<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 August 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 26, 1997


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

                                       1

<PAGE>


                         PART I.  FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

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


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

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

RESULTS OF OPERATIONS

     During the three months ended August 31, 1997, the Company had net sales 
of $346,094, a decrease of $1,416,313, or 80.4% over net sales of $1,762,407 
for the three months ended August 31, 1996.  During the six months ended 
August 31, 1997, the Company had net sales of $838,368, a decrease of 
$2,050,570, or 71.0% over net sales of $2,888,938 for the six months ended 
August 31, 1996. 

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

     The Company, during the past six months, has entered into strategic
alliances with many of the market leaders in the industry and expects to
continue to explore similar arrangements in the future. The Company recently
signed strategic alliance with CORESTAFF, Inc. ("CORESTAFF"), whereby both
companies have agreed to cross-sell each others products, with the Company being
the exclusive distributor of CORESTAFF's "First Step" software program, a peer-
to-peer system that enables users to easily access multiple systems requiring
different user codes.  In addition, 

                                         2
<PAGE>

the alliance provides that CORESTAFF's Software Services Unit, Millennium, 
with a development staff of over 100, will provide development support to 
the Company.  The Company has also started to market its products 
internationally.  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 well received internationally.  
The Company expects both these channels to represent a significant percentage 
of its revenues in the future.

     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 decreased from $108,318, or 6.2% of net sales for the 
three months ended August 31, 1996, to $14,375, or 4.2% for the three months 
ended August 31, 1997. The costs and expenses incurred in connection with 
producing the Company's products decreased from $155,190, or 5.4% of net 
sales for the six months ended August 31, 1996, to $23,786, or 2.8% for the 
three months ended August 31, 1997. On an overall basis, these expenses 
decreased, as a percentage of sales, as a result of the Company, during the 
first quarter, performing order fulfillment in-house versus outsourcing this 
service as it had done last year. In addition, as an increasing percentage of 
the Company's sales are sold through strategic alliances, electronic 
commerce, site licensing, etc., the costs and expenses incurred in connection 
with producing the Company's products will continue to decrease as a 
percentage of sales. During the second quarter, the Company, as part of its 
restructuring, started to outsource its order fulfillment again. Therefore, 
as the Company  expected, these expenses increased, as a percentage of sales, 
over the first quarter but still remain below prior years' numbers. This is 
in part  to the fact, as mentioned above, that as the percentage of the 
Company's sales that are sold through strategic alliances, electronic 
commerce, site licensing, etc. increases, the costs and expenses incurred in 
connection with producing the Company's products, as a percentage of sales, 
will decrease.

     Selling, general and administrative expenses for the three months ended 
August 31, 1997, were $781,858, a decrease of $967,109, or 55.3%, over 
selling, general and administrative expenses of $1,748,967 for the three 
months ended August 31, 1996.   Selling, general and administrative expenses 
for the six months ended August 31, 1997, were $1,785,553, a decrease of 
$1,416,145, or 44.2%, over selling, general and administrative expenses of 
$3,201,698 for the six months ended August 31, 1995.  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, and its continued efforts 
to expand its product offerings.  The Company expects as revenues increase, 
it will allocate additional resources to selling and marketing activities.  
Thus these expenses may be expected to increase in future periods;  however, 
as a percentage of sales these expenses should remain relatively constant.

     Research and development costs charged to expense for the three months 
ended August 31, 1997 were $15,683 versus $3,959,069 for the same period last 
year, or a decrease of $3,943,386 or 99.6%.  Research and development costs 
charged to expense for the six months ended August 31, 1997 were $53,979 
versus $4,007,792 for the same period last year, or a decrease of $3,953,813 
or 98.7%. Research and development costs for the three and six months ended 
August 31, 1996 included approximately $3,959,000 of  research and 
development costs written-off by the Company in connection with certain 
acquisitions and the purchase of technology from Xerox.  In addition, as a 
result of the development activity on two of the Company's new products 
(C:\MORE and NRS),  the Company capitalized research and development costs of 
approximately $135,000 and approximately $281,000 for the three and six 
months ended August 31, 1997, respectively, versus approximately 

                                     3
<PAGE>

$90,000 and $160,000 for the three and six months ended August 31, 1996, 
respectively. The Company expects to continue to increase development staff 
and 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 to $348,156 for the 
three months ended August 31, 1997, from $175,856, or an increase of 98.0% 
over the prior period.  Depreciation and amortization expense increased to 
$622,328 for the six months ended August 31, 1997, from $340,505, or 82.8% 
over the same period last year.  The increases resulted from depreciation 
and amortization of certain  acquisitions and products in these periods that 
were not present in the same period last year and the commencement of 
amortization on certain capitalized research and development costs relating 
to products that are available for sale.
 
     Interest expense for the three and six months ended August 31, 1997, was 
$29,502 and $50,728, respectively, versus $144,256 and $178,909 for the same 
periods last year.

     As a result of the aforementioned, the Company for the three and six 
months ended August 31, 1997, reported a net loss of $935,236 and $1,796,355, 
respectively, compared to a net loss of $4,352,812 and $5,976,028 for the 
three and six months ended August 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash and cash equivalents at August 31, 1997 were $38,201.

     Cash flows from operations were a negative $665,047 for the six months 
ended August 31, 1997, compared to negative $2,833,895 for the six months 
ended August 31, 1996.  The decrease was due principally to a decrease in the 
net loss of the Company due to factors previously discussed in this Report 
and an increase in the Company's accounts payable and accrued expenses due to 
the Company's limited cash resources.  

     Cash used in investing activities was $252,846 for the six months ended 
August 31, 1997, compared to $3,613,944 for the same period last year.  This 
decrease resulted from a decrease in net securities and business purchases 
and a decrease in capital expenditures, offset by an increase in capitalized 
costs associated with the development of the Company's software products.

     Cash flows provided by financing activities were $940,994 for the six 
months ended August 31, 1997, compared to $6,916,767 for the six months ended 
August 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  $23,101 for the six months ended August 31, 1997 versus an 
increase of $468,928 for the same period last year.

     The Company has recently completed a plan of restructuring 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 Company does not 
believe that the current funds available will be sufficient to fund the 
Company's operations through the end of its fiscal 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.  In addition, 
the Company is currently discussing with several investment banking firms the 
possibility of raising additional capital.  While the 

                                       4
<PAGE>

Company has been successful, in the past, in raising additional capital when 
needed, no assurances can be made that the Company will be successful in 
raising any such capital in the future; and that if successful, such will not 
come at the expense (through dilution) of existing shareholders.  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 intend to vigorously defend against the claim and are
considering filing counterclaims.  The Company has filed an answer in the case,
styled HEREDIA V. CITADEL, ET AL., in the 298th Court of Dallas County, Texas.

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

     The 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.

ITEM 5.  OTHER INFORMATION
  
     On October 6, 1997, the Company entered into a definitive purchase 
agreement with CORESTAFF whereby CORESTAFF purchased 2.5 million shares of 
the Company's Common Stock for $750,000 and other valuable consideration with 
warrants to purchase an additional 2 million shares (1 million at $4.00 per 
share and 1 million at $5.00 per share).  As part of the agreement, CORESTAFF 
will provide development support for the Company, and each Company will 
cross-sell each others products, with Citadel being the exclusive distributor 
of CORESTAFF's "First Step" software program, a peer-to-peer system that 
enables users to easily access multiple systems requiring different user 
codes.  CORESTAFF is one of the largest providers of information technology 
and staffing services in the U.S. CORESTAFF's development division, 
Millennium Computer Corporation, has in excess of 100 programmers and will 
provide development support services to the Company, as needed.

                                    5
<PAGE>

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


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a). EXHIBITS

     10.9    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 10-KSB for the year ended
             February 28, 1997).

     (b)  REPORTS ON FORM 8-K.  

             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). 

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

     

                                   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)


Date: November 4, 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)

                                            6
<PAGE>










         PART 1. FINANCIAL INFORMATION - ITEM 1. FINANCIAL STATEMENTS
                        CITADEL COMPUTER SYSTEMS, INC.






























                                       7
<PAGE>
                                       
                      CITADEL COMPUTER SYSTEMS INCORPORATED

                           CONSOLIDATED BALANCE SHEETS



<TABLE>
                                                             AUGUST 31,        FEBRUARY 28,
                        ASSETS                                 1997               1997
                                                            ----------        -----------
<S>                                                         <C>               <C>
CURRENT ASSETS
   Cash                                                     $   36,201        $    15,100 
   Accounts receivable, less allowance for returns and
     doubtful accounts of $489,958 and $625,000                770,773            727,422 
   Notes receivable from related parties                       327,548            870,000 
   Marketable securities available for sale                          -          1,250,000 
   Other                                                       311,980             57,106 
                                                            ----------        -----------
   Total current assets                                      1,446,502          2,919,628 

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

PROPERTY AND EQUIPMENT, NET                                    447,831            696,459 

PURCHASED SOFTWARE, NET OF ACCUMULATED
   AMORTIZATION OF $1,331,537 AND $854,000                   3,918,863          4,396,398 

CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
   NET OF ACCUMULATED AMORTIZATION
   OF $69,250 AND $19,000                                      803,972            573,388 

OTHER ASSETS                                                   267,006            263,220 
                                                            ----------        -----------
                                                            $6,884,174        $10,724,093 
                                                            ----------        -----------
                                                            ----------        -----------
</TABLE>


The accompanying notes are an integral part of these statements.



                                       8
<PAGE>

                      CITADEL COMPUTER SYSTEMS INCORPORATED

                     CONSOLIDATED BALANCE SHEETS - CONTINUED



<TABLE>
                                                            AUGUST 31,        FEBRUARY 28,
          LIABILITIES AND STOCKHOLDERS' EQUITY                 1997               1997
                                                          ------------        -----------
<S>                                                       <C>                 <C>
CURRENT LIABILITIES
   Cash overdraft                                         $    144,459        $   167,256 
   Current maturities of long-term debt                        847,781            804,141 
   Notes payable                                               894,701          2,456,087 
   Accounts payable and accrued expenses                     2,748,780          2,253,481 
                                                          ------------        -----------
   Total current liabilities                                 4,635,721          5,680,965 

LONG-TERM LIABILITIES
   Debt, less current liabilities                            1,410,918          1,770,905 
                                                          ------------        -----------
   Total liabilities                                         6,046,639          7,451,870 

COMMITMENTS AND CONTINGENCIES                                        -                  - 

STOCKHOLDERS' EQUITY
   Common stock, $.01 par value per share; authorized
     30,000,000 shares; issued, 18,857,800 shares
     at 8/31/97 and 16,501,980 shares at 2/28/97               188,578            165,020 
   Preferred stock, $.07 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                                              1,275,000            300,000 
   Additional paid-in capital                               13,410,500         13,370,627 
   Accumulated deficit                                     (11,650,422)        (9,854,067)
   Unrealized loss on securities available for sale                  -           (355,772)
   Treasury stock, at cost (4,164,613 shares at 
     8/31/97 and 264,613 shares at 2/28/97)                 (2,386,121)          (353,590)
                                                          ------------        -----------
   Total stockholders' equity                                  837,535          3,272,223 
                                                          ------------        -----------
                                                          $  6,884,174        $10,724,093 
                                                          ------------        -----------
                                                          ------------        -----------
</TABLE>



The accompanying notes are an integral part of these statements.



                                       9
<PAGE>

                      CITADEL COMPUTER SYSTEMS INCORPORATED

                      CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>

                                           THREE MONTHS ENDED              SIX MONTHS ENDED
                                                AUGUST 31,                    AUGUST 31,
                                            1997          1996            1997         1996
                                       ------------  -------------  -------------  ------------
<S>                                    <C>           <C>            <C>            <C>
Net sales                              $   346,094   $  1,762,407   $    838,368   $ 2,888,938 

Cost of sales                               14,375        108,318         23,786       155,190 
                                       ------------  -------------  -------------  ------------
       Gross profit                        331,719      1,654,089        814,582     2,733,748 

Operating expenses
    Selling, general and
      administrative expenses              781,858      1,748,967      1,785,553     3,201,698 
    Depreciation and amortization          348,152        175,856        622,328       340,505 
    Research and development costs          15,687      3,959,069         53,979     4,007,792 
                                       ------------  -------------  -------------  ------------
                                         1,145,697      5,883,892      2,461,860     7,549,995 
                                       ------------  -------------  -------------  ------------
    Operating income (loss)               (813,978)    (4,229,803)     1,617,278    (4,816,247)

Other income (expense)
    Interest expense                       (29,502)      (144,256)       (50,728)     (178,909)
    Other                                  107,916        259,422        101,323       257,303 
    Loss on marketable securities         (199,672)      (238,175)      (199,672)   (1,238,175)
                                       ------------  -------------  -------------  ------------
                                          (121,258)      (123,009)      (149,077)   (1,159,781)
                                       ------------  -------------  -------------  ------------

       Net loss                        $  (935,236)  $ (4,352,812)  $ (1,796,355)  $(5,976,028)
                                       ------------  -------------  -------------  ------------

Per share data
    Net loss per share                 $     (0.06)  $      (0.36)  $      (0.12)  $     (0.50)
                                       ------------  -------------  -------------  ------------
                                       ------------  -------------  -------------  ------------

Weighted average shares outstanding     14,427,452     12,030,060     14,424,452    11,888,385 
                                       ------------  -------------  -------------  ------------
                                       ------------  -------------  -------------  ------------
</TABLE>

The accompanying notes are an integral part of these statements.

                                      10
<PAGE>

                      CITADEL COMPUTER SYSTEMS INCORPORATED 
          
                      CONSOLIDATED STATEMENTS OF CASH FLOWS 
<TABLE>
                                                                   SIX MONTHS ENDED
                                                                      AUGUST 31,
                                                               1997                1996
                                                          -------------       ------------
<S>                                                       <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES    
   Net loss                                               $ (1,796,355)      $ (5,976,028)
   Adjustments to reconcile net loss to net cash                      
     used by operating activities
         Depreciation and amortization                         622,328            338,681 
         Net loss on marketable securities                     199,672          1,238,414 
         Research and development expenses acquired
           with stock                                                -          3,959,069 
   Changes in operating assets and liabilities                        
      Accounts receivable                                      (99,851)        (1,367,237)
      Other receivables                                        (82,548)                 -   
      Other current assets                                    (254,874)          (172,140)
      Bank overdraft                                           (22,797)                 -   
      Accounts payable and accrued expenses                    771,164           (952,686)
      Other assets                                              (3,786)           132,492 
      Other liabilities                                              -            (34,460)
                                                          -------------       ------------

   NET CASH USED BY OPERATING ACTIVITIES                      (667,047)        (2,833,895)
      
CASH FLOWS FROM INVESTING ACTIVITIES                                  
   Capital expenditures                                       (128,112)          (644,487)
   Securities transactions - net                               156,100         (2,238,414)
   Purchase of business                                              -           (571,043)
   Development of software                                    (280,834)          (160,000)
                                                          -------------       ------------
   NET CASH USED BY INVESTING ACTIVITIES                      (252,846)        (3,613,944)
      
CASH FLOW FROM FINANCING ACTIVITIES                                   
   Net change in notes payable                                (197,432)          (755,776)
   Proceeds from sale of equity & convertible notes          1,075,000          3,223,700 
   Proceeds from sale of common stock                           63,426          3,933,743 
   Proceeds from sale of debentures                                  -            515,100 
                                                          -------------       ------------
   NET CASH PROVIDED BY FINANCING ACTIVITIES                   940,994          6,916,767 
                                                          -------------       ------------
   Net increase (decrease) in cash                              21,101            468,928 
   Cash at the beginning of the period                          15,100            125,565 
                                                          -------------       ------------
   Cash at the end of the period                          $     36,201        $   594,493 
                                                          -------------       ------------
                                                          -------------       ------------
</TABLE>
The accompanying notes are an integral part of these statements. 

                                      11

<PAGE>

                      CITADEL COMPUTER SYSTEMS INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - BASIS OF PRESENTATION

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

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

NOTE B - STOCKHOLDERS' EQUITY

     During the period from March 1, 1997 through August 31, 1997, the 
Company's stockholders' equity reflected the following changes:

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

     Balance at May 31, 1997                  1,021,998

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

     Balance at August 31, 1997              $  837,535 
                                             -----------
                                             -----------


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<PAGE>

                      CITADEL COMPUTER SYSTEMS INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE C - 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 claims.

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

NOTE D - SUBSEQUENT EVENTS

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



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