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

                                 FORM 10-QSB

(Mark One)
  [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES     
          EXCHANGE ACT OF 1934
       For the quarterly period ended May 31, 1997

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

                                       
                      Commission file number: 0-08718

                                       
                   CITADEL COMPUTER SYSTEMS INCORPORATED
                   (Exact name of small business issuer 
                        as specified in its charter)


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

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

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

                                  ----------

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

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



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

Common Stock, par value $.01                                          
       18,536,902
---------------------------
Outstanding at October 14, 1997
  
  
     Transitional Small Business Disclosure Format Yes [ ] No [X]

                                       1
<PAGE>

UNLESS OTHERWISE INDICATED, SHARE AND PER SHARE INFORMATION CONTAINED IN THIS 
REPORT REFLECT THE COMPANY'S ONE-FOR-TWO REVERSE STOCK SPLIT, EFFECTIVE AS OF 
MAY 1, 1996.   

                                       
                        PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

    ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS

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

RESULTS OF OPERATIONS

    During the three months ended May 31, 1997, the Company had net sales of 
$492,274, a decrease of $632,137, or 56.2% over net sales of $1,124,411 
during the three months ended May 31, 1996. 

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

    The Company during the past six months has entered into a agreement with 
Microsoft relating to its Winshield product and has recently entered into a 
strategic alliance with Compaq Computer, whereby the Company's Winshield 
product will be bundled as part of the software offered on certain Presario 
computers shipped by Compaq to the educational market.  In October 1997, the 
Company entered into a strategic alliance with CORESTAFF with respect to 
CORESTAFF's investment in the Company and certain joint research and 
development, technology, licensing and marketing activities. The Company is 
continuing to explore similar arrangements with other market leaders in the 
technology industry and expects to finalize additional alliances in its third 
and fourth quarters.  The Company expects this channel to represent a 
significant percentage of the Company's revenue in the future.

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

                                       2
<PAGE>

    The Company has recently introduced its  IOMEGA endorsed C:\MORE! product 
and expects to launch its Network Recovery System product in the third 
quarter of fiscal 1998.  The Company is also beta testing a Windows 95 32-bit 
upgrade to its Winshield product and expects to launch additional new 
products and upgrades in future quarters of fiscal 1998 that will provide 
ease of use security for Internet and intranet applications on Microsoft and 
Novell platforms.

    The costs and expenses incurred in connection with producing the 
Company's products were $9,411 during the quarter, a decrease of $37,461 or 
80% over cost of sales of $46,872 for the same period last year.  As a 
percentage of sales, the Company's cost of sales for the quarter decreased 
from 4.2% for the three months ended May 31, 1996 to 1.9% for the three 
months ended May 31, 1997.  This resulted primarily from the company bringing 
its order fulfillment in-house versus out-sourcing this service as it had 
done in the past.  The Company, as part of its restructuring, has recently 
started to out-source a significant portion of its order fulfillment.  
Therefore, the Company would expect that these expenses may increase, as a 
percentage of sales, in future periods. However, as an increasing percentage 
of the Company's sales are sold through strategic alliances, electronic 
commerce, site licensing, etc., the actual impact on the Company's operating 
performance is expected to be minimal.

    Selling, general and administrative expenses for the three months ended 
May 31, 1997, were $1,003,695, a decrease of $437,378, or 30.4%, over 
selling, general and administrative expenses of $1,441,073 during the three 
months ended May 31, 1996.  Such expenses decreased primarily due to the 
Company's savings as a result of its reorganization, a decrease in its 
provision for sales returns and allowance for doubtful accounts and a 
decrease in the Company's trade-show activities as a result of the change in 
the Company's sales approach, as discussed earlier. These decreases were 
offset by start-up and marketing expenses associated with its new sales 
approach and new product introductions; expenses related to its status as a 
publicly traded company; and its continued efforts to expand its product 
offerings.  The Company expects as revenues increase, it will allocate 
additional resources to selling and marketing activities, thus these expenses 
may be expected to increase in future periods.

    Research and development costs charged to expense for the quarter were 
approximately $38,296 versus $48,723 for the same period last year, or a 
decrease of $10,427 or 21.4%.  As a result of the development activity on two 
of the Company's new products, which will be introduced during the second and 
third quarters of this year, approximately $146,000 of research and 
development costs were capitalized during the quarter versus approximately 
$70,000 for the same quarter last year.  The Company expects to launch 
additional new products and upgrades in the future quarters of fiscal 1998 
that will provide for ease of security solutions for Internet and intranet 
applications on Microsoft and Novell platforms.  

    Depreciation and amortization expense increased $109,524, or 66.5% to 
$274,172 from $164,648 for the three months ended May 31, 1997 and 1996, 
respectively.  This increase resulted from depreciation and amortization of 
certain acquisitions and products in this quarter that were not present in 
the previous year's quarter and the commencement of amortization on certain 
capitalized research and development costs relating to products that are 
available for sale.

    Interest expense for the three months ended May 31, 1997 decreased to  
$21,226 a decrease of $13,426 or 38.7%, over interest expense of $34,652 
during the same period last year.  

                                       3
<PAGE>

    During the three months ended May 31, 1996, the Company determined that 
it could no longer recover the value of certain stock and wrote the 
investment down by taking a charge to earnings of $1,000,000 (for further 
discussion on this write-down reference is made to ITEM 5 - OTHER INFORMATION 
of this report).

    As a result of the aforementioned the Company, for the three months ended 
May 31, 1997, reported a net loss of $861,119, compared to a net loss of 
approximately $1,611,557 for the same period last year.

LIQUIDITY AND CAPITAL RESOURCES

    The Company's cash and cash equivalents at May 31, 1997 were $37,504.

    Cash flows from operations were a negative $408,270 for the three months 
ended May 31, 1997, compared to negative $1,380,980 for the three months 
ended May 31, 1996.  This decrease was primarily due to a decrease in the net 
loss of the Company due to factors previously discussed and an increase in 
the Company's accounts payable and accrued expenses due to the Company's 
limited cash resources. 

    Cash used in investing activities was approximately $279,232 for the 
three months ended May 31, 1997, compared to approximately $195,535 for the 
same period last year.  This increase was due to an increase in development 
expenses resulting from increased development activities on new products and 
product upgrades.

    Cash flows provided by financing activities were $709,906 for the three 
months ended May 31, 1997, compared to $1,376,067 for the three months ended 
May 31, 1996.  This decrease was due primarily to less capital being raised 
during this quarter compared to the same quarter last year and less debt 
financing.

    As a result of the aforementioned factors, cash and cash equivalents 
increased by $22,404 for the three months ended May 31, 1997 versus a 
decrease of approximately $56,705 for the same period last year.

                                       4
<PAGE>

    In April 1997, the Company entered into an Asset Sale Agreement with 
Messrs. Gertner and Sharp, two of the Company's directors (the "Purchasers"). 
At the date of the agreement, the Purchasers owned approximately 31% of the 
Company's outstanding Common Stock at that date.  The Company sold to the 
Purchasers, $3,750,000 of trade accounts receivable and forgave indebtedness 
owed by the Purchasers to the Company in the amount of $72,000.  The carrying 
value of the receivables at April 1997, net of allowance, was 
$1,931,500. Consideration received consisted of 3,900,000 shares of the 
Company's Common Stock, with a market value of approximately $2,750,000, as 
of the date of the transaction (for accounting purposes, the stock was valued 
at approximately $2,003,500).  The shares acquired represent approximately 
23% of the Company's then issued and outstanding shares and are held as 
treasury shares.  Pursuant to the participation interest, Citadel will retain 
a profits participation interest in the Assets in the event the Purchasers 
collect in excess of $2,250,000 of the accounts receivable (after expenses of 
collection), in which case the Purchasers shall pay to Citadel 50% of such 
amounts collected in excess of $2,250,000.  The transaction resulted in no 
gain or loss to the Company.

    In November 1996, the Company made a one-year, $625,000, 8% loan to GGS 
Investment Company ("GGS"), a joint venture owned by Mr. Gertner, Chairman of 
the Board of the Company, Mr. Sharp, former Chief Executive Officer of the 
Company and Steven B. Solomon, former Chief Operating Officer of the Company, 
who were also directors and owned an aggregate of approximately 6,800,000 
shares of the Company's outstanding Common Stock, at that time.  The purpose 
of the joint venture was to invest in securities for short-term profits.  The 
loan agreement provided that interest would be waived for the first six 
months in consideration of 100% of the net profits during that period being 
paid to the Company.  The loan was guaranteed by each of the officers, and 
the guaranty was secured by a pledge of 754,000 shares of the Company's 
Common Stock, valued at approximately $1,282,000 as of the date of the 
transaction.

    The joint venture was not profitable, and the loan was discharged in 
April 1997 in the following manner: Mr. Solomon forgave $78,000 of accrued 
compensation due him, Mr. Gertner assumed debt of approximately $275,000 
(including accrued interest) due to a company controlled by him, Mr. Sharp 
received a credit against the loan of $200,000 as consideration for agreeing 
to terminate his noncancellable employment contract, and approximately 
$72,000 was forgiven in connection with the Asset Sale Agreement discussed 
above (reference is made to the Company's Annual Report on Form 10-KSB for 
fiscal year ended February 28, 1997 for further discussion).

    In March and April 1997, the Company conducted private placements of 
convertible debt, which is convertible into common stock at an exercise price 
equal to 75% of the average closing bid price for the five trading days prior 
to the date of conversion.  The Company raised net proceeds of approximately 
$628,000 in these offerings which was used for working capital.  In June 
1997, the Company conducted a private placement of mandatory convertible debt 
which is convertible into common stock at an exercise price equal to 75% of 
the average bid price for the five trading days prior to the date of 
conversion.  The Company raised net proceeds of $1,000,000 in this offering 
of which $500,000 was used to pay off convertible debt and $500,000 was used 
for working capital. 

    As noted earlier, the Company has recently completed a plan of 
reorganization which is expected to save the Company approximately $350,000 
per month in operating expenses.  In addition, the Company is working with 
various vendors and lenders to restructure payables and debt that is 
currently owed. However, even if the Company is successful with these 
endeavors, the 

                                      5
<PAGE>

Company does not believe that the current funds available will be sufficient 
to fund the Company's operations through the end of the year.  As a result 
the Company is seeking additional capital to fund its operations for the 
remainder of the year, after which the Company believes its operations will 
be self-sufficient. In October 1997, the Company received cash proceeds of 
$750,000 and other valuable consideration from CORESTAFF in connection with 
the sale of 2.5 million shares of the Company's common stock. While the 
Company has been successful in the past in raising additional capital when 
needed, there can be no assurance, however, that the Company will be successful
in raising capital in the future.  The Company is continuing to look for 
other sources of capital.
 
PART II.  OTHER INFORMATION

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

ITEM 1.   LEGAL PROCEEDINGS
  
    A former employee of the Company's predecessor filed a lawsuit against 
the Company and one of its officers and directors alleging that the Company 
and/or the individual owe the plaintiff additional stock options and seeking 
damages in excess of $2,600,000.  The Company and the individual believe such 
claims are without merit and intends to vigorously defend against the claim 
and is considering filing counterclaims.  The Company has filed an answer in 
the case, styled HEREDIA V. CITADEL, ET AL., in the 298th Court of Dallas 
County, Texas.

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

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

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

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

                                       6
<PAGE>

ITEM 5.   OTHER INFORMATION

     In March 1996, in connection with the sale of its restaurants to Miami Subs
USA, Inc. ("Miami Subs"), the Company received 1,325,000 shares of Miami Subs
common stock and the assumption by Miami Subs of certain restaurant
indebtedness.  The Company issued a nonrecourse, non-interest bearing,
promissory note to Miami Subs with a remaining principal amount of $1,250,000,
secured by a pledge of the aforementioned 1,325,000 shares of Miami Subs common
stock owned by the Company.  As previously discussed, the Company determined
that it could not recover its investment in the Miami Subs stock and through a
charge to earnings of $1,000,000 wrote down the investment during the quarter
ended May 31, 1996, to its market value as of July 19, 1996. Subsequent to May
31, 1996, the Company through a charge to equity further wrote down the
investment in the Miami Subs stock to the carrying value of the debt.  In June
1997, the Company tendered the stock to Miami Subs as payment in full of the
$1,250,000 debt owed by the Company to Miami Subs.  In addition, to settle
certain disputes between the Company and Miami Subs, Miami Subs issued to the
Company 200,000 shares of Miami Subs common stock and agreed to assume
additional indebtedness related the Company's former restaurant operations.  The
Company sold the shares for approximately $155,000 and used the proceeds for
working capital.

     On September 22, 1997, the Company entered into a definitive agreement with
CORESTAFF, Inc. regarding the purchase of approximately 13% (2.5 million shares)
of the Company's outstanding common stock for $750,000 and other valuable
consideration, with warrants to purchase an additional 2 million shares (1
million at $4 and 1 million at $5).  In addition, CORESTAFF's Software Services
Unit, Millennium, with a development staff of over 100, will supplement the
Company's research and development activities and each company will cross-sell
each others products and services with the Company being the exclusive
distributor of CORESTAFF's "First Step" software program, a peer-to-peer system
that enables users to easily access multiple systems requiring different user
codes.  The transaction was closed on October 6, 1997.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

10.6   Agreement, dated April 11, 1997, among Citadel, George Sharp and Gil
       Gertner. (incorporated by reference to Exhibit 99.1 of the Company's
       Current Report on Form 8-K filed April 11, 1997)

10.7   Form of Offshore Securities Subscription Agreement, Convertible Notes,
       Warrants and Registration Rights Agreement between Citadel Computer
       Systems Incorporated and First Bermuda Securities Limited. (incorporated
       by reference to Exhibits 99.1 through 99.4 of the Company's Current
       Report on Form 8-K filed March 26, 1997)

10.8   Form of Offshore Securities Subscription Agreement, Convertible Notes,
       Warrants and Registration Rights Agreement between Citadel Computer
       Systems Incorporated and Willora Company Ltd. (incorporated by reference
       to Exhibits 99.1 through 99.4 of the Company's Current Report on
       Form 8-K filed April 28, 1997)

                                       7
<PAGE>

10.9   Form of Offshore Securities Subscription Agreement, Convertible Notes,
       Warrants and Registration Rights Agreement between Citadel Computer
       Systems Incorporated and Silenus Ltd. (incorporated by reference to
       Exhibits 99.1 through 99.4 of the Company's Current Report on Form 8-K
       filed June 24, 1997)

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


(b)  REPORTS ON FORM 8-K.

     On March 26, 1997, the Company filed a Form 8-K with respect to an initial
closing on $1,000,000 of 5% redeemable convertible notes (which is part of a
private placement of up to $1,500,000 of 5% redeemable convertible notes) due
February 2000 (before fees and expenses).  The notes were sold to certain
offshore accredited investors pursuant to Section 4(2) of the Securities Act of
1933, as amended, and Regulation S.  The Company used the proceeds to retire
certain outstanding indebtedness and for working capital.  The agreement
contains certain conversion restrictions as to the percentage of notes that may
be converted and when such conversions may be made.  The principal amounts of
the notes may be converted, at the holders option, into common stock of the
Company at an exercise price between 80% and 75% of the average bid price for
the five trading days prior to the date of conversion, depending on the date of
conversion.  No conversions are allowed prior to 41 days from the date of
closing.  The Company had previously announced its intention to raise
approximately $3 million from a private placement during its fourth quarter.  To
date, an aggregate of $1,000,000 of the notes, as disclosed above, were sold in
the placement.  The Company determined to postpone the sale of the remaining
amounts, but may consider other financing alternatives in the future.

     On April 11, 1997, the Company filed a Form 8-K with respect to an Asset 
Sale Agreement with its Chairman and former President and Chief Executive 
Officer ("purchasers") whereby the Company agreed to sell certain trade 
receivables, amounting to approximately $3,735,000 (with a net carrying value 
of approximately $1,865,000) in exchange for 3,900,000 shares of the 
Company's common stock (approximate market value as of the date of the 
transaction $2,769,000).  In addition, the agreement called for certain 
indebtedness of the parties to be forgiven and certain indebtedness of the 
Company to be assumed by the purchasers.  The agreement also provides that 
the Company will receive 50% of the proceeds collected on the receivables 
sold in excess of $2,250,000 and the employment contract of the Company's 
former President be terminated immediately.  The transaction resulted in no 
gain or loss to the Company during the quarter.  On April 11, 1997, the Board 
of Directors of the Company authorized the redemption of all or a portion of 
its Convertible Redeemable Debentures due 2000 and Series B Convertible 
Preferred Stock upon notice of conversion.  The Board has initially 
authorized up to $1.5 million for redemption, in amounts, and at times 
depending on market conditions.

     On April 28, 1997, the Company filed a Form 8-K with respect to the
completion of a private placement of $500,000 of 8% Convertible Redeemable
Debentures as of April 11, 1997, due April

                                      8
<PAGE>

11, 2000.  The notes were sold to certain offshore accredited investors
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and
Regulation S.  The Company used the proceeds to retire certain outstanding
indebtedness and for working capital.  The agreement contains certain
redemption provisions which allow the Company to redeem all or a portion of
the notes at a certain premium, depending on the date of redemption.  The
principal amounts of the notes may be converted, after 45 days and at the
holders option, into common stock of the Company at an exercise price of 75%
of the average bid price for the five trading days prior to the date of
conversion.

     On June 24, 1997, the Company filed a Form 8-K with respect to the
completion of a private placement of $1,125,000 of 8% redeemable convertible
notes due June 9, 2000 (before fees and expenses).  The notes were sold to
certain offshore accredited investors pursuant to Section 4(2) of the Securities
Act of 1933, as amended, and Regulation S.  The Company used the proceeds to
retire certain convertible notes and for working capital.  The agreement
contains certain redemption provisions which allow the Company to redeem all or
a portion of the notes at a certain premium, depending on the date of
redemption.  The principal amounts of the notes may be converted, after 45 days
and at the holders option, into common stock of the Company at an exercise
price of 75% of the average bid price for the five trading days prior to the
date of conversion.


                                 SIGNATURES


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

      CITADEL COMPUTER SYSTEMS INCORPORATED
      (REGISTRANT)

<TABLE>
<S>                          <C>
Date: October 17, 1997       By: /s/ Steven B. Solomon
                                ----------------------------------------------------------
                             Steven B. Solomon, President and Chief Executive Officer
                             (Duly Authorized Signatory and Principal Executive Officer)


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

                                       9
<PAGE>

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








                                       10
<PAGE>

                     CITADEL COMPUTER SYSTEMS INCORPORATED

                          CONSOLIDATED BALANCE SHEETS

                                                          May 31,   February 28,
               ASSETS                                      1997        1997
                                                        ------------------------
CURRENT ASSETS
 Cash                                                   $   37,504   $    15,100
 Accounts receivable, less allowance for returns and
  doubtful accounts of $522,274 and $625,000               764,839       727,422
 Notes receivable from related parties                     337,968       870,000
 Marketable securities available for sale                1,250,000     1,250,000
 Other                                                     139,048        57,106
                                                        ------------------------

  Total current assets                                   2,529,359     2,919,628

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

PROPERTY AND EQUIPMENT, NET                                489,073       696,459

PURCHASED SOFTWARE, NET OF ACCUMULATED
 AMORTIZATION OF $1,049,662 AND $854,000                 4,200,738     4,396,398

CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
 NET OF ACCUMULATED AMORTIZATION OF $44,125 AND $19,000    694,174       573,388

OTHER ASSETS                                               265,252       263,220
                                                        ------------------------

                                                        $8,178,596   $10,724,093
                                                        ------------------------
                                                        ------------------------



         The accompanying notes are an integral part of these statements.

                                       11
<PAGE>

                      CITADEL COMPUTER SYSTEMS INCORPORATED

                     CONSOLIDATED BALANCE SHEETS - CONTINUED

                                                         May 31,   February 28,
       LIABILITIES AND STOCKHOLDERS' EQUITY               1997         1997
                                                     --------------------------

CURRENT LIABILITIES
 Cash overdraft                                      $        -     $   167,256
 Current maturities of long-term debt                     786,750       804,141
 Notes payable                                          2,194,847     2,456,087
 Accounts payable and accrued expenses                  2,589,140     2,253,481
                                                     --------------------------

   Total current liabilities                            5,570,737     5,680,965

LONG-TERM LIABILITIES
 Debt, less current maturities                          1,585,861     1,770,905

                                                     --------------------------
   Total liabilities                                    7,156,598     7,451,870

COMMITMENTS AND CONTINGENCIES                                 -             -

STOCKHOLDERS' EQUITY
 Common stock, $.01 par value per share; authorized,
  30,000,000 shares; issued, 18,492,700 shares
  at 5/31/97 and 16,501,980 shares at 2/28/97             184,927       165,020
 Preferred stock, $.01 par value per share;
  authorized, 1,000,000 shares; issued and
  outstanding, 545 shares of Series B convertible
  (liquidation value of $545,000)                             -               5
 Equity notes                                             850,000       300,000
 Additional paid-in capital                            13,444,151    13,370,627
 Accumulated deficit                                  (10,718,186)   (9,854,067)
 Unrealized loss on securities available for sale        (355,772)     (355,772)
 Treasury stock, at cost (4,164,613 shares at  
  5/31/97 and 264,613 shares at 2/28/97)               (2,386,121)     (353,590)
                                                     --------------------------

   Total stockholders' equity                           1,021,998     3,272,223
                                                     --------------------------

                                                     $  8,178,596   $10,724,093
                                                     --------------------------
                                                     --------------------------

         The accompanying notes are an integral part of these statements.

                                       12

<PAGE>

                       CITADEL COMPUTER SYSTEMS INCORPORATED

                       CONSOLIDATED STATEMENTS OF OPERATIONS
                        For the three months ended May 31,



                                                    1997            1996
                                                 --------------------------- 
REVENUES
  Sales                                          $   498,069     $ 1,183,116
  Less returns for allowances                          5,795          58,705
                                                 --------------------------- 
      Net sales                                      492,274       1,124,411

COST OF SALES                                          9,411          46,872
                                                 --------------------------- 
      Gross profit                                   482,863       1,077,539

OPERATING EXPENSES
  Selling, general and administrative expenses     1,003,695       1,441,073
  Depreciation and amortization                      274,172         164,648
  Research and development expense                    38,296          48,723
                                                 --------------------------- 
                                                   1,316,163       1,654,444
                                                 --------------------------- 
      Operating loss                                (833,300)       (576,905)

OTHER INCOME (EXPENSE)
  Interest expense                                   (21,226)        (34,652)
  Write-down of marketable securities                      -      (1,000,000)
  Other                                               (6,593)              -
                                                 --------------------------- 
                                                     (27,819)      1,034,652
                                                 --------------------------- 
      NET LOSS                                   $  (861,119)    $(1,611,557)
                                                 --------------------------- 
                                                 --------------------------- 
Loss per share                                   $      (.06)    $      (.14)
                                                 --------------------------- 
                                                 --------------------------- 
Weighted average shares outstanding               15,420,384      11,746,709
                                                 --------------------------- 
                                                 --------------------------- 

       The accompanying notes are an integral part of these statements.


                                       13

<PAGE>

                       CITADEL COMPUTER SYSTEMS INCORPORATED

                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                         For the three months ended May 31,


                                                         1997          1996
                                                     --------------------------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                           $  (861,119)  $(1,611,557)
  Adjustments to reconcile net loss to net cash 
   used by operating activities
      Write-down of available for sale securities              -     1,000,000
      Depreciation and amortization                      274,172       164,648
  Changes in operating assets and liabilities
    Accounts receivable                                  (93,917)     (479,489)
    Other receivables                                    (92,968)            -
    Other current assets                                 (81,942)      (73,208)
    Bank overdraft                                      (167,256)            -
    Accounts payable and accrued expenses                616,792      (506,408)
    Other assets                                          (2,032)      125,034
                                                     --------------------------
       NET CASH USED BY OPERATING ACTIVITIES            (408,270)   (1,380,980)

CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                  (133,321)     (125,270)
  Development of software                               (145,911)      (70,265)
                                                     --------------------------
       NET CASH USED BY INVESTING ACTIVITIES            (279,232)     (195,535)

CASH FLOWS FROM FINANCING ACTIVITIES
  Payments on notes payable                              (11,240)      (37,822)
  Proceeds from notes payable                                  -       415,000
  Repayments on long-term debt                           (67,280)            -
  Proceeds from sale of equity & convertible notes       695,000             -
  Proceeds from sale of common stock                      93,426     1,104,046
  Decrease in assets under contract for sale - net             -        38,586
                                                     --------------------------
       NET CASH PROVIDED BY FINANCING ACTIVITIES         709,906     1,376,067
                                                     --------------------------

                                       14

<PAGE>

                      CITADEL COMPUTER SYSTEMS INCORPORATED

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                       For the three months ended May 31,


                                                        1997            1996
                                                     --------------------------

Net increase (decrease) in cash                           22,404       (56,705)

Cash at beginning of the period                           15,100       125,565
                                                     --------------------------
Cash at end of the period                            $    37,504   $    68,860
                                                     --------------------------
                                                     --------------------------
Supplemental disclosure of cash flow information:
 Non Cash investing and financing transactions:
  Sale of receivables - net                          $ 1,931,500
  Sale of furniture and fixtures - net                   287,322
  Notes receivable from related parties                  625,000
  Long term debt assumed by purchasers                  (250,000)
  Notes payable assumed by purchasers                   (280,155)
  Accounts payable and accrued liabilities assumed      (281,136)
  Purchase of treasury stock                          (2,032,531)









                                       15

<PAGE>

                     CITADEL COMPUTER SYSTEMS INCORPORATED

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - BASIS OF PRESENTATION

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

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

NOTE B - STOCKHOLDERS' EQUITY

Balance at February 28, 1997                                  $3,272,223

Issuance of equity notes - net                                   700,000
Purchase of treasury stock                                    (2,032,531)
Conversion of debt to equity                                      85,000
Expenses of offerings                                           (141,575)
Net loss                                                        (861,119)

                                                              ----------
Balance at May 31, 1997                                       $1,021,998
                                                              ----------
                                                              ----------

                                       16
<PAGE>

                     CITADEL COMPUTER SYSTEMS INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE C - RELATED-PARTY TRANSACTIONS

   JOINT VENTURE

   In November 1996, the Company made a one-year, $625,000, 8% loan to GGS
   Investment Company (GGS), a joint venture owned by Gilbert Gertner,
   Chairman of the Board of the Company, George Sharp, Chief Executive
   Officer of the Company and Steven B. Solomon, Chief Operation Officer of
   the Company, who were also directors and owned approximately 46% of the
   Company's outstanding common stock at that time.  The purpose of the
   joint venture was to invest in securities for short-term profits.  The
   loan agreement provided that interest would be waived for the first
   six months in consideration of 100% of the net profits, during that
   period, being paid to the Company.

   The loan was guaranteed by each of the officers, and the guaranty was
   secured by the pledge of a total of 754,000 shares of the Company's
   common stock, valued at approximately $1,282,000 as of the date of the
   transaction.

   The joint venture was not profitable, and the loan was discharged by GGS
   in April 1997 in the following manner:  Mr. Solomon forgave $78,000 due
   from the Company to him, Mr. Gertner assumed debt of the Company to a
   corporation controlled by him in the principal amount of $250,000 plus
   accrued interest of approximately $25,000, and Mr. Sharp received a
   credit against the loan of $200,000 as consideration for agreeing to
   terminate his non-cancelable employee contract aggregating approximately
   $700,000 through November 2000 and $72,000 was forgiven in connection
   with the asset sale agreement discussed below.

   ASSET SALE AGREEMENT

   In April 1997, the Company entered into an asset sale agreement with its
   former Chief Executive Officer and its Chairman of the Board (the
   Purchasers) jointly.  At the date of the agreement, the Purchasers owned
   approximately 31% of the Company's outstanding common stock at that date.
   The Company sold to the Purchasers, $3,750,000 of trade accounts
   receivable and forgave indebtedness owed by the Purchasers to the Company
   in the amount of $72,000. The carrying value of the receivables at
   February 28, 1997, net of allowance, was $1,931,500.  Consideration
   received consisted of 3,900,000 shares of the Company's common stock with
   a market value of approximately $2,750,000 as of the date of the
   transaction.  For accounting purposes, the Company has valued the shares
   at approximately $2,003,500.  The agreement provides that the Company
   will also receive 50% of the proceeds in excess of $2,250,000 from
   collection of the receivables.  The transaction resulted in no gain or
   loss to the Company in the quarter.



                                       17
<PAGE>

                     CITADEL COMPUTER SYSTEMS INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE D - COMMITMENTS AND CONTINGENCIES

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

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

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

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

NOTE E - SUBSEQUENT EVENTS

   In June 1997, the Company sold $1,125,000 of 8% redeemable convertible 
   notes due June 9, 2000 (before fees and expenses).  The notes were sold 
   to offshore accredited investors pursuant to Section 4(2) of the Securities 
   Act of 1933, as amended, and Regulation S. The Company used the proceeds to 
   retire certain convertible notes and for working capital.

   On September 1997, the Company signed a definite letter of intent with
   CORESTAFF, Inc. ("CORESTAFF") whereby CORESTAFF agreed to purchase 2.5
   million shares of the Company's common stock for $750,000 and other 
   valuable consideration, with warrants to purchase an additional 2 million 
   shares (1 million at $4 and 1 million at $5). CORESTAFF is one of the 
   largest providers of information technology and staffing services in the U.S.
   As part of the agreement, CORESTAFF's Software Services Unit, Millenium 
   Computer Corporation, with a development staff in excess of 100, will
   provide development support for the Company.  In addition, each company
   will cross-sell each others products, with Citadel being the exclusive 
   distributor of CORESTAFF's "First Step" software program, a peer-to-peer 
   system that enables users to easily access multiple systems requiring 
   different user codes.   The transaction closed on October 6, 1997.

                                       18