UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C.  20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

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


                        COMMISSION FILE NUMBER: 000-33491

                         CITADEL SECURITY SOFTWARE INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

                  DELAWARE                                75-2873882
       (STATE OR OTHER JURISDICTION OF                 (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                IDENTIFICATION NO.)

           8750 N. CENTRAL EXPRESSWAY, SUITE 100, DALLAS, TEXAS 75231
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (214) 520-9292
                (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

      SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:  NONE

         SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (TITLE OF CLASS)

Check  whether  the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]

Check  if  disclosure of delinquent filers in response to Item 405 of Regulation
S-B  is  not contained in this form, and no disclosure will be contained, to the
best  of  Registrant's  knowledge, in definitive proxy or information statements
incorporated  by reference to such filing requirements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]

State issuer's revenue for its most recent fiscal year $1,311,800

As  of March 28, 2003 the last reported sale price of the Company's common stock
was  $1.21  per  share.  The aggregate market value of the voting and non-voting
common  stock  held by non-affiliates of the Company was $16,355,120 as of March
28,  2003.

As  of  March  28,  2003, there were 20,068,077 shares of common stock, $.01 par
value  per  share,  outstanding.

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


<PAGE>
<TABLE>
<CAPTION>
                                CITADEL SECURITY SOFTWARE INC.
                                         FORM 10-KSB
                                        ANNUAL REPORT
                                  FOR THE FISCAL YEAR ENDED
                                      DECEMBER 31, 2002

                                      Table of Contents

PART I                                                                                   Page
<S>       <C>                                                                            <C>
Item 1.   Description of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . .    3

Item 2.   Description of Property. . . . . . . . . . . . . . . . . . . . . . . . . . . .   24

Item 3.   Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   24

Item 4..  Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . .   24

PART II

Item 5.   Market for Common Equity and Related Stockholder Matters . . . . . . . . . . .   25

Item 6..  Management's Discussion and Analysis . . . . . . . . . . . . . . . . . . . . .   27

Item 7.   Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   37

Item 8.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . .   37

PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons; Compliance with
          Section 16(a) of the Exchange Act. . . . . . . . . . . . . . . . . . . . . . .   38

Item 10.  Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .   42

Item 11.  Security Ownership of Certain Beneficial Owners and Management . . . . . . . .   47

Item 12.  Certain Relationships and Related Transactions . . . . . . . . . . . . . . . .   48

Item 13.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . .   52

Item 14.  Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . .   53
</TABLE>

This Annual Report on Form 10-KSB contains forward-looking statements that
involve known and unknown risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. In this Report, the words anticipates,
believes, expects, estimates, intends, future and similar expressions identify
forward-looking statements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed elsewhere in this Report under
the heading Risk Factors as well as those discussed elsewhere in this Report,
and the risks discussed in our Securities and Exchange Commission filings.


                                        2
<PAGE>
PART I

ITEM 1.  DESCRIPTION OF BUSINESS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10-KSB contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Citadel
Security Software Inc. ("Citadel" or the "Company") bases these forward-looking
statements on its expectations and projections about future events, which
Citadel has derived from the information currently available to it. In addition,
from time to time, Citadel or its representatives may make forward-looking
statements orally or in writing. Furthermore, forward-looking statements may be
included in Citadel's filings with the Securities and Exchange Commission or
press releases or oral statements made by or with the approval of one of their
executive officers. For each of these forward-looking statements, Citadel claims
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements relate to future events or Citadel's future performance, including
but not limited to:

     -    benefits resulting from the spin-off from CT Holdings, Inc. ("CT
          Holdings") in May 2002;

     -    possible or assumed future results of operations;

     -    future revenue and earnings; and

     -    business and growth strategies.

Forward-looking statements are those that are not historical in nature,
particularly those that use terminology such as may, could, will, should,
likely, expects, anticipates, contemplates, estimates, believes, plans,
projected, predicts, potential or continue or the negative of these or similar
terms. Forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those expressed in any
forward-looking statements. These risks and uncertainties include, but are not
limited to, the following important factors with respect to Citadel: (1) the
uncertainty of general business and economic conditions, including the potential
for a more severe slowdown in business and governmental expenditures on
information technology and software; (2) the impact of competition, both
expected and unexpected; (3) adverse developments, outcomes and expenses in
legal proceedings; (4) the risk that underlying assumptions or expectations
related to the Distribution prove to be inaccurate or unrealized; (5) the
company's inability to realize the anticipated benefits of strategic and
operational initiatives related to increased productivity, new product
development, technological advances, and the achievement of sales growth across
the business segments; and (6) those described under Risk Factors.

Forward-looking statements are only predictions and speak only as of the date
they are made.  Readers are cautioned not to place undue reliance on
forward-looking statements.  The forward-looking events discussed in this report
on Form 10-KSB and other statements made from time to time by Citadel or its
representatives may not occur, and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about
Citadel.  Except for their ongoing obligations to disclose material information
as required by the federal securities laws, Citadel is not obligated to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.  In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this report on Form
10-KSB and in other statements made from time to time by Citadel or its
representatives might not occur.

OVERVIEW

Our products, Hercules(R), WinShield(R) Secure PC(TM) and NetOFF(TM) provide
solutions within the security software segment of the software industry. Our
strategy is to provide software solutions that address the growing computer
network security needs of business, government and other entities. We focus our
software solutions on the needs and issues of securing computing environments
from internal and external attacks, accidents or failures due to system
vulnerabilities or noncompliance with security policies. Companies that
establish security policies for access and use of


                                        3
<PAGE>
their network systems could use WinShield Secure PC ("Secure PC") to monitor
desktop compliance with the established policies. This same customer group could
also use NetOFF for protection of sensitive data that could be viewed on an
unattended computer. The same customers would use Hercules with industry leading
vulnerability assessment tools to scan for vulnerabilities and remediate them
under a controlled automated process.

Our security software solutions do not eliminate the need for firewalls, virtual
private network technologies, virus scanners, intrusion detection solutions or
vulnerability scanning assessment tools.  Our security software solutions work
in concert with these security technologies thereby solidifying the security
infrastructure.  System security begins with firewalls and virus scanners at the
perimeter of the network and work inward securing the servers and desktops to
reduce the opportunity for internal and external attacks, accidents or failures
due to system vulnerabilities or noncompliance with security policies.

The security software business of Citadel is based in Dallas, Texas and was
formed in 1996 through the acquisition of several technology businesses.  In its
early history the Company was managed as part of a group of technology
businesses owned by CT Holdings, a technology business incubator.  CT Holdings
had several software products which were sold directly to corporations and
government entities as well as to consumers through retail distribution
channels.  Following some additional technology acquisitions in 1999, portions
of the technologies, were carved out and contributed to separate businesses
which CT Holdings either managed or held as an investment.  The security
software business was reorganized in 1999.  Several of CT Holdings' software
product offerings were discontinued and the security software business was
downsized.  In 2000, Citadel's security software business was re-focused
primarily on product development.

Two of our products, Secure PC and NetOFF, were not heavily promoted during the
years 2000 and 2001.  However during these years enhancements to Secure PC and
NetOFF were released and the year 2001 saw the formal launch of the Hercules(R)
development project, an automated vulnerability remediation technology.  As the
planned product release date approached, business development and marketing
activities were initiated.  Late in the year 2001 and early in the year 2002
sales resources were added to begin building the sales pipeline in anticipation
of the March 2002 general release of Hercules as our flagship product.  In
November 2001 the board of directors approved the spin-out of Citadel from CT
Holdings and upon its completion in May 2002, the security software business was
transferred from CT Holdings to a Delaware corporation known as Citadel Security
Software Inc.  On May 20, 2002 Citadel commenced trading under the symbol CDSS
on the OTC Bulletin Board.

OUR MARKET

The market for software and hardware security technology has many players and
many products that secure networks systems from attack, accident or failure from
outside and inside influences.  Our company is actively engaged in two of the
security market categories, "policy administration" and "automated vulnerability
remediation".  Our products NetOFF and Secure PC participate in the policy
administration category and Hercules is positioned in the automated
vulnerability remediation market.  In a November 2002 study, commissioned by us,
Aberdeen Group states that the category "automated vulnerability remediation" is
a new class of solution that has evolved to provide the desired automation for
vulnerability remediation.  Hercules is our automated vulnerability remediation
solution which Aberdeen cited as the only identified flexible and automated
solution at the time the paper was released.

The security technology market categories and representative companies in those
categories are listed below.

<TABLE>
<CAPTION>
SECURITY MARKET CATEGORIES                  REPRESENTATIVE COMPANIES IN THE CATEGORY
<S>                                         <C>
    Perimeter Security
      Anti Virus                            Symantec, Network Associates, Computer Associates
      Firewall                              Cisco, Checkpoint, Sonicwall, Netscreen
      Virtual Private Networks (VPN)        Cisco, Checkpoint, Nortel, Sonicwall
      Authentication                        Microsoft, Watchguard, Bindview
      Intrusion Detection                   Internet Security Systems, Intrusion, Cisco, Symantec


                                        4
<PAGE>
    Security Inside the Firewall
      Policy Administration                 Citadel, Microsoft, RSA
      Application Security                  Microsoft, Oracle, Computer Associates (application providers)
      Automated Vulnerability Assessment    Internet Security Systems, Harris Corporation, Microsoft,
                                            Network Associates, Symantec, Qualys, eEye Digital Security,
                                            Foundstone, Vigilante, SPI Dynamics, Sanctum
      Automated Vulnerability Remediation   Citadel
</TABLE>

POLICY ADMINISTRATION AND COMPLIANCE

The policy administration and compliance market is a mature market with many
players including Symantec, Microsoft, RSA and Computer Associates to name a
few.  This market has grown around the need for organizations to control access
to desktop and system settings, thereby reducing costs associated with downtime
and reconfiguration of systems, and the need to control unauthorized access,
whether internal or external to the company, of confidential information thereby
meeting organizational or mandated security and privacy requirements.
Healthcare, Financial Services, Education, and Data Processing are just a few of
the industries that require tools to protect private information and to restrict
user access to system settings that can cause down time and require extensive
cost and time to repair.

Our strategy is to position NetOFF and WinShield Secure PC as critical
components to the overall security and privacy posture of organizations in the
Healthcare, Financial, Educational and applicable corporate industries.  We will
continue to market and license these products into the industries in which we
have gained a foothold. We will furthermore expand the new customer
relationships developed though sales of Hercules to include WinShield SecurePC
and NetOFF.

AUTOMATED VULNERABILITY REMEDIATION

The automated vulnerability remediation software market addresses the need for
frequent and timely repair of the growing number of identified vulnerabilities
plaguing network systems today.  A vulnerability is any weakness in software
code, system configuration or systems settings that may be exploited thereby
allowing the running of a malicious code or the unauthorized access by an
individual to obtain information or do damage to an organization's computing
environment.  Vulnerabilities fall into five classes, unnecessary services,
mis-configurations, backdoors, insecure accounts and software defects.
CERT/CC(R) identified 4,129 vulnerabilities in the year 2002.  This is an
increase of 69% over vulnerabilities identified in the year 2001.  The number of
vulnerabilities identified in the years 2000, 2001 and 2002 were 7,656
representing 92% of the total vulnerabilities identified by CERT/CC(R) since
1988.  The statistics reported by CERT/CC(R), a registered trademark of Carnegie
Mellon University's Software Engineering Institute, may be found on the website
www.cert.org.  The task facing information technology ("IT") professionals is
the process of discovering the vulnerabilities on their systems and then
determining how and when to remedy them.

IT professionals have used automated vulnerability assessment solutions to
perform the discovery process. These solutions are commonly known as assessment
scanners or scanners and have been generally available from several technology
companies for several years. These tools have gained wide use and acceptance for
success in auditing systems and identifying the weakness in network systems that
make an organization subject to attack, accident or failure due to the
unrepaired vulnerabilities. When a system scan is performed the number, type and
severity level of system vulnerabilities are reported and then the repair
process can begin. Until the advent of the Hercules automated remediation
solution, the subsequent repair process was largely performed manually. The
manual repair process today consists of staff personnel searching for the right
fix for each vulnerability, downloading of a software patch when required,
testing the fix or patch and then manually deploying the patch or resetting a
configuration to each individual network node. This is time consuming and in
most cases not a cost effective solution as the number of vulnerabilities
identified is growing faster than the ability to remediate them using the manual
process. Organizations that choose to ignore the making of repairs to vulnerable
systems expose the organization to growing security exposure and potentially
significant financial liability.


                                        5
<PAGE>
According to data published by the Internet Software Consortium in January 2003,
the number of Internet connected devices is nearly 172,000,000.  As the number
of Internet connected devices increases, the potential to fall behind the
growing repair backlog of system vulnerabilities is likely to increase
dramatically.  Solutions that provide patch management capabilities often work
with their own proprietary scanning assessment engine which eliminates the
independence of the audit and the subsequent repair of the system weakness.
Some patch management tools merely push out a software patch without regard to
the real need for the patch.  Finally, the repair tools available today do not
aggregate the results of independent scans from multiple scanning assessment
solutions.

In addition, the government has mandated security compliance in certain
industries and in all government agencies.  In May 1998, Presidential Decision
Directive 63 ("PDD 63") was issued and called for the establishment of a
framework to protect the national infrastructure and improve the security of
government systems.  The Government Information Security Reform Act ("GISRA")
passed in October 2000 requires that government computers and networks be
scanned and remediated frequently.  In November 1999 the Gramm-Leach-Bliley Act
("GLB") was passed and mandates the protection of personal data and information
in the financial industry.  The Health Insurance Portability and Accountability
Act of 1996 ("HIPAA") places similar demands on the privacy and security of
patient data.  In February 2003 the President issued the final report on the
Strategy to Secure Cyberspace which mandates initiatives for federal government
agencies and makes recommendations to industry and individuals to improve
network security across the country and around the world.  Affecting all public
companies is the Sarbanes-Oxley Act of 2002 which places emphasis on process and
access controls with respect to financial information systems used for public
company financial reporting.  And finally, the creation of the Department of
Homeland Security is driving security initiatives throughout all agencies of the
federal and state governments affecting not only the agencies but the companies
and organizations that provide products and services to the government.

OUR STRATEGY

Our objective to increase stockholder value is to leverage our market position
with Hercules in what we believe to be a first mover product in the "automated
vulnerability remediation market" including the mandates and initiatives
addressed above.  We will initially focus marketing and licensing efforts on the
governmental agencies, healthcare organizations and financial institutions
affected by the mandates and initiatives of HIPAA, GLB, and GISRA.  Each of
these acts places an emphasis on securing personal data and financial
information from intentional or unintentional unauthorized access.  In addition,
the President's final report on the Strategy to Secure Cyberspace is driving
systems security initiatives across all agencies in the federal government.  As
discussed above, CERT/CC(R) reports an increasing number of vulnerabilities each
calendar quarter.  In addition, the severity and sophistication of attacks is
increasing.  As a result, Chief Information Officers and Chief Security Officers
are under increased scrutiny and pressure to secure their systems.  We believe
the increased focus on securing systems before an attack, accident or failure of
an organization's network happens will result in increased licensing of our
software products.

As the worldwide economy improves, we believe that corporations will shift
spending to information technology, especially infrastructure security.  A
survey published in 2002 by the Gartner Group entitled "Top Spending Priorities
for 2003" cites that a top five spending priority for 2003 is security
infrastructure.  Merrill Lynch estimated in November 2002 that the computer
security market will grow 11% a year over the next five years, from $9.8 billion
in 2002 to $15 billion in 2006.  We believe that corporations will want to spend
their money wisely and will look for information technology products that
provide a realistic return on investment ("ROI").  We believe that one of the
key benefits of Hercules that can be demonstrated in the customer product
evaluations is a realistic ROI translating into real labor cost savings.  We
intend to focus a part of our direct sales force on the Fortune 1000 companies
that will drive the spending being forecast by the Gartner Group.

During 2002 we entered into product referral agreements and marketing alliances
with several vulnerability assessment scanning companies including eEye Digital
Security, Harris Corporation and Qualys Corporation.  Hercules is interoperable
with the scanning tools from these companies.  Hercules is also interoperable
with several other leading industry vulnerability assessment scanning solutions
including products from Internet Security Systems and Nessus as well as
Microsoft's version of HFNetChk.  We plan to formalize relationships with these
companies in 2003 however we do not know the form or extent of such
relationships and we might not be successful in forming such relationships.


                                        6
<PAGE>
We believe that customers of these companies that have purchased vulnerability
assessment scanning tools will also desire an automated vulnerability
remediation solution. In addition, we seek to enter into strategic alliances
related to the marketing and licensing of our products through select systems
integrators and information technology outsourcing companies.

Our planned release of Hercules version 2.0 in 2003 will expand our product
offering to run on Solaris UNIX and Red Hat Linux platforms in addition to the
Microsoft Windows platform.  This will allow us to license Hercules to a larger
and wider audience of companies.  We also intend to broaden the number of UNIX
platforms through new point releases and updates during 2003 and beyond.  As
more mandates for privacy and security are issued by the federal government we
intend to apply our technology to address the security needs required by
organizations to come into compliance with the mandates.  While we believe we
can be successful with this strategy there can be no assurance that we will be
successful.


OUR PRODUCTS

Our software products, Hercules, Secure PC and NetOFF, provide network security
administrators flexibility and scalability for automating the remediation of
network security vulnerabilities, and for managing security policies within
their computing environments.  Our security software solutions operate inside
the firewall and are designed to secure computers and networks against
unauthorized configuration changes, unapproved software installations and other
causes of security vulnerabilities in computing systems.  In addition, we offer
a solution for automatic remediation of security vulnerabilities found in the
computing environment.  We license our security software products for perpetual
use on standalone personal computers or on single or multiple networks across
single or multiple customer computing sites.  We offer customer support services
and vulnerability remediation updates under yearly renewable contracts.  We also
make our Hercules software available to our customers under a two-year
subscription license in addition to a perpetual license.

Our products, Hercules, Secure PC and NetOFF, provide customers with network
security solutions inside the firewall.  Our customers license our products for
various reasons ranging from

     -    a need for the automated remediation of numerous security
          vulnerabilities to preclude internal and external attacks (Hercules),

     -    a desire for centralized desktop policies management and compliance to
          protect information or to meet the mandates of information protection
          laws (Secure PC),

     -    or, a simple need for a security solution to limit access to an
          unattended computer (NetOFF).

Hercules, Secure PC and NetOFF also address the mandated requirements of HIPAA
and GLB legislation, which impose strict security and privacy requirements on
personal data in the healthcare and financial industries, respectively.  The
direct impact of these laws on revenue is difficult to specifically determine,
however revenue from healthcare organizations and financial institutions
including insurance companies represent approximately 63% and 41% of total
revenue for the years ended December 31, 2002 and 2001, respectively.  We expect
that these laws and the increasing concern for security and privacy of personal
data will drive further interest in our products from healthcare and financial
institutions.  In addition, we see a growing awareness of network security needs
from the federal government as well as companies and organizations across all
industries.


                                        7
<PAGE>
HERCULES

Hercules is a robust software solution that automates the process for the
remediation of security vulnerabilities in computing environments.  We believe
it is the only solution that can automatically deploy the appropriate resolution
of all five classes of vulnerabilities across a network thereby enhancing the
overall security of the computing environment.  Hercules version 1.0 was
released in March 2002.  Version 1.5 of Hercules was released for commercial
availability in June 2002.  Versions 1.75 and 1.8 were released in August 2002
and September 2002, respectively and in January 2003 version 1.9 was released.
These point release added new features, functionality, reports and
interoperability with multiple vulnerability assessment scanning solutions.

Using industry standard vulnerability assessment scanning tools ("scanners")
security administrators today can identify security vulnerabilities affecting
their computing environments. Under the approval and control of the system
administrator, Hercules imports the data output from the assessment scanners and
applies the available remediation signature to repair the identified
vulnerabilities in a system. Hercules was developed to be scanner neutral and is
interoperable with several scanners including those from eEye Digital Security,
Harris Corporation, Internet Security Systems, Inc., Microsoft, Nessus
Consulting and Qualys, Inc.

All five classes of vulnerabilities may be selected for remediation by a
security professional using Hercules.  These include mis-configurations,
backdoors, unnecessary services, unauthorized or weak permissions, and software
defects.  Many of the vulnerabilities in these classes cannot be repaired by
applying software patches, for example, forcing password changes or turning off
unnecessary services.  The Hercules remediation process may include the
elimination of a malicious code, the blocking of an unauthorized user or
unnecessary service, the time out of a password, the deployment of a vendor
patch or a multitude of other remediation solutions to repair identified system
vulnerabilities.  Hercules allows a security professional to increase security
compliance for servers and workstations across a widely dispersed network from a
central point of control.  Prior to Hercules, for most vulnerabilities to be
repaired, each server and workstation required the user or IT professional to
physically find the device, research and identify the vulnerability repair
solution, apply the repair, test it and finally, restart the device.  This
process is time consuming and expensive.  Hercules remediation is initiated and
controlled from a central console eliminating the need to resolve each
vulnerability individually at each network node, one-at-a-time.

The vulnerability repair solutions are called Hercules remediation signatures.
These signatures are written by our staff of security engineers who monitor
multiple sources of vulnerability identification.  These sources include
published reports from Security Focus, CERT/CC(R), FEDcirc, Mitre, the FBI and
other law enforcement and government agencies.  We also work closely with the
suppliers of the vulnerability assessment scanners to match their vulnerability
database.  When a new vulnerability is identified our security engineers
immediately prepare the remediation signature, test it and update our Hercules
Vulnerability Remediation database called VFlash.  The VFlash database is
available to our customers via the Internet.  When a security professional runs
Hercules an option may be selected to gather the latest signatures from the
VFlash database.  This procedure allows the customer to have the latest
remediation signature updates to repair the newly identified system
vulnerabilities.

Hercules is offered to our customers under a perpetual license or under a two
year subscription license.  As part of the perpetual licensing process for
Hercules, we require our customers to enter into a customer support contract
whereby the customer receives vulnerability remediation updates through VFlash.
These services are also included under the subscription based license model.

WINSHIELD  SECURE  PC

WinShield Secure PC ("Secure PC") provides advanced features that allow security
administrators to create, manage and deploy security policies for Windows
computing environments. Secure PC establishes user and group profiles to enforce
workstation and server security policies from a single point of control. These
security policies can be configured to prevent changes to system settings and
installation of unauthorized software. Secure PC "hardens" system files as a
first line of defense against viruses, malicious code and unauthorized access or
theft of confidential information. Hardening of files is crucial to defending
against intentional and unintentional security breaches.


                                        8
<PAGE>
Secure PC offers support for computers running Microsoft Windows versions 95,
98, ME, NT, 2000 and XP.  Its advanced set of features allows administrators to
apply security policies to users or groups of users within an organization.  We
sell this product in two configurations.  Secure PC Workstation is designed for
home, educational or commercial non-networked computers.  Secure PC Network is
designed for environments with multiple computers connected to a Windows or
Novell network.  The network version of Secure PC has been designed to scale
dynamically within network environments ranging from departmental local area
networks (LANs) to global wide area network (WAN) capacity and includes tools
that provide remote installation and configuration of the Secure PC client
software.   Additional benefits include:

     -    File and Folder Access Control. Secure PC folder protection enables
          administrators to control access to specific files, folders, desktop
          shortcuts or drives. Administrators can also secure files and folders
          as read-only and prevent changes to file attributes. This enables
          organization to meet the privacy requirements that are applicable to
          their organization or industry.

     -    Prevent Un-Authorized Software Installation. Part of SecurePC's
          capabilities include preventing installation and running of
          unauthorized software. Whether the software was brought in by an
          employee or downloaded from the Internet if it is not approved by the
          administrator, it can be restricted from installing or running.

     -    Application Control. Administrators can disable specific menu items in
          most standard Windows applications which can reduce the time and cost
          spent reconfiguring application settings.


NETOFF

NetOFF allows administrators to secure unattended workstations from unauthorized
access.  A PC that stays connected to a network while users attend meetings - or
leave the office for the night - is a wide-open door to the network.  Customer
files, patient records, classified information and proprietary documents are
open to disclosure and theft through unattended PCs.  With NetOFF, unattended
PCs are a reduced security risk.

NetOFF is designed to protect a network by shutting down unattended client PCs
automatically after a specified period of inactivity.  Through NetOFF,
administrators can define policies that trigger a graceful logoff on unattended
or inactive workstations.  Through a graceful logoff, all user data is saved,
applications are closed and workstations are logged off the network.  Network
administrators may also use NetOFF to shut down PCs to enhance backup operations
or assist with the distribution of new software and anti-viral updates.

NetOFF is available for Windows NT and NetWare platforms and supports Windows
95, 98, ME, Windows NT, Windows 2000 and Windows XP desktop PCs.  Additional
benefits of NetOFF include:

     -    Enhancing Overall Computer Security. Unattended desktop PCs subject
          the network and PC to a heightened risk of data theft. NetOFF protects
          confidential files and information by loading a screen blocker and
          logging off the unattended PCs, thus shutting off access to the data
          that resides on them and the networks they are connected to.

     -    Regulatory Compliance. NetOFF's unique screen blocking and automated
          logoff features help organizations achieve and maintain HIPAA and GLB
          compliance. HIPAA requires each organization that uses communications
          or networks to protect communications containing health information
          that are transmitted electronically over open networks so that they
          cannot be easily


                                        9
<PAGE>
          intercepted and interpreted by parties other than the intended
          recipient. GLB imposes similar regulatory requirements on financial
          institutions.

     -    Conserving Resources. Software license fees are often based on the
          number of actual users of the licensed product. Many companies pay
          excess license fees for programs that are left open on unattended
          computers. NetOFF helps customers reduce costs by logging off
          unattended PCs.

PRODUCT  DEVELOPMENT

In developing new Citadel Security products, we strive to meet the following
standards in product development:

     -    Standards Compliance and Network Compatibility. Our products comply
          with industry standards and are designed to be compatible with the
          leading operating systems, including Microsoft, Novell, Unix and Linux
          variants. To that end, our products are currently developed using
          standard tools such as XML, C++, and various platform dependent
          toolkits.

     -    Ease of Use. Our products are designed to function without extensive
          and continual user involvement. The aim is to simplify, not
          complicate, the user's work environment.

     -    Commitment to Common Criteria. In June 1993, the sponsoring
          organizations in the United States, Canada, and European Union started
          the Common Criteria project to align their separate criteria into a
          single set of IT security criteria. In 1999 the Common Criteria
          project became ISO International Standard 15408. Common Criteria is
          required for selling software solutions to certain agencies of the
          federal government. In 2003 our Hercules product will undergo rigorous
          testing under the Common Criteria standards.

We plan to capitalize on our existing security and network administration
technology and our expertise in research, development and marketing to expand
our business into products that address the growing market for security.  Our
internal development work remains the key component of bringing new product
lines to market.  In addition, we may pursue an alliance strategy to develop new
products.  Our internal research and development staff is currently working on
the development of the next generation of Hercules with an expected release in
2003.  Schedules for the development and release of high technology products are
inherently difficult to predict, and there can be no assurance that we will
achieve targeted customer shipment dates for any of our products, or at all.  In
addition, we may pursue acquisitions of technologies or products that complement
our products and product strategy.  Acquisitions of technology are risky and we
may not be successful in finding the right technology products or, once
acquired, integrating the new technology with existing development projects.

We capitalize software development costs at the time technological feasibility
is established which generally occurs at the time the design and analysis plan
is completed and programming begins.  Costs and expenses that do not qualify for
capitalization are expensed as product development expenses.  These costs and
expenses primarily consist of salaries, benefits and the direct and indirect
costs associated with the development staff or the specific development
projects.  During the year ended December 31, 2002 we incurred $285,105 of
product development expense which is net of $597,034 of capitalized software
development costs.  During the year ended December 31, 2001 we incurred product
development expenses of $118,432 net of $177,110 of capitalized software costs.

Capitalized software development costs and product development expense are
expected to increase as we begin development of new versions and point releases
of our products in the future. Product development expense and the
capitalization rate historically have fluctuated, and may continue to fluctuate
from period to period in the future depending upon the number and status of
software development projects that are in process and the related number of
employees assigned to those projects. At December 31, 2002 we employed twelve
(12) people in development


                                        10
<PAGE>
including our Chief Technology Officer. We plan to add development resources to
our team as is necessary to execute the development project plan in the future.

BUSINESS DEVELOPMENT

The Business Development team at Citadel Security has the following objectives.

     1.   Negotiate and secure strategic alliances related to our security
          products;
     2.   Build and maintain technology integration partner relationships
          including our current and new vulnerability assessment scanning
          partners;
     3.   Establish relationships with system integration vendors and
          professional services firms; and
     4.   Provide leads for the sales staff.

The Citadel Business Development team is currently engaged in building strategic
alliances related to marketing and licensing our software products.  With
Hercules we are seeking to work with companies which have technologies for
scanning for vulnerabilities within a network structure.  In 2002 we established
relationships with several scanning technology companies including eEye Digital
Security, Harris Corporation, and Qualys, Inc.  We are engaged in ongoing talks
with additional companies that have similar scanning solutions.  By entering
into strategic alliances with these companies, we seek to leverage their
existing installed customer base to sell Hercules and broaden their opportunity
to sell more scanners.

In addition to the leading scanning software companies, we will seek to enter
into relationships with information technology consulting firms and the "Big
Four" accounting firms specifically targeting those firms that are engaged in
security assurance practices.  We believe that the process used by these firms
and the time to implement these processes can be dramatically reduced by using
Hercules as a remediation tool.

The Business Development team manages system integrator and value added reseller
relationships.  While we sell our products primarily on a direct basis, we work
with a limited number of resellers that administer government procurement
contracts or have their business aligned with security products and practices.

Through alliances and marketing relationships, the Business Development team is
constantly looking for ways to increase the number of leads that can be
cultivated by the Citadel sales team.  By working with the sales teams of the
third parties that the Business Development team is working with, we believe
that we can increase the revenue generated from Citadel products without adding
significant cost, and provide qualified customer leads for our inside sales
staff.

SALES AND MARKETING

Our technology is licensed, not sold, to our end user customers.  The license
grants the customer the right to use the software technology in return for a
license fee.  Each customer receives a license agreement stating the terms under
which our software may be used.  The license appears on a screen during the
software installation process and a paper copy is included in the product
documentation shipped to the customer.  A customer may license our products for
perpetual use or for limited terms under a subscription.  In addition to
technology licenses we offer one year renewable customer support agreements
generally referred to as maintenance or post contract customer support
agreements.

Even though our technology is not sold we refer to a sales organization and
depend upon our sales representatives to sell licenses of our products to end
users. The sales organization consists of experienced sales representatives that
have been trained in the use of each of our products. As a general rule we hire
individuals with prior technology selling experience so that we have an
experienced sales representative available from the first day of employment. The
sales representatives are supported by a team of software engineers who are
responsible for doing demonstrations of the products to prospective customers
and responding to the technical issues raised during the product evaluations
done prior to the closing of the licensing process. Our sales representatives
are assigned territories by geography or by


                                       11
<PAGE>
industry. At December 31, 2002 we had sales representatives assigned to the
healthcare, federal government and the state and local government vertical
markets, as well as sales representatives assigned to geographic territories.
Within these verticals, current and prospective customers are segregated by
employee size focusing our most experienced sales consultants on the larger
opportunities. In addition, our executive team is highly involved in the selling
process.

Each sales representative is assigned a sales quota and receives incentive
compensation based on achieving the assigned sales target, in addition to a base
salary and benefits package.  Higher commissions may be earned when a sales
representative exceeds the sales quota.  Special incentives may be offered from
time-to-time to encourage the sales team to achieve specific sales goals.

In addition to our direct sales organization we work with a select group of
systems integrators to attempt to extend that reach to more customers and
maximize revenues.  Hercules was designed to operate with several of the
industry leading vulnerability assessment scanners and as such we leverage the
marketing arrangements, both formal and informal, with our scanning partners to
increase the marketing and licensing of Hercules into their established customer
base.  With respect to sales to federal and state government agencies, we have a
contract with the General Services Administration for federal government
agencies, we are authorized to sell under the Procurement of Computer Hardware
and Software ("PCHS") contract for purchasing by the hospitals under the
Department of Veteran Affairs, we are a Qualified Information Systems Vendor for
Texas and we are listed on the California Multiple Award Schedules (CMAS) for
sales to the state agencies in California.

Marketing and partnering efforts are targeted to provide qualified leads and
leverage the opportunities presented by our vulnerability assessment partners.
Lead generation sources include database mining of prospects and customers,
partner opportunities, opt-in email, trade show events and conferences, and the
Citadel web site.  Our web site allows software downloads and tracking.  Citadel
may also participate in partner events and regional seminars.  All leads are
entered and tracked utilizing a web based customer relationship management
system.

We believe that our direct selling model, coupled with targeted marketing
activities and focused alliance efforts with vulnerability scanning providers
and managed service providers, will enable Citadel to increase revenues.  These
efforts will provide the opportunity for increased market penetration without
requiring significant additional sales and marketing resources.

COMPETITION

The security software industry is intensely competitive and rapidly changing.
We compete against large companies (such as Microsoft, Novell, Cisco, Computer
Associates, Internet Security Systems, Network Associates, Symantec and others)
that offer network and desktop PC security and administration software as a
segment of their businesses.  We also compete with a large number of small
companies that offer security and administration software for networks and
desktop PCs as a portion of their product line.  Some of these competitors offer
products that address multiple aspects of network and desktop security and
administration and management, while other competitors market products that
provide narrow solutions.  Many of our competitors have longer operating
histories and significantly greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and a larger installed
customer base, than we do.  Further, many competitors have established
relationships with our customers and end users of our products.  Our competitors
could, in the future, introduce products with more features and lower prices
than our product offerings.  These companies could also bundle existing or new
products with other, more established products in order to compete with us.

CUSTOMERS AND PRODUCT LICENSING

We license our software products to corporations, government organizations and
entities that need to reduce computing vulnerabilities and manage security and
privacy policies within their computing environments. Our products are licensed
for perpetual use on standalone computers, within a single network, or within a
network of computers across single or multiple customer sites. Our license
agreement restricts the use of the software to a single computer or designated
network or site(s) and generally prohibits the reproduction, transfer, reverse
engineering and disclosure of


                                       12
<PAGE>
the program code. Our customers include, Washington Mutual Bank and hospitals
under the Department of Veterans Affairs and numerous healthcare, education and
corporate clients.

During the year ended December 31, 2002, revenue from hospitals under the
Department of Veterans Affairs accounted for approximately 23% of total revenue
and Washington Mutual Bank accounted for approximately 27% of total revenue.
During the year ended December 31, 2001, revenue from the Washington Mutual Bank
accounted for approximately 31% of total revenue.  The Company does not depend
upon any one customer or group of customers for a significant source of
recurring revenue.  We expect that in the future our customers will enter into
annual renewal contracts for post sale customer support but no assurance is
provided that this expectation will be met.

INTELLECTUAL PROPERTY RIGHTS

We regard some features of our software and documentation to be proprietary
intellectual property.  We have been and will be dependent in part on our
ability to protect our proprietary technology.  We will seek to use copyright,
trademarks, trade secret laws, confidentiality agreements and other measures if
necessary to establish and protect our rights in our proprietary technology.
Although we have filed a patent application with respect to some of our business
applications and intellectual property rights related to our Hercules software,
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, and we cannot
be certain that others will not develop substantially equivalent or superseding
proprietary technology.  Furthermore, there can be no assurance that any
confidentiality agreements between our employees or third parties and us will
provide meaningful protection of our proprietary information in the event of any
unauthorized use or disclosure of such proprietary information.

There can be no assurance that we will not become the subject of claims of
infringement with respect to intellectual property rights associated with our
products.  In addition, we may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights.  Any such claims could be time consuming and could
result in costly litigation or lead us to enter into royalty or licensing
agreements rather than disputing the merits of such claims.

EMPLOYEES

As of December 31, 2002, we had 38 employees, including 16 in sales, customer
support and marketing, 16 in product development and technical support, and 6 in
finance and administration.  Our future success depends in significant part upon
the continued service of our key technical and senior management personnel and
our continuing ability to retain highly qualified technical and managerial
personnel.  Competition for such personnel with security technology skills is
intense, and there can be no assurance that we can retain our key technical and
managerial employees or that we can assimilate or retain other highly qualified
technical and managerial personnel in the future.  None of our employees are
represented by a labor union.  We have not experienced any work stoppages and
consider our relations with our employees to be good.

GOVERNMENT REGULATION

Government regulation has not had a material effect on the conduct of our
business to date.  Except for the requirement of compliance with United States
export controls relating to the export of high technology products, we are not
subject to government approval procedures or other regulations for the licensing
of our products.  The nature of our business does not subject us to
environmental laws in any material manner.  As the United States and other
governments address via legislation the growing requirements for increased
security and privacy of data, particularly health, financial and personal
information, new opportunities to license our existing and future products may
arise.


                                       13
<PAGE>
RISK FACTORS

You should carefully consider each of the following risk factors and all of the
other information in this information statement. The following risks relate
principally to the Distribution and Citadel's business.  The risks and
uncertainties described below are not the only ones Citadel will face.
Additional risks and uncertainties not presently known to Citadel or that it
currently believes to be immaterial may also adversely affect Citadel's
business.

If any of the following risks and uncertainties develops into actual events, the
business, financial condition or results of operations of Citadel could be
materially adversely affected. If that happens, the trading prices of Citadel
Shares could decline significantly.

The risk factors below contain forward-looking statements regarding the
Distribution and Citadel. Actual results could differ materially from those set
forth in the forward-looking statements. See Cautionary Statement Regarding
Forward-Looking Statements above.

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 used cash in operations of approximately $593,000 during the
year ended December 31, 2002. We had a cash balance of approximately $13,000 at
December 31, 2002 and current liabilities exceeded current assets by
approximately $3,428,000 at that date. We had a stockholders' deficit of
approximately $2,327,000 at December 31, 2002. We have been and continue to be
dependent upon outside and related party financing to develop and market our
software products, perform our business development activities, and provide for
ongoing working capital requirements. During the year ended December 31, 2002,
substantially all of this financing was provided by related parties, although we
closed a private placement subsequent to year end from accredited third party
investors.

We expect to generate cash from the sale of our software and will incur costs
relating to such operations that may result in a cash deficiency. We will also
continue to incur expenses relating to corporate overhead and activities related
to our software business and considering additional opportunities.

Achieving positive cash flow is currently highly dependent upon increasing sales
of our products. We estimate we will need to raise additional capital to fund
our business plan through the remainder of 2003 and substantially greater funds
if amounts become due to settle contingent liabilities. We may be required to
seek additional funds from related parties, including our directors and
officers.  Prior to the Distribution, Citadel was funded by CT Holdings, which
obtained its funding on a short-term bridge basis from its Chief Executive
Officer and directors.  Following the Distribution, Citadel was funded by the
Company's CEO, directors and shareholders of the Company primarily through
issuance of notes payable.  While Citadel may seek similar funding 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.

In January 2003, the Company closed a private equity placement (the "January
2003 Financing") and received net proceeds of approximately $2,378,000 from the
issuance of 3,275,000 shares of unregistered common stock and issued warrants to
the investors for approximately 1,637,500 shares of common stock with an
exercise price of $1.50 per share and warrants to the placement agent for
245,625 shares of common stock at an exercise price of $1.18 per share.  If all
of the warrants were exercised approximately $2,700,000 of additional cash
proceeds would be available to the Company.  The Company's primary cash flow
strategy is to increase cash flow from the execution the operating plan which
relies primarily upon the fees to be received from the licensing of Hercules.
The January 2003 Financing coupled with management's forecast of revenue in 2003
is expected to provide sufficient working capital for the next twelve months.
However should the Company not achieve its revenue forecast additional financing
would be required.

We have received a report from our independent auditors for our fiscal year
ended December 31, 2002 containing an explanatory paragraph that describes the
uncertainty regarding our ability to continue as a going concern due to our
recurring operating losses and working capital deficiency.


                                       14
<PAGE>
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 as part of CT Holdings and as a stand alone company, any
inability to raise capital may require us to 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.

OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY THE UNCERTAIN
GEOPOLITICAL ENVIRONMENT, AND UNFAVORABLE ECONOMIC AND MARKET CONDITIONS

Adverse economic conditions worldwide have contributed to a material slowdown in
the software business and may continue to adversely impact our business,
resulting in:

     -    Reduced demand for our products as a result of a decrease in
          technology spending by our customers and potential customers;
     -    Increased price competition for our products; and
     -    Higher overhead costs as a percentage of revenues.

Terrorist and military actions may continue to put pressure on economic
conditions.  If the economic and market conditions in the United States do not
improve, or deteriorate further, we may continue to experience material adverse
impacts on our business, operating results, and financial condition as a
consequence of the above factors or otherwise.

CITADEL STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION IF FUTURE EQUITY
OFFERINGS ARE USED TO FUND OPERATIONS OR ACQUIRE COMPLEMENTARY BUSINESSES OR AS
A RESULT OF OPTION EXERCISES

If future operations or acquisitions are financed through the issuance of equity
securities, Citadel stockholders could experience significant dilution. In
addition, securities issued in connection with future financing activities or
potential acquisitions may have rights and preferences senior to the rights and
preferences of the Citadel Shares.

Citadel has granted options to purchase Citadel Shares to its directors and
employees and CT Holdings employees who became Citadel employees, and Citadel
will grant additional options in the future. Options to purchase approximately
2,995,000 Citadel Shares were outstanding immediately following the
Distribution, and Citadel has granted an additional 4,415,000 options since the
Distribution. The issuance of Citadel Shares upon the exercise of these options
may result in dilution to the Citadel stockholders.

CITADEL HAS VERY LIMITED OPERATING HISTORY AS AN INDEPENDENT PUBLIC COMPANY AND
HAS BEEN AND MAY CONTINUE TO BE UNABLE TO OPERATE PROFITABLY AS A STANDALONE
COMPANY

Although CT Holdings and its predecessors have operated as a reporting public
company since 1994 and sold security software since 1996, Citadel has a very
limited operating history as an independent public company after the
Distribution in May 2002. Prior to the Distribution, since the businesses that
comprise each of Citadel and CT Holdings were under one ultimate parent, they
were able to rely, to some degree, on the earnings, assets, and cash flow of
each other for capital requirements. After the Distribution, Citadel has relied
solely on the security software business for such requirements.  The security
software business has operated at a loss in the past for CT Holdings and for
Citadel following the Distribution, and there can be no assurance that such
losses will not continue or increase.  Additionally, Citadel's business relied
prior to the Distribution on CT Holdings for various financial, administrative
and managerial expertise in conducting its operations. Following the
Distribution, Citadel has maintained its own credit and banking relationships
and performed its own financial and investor relations functions. While a
significant number of key employees of CT Holdings have been employed by Citadel
following the Distribution, there can be no assurance that Citadel will be able
to successfully put in place the financial, administrative and managerial
structure necessary to operate as an independent public company, or that the
development of such structure will not require a significant amount of
management's time and other resources.


                                       15
<PAGE>
CITADEL'S HISTORICAL FINANCIAL INFORMATION PRIOR TO THE DISTRIBUTION MAY BE OF
LIMITED RELEVANCE

The financial statements of Citadel for periods prior to the Distribution
include the accounts of the security software division of CT Holdings'
operations and have been prepared on the historical cost basis in accordance
with accounting principles generally accepted in the United States and present
Citadel's financial position, results of operations, and cash flows as derived
from CT Holdings' historical financial statements. Certain CT Holdings assets,
liabilities and expenses were allocated to Citadel based on an estimate of the
proportion of corporate amounts allocable to Citadel, using such factors as
revenues, number of employees, and other relevant factors. In the opinion of
Citadel's management, the allocations were made on a reasonable basis. Citadel's
management believes that all amounts allocated to Citadel are a reasonable
representation of the costs that would have been incurred if Citadel had
performed these functions as a stand-alone company.

The historical financial information for periods prior to the Distribution
included in this Form 10-KSB does not reflect the results of operations,
financial position and cash flows of Citadel in the future and only estimates
the results of operations, financial position and cash flows of Citadel had it
operated as a separate stand-alone entity during the periods presented. The
financial information for periods prior to the Distribution included herein does
not reflect any changes that have occurred and may occur in the funding and
operations of Citadel as a result of the Distribution.


OUR EARNINGS AND STOCK PRICE ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

Due to the factors noted in this Form 10-KSB, 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.


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

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


MEMBERS OF CITADEL'S BOARD OF DIRECTORS AND MANAGEMENT MAY HAVE CONFLICTS OF
INTEREST AFTER THE DISTRIBUTION

Members of the board of directors and management of Citadel own shares of both
Citadel and CT Holdings common stock after the Distribution because of their
prior relationship and, in some cases, continuing relationships as directors or
executive officers with CT Holdings. In addition, following the Distribution,
two of the three initial directors of Citadel are also directors of CT Holdings,
and the Chief Executive Officer and Chief Financial Officer of Citadel also
continue to serve as Chief Executive Officer and Chief Financial Officer of CT
Holdings. These relationships could create, or appear to create, potential
conflicts of interest when Citadel's directors and management are faced with
decisions that could have different implications for Citadel and CT Holdings.
Examples of these types of decisions might include the resolution of disputes
arising out of the agreements governing the relationship between CT Holdings and
Citadel following the Distribution. Also, the appearance of conflicts, even if
such conflicts do not materialize, might adversely affect the public's
perception of Citadel following the Distribution.


                                       16
<PAGE>
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. Future
technology or market changes may cause some of our products to become obsolete
more quickly than expected.

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. As part of CT Holdings, we 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 FACE INTENSE PRICE-BASED COMPETITION FOR LICENSING OF OUR PRODUCTS.

Price competition is often intense in the software market, especially for
security software 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.

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 MAY BE UNSUCCESSFUL IN UTILIZING NEW DISTRIBUTION CHANNELS.

We currently offer products over the Internet, among other channels. 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.


                                       17
<PAGE>
PRODUCT RETURNS MAY AFFECT OUR NET REVENUES.

A customer may return a product under very limited circumstances during the
first thirty days from shipment for a replacement if the media is damaged or for
a full refund if the software does not perform in accordance with written
specifications.  Accordingly, the Company records a provision for returns
against license revenue in the same period the revenue is recorded.  The
provision is estimated based on historical product returns and other known data
as well as market and economic conditions.  An allowance for returns, allowances
and bad debts of $20,000 has been recorded at December 31, 2002.  In the future
this estimate may fluctuate from period to period due to factors including but
not limited to the value of actual returns, the average dollar value of licenses
granted in the period and the relative product revenue volume for the period.
In addition, future returns could exceed the reserves we have established, which
could have a material adverse affect on our operating results.

Current reseller agreements do not provide for a contractual right of return,
future price concessions, or minimum purchase commitments.  Payment is not
contingent upon the reseller's future licensing of products.  Revenue generated
from products licensed through various marketing channels where the right of
return might explicitly or implicitly exist is reduced by reserves for estimated
product returns.  Such reserves are estimates developed by management based on
returns history and current economic and market trends.  Management determined
that no reserve for returns from resellers was required at December 31, 2002 or
2001. However, future returns could exceed the reserves we have established,
which could have a material adverse affect on our operating results.

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

We are increasingly emphasizing licenses to corporations and small businesses
through volume licensing agreements. These licensing arrangements tend to
involve a longer sales cycle than 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.

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 AND SALES CYCLES ARE DIFFICULT TO PREDICT.

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

WE MUST MANAGE AND RESTRUCTURE OUR OPERATIONS EFFECTIVELY.

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


                                       18
<PAGE>
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, sales and 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 may require
ongoing stockholder approval.

OUR SOFTWARE MAY BE SUBJECT TO DEFECTS AND PRODUCT LIABILITY.

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

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

While we have not been the target of software viruses or other attacks
specifically designed to impede the performance of our products or disrupt our
Web site, such viruses or other attacks could be created and deployed against
our products or Web site 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 THIRD PARTY TECHNOLOGIES.

Our software products are designed to run on multiple operating systems and
integrate with security products from other vendors. Although we believe that
the target operating systems and products 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 we do not support.
Moreover, if our products and technology are not compatible with new
developments from these companies, as to which there can be no assurances, our
business, results of operations and financial condition could be materially and
adversely affected.

WE RELY ON OUTSIDE RESEARCH ORGANIZATIONS.

With respect to security vulnerability research, we have contracted with
Security Focus to provide updated vulnerability research data in addition to our
own research efforts. Our own research team uses publicly available research to
find information on vulnerabilities and their attributes. There can be no
assurance that Security Focus or the publicly available sites will continue to
operate as a going concern and that the data they provide will be delivered
without interruption.

WE FACE AGGRESSIVE COMPETITION IN MANY AREAS OF OUR BUSINESS, AND OUR BUSINESS
WILL BE HARMED IF WE FAIL TO COMPETE EFFECTIVELY.

We encounter aggressive competition from numerous competitors in many areas of
our business. Many of our current and potential competitors have longer
operating histories, greater name recognition and substantially greater
financial,


                                       19
<PAGE>
technical and marketing resources than we have. We may not be able to compete
effectively with these competitors. To remain competitive, we must develop new
products and periodically enhance our existing products in a timely manner. We
anticipate that we may have to adjust the prices of many of our products to stay
competitive. In addition, new competitors may emerge, and entire product lines
may be threatened by new technologies or market trends that reduce the value of
these product lines. The market in which we compete is influenced by the
strategic direction of major computer hardware manufacturers and operating
system software 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.

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, WHICH
COULD CAUSE OUR STOCK PRICE TO DECREASE.

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

     -    the timing and volume of customer orders, customer cancellations, and
          reductions in orders by our distributors;
     -    the timing and amount of our expenses;
     -    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
revenues 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. If so,
the market price of our stock would likely decrease.

OUR MANAGEMENT TEAM IS NEW AND ITS WORKING RELATIONSHIPS ARE UNTESTED.

We have only recently assembled our management team, as part of the Distribution
and changes in our operating structure. Some members of our management team have
worked with each other in the past, although we cannot assess at this time the
effectiveness of their working relationships and may be required to make changes
in the management team to achieve our objectives.

WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.

We regard our software as proprietary and underlying technology as proprietary.
We seek to protect our proprietary rights through a combination of
confidentiality agreements and copyright, patent, trademark and trade secret
laws. However, we do not employ technology to prevent copying of our products.
Third parties may copy aspects of our products or otherwise obtain and use our
proprietary information without authorization or develop similar technology
independently.

We do not have any patents or statutory copyrights on any of our proprietary
technology that we believe to be material to our future success. Although we
have filed a provisional patent application with respect to some of our business
applications and intellectual property rights related to our Hercules software,
we have been issued no patents and we cannot assure you that any will be issued
from our provisional patent application. Our future patents, if any, may be
successfully challenged and may not provide us with any competitive advantages.
We may not develop proprietary products or technologies that are patentable and
other parties may have prior claims.

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.


                                       20
<PAGE>
Patent, trademark and trade secret protection is important to us because
developing and marketing new technologies and products is time-consuming and
expensive. We do not own any U.S. or foreign patents or registered intellectual
property. We may not obtain issued patents or other protection from any future
patent applications owned by or licensed to us.

Our competitive position is also dependent upon unpatented trade secrets. Trade
secrets are difficult to protect. Our competitors may independently develop
proprietary information and techniques that are substantially equivalent to ours
or otherwise gain access to our trade secrets, such as through unauthorized or
inadvertent disclosure of our trade secrets.

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, AND MAY BECOME INVOLVED IN FUTURE LITIGATION,
WHICH MAY RESULT IN SUBSTANTIAL EXPENSE AND MAY DIVERT OUR ATTENTION FROM THE
IMPLEMENTATION OF OUR BUSINESS STRATEGY.

We believe that the success of our business depends, in part, on obtaining
intellectual property protection for our products, defending our intellectual
property once obtained and preserving our trade secrets. Litigation may be
necessary to enforce our intellectual property rights, to protect our trade
secrets and to determine the validity and scope of our proprietary rights. Any
litigation could result in substantial expense and diversion of our attention
from our business, and may not adequately protect our intellectual property
rights.

In addition, we may be sued by third parties which claim that our products
infringe the intellectual property rights of others. This risk is exacerbated by
the fact that the validity and breadth of claims covered in technology patents
involve complex legal and factual questions for which important legal principles
are unresolved. Any litigation or claims against us, whether or not valid, could
result in substantial costs, place a significant strain on our financial
resources, divert management resources and harm our reputation. Such claims
could result in awards of substantial damages, which could have a significant
adverse impact on our results of operations. In addition, intellectual property
litigation or claims could force us to:

     -    cease licensing, incorporating or using any of our products that
          incorporate the challenged intellectual property, which would
          adversely affect our revenue;
     -    obtain a license from the holder of the infringed intellectual
          property right, which license may not be available on reasonable
          terms, if at all; and
     -    redesign our products, which would be costly and time-consuming.

As part of the Distribution, CT Holdings has assigned to us a legal proceeding
in which it is a defendant. From time to time, we may be subject to additional
legal claims incidental to our business. We may suffer an unfavorable outcome as
a result of one or more claims. We do not expect the final resolution of these
claims to have a material adverse effect on our financial position, individually
or in the aggregate. However, depending on the amount and timing of unfavorable
resolutions of claims against us, or the costs of settlement or litigation, our
future results of operations or cash flows could be materially adversely
affected.

CT Holdings is a party to some legal proceedings, to which Citadel is not a
party. If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time CT
Holdings effected the Distribution, CT Holdings or Citadel (1) was insolvent;
(2) was rendered insolvent by reason of the Distribution; (3) was engaged in a
business or transaction for which their respective remaining assets constituted
unreasonably small capital; or (4) intended to incur, or believed it would
incur, debts beyond its ability to pay as such debts matured, such court may be
asked to void the Distribution (in whole or in part) as a fraudulent conveyance
and require that the


                                       21
<PAGE>
stockholders return the Citadel Shares (in whole or in part) to CT Holdings or
require Citadel to fund certain liabilities for the benefit of creditors. The
measure of insolvency for purposes of the foregoing will vary depending upon the
jurisdiction whose law is being applied. Generally, however, CT Holdings or
Citadel would be considered insolvent if the fair value of their respective
assets were less than the amount of their respective liabilities or if they
incurred debt beyond their ability to repay such debt as it matures. See ITEM 3.
LEGAL PROCEEDINGS.

CITADEL MAY INCUR INCREASED EXPENSES IF THE TRANSITION SERVICES AGREEMENT WITH
CT HOLDINGS IS TERMINATED

In connection with the Distribution, Citadel will enter into a transition
services agreement with CT Holdings. This agreement will provide that CT
Holdings and Citadel will provide each other services in such areas as
information management and technology, employee benefits administration,
payroll, financial accounting and reporting, claims administration and
reporting, and other areas where CT Holdings and Citadel may need transitional
assistance and support following the Distribution. The agreement will generally
extend for one year after the Distribution, but may be terminated earlier under
certain circumstances, including a default. If the agreement is terminated,
Citadel may be required to obtain such services from a third party or increase
its headcount to provide such services. This could be more expensive than the
fees which Citadel will be required to pay under the transition services
agreement.

SOME PROVISIONS OF CITADEL'S CERTIFICATE OF INCORPORATION, BYLAWS AND THE TAX
DISAFFILIATION AGREEMENT MAY DISCOURAGE TAKEOVERS

Citadel's certificate of incorporation and bylaws contain some anti-takeover
provisions that may make more difficult or  expensive or that may discourage a
tender offer, change in control or takeover attempt that is opposed by Citadel's
board of directors. In particular, Citadel's certificate of incorporation and
bylaws:

     (1)  classify Citadel's board of directors into three groups, so that
          stockholders elect only one-third of the board each year;
     (2)  permit stockholders to remove directors only for cause and only by the
          affirmative vote of at least 80% of Citadel's voting shares;
     (3)  permit a special stockholders' meeting to be called only by a majority
          of the board of directors;
     (4)  do not permit stockholders to take action except at an annual or
          special meeting of stockholders;
     (5)  require stockholders to give Citadel advance notice to nominate
          candidates for election to Citadel's board of directors or to make
          stockholder proposals at a stockholders' meeting;
     (6)  permit Citadel's board of directors to issue, without stockholder
          approval, preferred stock with such terms as the board may determine;
     (7)  require the vote of the holders of at least 80% of Citadel's voting
          shares for stockholder amendments to Citadel's bylaws; and
     (8)  require, for the approval of a business combination with stockholders
          owning 5% or more of Citadel's voting shares, the vote of at least 50%
          of Citadel's voting shares not owned by such stockholder, unless
          certain fair price requirements are met or the business combination is
          approved by the continuing directors of Citadel.

These provisions of Citadel's certificate of incorporation and bylaws, and
Delaware law could discourage potential acquisition proposals and could delay or
prevent a change in control of Citadel, even though a majority of Citadel's
stockholders may consider such proposals, if effected, desirable. These
provisions could also make it more difficult for third parties to remove and
replace the members of Citadel's board of directors. Moreover, these provisions
could diminish the opportunities for stockholders to participate in some tender
offers, including tender offers at prices above the then-current market value of
the Citadel Shares, and may also inhibit increases in the trading price of the
Citadel Shares that could result from takeover attempts or speculation.

In connection with the Distribution, Citadel agreed to indemnify CT Holdings for
all taxes and liabilities incurred as a result of Citadel's or an affiliate's
post-Distribution action or omission contributing to an Internal Revenue Service
determination that the Distribution was not tax-free. Unless CT Holdings
effectively rebuts the presumption that a


                                       22
<PAGE>
change in control transaction involving Citadel or disposition of Citadel
occurring within the four-year period beginning two years prior to the
Distribution Date is pursuant to the same plan or series of related transactions
as the Distribution, the Internal Revenue Service might determine that the
Distribution was not tax-free, giving rise to Citadel's indemnification
obligation. These provisions of the tax disaffiliation agreement may have the
effect of discouraging or preventing an acquisition of Citadel or a disposition
of Citadel's businesses, which may in turn depress the market price for the
Citadel Shares.

SUBSTANTIAL SALES OF CITADEL SHARES MAY HAVE AN ADVERSE IMPACT ON THE TRADING
PRICE OF THE CITADEL SHARES

CT Holdings distributed to CT Holdings' stockholders a total of approximately
14,387,000 Citadel Shares. Under the United States federal securities laws,
substantially all of these shares may be resold immediately in the public
market, except for (1) Citadel Shares held by affiliates of Citadel or (2)
shares which are issued in respect of restricted shares of CT Holdings common
stock. Some of the CT Holdings stockholders who receive Citadel Shares may
decide that they do not want shares in a company consisting of the security
software business, and may sell their Citadel Shares. Citadel cannot predict
whether stockholders will resell large numbers of Citadel Shares in the public
market following the Distribution or how quickly they may resell these Citadel
Shares. If Citadel stockholders sell large numbers of Citadel Shares over a
short period of time, or if investors anticipate large sales of Citadel Shares
over a short period of time, this could adversely affect the trading price of
the Citadel Shares.

FAILURE TO QUALIFY AS A TAX-FREE TRANSACTION COULD RESULT IN SUBSTANTIAL
LIABILITY

CT Holdings and Citadel intend for the Distribution to be tax-free for U.S.
federal income tax purposes. Neither CT Holdings nor Citadel has requested an
advance ruling from the Internal Revenue Service, or any opinion of their tax
advisors, as to the tax consequences of the Distribution. No assurance can be
given that the Internal Revenue Service or the courts will agree that the
Distribution is tax-free.

If the Distribution does not qualify for tax-free treatment, a substantial
corporate tax would be payable by the consolidated group of which CT Holdings is
the common parent measured by the difference between (1) the aggregate fair
market value of the Citadel Shares on the Distribution Date and (2) CT Holdings'
adjusted tax basis in the Citadel Shares on the Distribution Date. The corporate
level tax would be payable by CT Holdings. However, Citadel has agreed under
certain circumstances to indemnify CT Holdings for all or a portion of this tax
liability. This indemnification obligation, if triggered, could have a material
adverse effect on the results of operations and financial position of Citadel.
In addition, under the applicable treasury regulations, each member of CT
Holdings' consolidated group (including Citadel) is severally liable for such
tax liability.

Furthermore, if the Distribution does not qualify as tax-free, each CT Holdings
stockholder who receives Citadel Shares in the Distribution would be taxed as if
he had received a cash dividend equal to the fair market value of his Citadel
Shares on the Distribution Date.

Even if the Distribution qualifies as tax-free, CT Holdings could nevertheless
incur a substantial corporate tax liability under Section 355(e) of the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code or the Code), if CT
Holdings or Citadel were to undergo a change in control (whether by acquisition,
additional share issuance or otherwise) pursuant to a plan or series of related
transactions which include the Distribution. Any transaction which occurs within
the four-year period beginning two years prior to the Distribution is presumed
to be part of a plan or series of related transactions which includes the
Distribution unless CT Holdings establishes otherwise. Under certain
circumstances, Citadel would be obligated to indemnify CT Holdings for all or a
portion of this substantial corporate tax liability under the tax disaffiliation
agreement. This indemnification obligation would have a material adverse effect
on the results of operations and financial position of Citadel.


                                       23
<PAGE>
ITEM 2.  DESCRIPTION OF PROPERTY

We lease approximately 13,700 square feet of general purpose office space at
8750 N. Central Expressway, Suite 100, Dallas, Texas 75231.  The lease will
expire on February 28, 2005.  We believe that the office space currently under
lease will be sufficient to meet the requirements of our operation for the
foreseeable future.  Office space of the nature required for our business is
generally available in the Dallas/Fort Worth market at reasonable rates.  We
have plans to open sales offices in cities around the United States but there
are no immediate plans to open offices outside the United States.

ITEM 3.  LEGAL PROCEEDINGS

In June 2000, Tech Data Corporation filed suit against CT Holdings, alleging a
breach of a Software Distribution Agreement (the "Agreement") with CT Holdings.
The lawsuit is styled Tech Data Corporation v. Citadel Technology, Inc. (now
known as CT Holdings), and was filed in Dallas County Court at Law No. 2.
Because CT Holdings was not properly served, Tech Data obtained a default
judgment for $101,048.53. When CT Holdings discovered the default judgment, it
filed and won a motion to set aside this judgment. In June 2001, Tech Data
properly served CT Holdings. CT Holdings answered and demanded binding
arbitration pursuant to the Agreement. The parties filed a Joint Motion to
Arbitrate in December 2001. The judge granted this motion, and the matter was
referred to binding arbitration in the fourth quarter of 2002. In the first
quarter of 2003 Tech Data obtained an arbitration award of approximately $72,000
plus interest at the applicable rate under Florida law from January 3, 2000
until January 10, 2003, together with attorney's fees of $3,500, and interest on
those sums at 10% per year from February 10, 2003 until the amounts are paid as
a result of the arbitration. Tech Data has filed a motion to revive the abated
lawsuit to enforce the arbitration award. As part of the Distribution, the
Company assumed payment responsibility for this lawsuit. The Company has an
accrued liability of approximately $101,000 recorded relating to this litigation
at December 31, 2002 and December 31, 2001.

Other than the lawsuit described above, we are not party to any material legal
proceedings.  Various legal claims are pending or may be instituted against CT
Holdings.  Because Citadel is a separate corporation which did not engage in the
activities giving rise to these legal claims, Citadel's management believes the
risk that Citadel's assets could be subject to these claims and liabilities
(except for those claims and liabilities expressly assumed in the distribution
agreement) is remote, although there can be no assurance that Citadel will not
become subject to these claims and liabilities.

We may become involved from time to time in litigation on various matters which
are routine to the conduct of our business.  We believe that none of these
actions, individually or in the aggregate, will have a material adverse effect
on our financial position or results of operations, though any adverse decision
in these cases or the costs of defending or settling such claims could have a
material adverse effect on our business.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NONE


                                       24
<PAGE>
PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION

Prior to the Distribution on May 17, 2002 there was no public market for the
Company's common stock. On May 20, 2002 the Company's stock began trading on the
Over-The-Counter Bulletin Board (OTCBB) under the symbol CDSS. The following
table sets forth, for the periods indicated, the high and low daily closing sale
prices for the Common Stock. The quotations reflect inter-dealer prices, without
retail markup, markdown or commission, and may not represent actual
transactions.

                                                   HIGH    LOW
                                                   -----  -----
     YEAR ENDED DECEMBER 31, 2002
         2nd Quarter (began trading May 20, 2002). $1.22  $0.51
         3rd Quarter . . . . . . . . . . . . . . .  0.75   0.30
         4th Quarter . . . . . . . . . . . . . . .  1.15   0.28


At December 31, 2002 there were approximately 845 holders of record of the
Company's outstanding common stock.  Holders of common stock are entitled to
dividends when and if declared by the Board of Directors out of legally
available funds.  The Company has never paid cash dividends on its Common Stock,
and management intends, for the immediate future, to retain any earnings for the
operation and expansion of the Company's business.  Any future determination
regarding the payment of dividends will depend upon results of operations,
capital requirements, the financial condition of the Company and such other
factors that the Board of Directors of the Company may consider.  The Company
has 1,000,000 shares of preferred stock authorized, none issued, which if issued
could entitle the holders thereof to preferences as to payment of dividends and
liquidation proceeds.

Sales of Unregistered Securities

In September 2002 the Company sold 200,000 unregistered shares of common stock
for $2,000 in conjunction with entering into a $200,000 unsecured convertible
note payable.  In December 2002 the Company sold 50,000 unregistered shares of
common stock for $500 in conjunction with entering into a $250,000 unsecured
note payable.  During December 2002 stock options were exercised for 488,333
unregistered shares of common stock for aggregate proceeds of approximately
$61,000 in cash and $201,000 in the form of a note receivable which was
collected in January 2003.  The proceeds of these transactions were used for
working capital purposes.  In the fourth quarter of 2002, 130,000 shares of
unregistered common stock were issued as payment for professional services in
lieu of cash payments. These offerings were exempt from registration under 4(2)
of the Securities Act.

In January 2003 the Company issued 3,275,000 shares of common stock to
accredited investors in a private equity placement under the exemption from
registration Rule 506 under the Securities Act for proceeds of $2,378,125 net of
transaction costs and expenses including placement fees of $196,875 and an
estimate of $50,000 for professional fees. In addition to the shares received,
the investors received warrants to purchase 1,637,500 shares of common stock at
$1.50 per share. The warrants expire in three years and may be terminated by the
Company, at its option, when the closing market price of the Company's common
stock has closed at or above $2.40 per share for ten consecutive trading days.
In addition, the placement agent received warrants to purchase 245,625 shares of
common stock at $1.18 per share with the same expiration terms. If all the
warrants were in-the-money and exercised approximately $2,700,000 of additional
cash proceeds could be available to the Company. The Company has agreed to file
a registration statement to register the shares issued in the private placement
and the shares underlying the warrants.

Equity Compensation Plans

The 2002 Stock Incentive Plan went effective upon the completion of the
Distribution.  This Plan was adopted by the board of directors and approved by
the shareholder of Citadel prior to the Distribution.  The plan authorizes the
Board or a committee, which administers the plan, to grant stock options, stock
appreciation rights, restricted stock and deferred stock awards to our officers,
directors, employees and consultants.  A total of 1,500,000 shares of common


                                       25
<PAGE>
stock were reserved for issuance under the terms of the 2002 Stock Incentive
Plan.  In the event of any sale of assets, merger, reorganization,
consolidation, recapitalization, stock dividend or other change in corporate
structure affecting the stock, the Board or committee may make an equitable
substitution or adjustment in the aggregate number of shares reserved for
issuance under the plan.  We have granted 550,000 awards under the 2002 Stock
Incentive Plan as of December 31, 2002.  Options cancelled due to employee
terminations amounted to 116,500 and were added back to the options available
for future grants under the Plan.  The options granted have a term of 10 years
and except for 80,000 immediately exercisable options, all options vest over a
period of three years.  The underlying shares of common stock in the Plan have
not been registered although the Company intends to register them.

The board of directors has also granted options outside of the 2002 Stock
Incentive Plan. These options are not covered under a plan approved by the
shareholders. Options have been granted to officers, directors, employees,
shareholders and consultants to the Company. The options granted have a term of
10 years or less. There were 5,466,667 options outstanding at December 31, 2002
of which 4,650,412 are exercisable. The remaining options granted vest over a
period of one to three years. Options to purchase 400,000 shares of common stock
were issued to consultants for services. The underlying shares of common stock
have not been registered although the Company intends to register them.

In November 2002 the Company entered into an agreement with an investment banker
to provide financial services including capital raising services to the Company.
Under the terms of the agreement the Company has agreed that for each month of
the agreement, up to six months, will issue to the investment banker warrants to
purchase 10,000 shares of common stock of the Company.  The warrants will be
issued at an exercise price equal to the closing price on the monthly
anniversary date of the agreement.  Warrants to purchase 20,000 shares of the
Company's common stock at an average exercise price of $0.80 were outstanding at
December 31, 2002.

<TABLE>
<CAPTION>
                                            Equity Compensation Plan Information
----------------------------------------------------------------------------------------------------------------------------
                                                                                                             Number of
                                                                                                            securities
                                                                                                        remaining available
                                                                                                        for future issuance
                                                                                                           under equity
                                                                                                        compensation plans
                               Number of securities to be issued    Weighted-average exercise price         (excluding
                                  upon exercise of outstanding      of outstanding options, warrants   securities reflected
Plan category                     options, warrants ant rights                 and rights                 in column (a))
-----------------------------  ----------------------------------  ----------------------------------  ---------------------
<S>                            <C>                                 <C>                                 <C>
                                              (a)                                 (b)                           (c)
Equity compensation plans
approved by security holders                433,500                               $0.54                      1,066,500

Equity compensation plans not
approved by security holders              5,486,667                               $0.33                              -
</TABLE>


                                       26
<PAGE>
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF  OPERATIONS

You should read the following discussion in conjunction with our audited
financial statements and related notes included elsewhere in this Form 10-KSB.
Our year ends on December 31, and each of our quarters end on the final day of a
calendar quarter (each March 31, June 30 and September 30).  Prior to separation
from CT Holdings, described below, our year end was the same as CT Holdings'
year end, also December 31.  The following discussion contains forward-looking
statements.  Please see Forward-Looking Statements for a discussion of
uncertainties, risks and assumptions associated with these statements.

SEPARATION FROM CT HOLDINGS

In November 2001 the board of directors of CT Holdings approved a pro rata
distribution to CT Holdings stockholders of 100% of the outstanding shares of
common stock of Citadel Security Software Inc. (the "Distribution"), which until
the distribution date on May 17, 2002 (the "Distributions Date"), was a wholly
owned subsidiary of CT Holdings.  On the Distribution Date 14,387,244 shares of
Citadel common stock were distributed to CT Holdings stockholders as of May 6,
2002, the record date for the Distribution.  Each CT Holdings stockholder
received one Citadel share for every four CT Holdings shares held on that date.
On May 20, 2002, Citadel common stock began trading on the OTC Bulletin Board
under the symbol "CDSS".

Prior to the Distribution Citadel filed an information statement on Form 10-SB
and amendments with the SEC.  The filings are available via the EDGAR system on
the SEC website, www.sec.gov, or through a link to the SEC website on Citadel's
web site, www.citadel.com.  The information statement that was filed with the
SEC describes the distribution and provides important financial and other
information about Citadel, including risk factors related to Citadel and the
Distribution.  CT Holdings began mailing the information statement to CT
Holdings shareholders on May 6, 2002.  Citadel was incorporated under the laws
of the State of Delaware in December 1996 as a wholly owned subsidiary of CT
Holdings.  Citadel had no material assets or activities until the contribution
of the security software business by CT Holdings to the Citadel corporate entity
on the Distribution Date.  After the Distribution, Citadel became an independent
public company, with CT Holdings having no continuing ownership interest in
Citadel.

Citadel's financial statements have been prepared in accordance with accounting
principles generally accepted in the United States, and reflect the historical
financial position, results of operations, and cash flows of the business
transferred to Citadel from CT Holdings in conjunction with the Distribution.
The financial information included in this report on Form 10-KSB, however, is
not necessarily indicative of what Citadel's results of operations or financial
position would have been had it operated as an independent company during the
periods presented prior to the Distribution Date, nor is it necessarily
indicative of its future performance as an independent company.

Prior to the Distribution on May 17, 2002 Citadel was allocated the CT Holdings
corporate assets, liabilities and expenses related to the security software
business based on an estimate of the proportion of such amounts allocable to
Citadel, utilizing such factors as total revenues, number of employees and other
relevant factors.  We believe that these allocations have been made on a
reasonable and a consistent basis for the periods presented.  We further believe
that all costs allocated to Citadel are a reasonable representation of the costs
that Citadel would have incurred if Citadel had performed these functions as a
stand-alone company although there can be no assurance in this regard.

In conjunction with the separation of the security software business from CT
Holdings, Citadel entered into various agreements with CT Holdings that address
the allocation of assets and liabilities, and that define Citadel's relationship
with CT Holdings after the Distribution, including a distribution agreement, a
tax disaffiliation agreement, a transition services agreement, and a sublease
agreement.  The transition services agreement allows for a charge to CT Holdings
of $20,000 per month for the payroll and benefits costs associated with the part
time services of our CEO, CFO and accounting staff, shared office space and
indirect overhead expenses.  It is estimated that the CEO, CFO and accounting
staff will spend 20% to 33% of their time on the business of CT Holdings.  CT
Holdings will bear the cost of all charges and activities directly identified to
CT Holdings.


                                       27
<PAGE>
OUR BUSINESS

The security software business of Citadel was formed in 1996 through the
acquisition of several technology businesses and was operated by the business
incubator CT Holdings from 1996 through May 17, 2002.  Following some additional
technology acquisitions in 1999, portions of the technology businesses of CT
Holdings were carved out and contributed to separate companies in which CT
Holdings held an investment.  In 2000, Citadel's security software business was
reevaluated and refocused primarily on product development.  Product sales were
not heavily promoted during the year 2000 through the end of the year 2001.
During 2000 and 2001 enhancements to Secure PC and NetOFF were released.  In
2001 the Hercules development project began and as the release date approached
business development and marketing activities were started.  In late 2001 and
early 2002 sales resources were added to begin building sales pipeline in
anticipation of the March 2002 release of Hercules.

In May 2002, Citadel was spun out of CT Holdings as a standalone public company.
Our strategy is to address the growing computer network security needs of
business, government and other entities with the development, marketing and
licensing of time saving and cost effective security software solutions that
automatically remediate security vulnerabilities from a central point of control
and manage security policies to secure the information infrastructure "inside
the firewall".  We operate in the security software business segment of the
software industry.

We focus our software solutions on the needs and issues of securing computing
environments inside the firewall from internal and external cyber threat
vulnerabilities.  A vulnerability is any weakness in software code, system
configuration or systems settings that may be exploited thereby allowing the
running of a malicious code or the unauthorized access by an individual to
obtain information or to do damage to an organization's computing environment.
Our security software solutions do not eliminate the need for firewalls, virtual
private network technologies, virus scanners, intrusion detection solutions or
vulnerability scanning assessment tools.  Our security software solutions work
in concert with these security technologies thereby completing the security
infrastructure which begins with firewalls and virus scanners at the perimeter
of the network and works inward securing the servers and desktops by reducing
the opportunity for internal and external attacks, accidents or failures due to
system vulnerabilities.

Vulnerabilities fall into five classes: unnecessary services,
mis-configurations, backdoors, insecure accounts and software defects.
CERT/CC(R) identified 4,129 vulnerabilities in the year 2002.  This is an
increase of 69% over vulnerabilities identified in the year 2001.  The number of
vulnerabilities identified in the years 2000, 2001 and 2002 were 7,656
representing 92% of the total vulnerabilities identified by CERT/CC(R) since
1988.  The statistics reported by CERT/CC(R), a registered trademark of Carnegie
Mellon University's, Software Engineering Institute, may be found on the website
www.cert.org.  The number of vulnerabilities and incidents of attack are
------------
increasing at an accelerating rate.  CERT/CC(R) reports further that the attacks
are becoming increasingly sophisticated and occur more frequently.  The task
facing information technology ("IT") professionals is the process of discovering
these vulnerabilities on their systems and then determining how and when to
remedy them.  We have positioned our company as a security solutions provider to
allow organizations to proactively protect their networks from this growing
number of security threats and incidents.

Network security administrators must continually monitor their networks for new
vulnerabilities in a timely manner to protect, and keep confidential, the
business data and personal information they hold in those networks.  Today a
security administrator must maintain a staff of people to manually remediate
each vulnerability on each machine attached to a network one-at-a-time.  This
process is time consuming and costly.  The larger the network the more personnel
that must be retained to perform the remediation function.  The anticipated
growth in vulnerabilities will add costs to the security infrastructure of an
organization.  Quality and consistency of applying the remediations manually
across large networks is also a concern of security administrators.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations
are based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America


                                       28
<PAGE>
(GAAP). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities.  On an on-going basis, we evaluate these estimates, including those
related to bad debts, returns and allowances, software capitalization and
technological obsolescence, payroll tax obligations, and litigation.  We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions.

We have identified below the accounting policies, revenue recognition and
software costs, related to what we believe are most critical to our business
operations and are discussed throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations where such policies affect our
reported and expected financial results.

REVENUE RECOGNITION

Our revenue recognition policies are in compliance with Statement of Position
(SOP) No.  97-2, "Software Revenue Recognition," as amended by SOP 98-9, and
Staff Accounting Bulletin (SAB) No.  101, "Revenue Recognition in Financial
Statements."  We recognize revenue from licensing of our products when
persuasive evidence of a sale arrangement exists, delivery has occurred, the fee
is fixed or determinable and collectibility is probable.  Post sale customer
support contracts provide the customer the right to telephone support, software
patches (software bug fixes), vulnerability remediation updates and software
updates on a when and if available basis.  Customer support contracts are sold
separately from the license and the related revenue is recognized ratably over
the term of the customer support contract.

Our products are typically sold standalone and are not bundled with professional
services, training or other products and services.  Should we group additional
products or services together as an offering in the future, revenue would be
allocated to the components based on vender specific objective evidence ("VSOE")
and recognized based on the fair value of that component had each been sold
separately.  In determining VSOE, management considers several factors that
include price lists, historical transactions with similar terms and conditions
and the interpretation of the contractual agreement.  If any of these factors
are misinterpreted, the result could be an error in the amount or period of the
revenue recognized.

In May 2002 we made our Hercules product available to our customers under a
two-year subscription license in addition to a perpetual license.  The customer
may renew the subscription at the end of the two-year term or may convert the
subscription into a perpetual use license at any time for an additional fee.
Under the subscription license the customer receives the right to use the
product, post sale customer support and remediation signature updates for the
term of the subscription and for as long as the customer meets its payment
obligation.  The subscription fee payment is generally due in equal payments at
the beginning of the subscription term and then on each anniversary date
thereafter.  Revenue from subscriptions is recognized ratably over the term of
the subscription.  If a customer fails to adhere to the payment terms of the
subscription, the revenue recognized is limited to the ratable recognition of
the amount of payments actually received.

The subscription license model offers customers under budget constraints the
ability to license our product for fees substantially less than the perpetual
license fees.  This model has the initial effect of lowering our revenue and
cash flow as compared to the perpetual model but we believe has a benefit of
sustainable recurring revenue and cash flow over the average life of the
subscriptions.  We believe that this licensing model will not change our cost
structure or our obligation to provide post sale customer support or
vulnerability remediation update services.  Since this is a new licensing model
for us there can be no assurance that we will be successful with this model or
that revenue, cash flow or costs may be adversely affected by unknown or
unidentified factors.

Customers may obtain a license to our products through our website and telesales
organization, and through promotions or reseller agreements with independent
third parties.  Our customers have a choice to electronically download our
software or to have the media and documentation shipped to them directly.  A
customer may return a product under very limited circumstances during the first
thirty days for a replacement if the media is damaged or for a full refund if


                                       29
<PAGE>
the software does not perform in accordance with written specifications.
Accordingly we record a provision for product returns and allowances against
product revenue in the same period the revenue is recorded.  The estimates are
based on historical product returns, allowances, refunds, average invoice size
and other known data as well as market and economic conditions.  Software code
is inherently subject to program coding errors commonly referred to as software
"bugs."  Changes in the estimates of product returns could occur should our
software experience an unusually high number of bugs.  While the product may
perform substantially in accordance with written specifications management may
decide to allow customers to return product or to incur costs to develop a
software patch to replace the code causing the bug.  While the returns of
product have been minimal there can be no assurance that our historical returns
are representative of the future.

Our products are not sold through retail distribution channels.  Resellers and
systems integrators generally order product when they receive an order from
their end user customer and receive a reseller discount from our product and
customer support contract list price for generating the order.  Current reseller
agreements do not provide for a contractual right of return, future price
concessions, minimum inventory commitments nor is payment contingent upon the
reseller's future sales of our products.  Revenue generated through distribution
and marketing channels where the right of return exists, explicitly or
implicitly, is reduced by reserves for estimated product returns.  Such reserves
are estimates based on returns history and current economic and market trends.

SOFTWARE DEVELOPMENT COSTS

We follow the guidance provided in Statement of Financial Accounting Standards
No.  86 "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed" ("SFAS No.  86") regarding the accounting for the costs of
developing our products.  Purchased software (i.e.  software acquired from a
third party) is recorded at the lower of acquisition cost or net realizable
value.  We develop software for licensing to our customers and capitalize
software development costs when technological feasibility has been established.
Technological feasibility generally occurs at the time a detailed plan is
available and programming of the software code may begin.  Software development
costs not qualifying for capitalization are expensed and classified as product
development expense in the statements of operations.  Product development
expense and the capitalization rate will fluctuate from period to period
depending upon the number and status of software development projects that are
in process and the related number of people assigned to those projects.

Purchased software and capitalized software development costs are amortized
using the greater of the revenue method or the straight-line method with useful
lives ranging from one to five years.  Amortization expense is classified in
costs of revenue on the statements of operations.  Our products operate on or
with other third party operating systems and software.  When determining the
useful life of a product we consider factors such as the current state of the
technology, operating systems on which our products run, competitive products
and the potential use of our products by the end user.  Technological advances
in software operating systems and other software technologies on which our
products rely may shorten the expected life cycle of some versions of our
products.  We make an assessment of the useful lives of our products at each
balance sheet date.  If that assessment determines that a shortened product life
has occurred, we amortize the remaining unamortized balances over the new
estimated useful life of the product and provide disclosure regarding a change
in estimate in the notes to the financial statements pursuant to Accounting
Principles Board Opinion No.  20 "Accounting Changes."

We evaluate the estimated net realizable value of each software product at each
balance sheet date.  The estimate is based on historical and forecasted net
revenue for each product.  Net revenue is the product revenue reduced by the
estimated costs of revenue and, if in development, the estimated cost to
complete the development of the product.  When the net book value exceeds the
estimate of net realizable value, we record a write-down to net realizable value
on each product affected.  Management's ability to achieve its revenue forecast
is subject to judgment, competitive pressures, market and economic conditions
and management's ability to successfully license its products to its customers.
A change in one or more of these factors may influence management's estimates.
Accordingly currently estimated net realizable values are subject to reductions
resulting in corresponding charges for impairment in the future.


                                       30
<PAGE>
RESULTS OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 2002 AS COMPARED WITH THE YEAR
ENDED  DECEMBER  31,  2001

OPERATIONAL HIGHLIGHTS OF 2002

Key operational highlights for the year ending December 31, 2002 include:

     -    Hercules, an automated vulnerability remediation solution and our
          flagship product, was first released for commercial licensing in March
          2002. The initial release was interoperable with scanners from
          Internet Security Systems, Microsoft and Nessus Consulting.

     -    Shipments of Hercules began in the second quarter of 2002.

     -    In May 2002 we completed the spin-out of Citadel from its former
          parent company and began trading on the OTCBB under the symbol CDSS.

     -    We entered into strategic relationships with eEye Digital Security
          Inc., Harris Corporation, and Qualys Inc. to build the
          interoperability of Hercules with their respective vulnerability
          scanning assessment solutions.

     -    New updates to Hercules were released in the second, third and fourth
          quarters adding new features, reporting capabilities and
          interoperability with the vulnerability assessment products offered by
          our partners.

     -    We began development of the next generation of Hercules in the fourth
          quarter of 2002 which is scheduled for release in 2003 and includes
          UNIX and Linux platform support, device grouping, enhanced remediation
          scheduling and enhanced reporting.

     -    In the third quarter we entered into an agreement with PlanetGov Inc.,
          a systems integrator servicing the U.S. Federal Government market, to
          offer our products to the Department of Veterans Affairs (VA) through
          the "Purchase of Computer Hardware and Software - 2" (PCHS-2)
          contract.

     -    In the second quarter of 2002 we began efforts and negotiations with
          potential funding sources to raise capital for the Company. Our
          efforts bore fruit in January 2003 as we were successful in raising
          approximately $2,380,000 of net proceeds from the sale of 3,275,000
          shares of common stock and warrants to purchase 1,883,125 shares in a
          private placement to accredited investors.

REVENUE

Revenue, net of provision for product returns, from all three of the our
products for the year ended December 31, 2002 was $1,311,800 versus $580,039 for
the year ended December 31, 2001, an increase of $731,761 or 126%.  The increase
in revenue is primarily due to an increase in the number of sales
representatives and the availability of Hercules for shipment during the year
ended December 31, 2002.  Revenue from all three products grew in 2002 over
2001.  During 2002 we grew our sales and marketing staff from 7 people at
December 31, 2001 to 16 people at December 31, 2002.

                                               Year Ended December 31,
                                                   2002        2001
                                                -----------  --------
          Revenue from:
            License fees
               Hercules                         $  414,444   $      -
               SecurePC                            542,825    468,570
               NetOFF                              222,103     77,123
                                                -----------  --------
                                                 1,179,372    545,693
            Customer support contracts             134,521     18,845
            Other                                    7,940     15,501
                                                -----------  --------
                                                 1,321,833    580,039
          Provision for returns and allowances     (10,033)         -
                                                -----------  --------
                                                $1,311,800   $580,039
                                                ===========  ========


                                       31
<PAGE>
Shipments of Hercules since its initial release in March 2002 attributed
$414,444 or 32% of total revenue during the year ended December 31, 2002.
Revenue recognized from customer support contracts is recognized ratably over
the length of the contract, generally one year, amounted to $134,521 and $18,845
for the years ended December 31, 2002 and 2001, respectively.  Since June 2002
we have required all customers to enter into a separate customer support
contract with the licensing of our products.  This had the effect of increasing
revenue from post sales customer support contracts in 2002 over 2001 as not all
customers were required to enter into customer support contracts prior to June
2002.  We expect that customer support revenue will increase in the future due
to this policy as well as our forecast of growth in license fees, primarily due
to Hercules, and we expect that our customers will renew their annual customer
support contracts in future periods.  However there can be no assurance that
that our customers will do either.  In addition, there is approximately $8,553
of services revenue recognized upon the completion of two custom development
projects during the year ended December 31, 2002.  Custom development services
are not expected to be a significant component of future revenue.

The provision for product returns and allowances for the years ended December
31, 2002 amounted to $10,033.  At December 31, 2001 no provision for returns and
allowances was determined to be required.  The provision for returns and
allowances is an estimate based upon historical trends and the increase in the
average invoice size in 2002.  We do not expect product returns, if any, related
to this 2002 revenue to exceed the estimated allowance of $10,033 at December
31, 2002 due to the nature of our licensing terms and product quality however,
there can be no assurance that returns will not exceed the allowance.  We do not
ship product into distribution channels to hold as inventory-for-sale and
therefore we have no exposure to distributor returns for overstocked inventory
or distributor price adjustments

We focus our licensing efforts on industry segments including government,
education, healthcare, financial institutions and corporations in all other
industry segments.  This is due in part to the mandates of the Health Insurance
Portability and Accountability Act ("HIPAA") for healthcare, Gramm-Leach-Bliley
Act for financial services ("GLB"), Government Information Systems Reform Act
("GISRA") and Presidential Decision Directive 63 ("PDD-63") for government, each
of which require certain industries to meet minimum security requirements for
the protection of personal, financial and government data.  The revenue
distribution by industry segments for the years ended December 31, 2002 and 2001
was as follows:

                                            Year Ended December 31,
                                             2002            2001
                                        -------------  -------------
     Healthcare                                   36%             8%
     Education                                     8%            15%
     Financial institutions                       27%            33%
     Government                                    8%             8%
     All other, primarily corporations            21%            36%

Revenue from customers representing 10% or more of total revenue during the
years ended December 31, 2002 and 2001, respectively, was as follows:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                      2002          2001        Industry Segment
                                                -------------  -------------  ----------------------
<S>                                             <C>            <C>            <C>
Washington Mutual Bank                                    27%            31%  Financial institutions

Veterans Administration Medical Centers
  of the Department of Veterans Affairs ("VA")            23%             3%        Healthcare
</TABLE>

Of our total revenue approximately $333,350 was sold through resellers with the
remainder from fees generated by our direct sales force.  Of the fees received
from resellers approximately $303,325 related to the product and support
contracts sold through resellers authorized to sell to the VA under a federal
procurement contract.  Although the customers listed above represent a large
portion of the 2002 revenue we do not rely on any one customer, group of
customers or industry segment for a significant source of recurring revenue.
There is no assurance that the distribution of revenue by industry segment is
representative of future revenue projections and we expect that our revenue by
industry segment could vary dramatically from period to period.


                                       32
<PAGE>
COSTS OF REVENUE

Costs associated with revenue generally consist of software amortization,
customer support costs associated with customer support contracts and the costs
of shipping our products.  Total costs of revenue were $291,639 for the year
ended December 31, 2002 versus $621,382 for the year ended December 31, 2001.
Software amortization for the year ended December 31, 2002 was $119,590 and
compares to $594,923 for the year ended December 31, 2001.  The decrease in
software amortization of $475,333 or 80% in 2002 from 2001 is directly
attributable to lower amortizable balances of capitalized software during the
year ended December 31, 2002 versus during the year ended December 31, 2001.
The lower amortizable balances were due in part to business conditions and
factors considered at December 31, 2000, including minimal revenue forecasts for
the then existing products and the decision at that time to refocus the
Company's strategic direction around the development and release of Hercules.
We determined that the estimated useful lives of the then existing products
should be shortened and we fully amortized the remaining capitalized software
costs over the year ended December 31, 2001.  The resulting change in estimate
increased software amortization in the year ended December 31, 2001 by
approximately $420,000.  We expect that software amortization costs will
increase in the future due to the increase in capitalization of software
development costs, primarily due to an increase in the number of product
development personnel, and the planned release of additional product features
and functionality.  The comparison of unamortized capitalized software
development costs to the net realizable value of the capitalized software at
December 31, 2002 and 2001 indicated that the unamortized capitalized software
balances at December 31, 2002 and 2001 did not exceed net realizable value and
accordingly no write-off was required during the years ended December 31, 2002
or 2001.

Under our customer support agreements a customer receives telephone support and
the right to receive software point releases and software patches. In addition
to these services Hercules customers receive updates to the vulnerability
remediation signatures via Internet access to our VFlash remediation signature
database. In July 2002, we formalized our customer support organization with the
assignment of personnel to the post sale customer support function and the
implementation of a customer support call tracking system. The post sale
customer support activities in periods prior to July 2002 were immaterial and
generally not distinguishable from sales and marketing costs. Prior to July 2002
the costs to write the vulnerability remediation signatures was included in
product development expense. The customer support costs for the year ended
December 31, 2002 of $167,107 include the salaries, benefits and other direct
expenses of the personnel assigned to the post sale customer support function
plus similar expenses associated with the team that writes the vulnerability
remediation signatures and manages the signature database.

We encourage our customers to download their licensed software programs and
related documentation directly from our website.  In many cases a limited use
evaluation copy is downloaded as part of the technical sales effort prior to the
customer committing to license the product.  Once the customer issues a purchase
order for the license a permanent license key is provided for the quantity and
time frame of use.  This delivery process reduces the costs of shipping and
preparation of media and documentation versus traditional media preparation and
delivery methods.  Shipping costs for the year ended December 31, 2002 were
$4,942 compared to $26,459 for the year ended December 31, 2001 a decrease of
$21,517 or 81%.  We expect that delivery and preparation costs will vary with
revenue levels but will not become a significant component of costs of revenue.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

We incurred selling, general and administrative expenses of $3,306,257 for the
year ended December 31, 2002 versus $1,610,922 for the year ended December 31,
2001, an increase of $1,695,335 or 105%. Of this increase approximately
$1,286,000 is attributable to the compensation, commissions and employee
benefits associated with the increase in the number of employees hired to
execute our business strategy. New hires during 2002 include members of the
management team including our chief financial officer, our vice president of
sales and our vice president of marketing. At December 31, 2002 we employed
sixteen (16) people in sales, marketing and business development, and six (6)
people in finance, administration and general management including our CEO. This
compares to seven (7) people in selling, general and administrative functions,
and five (5) in finance, administration and general management at December 31,
2001. The reason for the growth in sales and marketing personnel is primarily
due to the 2002 launch of the business around our flagship product, Hercules. In
the second quarter of 2001 we began the execution of a market development
strategy for the Hercules vulnerability remediation solution and hired business
development personnel to


                                       33
<PAGE>
begin building strategic third party relationships and in the third quarter of
2001 we hired marketing personnel to build brand awareness. In anticipation of
the initial Hercules release in March 2002 we expanded our sales organization in
the first and second quarters of 2002 to include the addition of experienced
sales representatives and sales engineers. These initiatives have increased the
number of employees and our operating expenses accordingly, including an
increase in travel expenses of approximately $153,000. Professional fees related
to consultants who provided strategic and tactical sales and marketing expertise
to the Company in 2002 increased approximately $144,000 including approximately
$63,000 of stock compensation expense for stock options and warrants issued to
consultants for services. The remaining increase in selling and administrative
expenses of approximately $112,000 is primarily due to the general increase in
telephone, office supplies recruiting fees and other similar overhead expenses
associated with the increase in personnel.

We are continuing to execute our business plan and accordingly we expect the
number of employees focused on sales, marketing, and business development
activities to increase in future periods causing an increase in the related
compensation and benefits expenses.  We do not anticipate a large increase in
the number of administrative personnel.  We will continue to tightly control
costs and expenses and limit expenditures to necessary items to support the
addition of sales and engineering resources.

PRODUCT DEVELOPMENT EXPENSE

We capitalize software development costs at the time technological feasibility
is established which generally occurs at the time the design and analysis plan
is completed and programming begins.  Costs and expenses that do not qualify for
capitalization are expensed as product development expenses.  These costs and
expenses primarily consist of salaries, benefits and the direct and indirect
costs associated with the development staff or the specific development
projects.  During the year ended December 31, 2002 we incurred $285,105 of
product development expense which is net of $597,034 of capitalized software
development costs.  During the year ended December 31, 2001 we incurred product
development expenses of $118,432 net of $177,110 of capitalized software costs.

Capitalized software development costs and product development expense are
expected to increase as we begin development of new versions releases of our
products in the future.  Product development expense and the capitalization rate
historically have fluctuated, and may continue to fluctuate from period to
period in the future depending upon the number and status of software
development projects that are in process and the related number of employees
assigned to those projects.  At December 31, 2002 we employed twelve (12) people
in development including our Chief Technology Officer.  We plan to add
development resources to our team as is necessary to execute the development
project plan in the future.

DEPRECIATION EXPENSE

Depreciation expense for the year ended December 31, 2002 was $36,934, compared
to $95,284 for the year ended December 31, 2001, representing a decrease of
$58,350 or 61%.  We attribute this decrease to lower depreciable balances of
property, equipment and leasehold improvements.  In September 2002 we entered
into commitments for approximately $400,000 to acquire computer software and
equipment.  The assets acquired are being depreciated over an estimated useful
life of three years and began depreciating in the fourth quarter of 2002.  The
addition of software and equipment to support our operating plan for the next
twelve months is expected to increase depreciation expense accordingly in future
periods.

INTEREST EXPENSE

Interest expense of $107,796 during the year ended December 31, 2002, including
$62,583 of amortization of debt discounts and $8,680 of expense related to the
fair value of stock options issued to a note holder, relates directly to the
borrowings on notes payable that were entered into to fund our operations
following the Distribution on May 17, 2002.  There was no interest expense for
the year ended December 31, 2001.


                                       34
<PAGE>
OTHER INCOME

Other income of $369,036 represents the write-off of old accounts payable
balances relating to years prior to 2001.  We wrote off these accounts payable
balances as we no longer believe that they represent liabilities of the company.
These amounts were written off primarily because the vendor is no longer in
business or we have not had any communication with the vendor in several years.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents at December 31, 2002 were $12,829. The net cash
used in operating activities of $592,716 for the year ended December 31, 2002 is
principally a result of the net loss of $2,346,895 partially offset by changes
in operating assets and liabilities of $1,374,214 plus net non-cash charges of
$379,965 primarily consisting of depreciation and amortization of $156,524,
amortization of debt discount of $62,583 and $140,858 of stock compensation
expense for the fair value of stock and stock options issued for payment of
professional services. The increase in accounts receivable of $162,443 is
directly attributable to the increase in revenue during the year ended December
31, 2002. Operating liabilities before deferred revenue have increased
$1,362,551, primarily due to the growth of accounts payable, payroll tax
obligations and accrued compensation related to commissions, vacation
liabilities and other incentives recorded at December 31, 2002. The increase is
primarily due to a lack of appropriate levels of cash to settle these
liabilities in a timely manner. In addition, deferred revenue increased $150,193
due to a higher value and volume of post sale customer support contracts in
force at December 31, 2002 than at December 31, 2001. Current liabilities
including notes payable will increase in the future until the Company raises
sufficient capital either through increased cash flow from operations or a
capital financing to settle these amounts. For the year ended December 31, 2001
the net cash used in operating activities of $703,774 is principally a result of
the net loss of $1,865,981, partially offset by non-cash charges of $670,851
primarily for depreciation and amortization expenses and a net increase in
operating assets and liabilities of $491,356 primarily related to the increase
in the payroll tax obligation or $245,385 and increases in accounts payable and
accrued expenses of $56,972 and accrued compensation of $78,037.

Cash flows used by investing activities were $1,023,423 representing $426,386
purchases of computer equipment and internal use software to support the
increase in employees and our technology infrastructure and $597,034 of
additions to capitalized software development costs related to the development
projects completed or in process at December 31, 2002.  During the year ended
December 31, 2001 we incurred $44,232 in expenditures for property and equipment
and $177,110 for capitalized software development costs. Expenditures for
computer equipment and our information technology infrastructure will likely
increase in future periods as we add personnel and continue to execute our
business plan.  In addition, our development plans include new releases of
features and functionality in our products therefore it is likely that there
will be an increase in the amount of capitalized software development costs in
future periods.

Cash flows provided by financing activities were $1,553,938 for the year ended
December 31, 2002.  We have financed our operations since the Distribution
primarily through notes to and advances from related parties of $1,262,441,
notes to shareholders of $450,000, a note to an unrelated third party of $40,000
and the exercise of stock options for $60,266.  During the year we made payments
to related parties for the notes and advances of $420,900 and $40,000 for a note
to an unrelated third party.  At December 31, 2002 there were notes payable to
shareholders parties for $450,000 before unamortized debt discounts.  Subsequent
to year end we repaid $225,000 of the notes to shareholders from the proceeds of
a private equity financing discussed below.

Notes and advances to related parties at December 31, 2002 totaled $841,541.
During the first quarter of 2003, approximately $550,000 of the notes and
advances from related parties were repaid in cash and $250,000 plus accrued
interest of approximately $26,000 was used to exercise stock options for 862,500
shares of common stock.  Financing activities prior to the Distribution
consisted of a net contribution of approximately $200,000 from our former parent
company CT Holdings.  Financing activity in the year ended December 31, 2001
consisted of a net contribution of $1,059,939 from the former parent company
offset by a $70,924 payment on notes payable.

As a result of the aforementioned factors, cash and cash equivalents decreased
by $62,201 for the year ended December 31, 2002, versus an increase of $63,899
for the year ended December 31, 2001.


                                       35
<PAGE>
Liquidity

We have received a report from our independent certified public accountants for
our fiscal year ended December 31, 2002 containing an explanatory paragraph that
describes the uncertainty regarding our ability to continue as a going concern
due to our historical negative cash flow and the uncertainty of access to
additional capital to fund the operations for at least the next 12 months.

During the year 2000 and through the third quarter of 2001 our business strategy
was focused on product development and limited marketing activities for our
Secure PC and NetOFF products. Since the fourth quarter of 2001 we have been
executing the business development and market awareness phase of our strategy
while increasing our sales staff. Since the release of Hercules version 1.0 in
March 2002 and through the year ended December 31, 2002 we have been actively
executing its sales strategy of building sales pipeline, product demonstrations,
customer pilots and licensing of Hercules, Secure PC and NetOFF. The result of
this strategy has been a planned increase in costs and expenses in advance of
the expected increase in revenue and positive cash flow. We continue to incur
operating losses, negative cash flow from operations and at December 31, 2002
have a cash balance of $12,829, a significant deficiency in working capital of
approximately $3,428,000 and a significant stockholders' deficit of
approximately $2,327,000.

We are addressing the liquidity situation through the execution of our operating
plan and the identification of financing alternatives. In March 2002 we released
Hercules and built our operating plan around the licensing of Hercules to large
enterprises and government agencies. In January 2003 we issued 3,275,000 shares
of common stock to accredited investors in a private equity placement for
proceeds of approximately $2,378,000, net of transaction costs and expenses
including placement fees of $196,875 and an estimate of $50,000 for professional
fees. In addition to the shares received, the investors received warrants to
purchase 1,637,500 shares of common stock at $1.50 per share. The warrants
expire in three years and may be terminated by us, at our option, when the
closing market price of our common stock has closed at or above $2.40 per share
for ten consecutive trading days. In addition, the placement agent received
warrants to purchase 245,625 shares of common stock at $1.18 per share with the
same expiration terms but without a forced conversion option. If all the
warrants were exercised approximately $2,700,000 of additional cash proceeds
would be available to us. We have agreed to file a registration statement to
register the shares issued in the private placement and the shares underlying
the warrants. The proceeds of the private placement are to be used to fund
operations and reduce liabilities.

Our strategy to increase cash flow from the execution of our operating plan
relies heavily upon the fees to be received from the licensing of its products,
largely from Hercules.  Our success is dependent upon the continuing need for
organizations to secure their networks, whether because of mandates such as
HIPAA, GLB, GISRA and PDD-63, or as a result of a known or threatened of
cyberattack.  It is also largely dependent upon customer acceptance of Hercules
and our ability to continue to meet the security requirements of our customers.
In addition, the worsening economy and the war with Iraq may slow capital
spending for technology including our products.  These factors are not
predictable and are generally outside of our control.  As a result, there can be
no assurance that we will be successful should one or all of these factors
affect us unfavorably.  If the timing of revenue and the related cash
collections are delayed three to six months from the timing of revenue and cash
collections in our operating plan then, an additional $1.5 million to $2.5
million in funds may be needed to fund the operations for the next twelve
months.

There can be no assurance that our execution of our operating plan and financing
strategies will be successful or that other actions may become necessary in
order to raise capital.  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 the
our business and results of operations.


                                       36
<PAGE>
ITEM 7.   FINANCIAL STATEMENTS

The Financial Statements for the years ended December 31, 2002 and 2001 are
found following the signature page of this report.

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS

On March 7, 2003 we filed a Report on Form 8-K to report a change in accountants
due to a merger of accounting firms.  Effective March 1, 2003, King Griffin &
Adamson P.C. merged with BDA&K Business Services, Inc. and formed a new entity,
KBA Group LLP.  The personnel that the Registrant has dealt with at King Griffin
& Adamson P.C. are now employees of KBA Group LLP.  As a result of this merger,
on March 1, 2003, King Griffin & Adamson P.C. resigned to allow its successor
entity KBA Group LLP to be engaged as the Registrant's independent public
accountants.


                                       37
<PAGE>
PART  III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

BOARD OF DIRECTORS

The following sets forth the names of our directors at December 31, 2002, their
principal occupations and the year in which each current Director of Citadel
initially joined the Board of Directors and the year in which their term as
director expires.

<TABLE>
<CAPTION>
                                                                                    DIRECTOR   TERM
NAME                            AGE              POSITION WITH COMPANY               SINCE    EXPIRES
------------------------------  ---  ---------------------------------------------  --------  -------
<S>                             <C>  <C>                                            <C>       <C>
Steven B.  Solomon               38  President, Chief Executive Officer, Secretary      1996     2004

Major General (Ret) John Leide   65  Director                                           2001     2003

Chris A. Economou                47  Director                                           2001     2003
</TABLE>

STEVEN B. SOLOMON has served as a director and the President and Chief Executive
Officer of Citadel since its formation in December 1996, as President and Chief
Executive Officer of CT Holdings since May 1997 and as a director of CT Holdings
since February 1996. Mr. Solomon also serves as a Director of Parago, Inc., an
incubation venture of CT Holdings that is an application solution provider and
Internet-based business process outsourcer that provides an on-line suite of
promotional offerings designed to automate promotional management and optimize
the customer care services offered by its clients, and he served as Chairman of
the Board of Directors of Parago from January 1999 to April 2001, and Chief
Executive Officer of Parago from January 1999 to August 2000. From February 1996
through April 1997, Mr. Solomon served as Chief Operating Officer of CT
Holdings. Since May 5, 2000, Mr. Solomon has also served as a director of River
Logic, Inc., an incubation venture of CT Holdings that creates and operates
integrated networks of decision support tools, elearning solutions and ecommerce
capabilities designed to enable decision makers to leverage knowledge and
information to gain competitive advantage.

MAJOR GENERAL (RET.) JOHN LEIDE has served as a director of Citadel since
December 2001. Mr. Leide serves presently as President of Appenine Associates
Ltd., an international defense and security services company that consults with
government intelligence and operational agencies, on strategic and security
matters. He previously served as Executive Vice President of Avenue Technologies
of Alexandria, Virginia from 1997 to 1999. Upon retirement from the U.S. Army in
1995, General Leide was the President of Global Information Technologies
strategic business unit with Electronic Data Systems (EDS) until 1997 when he
joined Avenue Technologies. General Leide also serves as a Senior Executive
Advisor to General Dynamics Land Systems and Senior Consultant to various
Washington-based governmental and business organizations. His long and
distinguished military career includes service to the country in security and
intelligence matters for more than 30 years. Among his recent assignments,
General Leide performed duties as Director of Intelligence, J-2, United States
Central Command, and served as chief of intelligence in the Gulf War for General
Schwarzkopf throughout Operations Desert Shield and Desert Storm. In his last
military position before retiring as an Army Major General in August 1995,
General Leide was Director, National Military Intelligence Collection Center
(NMICC); Director, Central MASINT (Measurements and Signatures) Office:
Director, Defense Human Intelligence Service (DHS), for the Department of
Defense.

CHRIS A. ECONOMOU has served as a director of Citadel since November 2001 and as
a director of CT Holdings since February 1996, and as a director of LoneStar
Hospitality Corp. from June 1993 until its merger with CT Holdings. Mr. Economou
has been engaged in the private practice of law in Fort Lauderdale, Florida,
primarily in the transactional and corporate areas since 1981. Mr. Economou also
served as a director of Parago during its incubation phase from January 1999 to
February 2000.


                                       38
<PAGE>
Classified Board of Directors

The current directors are divided into three classes with staggered three-year
terms.  As a result, a portion of our board of directors will be elected each
year.  The division of the three classes, the initial directors and their
respective election dates are as follows:

- the class 1 director is Chris A. Economou, and his term will expire at the
next annual meeting of stockholders;

- the class 2 director is Major General (Ret.) John Leide, and his term expires
at the 2003 annual meeting of stockholders; and

- the class 3 director is Steven B. Solomon and his term will expire at the 2004
annual meeting of stockholders.

In October 2002 Mr. Lawrence Lacerte and Mr. Philip Romano resigned as directors
of the Company for personal reasons unrelated to Company matters.  Both remain
shareholders in the Company.

At each annual meeting of stockholders, a class of directors will be elected to
serve for a three-year term to succeed the directors of the same class whose
terms are then expiring.  Only our board of directors may change the authorized
number of directors.  Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors.  This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of our company.

Committees of the Board of Directors

Citadel's board of directors established several standing committees to assist
in the discharge of its responsibilities.  These committees include an audit
committee composed exclusively of the outside directors, Mr. Economou and
General Leide, an executive committee and a compensation committee.  The
executive committee acts in place of the full board in matters delegated to it
to the extent permitted under Delaware law.  Messrs. Solomon and Economou serve
as members of the executive committee.  Citadel's board of directors may also
establish such other committees as it deems appropriate, in accordance with
applicable Delaware law and Citadel's bylaws.

Directors' Compensation

Citadel reviews its compensation arrangements for directors from time to time
and may alter these arrangements. Directors will receive no cash compensation
for services as a director or as a member of a committee of Citadel's board.
Citadel will reimburse each director for out-of-pocket expenses incurred in
connection with attendance at board and committee meetings.

We may, in our discretion, grant stock options and other equity awards to our
non-employee directors under our equity incentive plan.  Our outside directors
hold options to purchase an aggregate of 125,000 shares of our common stock at a
weighted average exercise price per share of $0.32.  Options held by these
directors were granted at the fair market value of our common stock as of the
date of grant as determined by our board of directors.


                                       39
<PAGE>
EXECUTIVE OFFICERS

Listed below is certain information concerning individuals who serve as
executive officers of Citadel.

<TABLE>
<CAPTION>
NAME                AGE              POSITION WITH CITADEL              EMPLOYED SINCE
------------------  ---  ---------------------------------------------  --------------
<S>                 <C>  <C>                                            <C>
Steven B.  Solomon   38  President, Chief Executive Officer, Secretary       1996

Richard Connelly     51  Chief Financial Officer                             2002

Carl Banzhof         37  Chief Technology Officer                            1996

David Harris         41  Chief Strategy Officer                              2003

Greg Duke            42  Vice President Sales                                2003

Richard Speyer       50  Executive Vice President Business Development       2001

Jack Doxey           36  Executive Vice President Marketing                  2002
</TABLE>

STEVEN B. SOLOMON has served as the President and Chief Executive Officer of
Citadel Security since its formation in December 1996, as President and Chief
Executive Officer of CT Holdings since May 1997 and as a director of CT Holdings
since February 1996.  Mr.  Solomon also serves as a Director of Parago, Inc., an
incubation venture of CT Holdings that is an application solution provider and
Internet-based business process outsourcer that provides an on-line suite of
promotional offerings designed to automate promotional management and optimize
the customer care services offered by its clients, and he served as Chairman of
the Board of Directors of Parago from January 1999 to April 2001, and Chief
Executive Officer of Parago from January 1999 to August 2000.  From February
1996 through April 1997, Mr. Solomon served as Chief Operating Officer of CT
Holdings.  Since May 5, 2000 Mr. Solomon has also served as a director of River
Logic, Inc., an incubation venture of CT Holdings that creates and operates
integrated networks of decision support tools, elearning solutions and ecommerce
capabilities designed to enable decision makers to leverage knowledge and
information to gain competitive advantage.

RICHARD CONNELLY joined the Company in March 2002 and serves as Chief Financial
Officer.  Mr. Connelly also serves as Chief Financial Officer of CT Holdings.
Mr. Connelly brings 27 years of financial management experience to the Company
initially serving as a financial consultant to Citadel and CT Holdings from
January 2002 until March 2002.  Prior to this, he served as Chief Financial
Officer for several venture funded technology companies, including from February
2001 until December 2001 at ASSET InterTech, Inc., a boundary scan software tool
developer; from September 1998 through November 2000 at JusticeLink, Inc., an
ecommerce legal services provider; and from April 1997 through July 1998 at
AnswerSoft, Inc., a developer of computer telephony software.  From February
1987 through March 1997, Mr. Connelly served in various financial management
capacities at Sterling Software Inc., an enterprise software development
company, including Vice President Corporate Controller, Vice President Treasurer
and Group Vice President Finance & Administration of Sterling's Systems
Management Group.

CARL E. BANZHOF has served as Chief Technology Officer of the Company since
November 2001 and of CT Holdings since July 1997, prior to which he served as
Vice President - Development of Network Products since joining CT Holdings in
February 1996. Mr. Banzhof has more than 17 years of experience in the software
industry, including designing, developing and marketing software products,
building software development teams and organizations and managing products in
network management and PC desktop markets. He was the founding partner and Vice
President of Software Engineering from 1992 to 1995 of Circuit Masters Software,
Inc., a software company which developed and marketed network management
utilities for Novell NetWare environments, and was acquired by CT Holdings in
February 1996. During his career, Mr. Banzhof has held various technology
positions with other companies including Fluor Daniel Engineers where he was
responsible for network infrastructure, and software development on numerous
projects. Mr. Banzhof currently sits on the board of OVAL, an industry
consortium developing a common language for security experts to discuss and
agree upon technical details about how to check for the presence of
vulnerabilities on computer systems.


                                       40
<PAGE>
DAVID HARRIS joined the Company in February 2003 as Chief Strategy Officer. Mr.
Harris has 21 years of experience in sales, marketing and management roles at
information technology and data security companies. Prior to joining the Company
Mr. Harris was Founder, Chairman and Chief Executive Officer of Complysec an IT
Security and Privacy services company. From June 2000 to January 2001 he held
the position of Vice President Business Development at e-Security, Inc. a
provider of security event management software. While at Internet Security
Systems, Inc. from December 1996 to June 2000, Mr. Harris was responsible for
the managing the sales, marketing, field engineering and professional services
activities.

GREG DUKE joined the Company as Vice President of Sales in January 2003.  Mr.
Duke has 22 years of experience with information technology companies and most
recently served as President of Duke and Associates Corporation a provider of
sales and business development outsourcing services from August  2001 until
joining Citadel.  From September 2000 to  July 2001 Mr. Duke was Vice President
of Sales and Business Development for Cotelligent, Incorporated an information
technology consulting company.  Mr. Duke held senior management positions at
Computer Associates International from December 1998 until August 2000,
including Senior Divisional Vice President of Application Information Management
Services and Senior Vice President and General Manager for the Western US
consulting services business.  From July 1995 until December 1998 Mr. Duke held
various sales and marketing management positions at IBM Corporation.

RICHARD SPEYER has served as Executive Vice President of Business Development
for Citadel since May 2001.  Prior to joining Citadel, Mr. Speyer served as EVP
of Business Development of Parago, Inc. from June 2000 to May 2001.  Prior to
joining Parago, Mr. Speyer worked for Compaq where he was responsible for a
billion dollar P&L managing the business development and partnership activities
for SAP, from 1993 to 1995 and from 1997 to 2000.  Mr.  Speyer held similar
positions at Novell from 1995 to 1997, where he managed the activities of
licensing complementary software and hardware for the NetWare operating system.
In addition, he was involved in defining the initial specifications and
licensing terms for Novell's High Availability clustering solutions.  Mr. Speyer
brings more than 21 years of experience in the computer industry to Citadel.
Eight of those years he served as CEO and Executive Vice President of Sales and
Marketing for CPU Corporation, a distributor of networking products.

JACK DOXEY joined Citadel in August 2002, as the Executive Vice President of
Marketing.  Mr. Doxey has thirteen years experience in software sales and
marketing including the retail and VAR distribution channels.  Prior to joining
Citadel, Mr. Doxey served as Vice President of Partners and Alliances for
Parago, Inc.  from August 1999 to August 2002.  From October 1997 to August 1999
Mr. Doxey served as Vice President of Marketing for CT Holdings Inc., a
technology incubator.  From November 1996 until October 1997, he served as Vice
President of Sales and Marketing for Visual Applications, a privately held
software manufacturer based in Kansas City, MO.  From March 1995 until November
1996, Mr. Doxey served as an independent sales and marketing consultant to
software and hardware manufacturers including: Attachmate Corporation,
MicroHelp, Eicon Technology Corporation, Penumbra Group, and smaller start-up
manufacturers.  From September 1994 until March 1995, he helped found MindShare
Associates, an out-sourced marketing company for software and hardware
manufacturers, where he served as Vice President.


                                       41
<PAGE>
ITEM 10.  EXECUTIVE COMPENSATION

The following table sets forth certain information with respect to the annual
and long-term compensation for services to Citadel for Citadel's chief executive
officer and the other most highly compensated officers of Citadel who are
executive officers of Citadel (the Named Executive Officers) during the periods
presented. Such amounts do not necessarily reflect the compensation such persons
will receive in the future. Following the Distribution all the executive
officers of the Company were compensated by Citadel. Prior to the Distribution
all executive officers, except Mr. Doxey, were compensated by CT Holdings from
the date of their employment. Compensation for Messrs. Solomon and Banzhof is
presented for all three reporting periods because they were employed by CT
Holdings prior to the Distribution for all of those periods. Compensation for
Messrs. Connelly, Doxey and Speyer are presented from their respective dates of
employment by either CT Holdings or Citadel.

<TABLE>
<CAPTION>
                                               SUMMARY COMPENSATION TABLE
                                                                                        LONG-TERM
                                                    ANNUAL COMPENSATION                COMPENSATION
                                          ------------------------------------------  ---------------
                                                                         OTHER          SECURITIES
                                                                        ANNUAL          UNDERLYING         ALL OTHER
                            PERIOD ENDED  SALARY ($)   BONUS ($)   COMPENSATION ($)     OPTIONS (#)    COMPENSATION ($)
                            ------------  -----------  ----------  -----------------  ---------------  -----------------
<S>                         <C>           <C>          <C>         <C>                <C>              <C>
Steven B.  Solomon               12/2002  $   200,000  $  150,000  $               0  4,750,000 ( 1 )  $    48,887 ( 3 )
  Chief Executive Officer        12/2001      200,000     150,000                  0  2,750,000 ( 2 )       17,548 ( 4 )
                                 12/2000      140,000     120,500                  0                0       12,619 ( 5 )

Richard Connelly                 12/2002  $   118,750  $        0  $               0          425,000  $    36,516 ( 6 )
  Chief Financial Officer

Carl Banzhof                     12/2002  $   115,000  $    8,500  $               0          225,000  $    10,051 ( 7 )
  Chief Technology Officer       12/2001      115,000           0                  0           50,000
                                 12/2000       95,833           0                  0

Richard Speyer                   12/2002  $   150,000  $        0  $               0          150,000  $    10,051 ( 7 )
  Executive Vice President       12/2001       97,789                              0                         3,493 ( 7 )
    Business Development

Jack Doxey                       12/2002  $    52,885  $        0  $               0          175,000  $        54 ( 7 )
  Executive Vice President
    Marketing
<FN>
(1)  Includes options to purchase 3,250,000 shares of Citadel common stock and a
     conversion right to exchange shares in Parago, Inc. for 1,500,000 shares of
     Citadel common stock.

(2)  Includes options to purchase 1,250,000 shares of Citadel common stock and a
     conversion right to exchange shares in Parago, Inc. for 1,500,000 shares of
     Citadel common stock.

(3)  Includes a payment of $28,077 for unused vacation, a car allowance of
     $11,400, and payments for life, health and disability insurance premiums.

(4)  Includes a car allowance of $11,400 plus $6,048 for payments of life
     insurance premiums.

(5)  Includes a car allowance of $11,400 plus payments of life insurance
     premiums.

(6)  Includes $25,000 in cash payments plus $7,273 paid with 25,000 pre
     Distribution shares of CT Holdings common stock in lieu of cash for
     consulting services performed prior to employment as CFO for Citadel plus
     payments of life, health and disability insurance premiums.

(7)  Includes payments of life, health and/or disability insurance premiums.
</TABLE>

Our Board of Directors makes determinations regarding salary levels and bonus
opportunities for our executive officers, and performs all other compensation
related functions. Members of the Board of Directors do not receive cash
compensation for their service.

Our compensation policy reflects a commitment to an executive compensation plan,
which enables us to attract, retain and motivate highly qualified management
professionals.  Our compensation philosophy is to directly align executive


                                       42
<PAGE>
compensation with the financial performance of the organization.  We believe
that the relationship between executive compensation and our performance will
create benefit for all shareholders.

The executive compensation program has been developed by the Board using various
factors which include historical earnings, review of industry competition
executive compensation plans, and consultation with compensation experts.  The
key elements of the executive compensation program are base salary, annual
incentive bonus and stock options.

The Board reviews and approves each element of our executive compensation
program and periodically assesses the effectiveness of the program as a whole.
This program covers the Chief Executive Officer, the other named executive
officers and all other executive officers.  Specifically, the Board approves the
salaries of all executive officers, the grants of stock options, and the
provision of any special benefits or perquisites to executive officers.

The base salary program is intended to provide base salary levels that are
externally competitive and internally equitable, and to reflect each
individual's sustained performance and cumulative contribution.  Each executive
officer's individual performance is reviewed to arrive at merit increase
determinations.  These merit increases are then reviewed within the context of
the total merit increase budget to determine reasonableness.

The option grants are designed to reward executive officers and other key
employees directly for appreciation in the long-term price of our stock.  The
plan directly links the compensation of executive officers to gains by the
shareholders and encourages executive officers to adopt a strong stakeholder
orientation in their work.  The option grants also places what can be a
significant element of compensation at risk because the options have no value
unless there is appreciation over time in the value of our stock.

With the understanding that the value (if any) of stock options is based on
future performance, we base stock option grants on levels of expected value for
long-term incentive grants among other companies and other comparable corporate
employers.  The Board periodically reviews the practices, grant levels and grant
values of other companies to ensure the plan continues to meet our objectives.

Miscellaneous benefits offered to executive officers are designed to provide a
safety net of protection against the financial catastrophes that can result from
illness, disability, or death.  Benefits offered to executive officers are
largely the same as those offered to the general employee population.

The Board believes the executive compensation program is adequate to accomplish
the program's goals of attracting, retaining, and motivating highly qualified
management professionals.  The Board believes the executive compensation program
is fair to both the executive officers and Citadel Security Software.

EMPLOYMENT AGREEMENTS

We have entered into an employment agreement with Mr.  Solomon, our Chief
Executive Officer.  The annual base salary payable to Mr.  Solomon was $200,000
as of January 2002, and the employment agreement provides for an annual bonus of
$150,000.  The employment agreement has an initial term of five years and is
renewable for one year terms following the initial term unless terminated.  If
Mr.  Solomon is terminated for any reason other than for cause, he is entitled
to a severance payment equal to three times his base salary and up to three
times his bonus.


STOCK OPTIONS GRANTED DURING 2002

The following table sets forth each grant of stock options during 2002 to each
of the Named Officers.  No stock appreciation rights were granted during the
fiscal year.  Each of the options has a ten-year term, subject to earlier
termination in the event the holder ceases providing services to us.

The percentage numbers are based on an aggregate of 3,670,000 options granted to
our employees during 2002, including officers.  The exercise price was equal to
the fair market value of our common stock as valued on the OTCBB


                                       43
<PAGE>
or, if prior to the Distribution, by the board of directors on the date of
grant. The exercise price may be paid in cash or in shares of our common stock
valued at fair market value on the exercise date. We may also finance the option
exercise by accepting a full recourse note from the optionee, except officers
and directors prohibited under the Sarbanes-Oxley Act of 2002, equal to the
exercise price for the purchased shares, together with any federal and state
income tax liability incurred by the optionee in connection with such exercise.

<TABLE>
<CAPTION>
                                   INDIVIDUAL GRANTS
                   ---------------------------------------------------------------
                        NUMBER OF           PERCENT OF
                       SECURITIES         TOTAL OPTIONS      EXERCISE
                   UNDERLYING OPTIONS       GRANTED TO        PRICE     EXPIRATION
NAME                     GRANTED        EMPLOYEES IN 2002     ($/SH)       DATE
-----------------  -------------------  ------------------  ----------  ----------
<S>                <C>                  <C>                 <C>         <C>
Steven B. Solomon        2,000,000 (1)               54.5%  $     0.34  11/05/2012

Richard Connelly           275,000 (2)                7.5%        0.32  03/16/2012
                           150,000 (3)                4.1%        0.34  11/05/2012

Carl Banzhof               175,000 (2)                4.8%        0.32  03/15/2012

Richard Speyer             100,000 (2)                2.7%        0.32  03/15/2012

Jack Doxey                 175,000 (2)                4.8%        0.34  11/05/2012
<FN>
     (1)  All options are immediately exercisable
     (2)  Options become exercisable quarterly in equal amounts over three years
          from grant date
     (3)  Options become exercisable in equal amounts quarterly over one year
          from grant date
</TABLE>

OPTION EXERCISES DURING 2002 AND YEAR-END OPTION VALUES

The following table reports information regarding stock option exercises during
fiscal 2002 and outstanding stock options held at the end of fiscal 2002 by our
named executive officers.

<TABLE>
<CAPTION>
                                                NUMBER OF              VALUE OF
                                                SECURITIES           UNEXERCISED
                                                UNDERLYING           IN-THE-MONEY
                                           UNEXERCISED OPTIONS         OPTIONS
                     SHARES                  AT FISCAL YEAR-       AT FISCAL YEAR-
                   ACQUIRED ON    VALUE      END(EXERCISABLE/      END(EXERCISABLE/
NAME                EXERCISE    REALIZED      UNEXERCISABLE)      UNEXERCISABLE)(2)
-----------------  -----------  ---------  --------------------  --------------------
<S>                <C>          <C>        <C>                   <C>
Steven B. Solomon        0         $0        3,250,000 / 0  (1)  $     3,640,000 / $0

Richard Connelly         0         $0         68,748 / 406,252   $  76,998 / $455,002

Carl Banzhof             0         $0         93,749 / 131,251   $ 104,999 / $147,001

Richard Speyer           0         $0         41,663 / 108,337   $  46,663 / $121,337

Jack Doxey               0         $0         14,583 / 160,417   $  16,333 / $179,667
<FN>
     (1)  Does not include an immediately exercisable exchange right for
          1,500,000 shares of common stock
     (2)  Based on closing market price of $1.12 per share on the OTCBB on
          December 31, 2002
</TABLE>


                                       44
<PAGE>
2002 STOCK INCENTIVE PLAN

The board of directors adopted the 2002 Stock Incentive Plan effective upon the
completion of the Distribution.  The plan authorizes the Board or a committee,
which administers the plan, to grant stock options, stock appreciation rights,
restricted stock and deferred stock awards to our officers, other key employees
and consultants.

A total of 1,500,000 shares of common stock were reserved for issuance under the
terms of the 2002 Stock Incentive Plan.  In the event of any sale of assets,
merger, reorganization, consolidation, recapitalization, stock dividend or other
change in corporate structure affecting the stock, the Board or committee may
make an equitable substitution or adjustment in the aggregate number of shares
reserved for issuance under the plan.  We have granted 550,000 awards under the
2002 Stock Incentive Plan as of  December 31, 2002.

Option Grants

The 2002 Stock Incentive Plan permits the granting of incentive stock options,
as defined by the Internal Revenue Code, and nonqualified stock options.
Incentive stock options may only be granted to our employees.  The term of any
stock option is set by the Board or committee, but cannot exceed ten years in
the case of incentive stock options.  Stock options become exercisable, in full
or in installments, for shares of common stock at the time determined by the
Board or committee, but generally a stock option will not be exercisable prior
to three months from the date of the grant of a stock option.  The exercise
price per share of stock options is determined by the Board or committee at the
time of grant, but must be equal to 100% of the fair market value of our common
stock on the date of grant.

Stock Appreciation Rights

Stock appreciation rights may be granted in conjunction with nonqualified stock
options granted under the 2002 Stock Incentive Plan to our officers, employees
and consultants.  Stock appreciation rights may only be exercised at such time
and to the extent the underlying options are exercisable.  These stock
appreciation rights entitle the holder, upon exercise of the stock appreciation
right, to receive an amount in any combination, of cash or our unrestricted
common stock equal in value to the excess of the fair market value on the date
of exercise of the stock appreciation rights of one share of our common stock
over the exercise price per share of the connected stock option multiplied by
the number of shares for which the stock appreciation right is exercised.  Each
stock appreciation right will terminate upon the termination of the related
option.

Restricted Stock Awards

The Board or committee may also award non-transferable restricted shares of our
common stock to our officers and key employees.  Such restricted shares will be
subject to such conditions and restrictions as the Board or committee may
determine.  The Board or committee will determine to whom restricted shares will
be granted, the number of shares to be awarded, the price, if any, to be paid by
the recipient, the times within which such awards may be subject to forfeiture
and all other conditions of the award.  During the restriction period set by the
Board or committee, the recipient may not sell, transfer, pledge or assign
restricted shares awarded to the recipient under the 2002 Stock Incentive Plan.
If a recipient of restricted stock terminates employment for any reason other
than death, disability or retirement prior to the end of the restriction period
determined by the Board or committee, the participant will forfeit all shares
still subject to restriction in exchange for the amount, if any, that the
participant paid for them.

Deferred Stock Awards

Deferred stock awards may be made under the 2002 Stock Incentive Plan by the
Board or committee to any of our officers, key employees and consultants it
determines.  These awards entitle the recipient to receive unrestricted shares
without any payment in cash or property in one or more installments at a future
date or dates, as determined by the Board or committee.  Each deferred stock
award will be confirmed by and subject to the terms of a deferred stock award
agreement executed by us and the recipient and may generally not be sold,
assigned, transferred, pledged or otherwise encumbered during the period
specified by the Board or committee.  Receipt of deferred stock may be
conditioned on


                                       45
<PAGE>
such matters as the Board or committee may determine, including continued
employment or attainment of performance goals. All rights under a deferred stock
award will generally terminate upon the participant's termination of employment
prior to the receipt of unrestricted shares.

Executive Compensation Conversion Stock Options

Under the 2002 Stock Incentive Plan, each year the Chairman of the Board of
Directors or the Board or committee will designate those executives eligible to
convert salary and bonus to stock options for the next year.  These eligible
executives may then, prior to the beginning of the next calendar year, elect to
convert up to 25% of their next year's salary and 25% of their next year's bonus
(in either 5% or $10,000 increments) into stock options under the plan.  On the
last day of each calendar year, the total amount of salary, bonus and
compensation an eligible executive elected to convert into stock options for
that calendar year will be converted into stock options.  The number of shares
of common stock subject to stock options that are converted from salary, bonus
or compensation will be the total dollar amount an eligible executive has
elected to convert into stock options divided by the per share value of a stock
option on the last day of that year, as determined by the Board or committee
using any recognized option valuation model it selects.  Options converted from
salary, bonus or compensation are generally exercisable, cumulatively, as to 10%
commencing on each of the first through tenth anniversaries of the day the
option is converted.

The exercise price per share of common stock under stock options obtained by
conversion of salary, bonus or compensation will, at the election of the holder
of the option prior to the year for which the option is converted from salary,
bonus or cash, be either 100% of the fair market value on the last day of the
year when the option is obtained or a lesser percentage determined by the Board
or committee from time to time, but not less than 75% of the fair market value
on the last day of the year when the option is obtained.

Change of Control

The 2002 Stock Incentive Plan provides that in the event of a change of control
of Citadel Security, unless otherwise determined by the Board or committee prior
to the change of control, and, to the extent expressly provided by the Board or
committee, in the event of a potential change of control, the following will
occur:

- Any stock appreciation rights and any stock options that are not previously
exercisable and vested will become fully exercisable and vested;

- The restrictions and deferral limitations on restricted stock and deferred
stock awards will lapse and these shares and awards will become fully vested;
and

- The value of all outstanding stock options, stock appreciation rights,
restricted stock and deferred stock awards will, to the extent determined by the
Board or committee, be settled on the basis of the change of control price as of
the date the change of control occurs.


                                       46
<PAGE>
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of March 21, 2003, there were issued and outstanding approximately 20,068,077
shares of Common Stock.  There is no other class of voting security of Citadel
issued or outstanding.  The following table sets forth the number of shares of
Common Stock beneficially owned as of March 21, 2003 by (i) each person known to
the Company to own more than 5% of the Common Stock, (ii) each director, (iii)
each executive officer named in the Summary Compensation Table and (iv) all
directors, named executive officers and other executive officers as a group.  We
calculated beneficial ownership according to Rule 13d-3 of the Securities
Exchange Act as of that date.  Shares issuable upon exercise of options or
warrants that are exercisable within 60 days after March 21, 2003 are included
as beneficially owned by the option holder or warrant holder.  Beneficial
ownership generally includes voting and investment power with respect to
securities.  Unless otherwise indicated below, the persons and entities named in
the table have sole voting and sole investment power with respect to all shares
beneficially owned.

<TABLE>
<CAPTION>
                                                          Approximate
                                             Number of      Percent
Name and Address                            Shares Owned    Of Class
------------------------------------------  ------------  ------------
<S>                                         <C>           <C>
Steven B. Solomon (1)                          6,396,499         24.2%

Lawrence Lacerte
     5950 Sherry Lane #900
     Dallas, Texas  75225                      2,175,000          9.8%

Micro Capital (2)
     410 Jessie Street, Suite 1002
     San Francisco, California  94103          1,350,000          6.3%

Chris A. Economou (3)
     150 North Federal Highway, Suite 210
     Fort Lauderdale, Florida  33301             243,600          1.2%

Richard Connelly (4)                             197,914            *

Carl Banzhof (5)                                 147,682            *

Richard Speyer (6)                                65,828            *

Major General (Ret) John Leide (7)
     78 Clubhouse Drive
     Palm Coast, Florida  32137                   62,500            *

Jack Doxey (8)                                    62,416            *

All officers and directors
     as a group (9 people) (9)                 7,213,938         26.4%

<FN>

* Less than 1%

(1) Includes 3,250,000 shares of common stock that are issuable upon the
exercise of immediately exercisable options and exchange rights for 1,500,000
shares of common stock.

(2) Includes 450,000 shares of common stock that are issuable upon the exercise
of warrants.

(3) Includes 62,500 shares of common stock that are issuable upon the exercise
of immediately exercisable options.

(4) Includes 129,614 shares of common stock that are issuable upon the exercise
of vested options.

(5) Includes 108,332 shares of common stock that are issuable upon the exercise
of vested options.  Includes 500 shares owned by his spouse.


                                       47
<PAGE>

(6) Includes 54,162 shares of common stock that are issuable upon the exercise
of vested options and 4,166 exercisable within 60 days of March 21, 2003.

(7) Includes 62,500 shares of common stock that are issuable upon the exercise
of immediately exercisable options.

(8) Includes 14,583 shares of common stock that are issuable upon the exercise
of vested options and 14,583 exercisable within 60 days of March 21, 2003.

(9) Includes 3,681,241 of shares issuable upon the exercise of vested options
and 56,248 shares issuable pursuant to options exercisable within 60 days of
March 21, 2003 held by all directors and all executive officers as a group.
</TABLE>

ITEM  12.  CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS

The following is a description of the material terms of the agreements and
arrangements involving our company and either CT Holdings or its direct or
indirect subsidiaries.

GENERAL

We were organized in December 1996 as a wholly owned subsidiary of CT Holdings.
Prior to the Distribution, two of our current directors (Messrs. Solomon and
Economou) and four of our executive officers (Messrs.  Solomon, Banzhof,
Connelly and Speyer) were also directors or officers and employees of CT
Holdings and/or its other subsidiaries.  Prior to the Distribution while acting
on our behalf, these directors and officers considered not only the short-term
and long-term impact of operating decisions on our business, but also the impact
of such decisions on the consolidated financial results of CT Holdings.
Following the distribution, Mr. Solomon remains Chief Executive Officer and a
director and Mr. Connelly remains Chief Financial Officer of CT Holdings, and
Messrs. Solomon and Economou remain directors of CT Holdings.

We have entered into a number of agreements with CT Holdings and its
subsidiaries relating to our historical business and our relationship with the
CT Holdings group of companies, the material terms of which are described below.
In addition, we recently entered into a number of agreements with CT Holdings
relating to the Distribution, which are described below and elsewhere in this
Form 10-KSB.  Although these agreements were not negotiated on an arm's-length
basis, we believe that the terms of these agreements are comparable to those
that we would receive from unaffiliated third parties.

Prior to the Distribution Date of May 17, 2002 the security software business
of Citadel was operated by CT Holdings  therefore the related party
transactions of CT Holdings from January 1, 2001 through the Distribution date
are described below.  Prior to the enactment of the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley") companies were allowed to enter into loan agreements with its
officers and directors.  Such loan transactions with officers and directors are
discussed below.  Following the enactment of Sarbanes-Oxley, no loans are
allowed or were made by either CT Holdings or Citadel to its officers and
directors.

AGREEMENTS RELATING TO THE DISTRIBUTION

We have entered into several agreements with CT Holdings to define our ongoing
relationship after the Distribution and to allocate tax and other specified
liabilities and obligations arising from periods prior to the Distribution Date.
We entered into these agreements prior to the Distribution while we were a
wholly owned subsidiary of CT Holdings.

DISTRIBUTION AGREEMENT

On or before the Distribution Date, CT Holdings and Citadel entered into the
distribution agreement, which provides for, among other things, the principal
corporate transactions required to effect the Distribution and certain other
agreements relating to the continuing relationship between Citadel and CT
Holdings after the Distribution.

The distribution agreement provides that prior to the Distribution Date, Citadel
will have issued to CT Holdings a number of Citadel Shares equal to one fourth
of the total number of shares of CT Holdings common stock outstanding on the
Distribution Date (plus an additional immaterial number of Citadel Shares to be
distributed with respect to


                                       48
<PAGE>
fractional shares that are rounded up). CT Holdings effected the Distribution by
delivering a certificate representing 100% of the Citadel Shares to the
Distribution Agent.

Under the distribution agreement and effective as of the Distribution Date,
Citadel assumed and agreed to indemnify CT Holdings against all liabilities,
litigation and claims, including related insurance costs, arising out of
Citadel's businesses (including discontinued or sold security software
businesses), and CT Holdings retained and agreed to indemnify Citadel against
all other liabilities, litigation and claims, including related insurance costs.
The foregoing obligations do not entitle an indemnified party to recovery to the
extent any such liability is covered by proceeds received by such party from any
third party insurance policy.

Under the distribution agreement for a two-year period beginning on the
Distribution Date, except in limited circumstances, Citadel will not solicit or
recruit any CT Holdings employee without CT Holdings' prior written consent and
likewise, CT Holdings will not solicit or recruit any Citadel employee without
Citadel's prior written consent.

The distribution agreement also provides that each of CT Holdings and Citadel
shall be granted access to certain records and information in the possession of
the other, and requires the retention by each of CT Holdings and Citadel for a
period of six years following the Distribution Date of all such information in
its possession.

TRANSITION SERVICES AGREEMENT

On the Distribution Date, Citadel entered into a transition services agreement
with CT Holdings.  This agreement provides that CT Holdings and Citadel will
provide each other services in such areas as information management and
technology, sharing of office space, personnel and indirect overhead expenses,
employee benefits administration, payroll, financial accounting and reporting,
claims administration and reporting, and other areas where CT Holdings and
Citadel may need transitional assistance and support.  The transition services
agreement provides generally that each of Citadel and CT Holdings will undertake
to provide substantially the same level of service and use substantially the
same degree of care as their respective personnel provided and used in providing
such services prior to the execution of the agreement.  The agreement generally
will extend for a one year term, but may be terminated earlier under certain
circumstances, including a default, and may be renewed for additional one-year
terms.  Initially, CT Holdings will pay Citadel a monthly fee of $20,000,
subject to adjustment on a quarterly basis.  No adjustments to the fee have been
made through December 31, 2002.  We believe that the terms and conditions of the
transition services agreement are as favorable to Citadel as those available
from unrelated parties for a comparable arrangement.

TAX DISAFFILIATION AGREEMENT

On the Distribution Date CT Holdings and Citadel entered into a tax
disaffiliation agreement which sets out each party's rights and obligations with
respect to deficiencies and refunds, if any, of federal, state, local or foreign
taxes for periods before and after the Distribution Date and related matters
such as the filing of tax returns and the conduct of Internal Revenue Service
and other audits.  Under the tax disaffiliation agreement, Citadel will
indemnify CT Holdings for all taxes and liabilities incurred as a result of
Citadel's or an affiliate's post-Distribution action or omission contributing to
an Internal Revenue Service determination that the Distribution was not
tax-free.  CT Holdings will indemnify Citadel for all taxes and liabilities
incurred solely because CT Holdings or an affiliate's post-Distribution action
or omission contributes to an Internal Revenue Service determination that the
Distribution was not tax-free.  If the Internal Revenue Service determines that
the Distribution was not tax-free for any other reason, CT Holdings and Citadel
will indemnify each other against all taxes and liabilities pro rata based on
relative values as of the Distribution Date.

Citadel will indemnify CT Holdings against any taxes resulting from any internal
realignment undertaken to facilitate the Distribution on or before the
Distribution Date.

RELATED PARTY TRANSACTIONS PRIOR TO THE DISTRIBUTION DATE

Prior to the Distribution CT Holdings held investments in Citadel, Parago Inc.
("Parago"), River Logic Inc. ("River Logic") and Encore Telecommunications, Inc.
("Encore").  Mr. Solomon, our CEO and a director of Citadel and a


                                       49
<PAGE>
director and CEO of CT Holdings is also a director of Parago and River Logic.
Mr. Lacerte and Mr. Romano, shareholders and former directors of Citadel were
directors and shareholders of CT Holdings until their resignation effected with
the Distribution. Mr. Lacerte also served as a director of Parago. Mr. Romano
served as a director of Encore.

During the years ended December 31, 2002 and 2001 CT Holdings received
substantially all of its financing from its CEO, directors and other related
parties.  The related party transactions of CT Holdings prior to the
Distribution Date are described below.  Other than transactions related to the
agreements related to the Distribution described above there were no
transactions with CT Holdings following the Distribution Date.

On January 1, 2001 CT Holdings had recorded a $1.2 million note receivable from
its CEO recorded on its balance sheet.  This note was issued in October 2000 by
CT Holdings with approval from its board of directors.  The note receivable was
due October 2001, bore interest at 5% per year and was repaid in full prior to
its maturity by cash payments of approximately $700,000 and by the offset of
approximately $506,000 in accrued salary and bonus due to him in 2001 pursuant
to his employment agreement.

In June 2001, the CEO loaned CT Holdings approximately $855,000 in connection
with CT Holdings' participation in a bridge loan transaction for Parago Inc., an
affiliated company.  Our CEO is also a director of Parago Inc. and through
several transactions advanced approximately $4 million of his personal assets to
Parago for working capital needs all of which was repaid to him in payments in
January and April 2001.

During the year ended December 31, 2001 and the period January 1, 2002 through
the Distribution Date, May 17, 2002, CT Holdings incurred legal fees in the
amount of approximately $60,000 and $49,500 respectively to a law firm in which
David Wood, an attorney who was a former CT Holdings' employee and is a relative
our CEO, is a partner.  After leaving the CT Holdings in 1997, his law firm
continued to provide legal services to CT Holdings.  Mr. Wood was also employed
as an executive officer of Parago from March 1999 through October 2001 for which
he had received an annual  salary of $150,000 per year.  See below for a
discussion of Mr. Wood's services to Citadel following the Distribution.

Mr. Lawrence Lacerte resigned as a director of CT Holdings effective with the
Distribution.  During the year ended December 31, 2001, CT Holdings issued an 8%
note payable to Mr. Lacerte for $250,000 and payable April 30, 2002.  This note
was unpaid at December 31, 2002 and is in default by CT Holdings.  In May 2002,
prior to the Distribution Date, Mr. Lacerte exercised stock options for
2,250,000 shares of CT Holdings' common stock by entering into a note payable to
CT Holdings for $450,000, the aggregate exercise price of the options.  This
note was subsequently charged to stock compensation expense.

At December 31, 2001 CT Holdings had a liability to its CEO of approximately
$290,000 for cash advances received to fund operations in 2001.  From January 1,
2002 through the Distribution Date CT Holdings received approximately $267,500
of additional advances from its CEO, repaid $322,500 of the total advances to
its CEO and offset $8,934 of the CEO's business expenses against the net amount
due the CEO.  The remaining amount due the CEO of approximately $226,000 was
converted by CT Holdings into a 5% note payable due July 1, 2002, and at
December 31, 2002 is in default and accruing interest at 18% per annum.

At December 31, 2001 CT Holdings had a $130,000 note receivable due from Encore.
CT Holdings' investment in Encore was liquidated in October 2002 in exchange for
approximately $2000 in liquidating proceeds.

In June 2001, two directors, Messrs.  Solomon and Lacerte, funded and guaranteed
CT Holdings' participation in a bank bridge loan financing of Parago.  In
consideration for this funding and guarantees, CT Holdings has agreed to permit
the directors to exchange up to 5,000,000 Parago shares into up to 6,000,000
shares of CT Holdings common stock including a right to any dividends.  The
exercise of the exchange right will require Citadel to issue up to 1,500,000
shares of Citadel common stock, if exercised.

On April 1, 2002, prior to the Distribution, CT Holdings entered into a $600,000
non-interest bearing convertible note payable due April 1, 2003 to Thomas Oxley
a 5% shareholder.  The note payable may be converted, at the option of the


                                       50
<PAGE>
shareholder, into a maximum of 2,700,000 shares of CT Holdings common stock and
675,000 shares of Citadel common stock.

Prior to the Distribution Date employees, officers and directors of CT Holdings
exercised options for approximately 1,397,500 shares of CT Holdings common
stock.  The aggregate exercise price of approximately $297,000 was recorded as
compensation expense by CT Holdings.  The holders of these shares received
approximately 349,375 shares of Citadel common stock as a result of the
Distribution.

In May 2002, prior to the record date of the Distribution, CT Holdings entered
into negotiations to settle approximately $860,000 of operating liabilities in
exchange for 1,662,500 shares of CT Holdings common stock.  As of December 31,
2002  the extinguishment of approximately $163,000 of these liabilities was
completed and approximately 612,500 shares of CT Holdings common stock was
issued including 100,000 shares for services provided by an independent
consultant, 12,500 shares to a consultant for services performed prior to
employment as the CT Holdings' and Citadel's Chief Financial Officer, 250,000
shares to a shareholder for consulting services,  and 250,000 shares to David
Wood for the performance of professional services to the Company.  At the
Distribution Date approximately 153,125 shares of Citadel common stock were
issued to these same individuals.  At December 31, 2002 approximately $697,000
of CT Holdings operating liabilities were not yet settled with approximately
1,050,000 shares of the CT Holdings' common stock which if issued will require
Citadel to issue approximately 262,500 shares of Citadel common stock.  We
believe that the negotiations will ultimately be concluded with the issuance of
the shares in full settlement of these liabilities however there can be no
assurance that such settlement will be finalized or on terms favorable to the
Company.

CITADEL RELATED PARTY TRANSACTIONS FOLLOWING THE DISTRIBUTION DATE

Since the Distribution Date we have entered in notes payable aggregating
$450,000 for which our CEO has signed personal guarantees. In addition, our CEO
has personally guaranteed the lease for our office space with future minimum
rent commitments of $410,803. Since the Distribution Date our CEO has advanced
$604,000 to the Company and the Company has repaid $250,000 of those advances.
On November 5, 2002 we entered into two promissory notes payable to our CEO in
the total amount of $570,000. The $570,000 consists of $354,000 of cash advances
and accrued compensation and expenses of $216,000 due to the CEO. The notes bear
interest at 8% per annum, mature on February 28, 2003 and are secured by all of
the Company's copyrights, trademarks, patents and intellectual property under
patent application. In the event of default, including the failure to pay any
principal or interest by the Company or the payment of any obligations of the
Company for which the CEO has personally guaranteed, the notes shall become
immediately due and payable and shall bear interest at 18% per annum. In
February, 2003 the Company repaid $550,000 of the notes to the CEO.

Since the Distribution Date and entity related to an employee of the Company has
advanced the Company $170,900 under short term notes and advances due on demand.
The Company has repaid all of the notes and advances.

In June 2002, the Company entered into an 8% note payable for $250,000 due July
31, 2002 with Lawrence Lacerte, a former director of the Company.  This note was
in default and accrued interest at 18% per annum.  In February 2003 Mr. Lacerte
exercised stock options for 862,500 shares of the Company's common stock using
the note and accrued interest through the date of exercise as payment of the
aggregate exercise price of $276,000.

Pursuant to the transition services agreement, CT Holdings reimburses the
Company $20,000 per month for the shared services of the Company's CEO, CFO and
administration.  At December 31, 2002 the Company has a $150,000 receivable due
from CT Holdings for these services since May 17, 2002, the Distribution Date.
Due to the cash deficiency of CT Holdings we have fully reserved this receivable
and continue to show the costs of these services as a general and administrative
expense in our statement of operations.

Following the Distribution and through December 31, 2002, Mr. Wood provided
legal services to the Company and the Company has recorded legal expenses of
approximately $ 31,225 plus stock compensation expense of $84,200 for stock and
stock options issued in payment for consulting services provided by Mr. Wood
since the Distribution Date.


                                       51
<PAGE>
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

The  exhibits  listed  in  the  accompanying  index  to  exhibits  are  filed or
incorporated  by  reference  as  part  of  this  Annual  Report.

(b)  REPORTS ON FORM 8-K

On November 13, 2002 the Company filed a report on Form 8-K which included an
earnings release for the three and nine months ended September 30, 2002.

On February 13, 2003 the Company filed a report on Form 8-K which included a
press release announcing the closing of a private placement on January 30, 2003
for approximately $2.5 million.

On March 7, 2003 the Company filed a Report on Form 8-K to report a change in
accountants due to a merger of accounting firms.  Effective March 1, 2003, King
Griffin & Adamson P.C. merged with BDA&K Business Services, Inc. and formed a
new entity, KBA Group LLP.  The personnel that the Registrant has dealt with at
King Griffin & Adamson P.C. are now employees of KBA Group LLP.  As a result of
this merger, on March 1, 2003, King Griffin & Adamson P.C. resigned to allow its
successor entity KBA Group LLP to be engaged as the Registrants independent
public accountants.


                                       52
<PAGE>
ITEM.14. CONTROL AND PROCEDURES

a) Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date
within 90 days of the filing date of this Annual Report on Form 10-K, the
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner. (b) Changes in internal controls. There were
no significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
most recent evaluation.


                                       53
<PAGE>
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Annual Report on
Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date:  March 31, 2003                  CITADEL SECURITY SOFTWARE INC.

                                       By:  /s/  STEVEN B. SOLOMON
                                       ---------------------------------------
                                            Steven B. Solomon, President And
                                               Chief Executive Officer



POWER OF ATTORNEY

KNOW  ALL  PERSONS  BY  THESE PRESENTS, that each person whose signature appears
below  constitutes  and  appoints  Steven  B.  Solomon  his  true  and  lawful
attorney-in-fact  and agent, with full power of substitution and resubstitution,
to  sign any and all amendments to this Annual Report on Form 10-KSB and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and  agent  full  power  and  authority to do and perform each and every act and
thing  requisite  and  necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming  all  that  said  attorney-in-fact  and  agent,  or his substitute or
substitutes,  or  any  of  them,  shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this  report  has  been  signed  below by the following persons on behalf of the
Registrant  and  in  the  capacities  and  on  the  dates  indicated:

<TABLE>
<CAPTION>
             SIGNATURE                             TITLE                        DATE
------------------------------------  -----------------------------------  --------------
<S>                                   <C>                                  <C>
/s/   STEVEN B. SOLOMON               President, Chief Executive Officer   March 31, 2003
------------------------------------  and Director
Steven B. Solomon                     (Principal Executive Officer )


/s/   RICHARD CONNELLY                Chief Financial Officer and          March 31, 2003
------------------------------------  Principal Accounting Officer
Richard Connelly


/s/   JOHN LEIDE                      Director                             March 31, 2003
------------------------------------
Major General (Ret) John Leide


/s/   CHRIS A. ECONOMOU               Director                             March 31, 2003
------------------------------------
Chris A. Economou
</TABLE>


                                       54
<PAGE>
CERTIFICATIONS

I, Steven B. Solomon, Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-KSB of Citadel Security
Software Inc., a Delaware corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

/s/ STEVEN B. SOLOMON
---------------------
Steven B. Solomon, Chief Executive Officer
Principal Executive Officer


                                       55
<PAGE>
I, Richard Connelly, Chief Financial Officer, certify that:

1. I have reviewed this annual report on Form 10-KSB of Citadel Security
Software Inc., a Delaware corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

/s/ RICHARD CONNELLY
--------------------
Richard Connelly, Chief Financial Officer
Principal Financial Officer


                                       56
<PAGE>
INDEX TO EXHIBITS

Item 13(a)

EXHIBIT
NUMBER                             DESCRIPTION

3.1     Amended and Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3.1 to the Registrant's Registration Statement on Form 10-SB,
Registration No. 000-33491, filed with the Commission on January 11, 2002 (the
"Form 10-SB") and incorporated by reference herein)

3.2     Amended and Restated By-laws of the Registrant (filed as Exhibit 3.2 to
the Form 10-SB and incorporated by reference herein)

4.1     Form of Certificate of Common Stock of the Registrant (filed as Exhibit
4.1 to the Form 10-SB and incorporated by reference herein)

10.1    Form of Plan and Agreement of Distribution between CT Holdings and
Registrant (filed as Exhibit 10.1 to the Form 10-SB and incorporated by
reference herein)

10.2    Form of Tax Disaffiliation Agreement between CT Holdings and the
Registrant (filed as Exhibit 10.2 to the Form 10-SB and incorporated by
reference herein)

10.3     Form of Transition Services Agreement between CT Holdings and
Registrant (filed as Exhibit 10.3 to the Form 10-SB and incorporated by
reference herein)

10.4    Form of Indemnification Agreement between Registrant and its directors
and officers (filed as Exhibit 10.4 to the Form 10-SB and incorporated by
reference herein)

10.5    Employment Agreement dated as of January 1, 2002 by and between
Registrant and Steven B.  Solomon (filed as Exhibit 10.5 to the Form 10-SB and
incorporated by reference herein)

10.6    2002 Stock Incentive Plan of the Registrant  (filed as Exhibit 10.6 to
the Form 10-SB and incorporated by reference herein)

10.7    Master Services Agreement, dated as of December 19, 2001, between CT
Holdings and SBC Services (filed as Exhibit 10.7 to Amendment No. 1 to the Form
10-SB filed with the Commission on March 6, 2002 and incorporated by reference
herein)

10.8    Sublease Agreement, dated March 22, 2002, between the Registrant and
SWS Securities, Inc. (filed as Exhibit 10.8 to Amendment No. 2 to the Form 10-SB
filed with the Commission on April 5, 2002 and incorporated by reference herein)

10.9    Form of Subscription Agreement between the Registrant and certain
accredited investors (filed as Exhibit 99.2 to the Registrant's Current Report
on Form 8-K filed with the Commission February 13, 2003 and incorporated by
reference herein)

10.10   Form of Warrant issued by the Registrant to certain accredited
investors (filed as Exhibit 99.3 to the Registrant's Current Report on Form 8-K
filed with the Commission February 13, 2003 and incorporated by reference
herein)


                                       57
<PAGE>
                         CITADEL SECURITY SOFTWARE INC.
                               DECEMBER 31, 2002
                               TABLE OF CONTENTS



                                                                           Page

Report of Independent Certified Public Accountants                          F-2

Balance Sheets as of December 31, 2002 and 2001                             F-3

Statements of Operations
  for the years ended December 31, 2002 and 2001                            F-4

Statement of Stockholders' (Deficit) Equity
  for the years ended December 31, 2002 and 2001                            F-5

Statements of Cash Flows
  for the years ended December 31, 2002 and 2001                            F-6

Notes to Financial Statements                                               F-7


                                      F-1
<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
               --------------------------------------------------


Board of Directors
Citadel Security Software Inc.

We have audited the accompanying balance sheets of Citadel Security Software
Inc., (the "Company") as of December 31, 2002 and 2001 and the related
statements of operations, stockholders' (deficit) equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Citadel Security Software Inc.
as of December 31, 2002 and 2001 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note A, the
Company has incurred recurring operating losses and has a working capital
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note A. The financial statements do not include any
adjustments that may result from the outcome of this uncertainty.


/s/ KBA  Group  LLP
-------------------
KBA  Group  LLP
Dallas,  Texas
March  5,  2003


                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                         CITADEL SECURITY SOFTWARE INC.
                                 BALANCE SHEETS


                                                                        DECEMBER 31,
                                                                    2002           2001
                                                             ---------------  --------------
<S>                                                          <C>              <C>
                            ASSETS
                            ------
CURRENT ASSETS
  Cash and cash equivalents                                  $       12,829   $      75,030
  Accounts receivable-trade, less allowance
   of $20,000 and $0                                                166,665          24,222
  Note receivable                                                   201,000               -
  Prepaid expenses and other current assets                          56,197          72,702
                                                             ---------------  --------------
  Total current assets                                              436,691         171,954

PROPERTY AND EQUIPMENT, net of accumulated
  depreciation of $1,005,503 and $968,569                           432,461          43,006

CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
  net of accumulated amortization of
  $2,671,257 and $2,551,666                                         651,554         174,110

OTHER ASSETS                                                         17,243          24,651
                                                             ---------------  --------------
  TOTAL ASSETS                                               $    1,537,949   $     413,721
                                                             ===============  ==============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT
                      -------------------------------------
CURRENT LIABILITIES
  Accounts payable and accrued expenses                      $    1,416,196   $     768,406
  Payroll tax obligations                                           788,562         245,385
  Accrued compensation                                              265,440          93,856
  Deferred revenue                                                  150,193               -
  Notes payable to shareholders,
    net of debt discount of $47,083                                 402,917               -
  Notes and advances payable to related parties                     841,541               -
                                                             ---------------  --------------
  Total current liabilities                                       3,864,849       1,107,647

COMMITMENTS AND CONTINGENCIES (Notes F and G)

PREFERRED STOCK, $.01 par value per share;
  1,000,000 shares authorized; no shares issued
  or outstanding at December 31, 2002 and 2001
COMMON STOCK, $.01 par value per share;
  50,000,000 shares authorized; 15,255,577
  and 12,457,402 shares issued and outstanding
  at December 31, 2002 and 2001                                     152,555         124,574
ADDITIONAL PAID-IN CAPITAL                                       28,889,332      28,203,392
ACCUMULATED DEFICIT                                             (31,368,787)    (29,021,892)
                                                             ---------------  --------------
STOCKHOLDERS' DEFICIT                                            (2,326,900)       (693,926)
                                                             ---------------  --------------
 TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                 $    1,537,949   $     413,721
                                                             ===============  ==============
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                      F-3
<PAGE>
<TABLE>
<CAPTION>
                         CITADEL SECURITY SOFTWARE INC.
                            STATEMENTS OF OPERATIONS


                                                                YEARS ENDED
                                                                DECEMBER 31,
                                                             2002          2001
                                                        ------------  ------------
<S>                                                     <C>           <C>
Revenue
  License fees                                           $ 1,169,339   $   545,693
  Customer support and services                              142,461        34,346
                                                          -----------   -----------
                                                           1,311,800       580,039

Costs of revenue
  Software amortization                                      119,590       594,923
  Customer support costs                                     167,107             -
  Shipping and other costs                                     4,942        26,459
                                                          -----------   -----------
  Total costs of revenue                                     291,639       621,382

Operating expenses
  Selling, general and administrative expense              3,306,257     1,610,922
  Product development expense                                285,105       118,432
  Depreciation expense                                        36,934        95,284
                                                        ------------   -----------
  Total operating expenses                                 3,628,296     1,824,638
                                                        ------------   -----------
  Operating loss                                          (2,608,135)   (1,865,981)

Interest expense                                            (107,796)            -
Write off of accounts payable                                369,036             -
                                                        ------------   -----------
Loss before income taxes                                  (2,346,895)   (1,865,981)

Provision for income taxes                                        -             -
                                                         -----------   -----------
Net loss                                                 $(2,346,895)  $(1,865,981)
                                                         ===========   ===========

Net loss per share - basic and diluted                   $     (0.17)  $     (0.15)
                                                         ============  ============

Weighted average shares outstanding -
    basic and diluted                                     13,874,488    12,433,427
                                                         ============  ============
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                                CITADEL SECURITY SOFTWARE INC.
                                         STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY


                                               Common Stock
                                -----------------------------------------
                                               After Effect of
                                 As Reported    Distribution                 Additional      Accumulated
                                  By Parent         Ratio        Amount    Paid-in Capital     Deficit         Total
                                -------------  --------------  ----------  ---------------  --------------  -----------
<S>                             <C>            <C>             <C>         <C>              <C>             <C>
Balances at December 31, 2000    49,660,704        12,415,176  $  124,152    $ 27,143,875   $(27,155,911)   $  112,116

Parent common stock issued
   pursuant to the exercise of
   warrants                         168,904            42,226         422            (422)                            -

Net contribution from parent                                                    1,059,939                    1,059,939

Net loss                                                                                      (1,865,981)   (1,865,981)
                                -------------  --------------  ----------  ---------------  --------------  -----------
Balances at December 31, 2001    49,829,608        12,457,402     124,574      28,203,392    (29,021,892)     (693,926)

Parent common stock issued in
   lieu of cash for services         12,500             3,125          31             (31)                           -

Parent common stock issued
   pursuant to the exercise
   of stock options               6,647,500         1,661,875      16,618         (16,618)                           -

Parent common stock issued in
   lieu of cash for settlement
   of liabilities                   868,306           217,077       2,171          (2,171)                           -

Other, including fractional
   shares issued in the
   Distribution                     188,014            47,765         478            (478)                           -

Net contribution from parent
   through spin-off
   distribution date                                                              200,131                       200,131

Issuance of common stock
   in conjunction with notes payable
   to shareholders                                    250,000       2,500         109,167                       111,667

Issuance of common stock
   pursuant to the exercise of
   stock options                                      488,333       4,883         256,382                       261,265

Stock and stock options issued
   in lieu of cash for services                       130,000       1,300         139,558                       140,858

Net loss                                                                                      (2,346,895)    (2,346,895)
                                               --------------  ----------  ---------------  --------------  -----------
Balances at December 31, 2002                      15,255,577   $ 152,555    $ 28,889,332   $(31,368,787)   $(2,326,900)
                                               ==============  ==========  ===============  ==============  ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                      F-5
<PAGE>
<TABLE>
<CAPTION>
                         CITADEL SECURITY SOFTWARE INC.
                           STATEMENTS OF CASH FLOWS


                                                                      YEARS ENDED
                                                                      DECEMBER 31,
                                                                   2002          2001
                                                               ------------  ------------
<S>                                                            <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net loss                                                 $(2,346,895)  $(1,865,981)
      Adjustments to reconcile net loss to net cash
        used in operating activities:
          Depreciation and amortization                            156,524       690,205
          Provision for returns, allowances and bad debts           20,000       (19,354)
          Amortization of debt discount                             62,583             -
          Stock and stock options issued for payment
            of services                                            140,858             -
      Changes in operating assets and liabilities
        Accounts receivable                                       (162,443)       49,926
        Inventory                                                       -         22,077
        Prepaid expenses and other current assets                   16,505        21,515
        Other assets                                                 7,408        17,444
        Accounts payable and accrued expenses                      647,790        56,972
        Payroll tax liability                                      543,177       245,385
        Accrued compensation                                       171,584        78,037
        Deferred revenue                                           150,193             -
                                                              ------------  ------------
      NET CASH USED IN OPERATING ACTIVITIES                       (592,716)     (703,774)

CASH FLOWS FROM INVESTING ACTIVITIES
      Purchases of property and equipment                         (426,389)      (44,232)
      Capitalized software development costs                      (597,034)     (177,110)
                                                              ------------  ------------
      NET CASH USED IN INVESTING ACTIVITIES                     (1,023,423)     (221,342)

CASH FLOWS FROM FINANCING ACTIVITIES
      Proceeds of notes and advances from
        related parties                                          1,262,441             -
      Payments on notes and advances from
        related parties                                           (420,900)            -
      Proceeds from notes payable to shareholders                  450,000             -
      Proceeds from notes payable                                   40,000             -
      Payments on notes payable                                    (40,000)      (70,924)
      Proceeds from exercise of stock options                       60,266             -
      Proceeds from issuance of common stock                         2,000             -
      Net contribution from Parent                                 200,131     1,059,939
                                                               ------------  ------------
      NET CASH PROVIDED BY FINANCING ACTIVITIES                  1,553,938      989,015
                                                               ------------  ------------
      Net (decrease) increase in cash
        and cash equivalents                                       (62,201)       63,899
      Cash and cash equivalents at the beginning
        of the period                                               75,030        11,131
                                                               ------------  ------------
      Cash and cash equivalents at the end
        of the period                                          $    12,829   $    75,030
                                                               ============  ============

Interest payments                                              $     4,223            -

Non cash financing and investment items
   Common stock issued at below fair value recorded
     as debt discount                                           $  109,167    $        -
   Stock options exercised in exchange for note receivable         201,000             -
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                      F-6
<PAGE>
                         CITADEL SECURITY SOFTWARE INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2002

NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements of Citadel Security Software Inc. (the
"Company" or "Citadel") have been prepared in accordance with generally accepted
accounting principles.  The Company began operations as a separate standalone
company immediately following the pro rata dividend distribution on May 17, 2002
as further discussed below.  Prior to May 17, 2002 certain of CT Holdings, Inc.
("CT Holdings"), the Company's former parent, assets, liabilities and expenses
were allocated to Citadel based on an estimate of the proportion of amounts
allocable to Citadel, utilizing such factors as revenues, number of employees,
and other relevant factors.  In the opinion of management, the allocations have
been made on a reasonable and consistent basis for the periods presented prior
to May 17, 2002.  Management believes that all amounts allocated to Citadel are
a reasonable representation of the costs that would have been incurred if
Citadel had performed these functions as a standalone company.

The Distribution

Citadel was incorporated under the laws of the state of Delaware in December
1996 as a wholly owned subsidiary of CT Holdings.  In November 2001, the board
of directors of CT Holdings approved the spin-off of Citadel through the
declaration of a pro rata dividend distribution to the holders of record of the
outstanding shares of CT Holdings common stock (the "Distribution").  CT
Holdings set May 6, 2002 as the record date and on May 17, 2002 a pro rata
dividend of 14,387,244 shares of Citadel's common stock were distributed to CT
Holdings shareholders.  In the Distribution each common shareholder of CT
Holdings received one share of Citadel common stock for every four shares of CT
Holdings common stock held as of May 6, 2002, the record date. The Distribution
is intended to be a tax free distribution for U.S. federal tax purposes although
there is no assurance that the transaction will be tax free to CT Holdings or to
shareholders receiving the dividend.

Description of Business

Citadel develops, markets, and licenses security software solutions that address
network security inside the firewall, a growing segment within the software
industry.  The Company's security software products are typically licensed for
perpetual use on standalone personal computers or on single or multiple
networks, across single or multiple customer computing sites.  The Company's
software products, Hercules, Secure PC(TM) and NetOFF(TM), provide flexibility
and scalability to network security administrators for automating the
remediation of security vulnerabilities and for managing security policies
within computing environments.  These security software solutions run on servers
and workstations and provide controlled automation of the remediation process of
network security vulnerabilities and to secure computers and networks against
unauthorized configuration changes, unapproved software installations, insecure
accounts, backdoors, software defects and other causes of network security
vulnerabilities in computing systems.


Liquidity

From the beginning of the year 2000 until the first release of Hercules in March
2002 the Company's business strategy was focused primarily on Hercules product
development, business development and minimal marketing of its Secure PC and
NetOFF products.


                                      F-7
<PAGE>
Until late 2001, the Company allocated minimal resources to the licensing of its
products and as a result the Company generated minimal revenue. The result has
been recurring operating losses, negative cash flow from operations and a
significant deficiency in working capital of $3,428,158 and a significant
stockholders' deficit of $2,326,900 at December 31, 2002.

In January 2003, the Company closed a private equity placement (the "January
2003 Financing") and received net proceeds of approximately $2,378,000 from the
issuance of 3,275,000 shares of unregistered common stock and issued warrants to
the investors for approximately 1,637,500 shares of common stock with an
exercise price of $1.50 per share and warrants to the placement agent for
245,625 shares of common stock at an exercise price of $1.18 per share.  If all
of the warrants were exercised approximately $2,700,000 of additional cash
proceeds would be available to the Company.  The Company's primary cash flow
strategy is to increase cash flow from the execution of the operating plan which
relies primarily upon the fees to be received from the licensing of Hercules.
The January 2003 Financing coupled with management's forecast of revenue in 2003
is expected to provide sufficient working capital for the next twelve months.
However should the Company not achieve its revenue forecast additional financing
would be required.

Subsequent to December 31, 2002 principal in the amount of $225,000 of the
$450,000 on notes payable to shareholders was paid.  In addition, a $250,000
note payable to a former director plus accrued interest was used to offset the
aggregate exercise price of stock options exercised for 862,500 shares of common
stock.

During the year ended December 31, 2001, substantially all of the funding of
Citadel and its former parent company, CT Holdings, was received from related
parties.  Citadel received contributions from CT Holdings of approximately
$1,060,000 during the year ended December 31, 2001 and approximately $200,000
from January 1, 2002 through May 17, 2002, the Distribution Date.  Since the
Distribution Date the Company has received advances and proceeds of short term
notes of approximately $1,260,000 from related parties and entered into a notes
payable for approximately $490,000 from shareholders and other third parties.
Since the Distribution Date stock options for 188,333 shares of common stock
were exercised providing proceeds of approximately $60,000.  In addition, in
December 2002 stock options for 300,000 shares of stock were exercised in
exchange for a note receivable of $201,000 that was colleted in January 2003.

During the year ended December 31, 2002 the Company repaid debt to related
parties of $420,900 and repaid a short term note payable of $40,000 to an
unrelated third party.  A $250,000 note payable to a former director of the
Company due July 31, 2002 was in default at December 31, 2002 and was bearing
interest at a rate of 18% per annum.  This note payable plus accrued interest
was repaid through the offset of the aggregate exercise price of stock options
exercised by the former director in the first quarter of 2003.

Prior to the January 2003 Financing substantially all of the Company's cash
requirements were raised from related parties including the Company's CEO and
certain shareholders of the Company.  This funding from related parties was
obtained through the issuance of short term notes payable, sales of unregistered
stock and the exercise of stock options.  Should additional funding be required
the Company would seek funding from independent third party sources, as well as,
current shareholders and related parties.  There can be no assurance that
management's execution of its operating plan and financing strategies will be
successful or that other actions may become necessary in order to raise capital.
Although the Company has been successful


                                      F-8
<PAGE>
raising capital in the past, any inability 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.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements.  Actual results could
differ from those estimates.

Revenue Recognition

The Company's customers consist of large and small corporations, healthcare
organizations, financial institutions, individual consumers, and government and
educational agencies.  The Company's revenue recognition policies comply with
Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by
SOP 98-9 and Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in
Financial Statements".  License revenue is recognized when persuasive evidence
of a sale arrangement exists, delivery has occurred, the fee is fixed or
determinable and collectibility is probable.  Customer support contracts provide
the customer the right to telephone support, software patches, point releases of
new features and functionality and vulnerability remediation updates on a when
and if available basis.  Customer support contracts do not include explicit
rights to new versions of the software or new products.  Customer support
contracts are sold separately from the license and the related revenue is
recognized ratably over the term of the support contract.  The Company's
products are typically licensed standalone and are not typically bundled with
professional services, training or other products and services.  Should
additional products or services be grouped together as an offering, revenue
would be allocated to the components based on vender specific objective evidence
and recognized separately for each component in accordance with SOP 97-2, SOP
98-9 and SAB 101.

Customers may download the Company's products from its website, obtain a license
from Citadel's direct sales organization, or license products through promotions
or agreements with independent third party resellers.  The Company's products
are not licensed through retail distribution channels.  A customer may return a
product under very limited circumstances during the first thirty days from
shipment for a replacement if the media is damaged or for a full refund if the
software does not perform in accordance with written specifications.
Accordingly, the Company records a provision for returns against license revenue
in the same period the revenue is recorded.  The provision is estimated based on
historical product returns and other known data as well as market and economic
conditions.  An allowance for returns, allowances and bad debts of $20,000 has
been recorded at December 31, 2002.  This estimate may fluctuate from period to
period due to factors including but not limited to the value of actual returns,
the average dollar value of licenses granted in the period and the relative
product revenue volume for the period.  No such reserve was determined to be
required at December 31, 2001.

Current reseller agreements do not provide for a contractual right of return,
future price concessions, or minimum purchase commitments.  Payment is not
contingent upon the reseller's future licensing of products.  Revenue generated
from products licensed through various marketing channels where the right of
return might explicitly or implicitly exist is reduced by reserves for estimated
product returns.  Such reserves


                                      F-9
<PAGE>
are estimates developed by management based on returns history and current
economic and market trends. Management determined that no reserve for returns
from resellers was required at December 31, 2002 or 2001.

The Company also offers its products to customers under two-year subscription
licenses.  The customer may renew the subscription at the end of the two-year
term or may convert the subscription into a perpetual use license at any time
for an additional fee.  Under the subscription license the customer receives the
right to use the product, post sale customer support and vulnerability updates
for the term of the subscription and as long as the customer meets its payment
obligation.  The subscription fee payment is generally due in equal payments at
the beginning of the subscription term and then on each anniversary date
thereafter.  Revenue from subscriptions is recognized ratably over the term of
the subscription.  If a customer fails to adhere to the payments terms of the
subscription, the revenue recognized is limited to the ratable recognition of
the amount of payments actually received.  No subscription revenue was
recognized in the years ended December 31, 2002 or 2001.

The Company's current product strategy is structured around the current and
future releases of Microsoft Windows operating system environments.  A 2003
release of Hercules will support versions of UNIX and Linux operating system
platforms.  These operating systems are well established and the Company
believes that this cross platform strategy reduces the potential exposure to
product obsolescence due to rapid changes in customer preferences or
technological obsolescence due to the introduction of new operating systems or
computing products.  However, it is possible that these factors may change in
the future as the Company's business model is adapted to changes in technology,
changes in customer buying patterns and changes in the software industry's
licensing models.

Software Development Costs

The Company capitalizes software development costs when technological
feasibility has been established.  Software development costs not qualifying for
capitalization are recorded as product development expense.  Product development
expense, net of capitalized software development costs, was $285,105 and
$118,432 for the years ended December 31, 2002 and 2001, respectively.
Additionally, the Company capitalized software development costs of $597,034 and
$177,110 for the years ended December 31, 2002 and 2001, respectively.
Capitalized software development costs, including purchased software, if any,
are amortized using the greater of the revenue method or the straight-line
method with useful lives ranging from one to five years.  Amortization expense
related to capitalized software development costs was $119,590 and $594,923 for
the years ended December 31, 2002 and 2001, respectively.

At each balance sheet date the Company evaluates the estimated net realizable
value of each software product and when required, records write-downs of net
book value to net realizable value of any products for which the net book value
is in excess of net realizable value.  The net realizable value is the estimated
future gross revenues of each product reduced by the estimated future costs of
completing and disposing of that product, including the costs of performing
completing in process development and customer support.  The Company determined
that no write-down of capitalized software development costs was required at
December 31, 2002 or 2001.

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
and diluted


                                      F-10
<PAGE>
loss per common share are identical because options or warrants outstanding are
antidilutive and are therefore excluded from the computation of diluted earnings
per share. The effect of 10,678,350 CT Holdings options and 2,351,601 CT
Holdings warrants outstanding at December 31, 2001 plus 2,445,000 Citadel
options outstanding at December 31, 2001 have been excluded from the weighted
average shares computation as they are antidilutive. For the year ended
December 31, 2001 the weighted average number of shares of common stock
outstanding has been computed using the weighted average number of CT Holdings
common shares outstanding of 49,733,710 for the year ended December 31, 2001,
divided by four (the Distribution Ratio) resulting in weighted average shares
for Citadel of 12,433,427 for the year ended December 31, 2001.

For the year ended December 31, 2002 the weighted average number of shares was
calculated using the weighted average number of CT Holdings shares from January
1, 2002 through the Distribution on May 17, 2002, 51,019,020, divided by the
Distribution Ratio, four, plus the weighted average number of Citadel shares
outstanding following the Distribution through December 31, 2002.  This resulted
in a weighted average number of shares outstanding of 13,874,488 for the year
ended December 31, 2002.  The effect of 4,080,850 CT Holdings options and
2,351,601 CT Holdings warrants outstanding on The Distribution Date plus
5,900,167 Citadel options and 20,000 Citadel warrants outstanding at December
31, 2001 have been excluded from the weighted average shares computation as they
are antidilutive.

Common Stock

The shares of common stock outstanding of 12,457,402 at December 31, 2001,
presented in the financial statements represent the number of shares that would
have been outstanding if the Distribution had occurred at December 31, 2001,
using the number of shares of CT Holdings common stock outstanding of 49,829,608
at December 31, 2001, divided by four, the Distribution Ratio.

Change in Estimate

The Company's product versions existing at January 1, 2001 were determined at
that time to have a limited useful life and therefore the Company decreased its
estimate of the useful lives of all remaining unamortized balances of purchased
software and capitalized software development costs from primarily three years
to one year. This change has the effect of increasing the net loss for the year
ended December 31, 2001 by approximately $420,000 or $0.03 per share.

Cash  and  Cash  Equivalents

The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents.

Property, Equipment and Depreciation

Property and equipment are stated at cost.  Depreciation is provided using the
straight-line method over estimated useful lives of the assets.


                                      F-11
<PAGE>
Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No.  144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and exceeds its fair value.  If conditions indicate an asset might
be impaired, the Company estimates the future cash flows expected to result from
the use of the asset and its eventual disposition.  The impairment would be
measured by the amount by which the asset exceeds its fair value typically
represented by the future discounted cash flow associated with the asset.

Income Taxes

Income taxes are accounted for using the asset and liability method.  Deferred
income tax expenses are provided based upon estimated future tax effects of
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes calculated based
upon provisions of enacted laws.

Advertising Expense

The Company expenses costs associated with advertising as they are incurred and
includes these costs in selling, general and administrative expense.
Advertising expense for the years ended December 31, 2002 and 2001 was $12,376
and $53,617, respectively.

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123". Under APB Opinion No. 25,
compensation expense for employees is based on the excess, if any, on the date
of grant, between the fair value of the Company's stock over the exercise price.

The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and SFAS No. 148 and Emerging
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date of the fair value of the equity instrument issued is the earlier of the
date on which the counterparty's performance is complete or the date on which it
is probable that performance will occur.

If  the Company had recognized compensation expense, in accordance with SFAS No.
123  and 148, based upon the fair value at the grant date for options granted to
employees,  officers  and directors during the years ended December 31, 2002 and
2001, the pro forma effect on net loss and net loss per share would have been as
follows:

<TABLE>
<CAPTION>
                                                   2002          2001
                                               ------------  ------------
<S>                                            <C>           <C>
Net loss attributable
   to common stockholders
   as reported                                 $(2,346,895)  $(1,865,981)


Add: Stock-based employee
   compensation expense included
   in reported net loss                                  -             -

Deduct: Stock-based employee
   compensation expense
   determined under fair value
   based method                                   (565,525)     (627,019)
                                               ------------  ------------
Pro forma net loss                             $(2,912,420)  $(2,493,000)
                                               ============  ============

Net loss per common share - basic and diluted
   As reported                                 $     (0.17)  $     (0.15)
                                               ============  ============
   Pro forma                                   $     (0.21)  $     (0.20)
                                               ============  ============
</TABLE>

Fair Value of Financial Instruments

The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and notes payable are carried at cost,
which approximates fair value.


                                      F-12
<PAGE>
Recent Accounting Pronouncement

In December 2002, Statement of Financial Accounting Standards No. 148 (SFAS
148), "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of Statement of Financial Accounting Standards No. 123 (SFAS 123)" was
issued. This statement amends SFAS 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results of operations. This
statement is effective for fiscal years ending after December 15, 2002. The
Company has not voluntarily changed to fair value accounting for employee stock
options but has adopted the disclosure requirements of SFAS 148. The adoption of
this standard had no material effect on the Company's financial position, cash
flows or results of operations.


NOTE B - PROPERTY AND EQUIPMENT

Major classes of property and equipment and their estimated useful lives are as
follows:

                                                     December 31,
                                Lives             2002          2001
                              ----------      ----------    ----------
Furniture                     5-10 years      $  179,114    $  179,114
Office equipment              3-7 years           87,101        87,101
Computer equipment            3-7 years        1,103,077       676,688
Leasehold improvements        Lease term          68,672        68,672
                                              ----------    ----------
                                               1,437,964     1,011,575
Less accumulated depreciation
  and amortization                            (1,005,503)     (968,569)
                                              ----------    ----------
Net property and equipment                    $  432,461    $   43,006
                                              ==========    ==========

NOTE C - PAYROLL TAX OBLIGATIONS

The Company has timely filed its Federal and State employer and employee payroll
tax forms during the years ended December 31, 2002 and 2001 but has an estimated
obligation at December 31, 2002 to remit $788,562 of payroll taxes and related
late payment penalties for these periods. At December 31, 2001 this obligation
was estimated to be $245,385. The Company has estimated this obligation to be
the actual amounts of tax withheld from employees and the employer portion of
Social Security Federal Tax Obligation in addition to an estimated accrual for
interest and penalties. The liability is reflected in the accompanying financial
statements as payroll tax obligations. During the first quarter of 2003 the
Company made payments of $114,791 against this payroll tax obligation.


                                      F-13
<PAGE>
NOTE  D  -  INCOME  TAXES

The significant components of the Company's deferred tax liabilities and assets
are as follows:

                                                     December 31,
                                                 2002          2001
                                             -----------  ------------
Deferred tax assets (liabilities)
  Net operating loss carryforwards           $11,518,000  $ 10,738,000
  Accounts receivable allowance                    8,000             -
  Accrued expenses                               122,000        75,000
                                             -----------  ------------
Total deferred tax assets                     11,648,000    10,813,000
Valuation allowance                          (11,648,000)  (10,813,000)
                                             -----------  ------------
Total deferred tax assets, net               $         -  $          -
                                             ===========  ============

The difference between the provision for income taxes and the amount computed by
applying the federal statutory rate to loss before provision for income taxes is
explained below:

                                                    December 31,
                                                 2002          2001
                                              ----------  ----------
Benefit computed at federal statutory rate    $(798,000)  $(634,000)
Increase in valuation allowance                 835,000     700,000
Other                                           (37,000)    (66,000)
                                              ----------  ----------
                                              $      --   $      --
                                              ==========  ==========

For Federal Income Tax purposes, at December 31, 2002 the Company had a net
operating loss carryforward of approximately $30,000,000.  The net operating
loss carryover, which is subject to annual limitations as prescribed by the
Internal Revenue Code, is available to offset future taxable income and begins
to expire in 2013.  A valuation allowance has been recorded for the entire
amount of the net deferred tax asset due to uncertainty of realization.


NOTE E - NOTES PAYABLE

Notes payable to shareholders consist of the following:

                                                    December 31,
                                                 2002        2001
                                              ----------  ---------
8% Note payable due February 11, 2003         $  200,000  $       -
8% Note payable due May 16, 2003                 250,000          -
Unamortized debt discount                        (47,083)         -
                                              ----------  ---------
                                              $  402,917  $       -
                                              ==========  =========

On September 11, 2002 the Company entered into a $200,000 8% note payable due
January 11, 2003 that was personally guaranteed by the Company's Chief Executive


                                      F-14
<PAGE>
Officer.  The due date was later extended by the noteholder to February 11,
2003.  In the event of payment default the note would accrue interest at 18% per
annum.  At the option of the noteholder, all unpaid principal and interest would
become convertible into shares of common stock of the Company at a conversion
rate of $0.30 per share.  In conjunction with this note, the Company entered
into a stock purchase agreement with the principals of the entity holding the
note payable.  Under this agreement the Company sold 200,000 shares of its
common stock for $2,000, $0.01 per share.  The Company recorded a note discount
of $64,666 representing the difference between the proceeds of $2,000 and the
fair value of the stock.  This discount has been amortized over the term of the
note and approximately $57,000 of amortized discount expense is included in
interest expense in the statement of operations.

On December 9, 2002 the Company entered into a $250,000 8% note payable due
May 16, 2003 that was personally guaranteed by the Company's Chief Executive
Officer. In conjunction with this note, the Company entered into a stock
purchase agreement with the noteholder.  Under this agreement the Company sold
50,000 shares of its common stock for $500, $0.01 per share, to be offset
against accrued interest.  The Company recorded a note discount of $8,611
representing the difference between the proceeds of $500 and the fair value of
the stock.  This discount has been amortized over the term of the note and
approximately $6,000 of amortized discount expense is included in interest
expense in the statement of operations.

Pursuant to the terms of a $40,000 note payable to an unrelated third party,
entered into in June 2002, stock options to acquire 40,000 shares of common
stock were issued to the note holder.  The Company recorded interest expense of
approximately $9,000 for the issuance of these options which represented the
fair value of the options.  This note was repaid in 2002.

Notes  and  advances  payable  to  related  parties  consist  of  the following:

                                                     December 31,
                                                 2002        2001
                                              ----------  ----------
8% Note payable to a former director
    due July 31, 2002                         $  250,000  $        -
8% Demand note payable to an officer             270,000           -
8% Note payable to an officer
    due February 28, 2003                        300,000           -
Non-interest bearing advance from
    an officer due on demand                      21,541           -
                                               ---------  ----------
                                              $  841,541  $        -
                                              ==========  ==========

On June 13, 2002, the Company entered into an 8% note payable for $250,000 due
July 31, 2002 with a former director of the Company.  At December 31, 2002 this
note was in default and accrued interest at 18% per annum since July 31, 2002.
Subsequent to December 31, 2002 the former director exercised stock options for
862,500 shares of the Company's common stock using the note plus accrued
interest through the date of exercise as payment of the aggregate exercise price
of $276,000.

On November 5, 2002 the Company entered into a $270,000 secured promissory note
due on demand and a $300,000 8% note payable due February 28, 2003 to the
Company's Chief Executive Officer.  The $570,000 consists of the $54,000 of
advances due to the CEO at September 30, 2002, accrued compensation and expenses
of $216,000 and $300,000 of cash


                                      F-15
<PAGE>
advances to the Company. The notes are secured by all of the Company's
copyrights, trademarks, patents and intellectual property under patent
application. In the event of default, including the failure to pay any principal
or interest by the Company or the payment of any obligations of the Company for
which the CEO has personally guaranteed, the notes would become immediately due
and payable and shall bear interest at 18% per annum. In February, 2003 the
Company paid $550,000 against the principal balance of notes payable and the
security interest in the intellectual property was released.

NOTE F - COMMITMENTS TO ISSUE STOCK

On April 1, 2002, prior to the Distribution, CT Holdings entered into a $600,000
non-interest bearing convertible note payable due April 1, 2003 to a
shareholder.  The note payable may be converted, at the option of the
shareholder, into a maximum of 2,700,000 shares of CT Holdings common stock and
675,000 shares of Citadel common stock.  Subsequent to December 31, 2002 this
note was converted and 675,000 shares of the Company's common stock were issued
to the noteholder.

On May 1, 2002, prior to the Distribution, CT Holdings reserved 1,050,000 shares
of its common stock (together with dividends and distributions on these shares)
for issuance in connection with the settlement of certain of its liabilities. CT
Holdings had reached agreement in principle regarding the settlements but at
December 31, 2002 the Company had not completed negotiations with all the
parties.  Accordingly, should CT Holdings ultimately complete the negotiations
and issue these shares, up to 262,500 shares of Citadel common stock would be
issued to the parties to the settlements.

In June 2001, two directors of CT Holdings funded and guaranteed CT Holdings'
participation in a bank bridge loan of an affiliate. In consideration for this
funding and guarantees, CT Holdings agreed to permit the directors to exchange
up to 5,000,000 affiliate company shares into up to 6,000,000 shares of CT
Holdings' common stock including a right to any dividends. The exercise of this
exchange right will require Citadel to issue up to 1,500,000 shares of Citadel
common stock.

NOTE G - COMMITMENTS AND CONTINGENCIES

Leases

The company leases office space under a noncancelable operating lease with an
initial term greater than one year, as of December 31, 2002 and future minimum
lease payments as follows:

     2003            $ 169,401
     2004              206,916
     2005               34,486
     Thereafter              -
                     ---------
        Total        $ 410,803
                     =========

The Company's Chief Executive Officer signed a personal guarantee for the lease
payments on behalf of the Company.  Rent expense was $210,330 and $169,483 for
the years ended December 31, 2002 and 2001, respectively.


                                      F-16
<PAGE>
Legal Proceedings

In June 2000, Tech Data Corporation filed suit against CT Holdings, alleging a
breach of a Software Distribution Agreement with CT Holdings. The lawsuit is
styled Tech Data Corporation v. Citadel Technology, Inc. (now known as CT
Holdings), and was filed in Dallas County Court at Law No. 2. Because CT
Holdings was not properly served, Tech Data obtained a default judgment for
approximately $101,000. When CT Holdings discovered the default judgment, it
filed and won a motion to set aside this judgment. In June 2001, Tech Data
properly served CT Holdings. CT Holdings answered and demanded binding
arbitration pursuant to the agreement. The parties filed a Joint Motion to
Arbitrate in December 2001. The judge granted this motion, and the matter was
referred to binding arbitration in the fourth quarter of 2002. In the first
quarter of 2003 Tech Data obtained an arbitration award of approximately $72,000
plus interest at the applicable rate under Florida law from January 3, 2000
until January 10, 2003, together with attorney's fees of $3,500, and interest on
those sums at 10% per year from February 10, 2003 until the amounts are paid as
a result of the arbitration. Tech Data has filed a motion to revive the abated
lawsuit to enforce the arbitration award. As part of the Distribution, the
Company assumed payment responsibility for this lawsuit. The Company has an
accrued liability of approximately $101,000 recorded relating to this litigation
at December 31, 2002 and December 31, 2001.

The Company may become involved from time to time in litigation on various
matters which are routine to the conduct of the business. The Company believes
that none of these actions, individually or in the aggregate, will have a
material adverse effect on our financial position or results of operations,
though any adverse decision in these cases or the costs of defending or settling
such claims could have a material adverse effect on our business.

NOTE H - SIGNIFICANT CUSTOMERS

The following customers represented more than 10% of total revenue in at least
one the periods presented below:

                                          Years Ended
                                          December 31,
                                         2002      2001
                                       --------  -------
Washington Mutual Bank                      27%      31%
VA Medical Centers of the
  Department of Veterans Affairs            23%       3%

NOTE I - STOCKHOLDER'S EQUITY (DEFICIT)

On the Distribution Date the Company had authorized 1,000,000 shares of
preferred stock and 50,000,000 shares of common stock, each with a par value of
$0.01 per share.  Except for 1000 formation shares of common stock owned by CT
Holdings, no shares of preferred stock or common stock were outstanding at
December 31, 2001.  The changes in common shares presented in the statement of
changes in stockholders' equity (deficit) are presented as reported by CT
Holdings after giving effect to the 1 for 4 Distribution Ratio.  If the
Distribution had occurred on December 31, 2001, approximately 12,457,000 shares
of common stock would have been outstanding.


                                      F-17
<PAGE>
NOTE J - STOCK OPTIONS AND WARRANTS

The Company's 2002 Stock Incentive Plan (the "Plan") became effective with the
Distribution on May 17, 2002.  Under the Plan the Company may grant options to
purchase up to 1,500,000 shares of common stock to eligible participants.
Eligible participants include all employees, officers, directors and consultants
to the Company.  The Plan allows for the grant of non-qualified or incentive
stock options.  Activity under the Plan since the Distribution Date was as
follows:

                                                    Outstanding Options
                                                   ---------------------
                                                                Weighted
                                     Options                    average
                                     available     Number       exercise
                                     for issuance  of options   price
                                     ------------  ----------  ---------
Options authorized under plan          1,500,000
Grants                                  (550,000)    550,000       $0.63
Exercised                                                  -           -
Cancelled                                116,500    (116,500)      $0.40
                                     ------------  ----------
Balances at December 31, 2002          1,066,500     433,500       $0.54
                                     ============  ==========

The options granted have a term of 10 years and except for 80,000 immediately
exercisable options, all options vest over a period of three years. During the
year ended December 31, 2002 compensation expense of approximately $9,000 was
recorded for 30,000 options issued under the plan to a consultant. The
underlying shares of common stock in the Plan have not been registered.

The table below summarizes the range of exercise prices of options outstanding
and exercisable under the Plan at December 31, 2002:

                                                Outstanding Options
                                      ---------------------------------------
                                                   Weighted         Weighted
                                                   average          average
                                      Number       contractual      exercise
Range of exercise prices              of options   life in years    price
------------------------              ----------   -------------    ---------
       $0.32 to $0.34                  271,000         9.79         $   0.34
        0.35 to  0.75                   93,000         9.52             0.70
        0.76 to  1.12                   69,500         9.98             1.12

                                                      Exercisable Options
                                                   --------------------------
                                                                     Weighted
                                                                     average
                                                    Number           exercise
Range of exercise prices                            of options       price
------------------------                            -------------    --------
       $0.32 to $0.34                                64,792          $  0.34
        0.35 to  0.75                                20,000             0.53
        0.76 to  1.12                                     -                -


                                      F-18
<PAGE>
In addition, the Company granted options outside of the Plan.  The table below
summarizes option grants and exercises:

                                                       Outstanding Options
                                                     ------------------------
                                                                    Weighted
                                                                    average
                                                     Number         exercise
                                                     of options     price
                                                     ----------     ---------
Balance at January 1, 2001                                  -
Grants                                               2,445,000      $    0.32
Exercised                                                   -               -
Cancelled                                                   -               -
                                                     ----------     ---------
Balance at December 31, 2001                         2,445,000           0.32

Grants                                               3,865,000           0.36
Exercised                                             (488,333)          0.54
Cancelled                                             (355,000)          0.32
                                                     ----------     ---------
Balance at December 31, 2002                         5,466,667      $    0.33
                                                     ==========     =========

The options granted have a term of 10 years.  Approximately 4,452,500 of the
option grants were immediately exercisable.  The remaining options granted vest
over a period of one to three years.  Options to purchase 400,000 shares of
common stock were issued to consultants for services and accordingly the Company
recorded stock compensation expense of approximately $47,000 during the year
ended December 31, 2002 The underlying shares of common stock have not been
registered.

The table below summarizes the range of exercise prices of options outstanding
and exercisable outside the Plan at December 31, 2002:

                                                 Outstanding Options
                                      ----------------------------------------
                                                    Weighted         Weighted
                                                    average          average
                                      Number        contractual      exercise
Range of exercise prices              of options    life in years    price
------------------------              -----------   -------------    ---------
       $0.32 to $0.34                 5,466,667        9.41            $0.33

                                                      Exercisable Options
                                                    -------------------------
                                                                     Weighted
                                                                     average
                                                    Number           exercise
Range of exercise prices                            of options       price
------------------------                            ----------       --------
       $0.32 to $0.34                                4,650,412         $0.33

In November 2002 the Company entered into an agreement with an investment banker
to provide financial services including capital raising services to the Company.
Under


                                      F-19
<PAGE>
the terms of the agreement the Company has agreed that for each month of the
agreement, up to six months, the Company will issue to the investment banker
warrants to purchase 10,000 shares of common stock of the Company. The warrants
will be issued at an exercise price equal to the closing price on the monthly
anniversary date of the agreement. Warrants to purchase 20,000 shares of the
Company's common stock at an average exercise price of $0.80 were issued and
outstanding at December 31, 2002 pursuant to this agreement.

The weighted-average fair value for the options granted was approximately $0.23
per share and $0.30 per share for the years ended December 31, 2002 and 2001
respectively. This estimate was made using the Black-Scholes option pricing
model with the weighted-average assumptions shown in the table below. The
weighted-average expected volatility for 2002 was based on the volatility of the
trading prices for Citadel common stock. The weighted-average expected
volatility for 2001 was based on the volatility of the trading prices for the
common stock of CT Holdings, Citadel's former parent.

                                            2002      2001
                                          --------  --------
     Expected dividend yield                 0.0%       0.0%
     Risk-free interest rate                3.54%      3.66%
     Expected volatility                    77.0%     160.0%
     Expected life (in years)                5.0        5.0


NOTE K - RELATED PARTY RELATIONSHIPS AND TRANSACTIONS

Prior to the Distribution Date of May 17, 2002 the security software business
that is Citadel was operated by CT Holdings.  Prior to the Distribution, two of
the Company's current directors and four executive officers were also directors
or officers and employees of CT Holdings and/or its other subsidiaries.
Following the distribution, Citadel's CEO remains Chief Executive Officer and a
director of CT Holdings and Citadel's CFO remains Chief Financial Officer of CT
Holdings and two directors remain directors of CT Holdings.

The Company entered into a number of agreements with CT Holdings and its
subsidiaries relating to Citadel's historical business and relationship with the
CT Holdings group of companies, the material terms of which are described below.
In addition, The Company entered into a number of agreements with CT Holdings
relating to the Distribution, which are described below.  Although these
agreements were not negotiated on an arm's-length basis, the Company believes
that the terms of these


                                      F-20
<PAGE>
agreements are comparable to those that it would receive from unaffiliated third
parties.

AGREEMENTS RELATING TO THE DISTRIBUTION

The Company entered into several agreements with CT Holdings to define their
ongoing relationship after the Distribution and to allocate tax and other
specified liabilities and obligations arising from periods prior to the
Distribution Date.  The Company entered into these agreements prior to the
Distribution while a wholly owned subsidiary of CT Holdings.

DISTRIBUTION AGREEMENT

On or before the Distribution Date, CT Holdings and Citadel entered into the
distribution agreement, which provides for, among other things, the principal
corporate transactions required to effect the Distribution and certain other
agreements relating to the continuing relationship between Citadel and CT
Holdings after the Distribution.

The distribution agreement provides that prior to the Distribution Date, Citadel
will have issued to CT Holdings a number of Citadel Shares equal to one fourth
of the total number of shares of CT Holdings common stock outstanding on the
Distribution Date (plus an additional immaterial number of Citadel Shares to be
distributed with respect to fractional shares that are rounded up). CT Holdings
effected the Distribution by delivering a certificate representing 100% of the
Citadel Shares to the Distribution Agent.

Under the distribution agreement and effective as of the Distribution Date,
Citadel assumed and agreed to indemnify CT Holdings against all liabilities,
litigation and claims, including related insurance costs, arising out of
Citadel's businesses (including discontinued or sold security software
businesses), and CT Holdings retained and agreed to indemnify Citadel against
all other liabilities, litigation and claims, including related insurance costs.
The foregoing obligations do not entitle an indemnified party to recovery to the
extent any such liability is covered by proceeds received by such party from any
third party insurance policy.

Under the distribution agreement for a two-year period beginning on the
Distribution Date, except in limited circumstances, Citadel will not solicit or
recruit any CT Holdings employee without CT Holdings' prior written consent and
likewise, CT Holdings will not solicit or recruit any Citadel employee without
Citadel's prior written consent.

The distribution agreement also provides that each of CT Holdings and Citadel
shall be granted access to certain records and information in the possession of
the other, and requires the retention by each of CT Holdings and Citadel for a
period of six years following the Distribution Date of all such information in
its possession.

TRANSITION SERVICES AGREEMENT

On the Distribution Date, Citadel entered into a transition services agreement
with CT Holdings.  This agreement provides that CT Holdings and Citadel will
provide each other services in such areas as information management and
technology, sharing of office space, personnel and indirect overhead expenses,
employee benefits administration, payroll, financial accounting and reporting,
claims administration and reporting, and other areas where CT Holdings and
Citadel may need transitional


                                      F-21
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assistance and support. The transition services agreement provides generally
that each of Citadel and CT Holdings will undertake to provide substantially the
same level of service and use substantially the same degree of care as their
respective personnel provided and used in providing such services prior to the
execution of the agreement. The agreement generally will extend for a one year
term, but may be terminated earlier under certain circumstances, including a
default, and may be renewed for additional one-year terms. Initially, CT
Holdings will pay Citadel a monthly fee of $20,000, subject to adjustment on a
quarterly basis. No adjustments to the fee have been made through December 31,
2002. The Company believes that the terms and conditions of the transition
services agreement are as favorable to Citadel as those available from unrelated
parties for a comparable arrangement.

TAX DISAFFILIATION AGREEMENT

On the Distribution Date CT Holdings and Citadel entered into a tax
disaffiliation agreement which sets out each party's rights and obligations with
respect to deficiencies and refunds, if any, of federal, state, local or foreign
taxes for periods before and after the Distribution Date and related matters
such as the filing of tax returns and the conduct of Internal Revenue Service
and other audits.  Under the tax disaffiliation agreement, Citadel will
indemnify CT Holdings for all taxes and liabilities incurred as a result of
Citadel's or an affiliate's post-Distribution action or omission contributing to
an Internal Revenue Service determination that the Distribution was not
tax-free.  CT Holdings will indemnify Citadel for all taxes and liabilities
incurred solely because CT Holdings or an affiliate's post-Distribution action
or omission contributes to an Internal Revenue Service determination that the
Distribution was not tax-free.  If the Internal Revenue Service determines that
the Distribution was not tax-free for any other reason, CT Holdings and Citadel
will indemnify each other against all taxes and liabilities pro rata based on
relative values as of the Distribution Date.

Citadel will indemnify CT Holdings against any taxes resulting from any internal
realignment undertaken to facilitate the Distribution on or before the
Distribution Date.

RELATED PARTY RELATIONSHIPS AND TRANSACTIONS PRIOR TO THE DISTRIBUTION DATE

Prior to the Distribution Date the Company was a wholly owned subsidiary of CT
Holdings.  During the years ended December 31, 2002 and 2001 CT Holdings
received substantially all of its financing from its CEO, directors and other
related parties which, in part, contributed to the funding of Citadel.  The
statements of cash flow show a net contribution from parent of $1,059,939 for
the year ended December 31, 2001 and $200,131 for the period January 1, 2002
through the Distribution Date, May 17, 2002.

During the year ended December 31, 2001 and the period January 1, 2002 through
the Distribution Date, May 17, 2002 the Company incurred legal fees in the
amount of approximately $60,000 and $49,500 respectively to a law firm in which
an attorney who was a former CT Holdings' employee and is a relative Citadel's
CEO, is a partner.  The Company recorded fees of $31,225 to this attorney plus
stock compensation expense for $21,700 related to the issuance of stock options
for 100,000 shares of common stock to the attorney for consulting services.

In May 2002, prior to the Distribution Date, a former director of Citadel and CT
Holdings exercised stock options for 2,250,000 shares of CT Holdings' common
stock by entering into a note payable to CT Holdings for $450,000, the aggregate
exercise price


                                      F-22
<PAGE>
of the options. The former director received 562,500 shares of Citadel common
stock in the Distribution as a result of this exercise of CT Holdings options.

In May 2002, prior to the Distribution the Company's CEO exercised stock options
for 3,000,000 shares of common stock of CT Holdings and used a note in the
amount of $600,000 to offset the exercise price.  On the Distribution Date the
CEO received 750,000 shares of Citadel common stock as a result of the exercise
of the CT Holdings options.

Prior to the Distribution Date employees, officers and directors of CT Holdings,
other than those noted above, exercised options for approximately 1,397,500
shares of CT Holdings common stock.  The holders of these CT Holdings shares
received approximately 349,375 shares of Citadel common stock as a result of the
Distribution.

In May 2002, prior to the record date of the Distribution, CT Holdings entered
into negotiations to settle approximately $860,000 of operating liabilities in
exchange for 1,662,500 shares of CT Holdings common stock.  As of December 31,
2002 the extinguishment of approximately $163,000 of these liabilities was
completed and approximately 612,500 shares of CT Holdings common stock were
issued including 100,000 shares for services provided by an independent
consultant, 12,500 shares to a consultant for services performed prior to
employment as the CT Holdings and Citadel Chief Financial Officer, 250,000
shares to a shareholder for consulting services, and 250,000 shares to an
attorney, who is a relative of the CEO, for the performance of professional
services to the Company.  At the Distribution Date approximately 153,125 shares
of Citadel common stock were issued to these same individuals.

At December 31, 2002 approximately $697,000 of CT Holdings operating liabilities
were not yet settled with approximately 1,050,000 shares of the CT Holdings'
common stock which if issued will require Citadel to issue approximately 262,500
shares of Citadel common stock.  The Company believes that the negotiations will
ultimately be concluded with the issuance of the shares in full settlement of
these liabilities however there can be no assurance that such settlement will be
finalized or on terms favorable to the Company.


CITADEL RELATED PARTY TRANSACTIONS FOLLOWING THE DISTRIBUTION DATE

Since the Distribution Date we have entered in notes payable aggregating
$490,000 for which our CEO has signed personal guarantees.  Of these notes
$265,000 was paid ($225,000 in the first quarter of 2003) by the Company.  In
addition, our CEO has personally guaranteed the office space lease space with
future minimum rent commitments of approximately $411,000.

Since the Distribution on May 17, 2002 the Company's CEO has advanced
approximately $642,000 to the Company and the Company has repaid approximately
$250,000 of those advances through December 31, 2002.  On November 5, 2002 the
Company entered into two promissory notes payable to its CEO in the total amount
of $570,000.  The $570,000 consisted of the $54,000 of advances due to the CEO,
accrued compensation and expenses of $216,000 and $300,000 of cash advances to
the Company in November 2002.  The notes bear interest at 8% per annum, mature
on February 28, 2003 and are secured by all of the Company's copyrights,
trademarks, patents and intellectual property under patent application.  In the
event of default, including the failure to pay any principal or interest by the
Company or the payment of any obligations of the Company for which the CEO has
personally guaranteed, the notes shall become immediately due and payable and
shall bear interest at 18% per annum.  In February, 2003 the Company paid
$550,000


                                      F-23
<PAGE>
against the principal balance of notes payable and the security interest in the
intellectual property was released .

During the year ended December 31, 2002, the Company received advances and
proceeds from notes payable of $170,900 from an entity related to an employee of
the Company.  The Company repaid the notes and advances and has no amounts due
this entity at December 31, 2002.

In June 2002, the Company entered into an 8% note payable for $250,000 due July
31, 2002 with a former director of the Company.  This note was in default
December 31, 2002 and accruing interest at 18% per annum.  In February 2003 the
former director exercised stock options for 862,500 shares of the Company's
common stock using the note and accrued interest through the date of exercise as
payment of the aggregate exercise price of $276,000.

Pursuant to the transition services agreement, CT Holdings reimburses the
Company $20,000 per month for the shared services of the Company's CEO, CFO and
administration staff.  At December 31, 2002 the Company has a $150,000
receivable due from CT Holdings for these services since May 17, 2002, the
Distribution Date.  Due to the cash deficiency of CT Holdings the receivable was
fully reserved and the Company continues to show the costs of these services as
a general and administrative expense in the statement of operations.

NOTE L - WRITE-OFF OF ACCOUNTS PAYABLE

During the year ended December 31, 2002, the Company wrote off certain accounts
payable balances relating to years prior to 2001 totaling $369,036 as the
Company no longer believes that they represent liabilities of the Company.
These amounts were written off primarily because the vendor is no longer in
business or the Company has not had any communication with the vendor in several
years.

NOTE M - SUBSEQUENT EVENTS

In the January 2003 the Company issued 3,275,000 shares of common stock to
accredited investors in a private equity placement for proceeds of $2,378,125
net of transaction costs and expenses including placement fees of $196,875 and
approximately $50,000 of professional fees.  In addition, the investors received
warrants to purchase 1,637,500 shares of common stock at $1.50 per share.  The
warrants expire in three years and may be terminated by the Company, at its
option, when the closing market price of the Company's common stock has closed
at or above $2.40 per share for ten consecutive trading days.  In addition, the
placement agent received warrants to purchase 245,625 shares of common stock at
$1.18 per share with the same expiration terms.  The Company is has agreed to
file a registration statement to register the shares issued in the private
placement and the shares underlying the warrants.

In February 2003 a former director exercised stock options for 862,500 shares of
the Company's common stock using the note and accrued interest through the date
of exercise as payment of the aggregate exercise price of $276,000.  The Company
repaid principal and interest related to notes payable and advances to the
Company's Chief Executive officer in the amount of $550,000.  In addition, the
Company repaid the $200,000 8% note payable to a shareholder in February 2003.

On April 1, 2002, prior to the Distribution, CT Holdings entered into a $600,000
non-interest bearing convertible note payable due April 1, 2003 to a greater
than 5% shareholder.  The note payable may be converted, at the option of the
shareholder,


                                      F-24
<PAGE>
into a maximum of 2,700,000 shares of CT Holdings common stock and 675,000
shares of Citadel common stock. Subsequent to December 31, 2002 the shareholder
converted the note and accordingly 675,000 shares of Citadel common stock were
issued.


                                      F-25
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