
nature, are reflected in the accompanying financial statements.

NOTE B - STOCKHOLDERS' EQUITY

     During the period from March 1, 1997 through November 30, 1997, the
Company's stockholders' equity reflected the following changes:

     Balance at February 28, 1997                  $ 3,272,223
     
     Issuance of equity notes - net                    700,000
     Purchase of treasury stock                     (2,032,531)
     Conversion of debt to equity                       85,000
     Expenses of offerings                            (141,575)
     Net loss                                         (861,119)
                                                   ------------
     Balance at May 31, 1997                         1,021,998

     Issuance of equity notes - net                    295,000
     Exercise of options                                80,000
     Conversion of debt to equity                       45,000
     Expenses of offering                              (24,999)
     Realization of unrealized loss                    355,772
     Net loss                                         (935,236)
                                                   ------------
     Balance at August 31, 1997                        837,535

     Exercise of options                               143,400
     Conversion of debt                                 75,000
     Issuance of common stock                          750,000
     Issuance of preferred stock                       500,000
     Expenses of offering                              (40,000)
     Net loss                                       (1,196,246)
                                                   ------------
     Balance at November 30, 1997                   $1,069,689
                                                   ------------
                                                   ------------

                                       13
<PAGE>

                        CITADEL COMPUTER SYSTEMS INCORPORATED

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE C - COMMITMENTS AND CONTINGENCIES

     A former employee of the Company's predecessor filed a lawsuit against 
the Company and one of its officers and directors alleging that the Company 
and/or the individual owe the plaintiff additional stock options and seeking 
damages of $2,600,000.  The Company believes such claims are without merit 
and intends to vigorously defend against the claim.

     One current and one former employee of the Company have filed a lawsuit
against the Company demanding payment of a promissory note issued in connection
with the acquisition of Kent-Marsh and ADI and seeking damages in excess of
$400,000.  The Company believes it has defenses to payment under the note.  The
Company is currently involved in negotiations with respect to the settlement of
the case.  In the event the settlement negotiations are unsuccessful, the
Company intends to vigorously defend against the lawsuit.  The Company has filed
an answer in the case, styled NESBITT & WESOLEK V. CITADEL, in the 193rd
District Court of Dallas County, Texas.  The portion of the suit relating to the
former employee has been settled.  The remaining suit seeks damages in excess of
$240,000.

     An unrelated company has filed a lawsuit against the Company and one of its
officers and directors alleging that the Company and/or the officer owe the
plaintiff a finder's fee and is seeking $100,000 of the Company's common stock. 
The Company believes such claims are without merit and intends to vigorously
defend against the claim.  The case is currently scheduled for non-binding
arbitration.

     The Company is also involved in various legal actions arising in the normal
course of business.  Management is of the opinion that their outcome will not
have a material adverse effect on the Company's financial position or results of
operations.

NOTE D - PREFERRED STOCK
     
     During the quarter the Company issued 5,000 shares of Series C preferred
stock.  These shares are convertible, at the option of the holder, after a 4
month lock-up period, into shares of common stock  at conversion rates ranging
between 70% to  80% of the average market price of the common stock for the five
days preceding conversion, depending on the date of conversion.  Each share of
preferred stock has a conversion value of $100 and warrants for five years to
purchase ten (10) shares of common stock of the Company at a price of $1.00 per
share.  Dividends accrue at 8% and are payable, at the Company's option, in cash
or common stock at the time of conversion. 


NOTE E - SUBSEQUENT EVENTS

     The Company recently engaged Hoak Breedlove Wesneski & Co., a Dallas based
investment banking firm,  to work with the Company in procuring future
financing.

                                      14