Citadel Security Software Reports Second Quarter 2005 Results; Company Reiterates Fiscal 2005 Revenue Outlook of $18 to $20 Million.

DALLAS -- Citadel Security Software Inc. (NASDAQ:CDSS), a leader in enterprise vulnerability management and policy enforcement solutions, today announced financial results for its second quarter ended June 30, 2005. Revenue for the three months ended June 30, 2005 was $2,693,301 compared to $3,443,799 for the same period in 2004. The Company reported a net loss to common shareholders of $5,465,394, or $0.18 loss per share, compared to $2,064,357, or $0.07 loss per share in the 2004 second quarter. The net loss to common shareholders for the second quarter of 2005 included non-cash costs related to the issuance of warrants in connection with the May, 2005 financing and the accretion of the fair value of the Series A Convertible Preferred Stock beneficial conversion feature of approximately $336,000.

For the six months ended June 30, 2005, the Company had revenue of $4,433,227 compared to $5,765,914 for the first six months of 2004. For the six months ended June 30, 2005, the Company had a net loss to common shareholders of $10,718,612, or $0.36 loss per share. The net loss to common shareholders for the six months ended June 30, 2005 included non-cash costs related to the issuance of warrants in connection with the May, 2005 financing and the accretion of the fair value of the Series A Convertible Preferred Stock beneficial conversion feature of approximately $398,000. For the first six months of 2004, the net loss to common shareholders was $3,784,950, or $0.13 loss per share, respectively.

"We have begun to see the tangible results from our broadened Compliance and Remediation product strategy which provides customers with the opportunity to license our solutions on a modular basis. We expect that this strategy will result in shortened sales cycles with the opportunity to further expand the staged deployment of our solution within our customers' organizations," said Steven B. Solomon, CEO of Citadel Security Software Inc. "While we continue to remain excited by the larger enterprise-wide opportunities within Fortune 500 companies that are in our commercial pipeline, we believe that by targeting multiple smaller orders from many of our commercial customers, that we can shorten the sales cycle and generate a recurring stream of license fees, support maintenance and professional services. We believe this strategy will continue to benefit the Company as demonstrated by the recent announcement of orders received from several leading financial institutions. We are encouraged by the recent adoption of Hercules within the financial services sector and believe that this sector represents a large source of sales opportunities for Citadel.

"In the second quarter we launched CitadelSecure, our reseller and alliance partner program. As of today, we have signed 13 selected resellers and alliance partners. In addition to their current service offerings of IT audit and security assessment, these partners are now able to offer Hercules based policy compliance, enforcement and remediation services as well as reselling Citadel's full product offering. These new business partners are being or have been trained to license the Hercules Security Appliance and Hercules Enterprise Software. We are already collaborating with some of these partners to close existing sales opportunities in the sales pipeline. It is expected that these new sales strategies will increase product distribution through the channel and broaden our market coverage.

"We are pleased that our largest customers have demonstrated their commitment to our technology through their placement of follow-on orders for products, professional services and support contracts. Feedback from our customers and respected industry analysts support our position that Hercules continues to be the broadest and most advanced Policy Compliance, Enforcement and Remediation solution on the market."

Highlights of the second quarter included:

--Growing orders and pipeline from the commercial sector. Key commercial orders were received from two of the top financial services providers in the U.S. Citadel provided security architecture services to one of the world's largest financial services firms and delivered its award-winning Hercules(R) software and support services to a leading servicer of U.S. pension plans and mutual funds.

--First sale of security appliance. The Company began shipping its first Hercules Security Appliance in June 2005 with the first appliance implemented by a regional east coast bank. The Security Appliance is a key element in Citadel's strategy to offer its product on a component basis.

--$11.0 million financing commitment. The Company entered into a private placement of up to $11.0 million of Series B preferred stock of which it has received $7.0 million. An option to sell an additional $4.0 million preferred stock is available to the Company based upon the achievement of certain business milestones.

--Launch of Hercules 4.0. Citadel announced the general availability of Hercules 4.0 which provides organizations with significant new enhancements to help manage their security needs, including the release of the modules Hercules Compliance Manager, Hercules Remediation Manager and Enterprise Reporting. These components are now also available on the Hercules Security Appliance, a preconfigured hardware appliance designed for the small to medium business market, giving organizations a simple, reliable and affordable way to begin securing their networks.

--New pricing model. Citadel's unique Security-On-Demand pricing model allows users to pay for compliance audits and remediation actions as they are performed, further minimizing upfront expenditures. Pricing for the Hercules 4.0 components was also available under perpetual and subscription based pricing.

--Introduction of a daily security news service. The Company introduced the Citadel 2 Minute Warning, which provides up-to-the-date threat alerts, recommended actions to thwart attacks, and headline news in a radio-style broadcast. This free subscription service enables network security professionals to stay abreast of new vulnerabilities and quickly develop plans to mitigate risk and maintain security compliance.

--Inclusion of Hercules in Vulnerability Management Category by Leading Governmental Agency. Hercules was selected for inclusion in the initial release of the National Institute for Standards and Technology (NIST) Security Configuration Checklist for IT Products in the vulnerability management category. The Computer Security Division of NIST in the United States Department of Commerce, in collaboration with the United States Department of Homeland Security, created the Security Configuration Checklist for IT Products to assist federal agencies with identifying proven products that meet the group's stringent security configuration guidelines.

Financial Outlook:

Based on current sales pipeline activity, the Company expects additional contracts to be finalized with corporate and government agency customers for Hercules products and services in both the third and fourth quarters. The Company is also in various stages of business discussions and/or contract negotiations with several third parties in the outsourced managed services or security consulting markets to offer Hercules compliance and remediation functionality to their end-user customers on a subscription or usage based license and expects that these arrangements will begin to provide the Company with another source of ratable and recurring revenue and cash flow during the fourth quarter of 2005 and continuing into 2006.

Based on these expectations, the Company continues to expect revenue for fiscal 2005 in a range of $18.0 million and $20.0 million. The Company, however, does not expect to provide quarterly guidance for the remainder of 2005 as revenue is still expected to be concentrated in several large transactions and, therefore, the timing of the revenue is difficult to forecast on a quarterly basis.

Mr. Solomon and Richard Connelly, CFO, will host a conference call and live Webcast at 4:30 p.m. Eastern Time today. Interested participants may call [phone] when calling within the United States or [phone] when calling internationally. Please reference Conference I.D. Number 31812377. This call is being webcast by CCBN and will be available from the Investor Relations section of the Company's corporate website or by going directly to http://www.citadel.com/2q05webcast.asp and via replay beginning two hours after the completion of the call. The webcast is also being distributed over CCBN's Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through CCBN's individual investor center at www.fulldisclosure.com or by visiting any of the investor sites in CCBN's Individual Investor Network. Institutional investors can access the call via CCBN's password-protected event management site, StreetEvents (www.streetevents.com).

Please refer to the Unaudited Financial Tables following this release for the details and comparisons to prior periods for the numbers reported above.

About Citadel

Citadel Security Software delivers security solutions that enable organizations to manage risk, reduce threats and enforce compliance with security policies and regulations. Citadel's proven architecture provides a business process to manage the increasing volume, frequency and complexity of cyber security attacks. Citadel combines the world's largest active library of remediations spanning all classes of vulnerabilities with a proven delivery methodology to dramatically streamline vulnerability management and security compliance and provide ROI from the first use. Citadel solutions are used across the Department of Defense, at the Veterans Administration, and within other government and commercial organizations. For more information on Citadel, visit www.citadel.com, or call 888-8CITADEL.

Safe Harbor/Forward-looking Statements:

This press release may contain forward-looking statements that are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or future financial performance and involve known and unknown risks and uncertainties that may cause actual results or performance to be materially different from those indicated by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "forecast," "may," "will," "could," "should," "anticipate," "expect," "plan," "believe," "potential" or other similar words indicating future events or contingencies. Some of the things that could cause actual results to differ from expectations are: the economic and geopolitical environment; changes in the information technology spending trends; the uncertainty of funding of government and corporate information technology security projects; the variability of the product sales cycle, including longer sales cycles for government and large commercial contracts; the uncertainty that the Company's prospective deals will result in final contracts; the potential changes in the buying decision makers during a customer purchasing cycle; the complexities in scope and timing for finalization of contracts; the fluctuations in product delivery schedules; a lack of Citadel operating history; uncertainty of product development and acceptance; uncertainty of ability to compete effectively in a new market; the uncertainty of profitability and cash flow of Citadel; intellectual property rights and dependence on key personnel; economic conditions; the continued impact of terrorist attacks, global instability and potential U.S. military involvement; the competitive environment and other trends in the Company's industry; the effects of inflation; changes in laws and regulations; changes in the Company's business plans, including shifts to new pricing models that may cause delays in licenses; interest rates and the availability of financing; liability, legal and other claims asserted against the Company; labor disputes; the Company's ability to attract and retain qualified personnel; and adjustments to the amounts presented in the unaudited financial tables as a result of the completion of the audit process. For a discussion of these and other risk factors, see the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004 and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. These risk factors may not be exhaustive. The Company operates in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on the Company's business or events described in any forward-looking statements. The Company disclaims any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results.

Editors Note: Citadel is a trademark and Hercules(R) is a registered trademark of Citadel Security Software.

Unaudited Financial Tables
--------------------------

                    CITADEL SECURITY SOFTWARE INC.
                            BALANCE SHEETS

                                            June 30,    December 31,
                                              2005          2004
                                          ------------- -------------
                    ASSETS
                    ------
CURRENT ASSETS
  Cash and cash equivalents               $  3,765,355  $  9,838,154
  Accounts receivable-trade, less
   allowance of $209,000                     1,122,651       615,749
  Prepaid expenses and other current
   assets                                    1,104,596     1,466,354
                                          ------------- -------------
  Total current assets                       5,992,602    11,920,257

PROPERTY AND EQUIPMENT, net of
 accumulated depreciation of $1,583,318
 and $726,444                                6,003,550     6,356,362
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
 net of accumulated amortization of
 $5,438,341 and $4,433,065                   4,749,994     4,048,452
OTHER ASSETS                                   101,097        83,439
                                          ------------- -------------
  TOTAL ASSETS                            $ 16,847,243  $ 22,408,510
                                          ============= =============

  LIABILITIES AND STOCKHOLDERS' EQUITY
  ------------------------------------
CURRENT LIABILITIES
  Current portion of long-term debt       $  1,372,727  $  1,327,273
  Accounts payable and accrued expenses      2,393,697     3,040,665
  Accrued compensation and payroll tax
   obligations                               1,041,153     1,413,670
  Preferred stock dividends payable             81,250       187,500
  Current portion of deferred revenue        2,016,765     2,462,851
                                          ------------- -------------
  Total current liabilities                  6,905,592     8,431,959

LONG-TERM DEBT, LESS CURRENT PORTION         1,303,030     1,989,393
DEFERRED REVENUE, LESS CURRENT PORTION         466,926       480,172
OTHER NON-CURRENT LIABILITIES                  662,190       714,466

PREFERRED STOCK, $1,000 stated value per
 share; 1,000,000 shares authorized;
  Series A Convertible Preferred Stock
   15,000 shares issued and outstanding at
   December 31, 2004 and June 30, 2005,
   liquidation preference of $15,081,250    10,550,131    10,701,847
  Series B Convertible Preferred Stock
   7,000 shares issued and outstanding at
   June 30, 2005, liquidation preference
   of $7,000,000                             5,698,336             -
COMMON STOCK, $.01 par value per share;
 50,000,000 shares authorized; 30,005,730
 and 29,845,730 shares issued and
 outstanding                                   300,057       298,457
ADDITIONAL PAID-IN CAPITAL                  45,469,352    44,248,609
ACCUMULATED DEFICIT                        (54,508,371)  (44,456,393)
                                          ------------- -------------
  Total Stockholders' Equity                 7,509,505    10,792,520
                                          ------------- -------------
 TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY                                  $ 16,847,243  $ 22,408,510
                                          ============= =============

                    CITADEL SECURITY SOFTWARE INC.
                  UNAUDITED STATEMENTS OF OPERATIONS

                        THREE MONTHS ENDED       SIX MONTHS ENDED
                             JUNE 30,                JUNE 30,
                         2005        2004        2005        2004
                      ----------  ----------  ----------  ----------
Revenue
  License fees          $613,418  $2,922,243    $807,276  $4,742,078
  Customer support
   services            1,200,499     521,556   2,361,010     987,759
  Professional
   services              879,384           -   1,264,941      36,077
                      ----------  ----------  ----------  ----------
    Total revenue      2,693,301   3,443,799   4,433,227   5,765,914

Costs of revenue
  Software
   amortization          520,717     261,757   1,005,276     451,723
  Customer support
   services costs        421,077     320,795     882,259     603,256
  Professional
   services costs        188,875           -     313,134      20,204
  Shipping and
   other costs            26,970         309      34,320       5,175
                      ----------  ----------  ----------  ----------
    Total costs of
     revenue           1,157,639     582,861   2,234,989   1,080,358

Operating expenses
  Selling, general
   and
   administrative
   expense             5,401,818   4,004,826  10,272,412   6,946,290
  Product
   development
   expense               701,216     566,935   1,044,060     957,100
  Depreciation
   expense               438,559     138,262     856,874     241,518
                      ----------  ----------  ----------  ----------
    Total
     operating
     expenses          6,541,593   4,710,023  12,173,346   8,144,908
                      ----------  ----------  ----------  ----------
    Operating loss    (5,005,931) (1,849,085) (9,975,108) (3,459,352)

Interest income           21,698      45,091      47,125      72,011
Interest expense         (63,569)    (18,322)   (123,995)    (25,275)
Other income
 expense                       -       7,001           -       9,919
                      ----------  ----------  ----------  ----------
Loss before income
 taxes                (5,047,802) (1,815,315)(10,051,978) (3,402,697)
Provision for
 income taxes                  -           -           -           -
                      ----------  ----------  ----------  ----------
Net loss              (5,047,802) (1,815,315)(10,051,978) (3,402,697)
Preferred stock
 dividends               (81,250)   (187,500)   (268,750)   (289,940)
Fair value
 adjustment for
 exchanged
 warrants               (274,800)          -    (274,800)          -
Accretion of
 preferred stock
 beneficial
 conversion
 feature                 (61,542)    (61,542)   (123,084)    (92,313)
                      ----------  ----------  ----------  ----------
Net loss to common
 shareholders        $(5,465,394)$(2,064,357)$(10,718,612)$(3,784,950)
                      ==========  ==========  ==========  ==========

Net loss per share
 to common
 shareholders -
 basic and diluted        $(0.18)     $(0.07)     $(0.36)     $(0.13)
                      ==========  ==========  ==========  ==========

Weighted average
 common shares
 outstanding -
 basic and diluted    29,877,708  29,467,112  29,861,807  28,944,399
                      ==========  ==========  ==========  ==========

                    CITADEL SECURITY SOFTWARE INC.
                  UNAUDITED STATEMENTS OF CASH FLOWS

                                                SIX MONTHS ENDED
                                                    JUNE 30,
                                               2005          2004
                                           ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
 Net loss                                  $(10,051,978)  $(3,402,697)
 Adjustments to reconcile net loss to net
  cash used in operating activities:
   Depreciation and amortization              1,862,150       693,241
   Provision for returns, allowances and
    bad debts                                         -        59,176
   Amortization of debt issue costs              13,659         4,013
   Common stock issued for services              88,000             -
     Changes in operating assets and
      liabilities
     Accounts receivable-trade                 (506,902)   (1,632,281)
     Prepaid expenses and other current
      assets                                    361,759      (727,853)
     Other assets                                     -        (6,202)
     Accounts payable and accrued expenses          276        55,628
     Accrued compensation and payroll tax
      obligations                              (372,517)      791,212
     Deferred revenue                          (459,332)   (1,244,132)
                                           ------------- -------------
  NET CASH USED IN OPERATING ACTIVITIES      (9,064,885)   (5,409,895)

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment        (1,203,583)     (910,261)
  Capitalized software development costs     (1,706,818)   (1,774,902)
                                           ------------- -------------
  NET CASH USED IN INVESTING ACTIVITIES      (2,910,401)   (2,685,163)

CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from issuance of preferred
   stock and warrants                         6,902,396    13,797,283
  Net borrowings(repayments) on long-term
   debt                                        (640,909)      797,576
  Debt issuance costs                                 -       (26,396)
  Net proceeds from the exercise of
   warrants                                           -        11,100
  Net proceeds from exercise of employee
   stock options                                 16,000        66,624
  Payments on notes and advances from
   related parties                                    -       (16,903)
  Preferred stock dividends paid               (375,000)     (102,439)
                                           ------------- -------------
  NET CASH PROVIDED BY FINANCING ACTIVITIES   5,902,487    14,526,845
                                           ------------- -------------
  Net increase in cash and cash equivalents  (6,072,799)    6,431,787
  Cash and cash equivalents at the
   beginning of the period                    9,838,154     5,092,161
                                           ------------- -------------
  Cash and cash equivalents at the end of
   the period                                $3,765,355   $11,523,948
                                           ============= =============

                    CITADEL SECURITY SOFTWARE INC.
            UNAUDITED STATEMENTS OF CASH FLOWS (continued)

                                                SIX MONTHS ENDED
                                                    JUNE 30,
                                               2005          2004
                                           ------------- -------------

Non-cash financing items:
 Preferred stock dividends accrued              $81,250      $187,500
                                           ============= =============
 Beneficial conversion feature of
  convertible preferred stock                       $ -      $984,649
                                           ============= =============
 Accretion of beneficial conversion feature
  of convertible preferred stock               $123,084       $92,313
                                           ============= =============
 Fair value of warrants issued in
  connection with sale of preferred stock    $1,204,060    $2,326,184
                                           ============= =============
 Fair value adjustment of exchanged
  warrants                                     $274,800           $ -
                                           ============= =============
 Issuance of common stock through exercise
  of exchange right by officer                      $ -       $15,000
                                           ============= =============
 Fair value of warrants issued in
  conjunction with long term debt recorded
  as deferred financing costs                   $31,317       $45,838
                                           ============= =============