<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 MARCH 31, 2001

[ ]  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

                               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 May 15, 2001

Common Stock, Par value $.01 per share            53,825,300


Transitional Small Business Disclosure Format Yes [ ]   No [X]
<PAGE>

                               CT HOLDINGS, INC.
                                  FORM 10-QSB
                     QUARTERLY PERIOD ENDED MARCH 31, 2001
                               TABLE OF CONTENTS



                                                                    Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

        Balance Sheets

             as of March 31, 2001 and December 31, 2000               3

        Statements of Operations

             for the three months ended March 31, 2001 and 2000       5

        Statements of Cash Flows

             for the three months ended March 31, 2001 and 2000       6

        Notes to Financial Statements                                 7

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations                          15

PART II. OTHER INFORMATION


Item 1.      Legal Proceedings                                       37

Item 5.      Other Information                                       38

Signatures                                                           44

                                       2
<PAGE>

PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS



                               CT HOLDINGS, INC.
                            UNAUDITED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                 March 31,            December 31,
                                                                   2001                   2000
                                                                ----------            ------------
CURRENT ASSETS
<S>                                                          <C>                      <C>
    Cash and cash equivalents                                   $      292             $   21,647
    Accounts receivable-trade, less allowance
       of $23,668 and $28,693                                       78,127                 54,794
    Accounts receivable, other                                      66,500                 45,250
    Notes receivable from related parties                          510,059                588,559
    Notes receivable from affiliates                               730,000                730,000
    Inventory                                                       41,038                 42,077
    Prepaid expenses                                                65,952                 94,217
                                                                ----------             ----------

    Total current assets                                         1,491,968              1,576,544

INVESTMENT IN UNCONSOLIDATED AFFILIATES                          2,613,976              2,613,976

PROPERTY AND EQUIPMENT, net                                         63,886                 94,054

PURCHASED SOFTWARE, net of accumulated
    amortization of $1,094,698 and $1,045,696                       57,702                106,704

CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
    net of accumulated amortization of $991,262 and $851,204       345,163                485,221

OTHER ASSETS                                                        40,084                 42,095
                                                                ----------             ----------
                                                                $4,612,779             $4,918,594
                                                                ==========             ==========
</TABLE>
       The accompanying notes are an integral part of these statements.

                                       3
<PAGE>

                               CT HOLDINGS, INC.
                      UNAUDITED BALANCE SHEETS - CONTINUED


<TABLE>
<CAPTION>

                                                                          March 31,     December 31,
   LIABILITIES AND STOCKHOLDERS' EQUITY                                     2001            2000
                                                                       ------------   ------------
<S>                                                                    <C>            <C>
CURRENT LIABILITIES
      Accounts payable and accrued expenses                            $  1,329,117   $    922,113
      Accrual for legal settlement                                        1,912,500      1,912,500
      Payable to affiliate                                                   97,581        126,028
      Current maturities of long-term debt                                  150,000        150,000
      Notes payable                                                          68,529         98,425
                                                                       ------------   ------------

      Total current liabilities                                           3,557,727      3,209,066


COMMITMENTS AND CONTINGENCIES                                                    --             --

STOCKHOLDERS' EQUITY
      Common stock, $.01 par value per share; authorized 60,000,000
        Shares; 53,825,317 shares issued and outstanding                    538,253        538,253
      Preferred stock, $.01 par value per share;
        authorized 1,000,000 shares; issued and outstanding
        Series B convertible, 50 shares (liquidation value $50,000)               1              1
      Additional paid-in capital                                         56,383,496     56,383,496
      Accumulated deficit                                               (53,366,459)   (52,711,983)

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

      Total stockholders' equity                                          1,055,052      1,709,528
                                                                       ------------   ------------

                                                                       $  4,612,779   $  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
                                                       MARCH 31,
                                                 2001            2000
                                              ----------     -----------
<S>                                           <C>            <C>

Net sales                                     $  100,707     $   144,278


Cost of sales, excluding depreciation and
   amortization                                    1,146           6,661

Operating expenses
    Selling, general and administrative
            expense                              551,552       1,752,514
    Research and development expenses                 --          98,078
    Write-off of capitalized software                 --         625,336
    Depreciation and amortization expense        219,228         322,535
                                              ----------     -----------
                                                 770,780       2,798,463
                                              ----------     -----------
    Operating loss                              (671,219)     (2,660,846)

Other income (expense)
    Interest expense                              (4,507)        (37,919)
    Interest income                               21,250           2,283
    Equity in loss of unconsolidated
            affiliate                                 --      (4,265,615)
                                              ----------     -----------
                                                  16,743      (4,301,251)
                                              ----------     -----------

Net loss                                      $ (654,476)    $(6,962,097)
                                              ==========     ===========

Loss per share - basic and diluted

         Net loss per share                   $    (0.01)    $     (0.16)
                                              ==========     ===========

Weighted average shares outstanding           49,660,704      44,587,663
                                              ==========     ===========

</TABLE>

   The accompanying notes are an integral part of these statements.

                                       5
<PAGE>

                               CT HOLDINGS, INC.
                       UNAUDITED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>

                                                                  THREE MONTHS ENDED
                                                                       MARCH 31,
                                                                   2001          2000
                                                                ---------    -----------
<S>                                                            <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net loss                                                  $(654,476)   $(6,962,097)
      Adjustments to reconcile net loss to net cash
           used in operating activities:
                Depreciation and amortization                     219,228        322,535
                Equity in loss of unconsolidated affiliate             --      4,265,615
                Write-down of software development costs               --        625,336
                Common stock and options issued as payment
                      of expenses                                      --         25,001
                Noncash employee severance                             --      1,163,392
      Changes in operating assets and liabilities
           Accounts receivable                                    (44,583)        (3,611)
           Prepaid expenses                                        28,265         34,301
           Inventory                                                1,039         58,906
           Accounts payable and accrued expenses                  407,004        (44,830)
           Payable to affiliate                                   (28,447)            --
        Other assets                                                2,011          6,086
                                                                ---------    -----------
      NET CASH USED IN OPERATING ACTIVITIES                       (69,959)      (509,366)

CASH FLOWS FROM INVESTING ACTIVITIES
      Net payments on notes receivable from related parties        78,500        119,181
      Software development costs                                       --       (238,559)
                                                                ---------    -----------
      NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES          78,500       (119,378)

CASH FLOW FROM FINANCING ACTIVITIES
      Payments on notes payable                                   (29,896)       (52,966)
      Proceeds from sale of common stock                               --      1,035,852

                                                                ---------    -----------
      NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES         (29,896)       982,886
                                                                ---------    -----------
      Net increase (decrease) in cash
        and cash equivalents                                      (21,355)       354,142
      Cash and cash equivalents at the beginning
        of the period                                              21,647         13,897
                                                                ---------    -----------
      Cash and cash equivalents at the end
        of the period                                           $     292    $   368,039
                                                                =========    ===========
</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., formerly Citadel Technology, Inc. ("CT Holdings"), is a
developer of technology-based companies that provides early stage ventures with
a single source of management capital, as well as consulting on operations,
marketing and strategic planning.  Its development model is designed to enable
the start up companies with whom it partners to become online market leaders in
their industries.  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), which is headquartered in
Beverly, Massachusetts and develops decision-support applications for industry.
Using COR Technology, a rapid-application development 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.

In addition to its business development business, CT Holdings continues to
operate its "Citadel Technology" security software line, which is focused on
marketing security and administration software products for both computer
networks and desktop personal computers.  Its integrated, easy-to-use software
products enable network administrators to control access to network resources,
automate routine network maintenance tasks, and automatically shutdown and
restart servers and desktop PCs in the event of a network crash.  These software
products also enable individual PC users to control access to their desktops,
secure files, and index and retrieve files stored in a variety of storage media.
The Citadel Technology software products are designed to reduce the direct and
indirect costs of computer network operations, protect proprietary networks and
information, and otherwise improve overall office productivity.



Liquidity

The Company has incurred recurring operating losses and has a working capital
deficiency. The Company has used cash in operations of approximately $69,959
during the three months ended March 31, 2001. The Company has a cash balance of
approximately $292 at March 31, 2001 and current liabilities exceed current
assets by approximately $2.1 million. As outlined below, these assets do not
reflect the value that may be realized from our investments in Parago and River

                                       7
<PAGE>

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.

Over the next year the Company expects to generate cash from the sale of the
Company's software and will incur costs relating to such operations which may
result in a cash deficiency. 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 is currently
analyzing various strategic alternatives for its Citadel Technology security
software business, including new strategic alliances with third parties, new
applications of the technology, new third party licensing, joint venture
arrangements or the sale of the business line. While the Company has reduced
costs as it has transitioned the core focus of its business plans to business
development activities, 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 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 a minimum of $1 million to fund the plan through the remainder of 2001 and
substantially greater amounts if the Company expects to continue to acquire
investments 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 $5.3 million for the
three months ended March 31, 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 of Parago may ultimately provide an
appropriate return. 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

                                       8
<PAGE>


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.

BASIS OF PRESENTATION

The accompanying condensed financial statements of CT Holdings have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. The condensed financial
statements of CT Holdings as of March 31, 2001 and for the three month period
ended March 31, 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 month period ended
March 31, 2001 are not necessarily indicative of the results to be expected for
the entire year (see "Part II. Item 1. 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 months ended March 31, 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 months ended March 31, 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

                                       9
<PAGE>

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. The Company
continues to hold 20,000,000 shares of common stock of Parago at March 31, 2001,
representing approximately 45% of Parago's outstanding common stock at March 31,
2001.

Because the Company owned less than 20% of the ownership interest in River Logic
at March 31, 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 March 31, 2001 of
approximately $2.6 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 March 31, 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 8,324,105
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
March 31, 2001), which would be issued upon the conversion of Series B preferred
stock, have been excluded from the computation of loss per share.


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

                                       10
<PAGE>

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 March 31, 2001, the Company owns 45% of
Parago's outstanding shares of common stock.

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
March 31, 2001 and December 31, 2000 and for the three months ended March 31,
2001 and 2000.
<TABLE>
<CAPTION>

SUMMARIZED BALANCE SHEET        MARCH 31, 2001     DECEMBER 31, 2000
<S>                           <C>                 <C>

Current assets                      $17,938,803           $29,369,901
Noncurrent assets                    26,623,410            27,988,337
                                    -----------           -----------

   Total assets                     $44,562,213           $57,358,238
                                    ===========           ===========

Current liabilities                 $23,377,446           $31,002,400
Long-term debt and capital
   lease obligations                  4,103,533             3,490,910
                                    -----------           -----------
   Total liabilities                 27,480,979            34,493,310
                                    -----------           -----------
Redeemable common stock               2,000,000             2,000,000
Shareholders' equity                 15,081,234            20,864,928
                                    -----------           -----------
                                    $44,562,213           $57,358,238
                                    ===========           ===========



SUMMARIZED STATEMENT          THREE MONTHS ENDED  THREE MONTHS ENDED
 OF OPERATIONS                MARCH 31, 2001      MARCH 31, 2000
----------------------------------------------------------------------
  Revenues                          $ 5,309,868          $  3,499,090
  Operating expenses                  9,262,732            12,202,117
  Loss on sale of assets                 14,248                    --
  Operating loss EBITDA              (3,673,991)           (8,371,527)
  Net loss                           (6,102,345)          (10,469,353)
</TABLE>

Parago has incurred recurring operating losses and has a working capital
deficiency. Parago has a net operating loss, before interest, taxes,
depreciation and amortization, of $3.7 million during the three months ended
March 31, 2001, and a working capital deficiency of $5.4 million as of March 31,
2001. Consequently, Parago is seeking to raise additional capital to execute its
business plans. The Parago financial information does not

                                       11
<PAGE>

include any adjustments that might result from the outcome of this uncertainty
regarding Parago's liquidity and capital resources.

On May 7, 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, 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. The warrants are
immediately exercisable 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.

Parago reached a further understanding with TH Lee that Parago securityholders
(including CT Holdings) who meet the required suitability criteria will be
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 will maintain their percentage equity ownership in Parago, 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 elect not to participate in the offering, 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 not yet
determined whether it will participate in this offering.

The Company has agreed to convert shares of Parago common stock issued in
connection with an 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.


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

                                       12
<PAGE>

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 bridge loans to River Logic that together were convertible into 800,000
shares, in the aggregate, of common stock that represented approximately 3.8% of
the then currently outstanding capital stock of River Logic. Each of the bridge
loans (i) bears interest at a rate of 12% per annum through its first
anniversary and at one percent above the prime rate per annum thereafter, (ii)
is secured by certain assets of River Logic, (iii) is payable upon the Company's
demand and (iv) is prepayable by River Logic commencing on its third anniversary
date. 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 April 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. 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


In August 1998, Janssen-Meyers Associates L.P. ("JMA") filed a lawsuit against
the Company arising out of an alleged 1995 contract with the Company's
predecessor "("Old Citadel"). The suit alleged that Old Citadel breached a
letter of intent dated September 1995 and/or a Placement Agency Agreement dated
November 1995 between JMA and Old Citadel. As its damages, JMA claimed that it
was entitled to, among other things, the cash value of 1.8 million $0.89
warrants valued during May 1996. According to JMA's valuation of those warrants,
potential damages were alleged to exceed $40 million. The Company vigorously
disputes that it breached either the

                                       13
<PAGE>

letter of intent or the Placement Agency Agreement or that it is liable to JMA.
The lawsuit was styled Janssen-Meyers Associates, L.P. v. Citadel Technology,
Inc., and was filed in the Supreme Court of the State of New York, County of New
York. The Company removed the case to federal court in the Southern District of
New York.

Following mediation in July 2000, the Company entered into a settlement term
sheet, pursuant to which the Company and JMA agreed in principle to settle the
lawsuit for an aggregate of $3 million, in a combination of $1.5 million in cash
and 300,000 shares of the Company's 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, the Company recorded approximately $1,912,500 as a nonrecurring
charge related to the settlement of the litigation.

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, the Company is unable to estimate the potential
loss related to this matter. The Company has also filed a lawsuit against JMA to
recover excess amounts charged by JMA in connection with related bridge loans.

In June 2000, the Company was served with a lawsuit filed in state court in
Houston, Texas by Michael and Patricia Ferguson for breach of contract, tortious
interference and negligence. Specifically, the Fergusons claim that they were
damaged when they attempted to exercise certain warrants during a time when the
Company's related registration statement could not be used. On June 29, 2000,
the Company moved to transfer venue from Harris County, Texas, to Dallas County,
Texas. On June 30, 2000, the Company answered (subject to its Motion to Transfer
Venue). On July 28, 2000, also subject to its Motion to Transfer, the Company
filed a third party petition against Yorkton Securities, Inc. and Yorkton
Capital, Inc., which acted as the Fergusons' broker in connection with the
transaction at issue. In the third party petition, the Company contends that the
Yorkton entities are liable to the Company based on negligence and contribution
for, among other things, failing to disclose to the Fergusons that the
registration statement could not be used. The Company believes that the claims
asserted by the Fergusons are without merit and will vigorously defend the
claims and the Company will vigorously prosecute the claims it has filed against
Yorkton Securities.

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.

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

                                       14
<PAGE>

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

OVERVIEW

We 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.

In addition to this business development strategy, we continue to operate our
"Citadel Technology" security software line, which is focused on developing and
marketing security and administration software products for both computer
networks and desktop personal computers. Our integrated, easy-to-use software
products enable network administrators to control access to network resources,
automate routine network maintenance tasks, and automatically shutdown and
restart servers and desktop PCs in the event of a network crash. These software
products also enable individual PC users to control access to their desktops,
secure files, and index and retrieve files stored in a variety of storage media.
Our Citadel Technology software products are designed to reduce the direct and
indirect costs of computer network operations, protect proprietary networks and
information, and otherwise improve overall office productivity.

We continue to analyze various strategic alternatives for our Citadel Technology
security software business, including new strategic alliances with third
parties, new applications of the technology, new third party licensing or joint
venture arrangements.

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

                                       15
<PAGE>

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 March 31, 2001 included revenues of
approximately $5.3 million. Through March 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.

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 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 March 31, 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 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 months ended March 31,
2001 and the three months ended March 31, 2000, we recorded an "equity in loss
of unconsolidated affiliate" of $0 and $4,265,615, respectively. We understand
that Parago expects to incur net losses for the foreseeable future.

                                       16
<PAGE>


On May 7, 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, 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. The warrants are
immediately exercisable 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.

Parago reached a further understanding with TH Lee that Parago securityholders
(including CT Holdings) who meet the required suitability criteria will be
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 will maintain their percentage equity ownership in Parago, 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 elect not to participate in the offering, 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 has not yet determined whether it will
participate in this offering.


OVERVIEW OF RIVER LOGIC

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 bridge loans to River Logic that together were convertible into 800,000
shares, in the aggregate, of common stock that represented approximately 3.8% of
the then currently outstanding capital

                                       17
<PAGE>

stock of River Logic. Each of the bridge loans (i) bears interest at a rate of
12% per annum through its first anniversary and at one percent above the prime
rate per annum thereafter, (ii) is secured by certain assets of River Logic,
(iii) is payable upon the Company's demand and (iv) is prepayable by River Logic
commencing on its third anniversary date. 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 April 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 which 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

                                       18
<PAGE>

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.

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

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

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

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

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

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

                                       19
<PAGE>

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

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

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

                                       20
<PAGE>

acquire non-investment security assets, we may not be able to identify and
acquire suitable assets and businesses.

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 $69,959 during the
three months ended March 31, 2001. We have a cash balance of approximately $292
at March 31, 2001 and current liabilities exceed current assets by approximately
$2.1 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
three months ended March 31, 2001, substantially all of this financing has been
provided by related parties.

Over the next year we expect to generate cash from the sale of our software and
will incur costs relating to such operations which may result in a cash
deficiency. We will also continue to incur expenses relating to corporate
overhead and activities related to managing our investments and considering
additional opportunities. We are currently analyzing various strategic
alternatives for our Citadel Technology security software business, including
new strategic alliances with third parties, new applications of the technology,
new third party licensing, joint venture arrangements or the sale of the
business line. While we have reduced costs as we have transitioned the core
focus of our business plans to business development activities, we may require
cash from financing activities to fund the deficits expected over the next year.

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 a minimum of $1 million to fund the plan through
the remainder of 2001 and substantially greater amounts if we expect to continue
to acquire investments or if amounts become due to settle contingent
liabilities. Historically, we have 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 on terms that we 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
us 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
us and no revenue, to net revenue of approximately $5.3 million for the three
months ended March 31, 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 of Parago may ultimately provide an appropriate return.

                                       21
<PAGE>

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.

Similarly, our 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, we 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 $200,00
was paid in April 2001. Similar to the investments into Parago, we 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 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 HAVE RECEIVED A NOTICE OF DELISTING OF OUR SHARES OF COMMON STOCK FROM THE
NASDAQ SMALLCAP MARKET. OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ
SMALLCAP MARKET. IF OUR SHARES ARE DELISTED, THEY MAY TRADE IN THE OVER THE
COUNTER MARKET, ALTHOUGH THERE CAN BE NO ASSURANCES IN THIS REGARD.

Our common stock has been trading at below $1.00 per share for more than thirty
consecutive days, and we received a letter from the Nasdaq Market advising us
that if we were unable to demonstrate compliance with the Nasdaq Market's $1.00
minimum bid requirement for ten consecutive trading days before March 15, 2001,
our common stock would be subject to being de-listed at the close of business on
March 15, 2001. Because our shares did not meet the minimum bid requirement by
March 15, 2001, we received a letter from the Nasdaq Market that our shares
would be delisted.  In addition, we received additional notices that we failed
to comply with Nasdaq's net tangible assets/market capitalization/net income and
annual meeting requirements for continued listing. We requested a hearing to
address the Nasdaq notices, and the hearing was held on April 26, 2001.  The
Nasdaq has not yet provided any indication as to the determinations made by the
panel that held the hearing.  If a delisting were to occur, our common stock
would trade on the OTC Bulletin Board or in the "pink sheets" maintained by the
National Quotation Bureau, Inc. Such alternatives are generally considered to be
less efficient markets, and our stock price, as well as the liquidity of our
common stock, may be adversely impacted as a result.


                                       22
<PAGE>
WE ARE INVOLVED IN LEGAL PROCEEDINGS THAT COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS

We are involved in legal proceedings as described in "Item 3. Legal Proceedings"
and from time to time, we may be subject to other legal proceedings, including
but not limited to claims that we have infringed the intellectual property
rights of others, 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.

RISKS RELATED TO OUR INTERNET SUBSIDIARY, PARAGO, INC.

The following are some risks related to the business of Parago, Inc., our
Internet subsidiary, and should be considered in addition to the risk factors
described in this 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
of Parago at March 31, 2001.

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 to TH Lee and the participating offerees. Non-
participating offerees 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 not yet
determined whether to participate in the proposed transactions.

In addition, in the event Parago is successful in its proposed private placement
of Series E Stock, its current shareholders, including CT Holdings, may suffer
substantial dilution.  Parago's board of directors has approved a proposal to
reduce the conversion price of the Series D Stock issued to TH Lee and Watershed
to equal the conversion price of the Series E Stock, so that the Series D Stock
and Series E Stock would be based upon the same valuation.  This adjustment
could result in substantial dilution to the holders of Parago's securities,
including CT Holdings, and could possibly result in change in control of Parago.


                                       23
<PAGE>
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.

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 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 therefor.

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 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, 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 May
15, 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 Series A-2 Stock and Series A-3
Stock, including CT Holdings if it elects to participate, 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 cash flow, 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

                                      24
<PAGE>

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.

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

                                       25
<PAGE>

 .  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 $6.1 million (unaudited) for the three
months ended March 31, 2001 and an accumulated deficit of approximately $76.4
million (unaudited) at March 31, 2001. Parago anticipates that its operating
expenses will continue at 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.

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

Parago's ability to maintain and grow its business is dependent on its access to
sufficient funds to support its working capital and capital expenditure needs.
If Parago does not raise additional funds, its business and results of
operations will be seriously harmed, and our 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 Parago stockholders, including us.

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 March 31, 2001, and because of our
interlocking directors and officers, who collectively owned 16.7% of Parago's
outstanding shares of common stock as of March 31, 2001, Parago and we are
likely to face potential conflicts of interest relating to each other.

                                       26
<PAGE>

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, Victor K. Kiam II, 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 March 31, 2001. Steven B. Solomon owned
approximately 10.0% of our common stock as of March 31, 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 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.


         RISKS RELATED TO OUR CITADEL TECHNOLOGY BUSINESS

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

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

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

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

                                       27
<PAGE>

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.

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

We and our competitors now provide integrated suites of utility products. The
price of integrated utility suites is significantly less than the aggregate
price of stand-alone products that are

                                       28
<PAGE>

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

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

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

 .  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.

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.

                                       29
<PAGE>

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

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

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

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

THE RESULTS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE UNCERTAIN.

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

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

                                       30
<PAGE>

modifications. These organizational changes increase the risk that objectives
will not be met due to the allocation of valuable limited resources to implement
changes. Further, due to the uncertain nature of any of these undertakings,
these efforts may not be successful and we may not realize any benefit from
these efforts.

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

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

WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.

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

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

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

                                       31
<PAGE>

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

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

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

WE RELY ON MICROSOFT AND NOVELL TECHNOLOGY.

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

                                       32
<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2000

NET SALES

During the quarter ended March 31, 2001, the Company had net sales of $100,707,
a decrease of $43,571 or 30.2%, from net sales of $144,278 during the quarter
ended March 31, 2000. We attribute the decrease in our software product revenues
for the quarter ended March 31, 2001 to our shift in focus to our activities as
an Internet business developer.

COST OF SALES, EXCLUDING DEPRECIATION AND AMORTIZATION

The costs and expenses incurred in connection with producing the Company's
products were $1,146 during the quarter ended March 31, 2001, a decrease of
$5,515 or 82.8%, from cost of sales of $6,661 for the same period last year. The
decrease in our cost of sales can be attributed to the overall decrease in
revenues due to our focus on our Internet business development model.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the quarter ended March 31,
2001 were $551,552 as compared to $1,752,514 for the quarter ended March 31,
2000, or a decrease of $1,200,962 or 68.5%. The decrease in our selling, general
and administrative expenses for the quarter ended March 31, 2001 resulted
primarily from the shift in our business to an Internet business development
model and our decreased emphasis on selling and marketing activities related to
our software business. Accordingly, we have incurred significantly lower costs
in advertising, marketing and other general and administrative activities, as
well as reduced employee and recruiting expenses, which resulted from our
reduced headcount. The expenses for March 31, 2001 include $219,537 for
litigation expenses related to the JMA lawsuit described in "contingent
liability".

RESEARCH AND DEVELOPMENT EXPENSE

For the quarter ended March 31, 2001, research and development costs charged to
expense were $0 as compared to $98,078 for the same period last year, or a
decrease of $98,078, or 100%. The decrease in costs capitalized for the three
months ended March 31, 2001 related primarily to the halting of development work
on its products due to decreases in headcount.

WRITE-OFF OF CAPITALIZED SOFTWARE

In the three months ended March 31, 2001, purchased and capitalized software
costs were written down by $0 as compared to $625,334 for the three months ended
March 31, 2000, resulting in a decrease of $625,334 or 100%.  These write-offs
were recognized as a result of the net book value of some of our products
exceeding the net realizable value associated with those same products.

                                       33
<PAGE>

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization expense decreased $103,307, or 32.0%, to $219,228
for the quarter ended March 31, 2001 from $322,535 for the quarter ended March
31, 2000. 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 19
months, not developing any new software products over the last 12 months, and
writing off approximately $856,000 of unrecoverable capitalized software costs
over the last 15 months.

OTHER INCOME (EXPENSE)

Interest expense for the quarter ended March 31, 2001 was $4,507 as compared to
$37,919 for the same period in the prior year. This decrease in expense resulted
primarily from the Company having less interest bearing debt during the first
quarter of 2001 than we did in the first quarter of 2000. Equity in loss of
unconsolidated affiliate was $0 for the quarter ended March 31, 2001 and
$4,265,615 for the quarter ended March 31, 2000. The significant decreases in
the equity in loss of unconsolidated affiliate is due to the Company no longer
applying the equity method due to our share of Parago's accumulated losses being
in excess of 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 $21,250 during the quarter ended March 31, 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 March 31, 2001 were $292.


The net cash used in operations of $69,959 for the quarter ended March 31, 2001
is principally a result of the net loss of $654,476, partially offset by non-
cash charges including $219,228 of depreciation and amortization. The net cash
used in operations of $509,366 for the quarter ended March 31, 2000 is
principally a result of the net loss of $6,962,097, partially offset by non-cash
charges including $4,265,615 associated with equity in losses of unconsolidated
affiliate, $322,535 of depreciation and amortization and other non-cash charges
totaling $1,813,729.

Cash flows provided by investing activities was $78,500 for the three months
ended March 31, 2001, as compared to cash used in investing activities of
$119,378 for the three months ended March 31, 2000. The change in investing
activities is primarily due to the Company not utilizing any cash in the three
months ended March 31, 2001 for the purchase of fixed assets or the development
of software.

Cash flows used by financing activities were $29,896 for the quarter ended March
31, 2001, as compared to cash provided by financing activities of $982,886 for
the quarter ended March 31, 2000.

                                       34
<PAGE>

As a result of the aforementioned factors, cash and cash equivalents decreased
by $21,355 for the quarter ended March 31, 2001, versus an increase of $354,142
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 $69,959
during the quarter ended March 31, 2001. The Company had a cash balance of
approximately $292 at March 31, 2001 and current liabilities exceed current
assets by approximately $2.1 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 March 31,  2001,
substantially all of this financing has been provided by related parties.

Over the next year the Company expects to generate cash from the sale of the
Company's software and will incur costs relating to such operations which may
result in a cash deficiency. 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 is currently
analyzing various strategic alternatives for its Citadel Technology security
software business, including new strategic alliances with third parties, new
applications of the technology, new third party licensing, or joint venture
arrangements. While the Company has reduced costs as it has transitioned the
core focus of its business plans to business development activities, 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 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 a minimum of $1 million to fund the plan through the remainder of 2001 and
substantially greater amounts if the Company expects to continue to acquire
investments 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 $5.3 million for the
three months ended March 31, 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 of Parago may ultimately provide an
appropriate return. Until we are able to create liquidity from the company's
investments through sale to a strategic investor, an

                                       35
<PAGE>

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

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 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 the
first / second quarter of 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, the Company is unable to estimate the potential loss related to this
matter.

                                       36
<PAGE>

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

Set forth below are certain litigation matters in which we are a party. 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.

In August 1998, Janssen-Meyers Associates L.P. ("JMA") filed a lawsuit against
the Company arising out of an alleged 1995 contract with the Company's
predecessor "("Old Citadel"). The suit alleged that Old Citadel breached a
letter of intent dated September 1995 and/or a Placement Agency Agreement dated
November 1995 between JMA and Old Citadel. As its damages, JMA claimed that it
was entitled to, among other things, the cash value of 1.8 million $0.89
warrants valued during May 1996. According to JMA's valuation of those warrants,
potential damages were alleged to exceed $40 million. The Company vigorously
disputes that it breached either the letter of intent or the Placement Agency
Agreement or that it is liable to JMA. The lawsuit was styled Janssen-Meyers
Associates, L.P. v. Citadel Technology, Inc., and was filed in the Supreme Court
of the State of New York, County of New York. We removed the case to federal
court in the Southern District of New York.

Following mediation in July 2000, the Company entered into a settlement term
sheet, pursuant to which the Company and JMA agreed in principle to settle the
lawsuit for an aggregate of $3 million, in a combination of $1.5 million in cash
and 300,000 shares of the Company's 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, the Company recorded approximately $1,912,500 as a nonrecurring
charge related to the settlement of the litigation.

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, the Company is unable to estimate the potential
loss related to this matter. The Company has also filed a lawsuit against JMA to
recover excess amounts charged by JMA in connection with related bridge loans.

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

                                       37
<PAGE>

compensation awarded, if any. The Company has, when appropriate, recorded its
current estimate of the amounts necessary to settle the litigation.

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

ITEM 5.  OTHER INFORMATION

River Logic Financing

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 it held into
shares of 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 April 2001 approximately 10% of the capital stock of River Logic.

Parago Bridge Financing

On May 7, 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 Warrants to
purchase shares of Parago's Series A-3 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 by approximately 90% Parago's existing stockholders, including CT
Holdings.

Parago reached a further understanding with TH Lee that Parago securityholders
(including CT Holdings) who meet the required suitability criteria will be
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, 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 has
not yet determined whether to participate in this offering.

                                       38
<PAGE>

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, is being 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 elect
to participate may be added.  TH Lee will be liable for all obligations owed to
Comerica under the Guaranty, while each participating offeree 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. It is not
expected that Parago's outstanding securities will change in any material
respect before June 15, 2001, and as the Warrants to purchase shares of
Series A-3 Stock will not be issued until after June 15, 2001 they will 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 will assume 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 elect not to participate and those offerees who do
not perform all of their obligations under the Participation Agreement.

   3.  Subscription and Deposit of Escrow Amounts.  Simultaneous with its entry
       ------------------------------------------
into the Participation Agreement, each participating offeree will also become 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
will be required to deliver its fully completed and executed subscription
booklet, along with the participating offeree's Escrow Amount in immediately
available funds, which is equal to 33% of such participating offeree's Pro Rata
Percentage of $8,000,000. At such time, TH Lee will also deliver 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 will be 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

                                       39
<PAGE>

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 will issue Warrants to purchase
shares of its Series A-3 Stock, with a Common Stock Equivalent exercise price of
$0.01 per share. Parago will grant 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 pari passu 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

                                       40
<PAGE>

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.

   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 us 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:

                                       41
<PAGE>

     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 certain 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 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

                                       42
<PAGE>

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 will execute 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.

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

Nasdaq Hearing Status

Our common stock has been trading at below $1.00 per share for more than thirty
consecutive days, and we received a letter from the Nasdaq Market advising us
that if we were unable to demonstrate compliance with the Nasdaq Market's $1.00
minimum bid requirement for ten consecutive trading days before March 15, 2001,
our common stock would be subject to being de-listed at the close of business on
March 15, 2001. Because our shares did not meet the minimum bid requirement by
March 15, 2001, we received a letter from the Nasdaq Market that our shares
would be delisted.  In addition, we received additional notices that we failed
to comply with Nasdaq's net tangible assets/market capitalization/net income and
annual meeting requirements for continued listing. We requested a hearing to
address the Nasdaq notices, and the hearing was held on April 26, 2001.  The
Nasdaq has not yet provided any indication as to the determinations made by the
panel that held the hearing. If a delisting were to occur, our common stock
would trade on the OTC Bulletin Board maintained by the National Quotation
Bureau, Inc. Such alternatives are generally considered to be less efficient
markets, and our stock price, as well as the liquidity of our common stock, may
be adversely impacted as a result.

                                       43
<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: May 15, 2001      By: /s/ STEVEN B. SOLOMON
                Steven B. Solomon, President and Chief
                Executive Officer (Duly Authorized Signatory and
                Principal Executive and Financial Officer)

                                       44