Citadel Security Software Reports Third Quarter 2005 Results; Citadel Receives Orders of $5.3 Million for the Third Quarter; Company Streamlines Operations, Reducing Annual Expenses by Approximately $5 Million.

DALLAS -- Citadel Security Software Inc. (NASDAQ:CDSS), a leader in enterprise vulnerability management, compliance and policy enforcement, today announced financial results for its third quarter ended September 30, 2005. Revenue for the three months ended September 30, 2005 was $2,193,840 compared to $7,773,464 for the same period in 2004. Revenue for the nine months ended September 30, 2005 was $6,627,067, which compares to $13,539,378 for the nine months ended September 30, 2004. The 2004 third quarter and nine month results were favorably impacted by an $8.6 million enterprise license and services order for the U.S. Department of Defense.

For the quarter ended September 30, 2005, the Company reported a net loss to common shareholders of $4,718,544 or $(0.16) loss per share. This compares to third quarter net income to common shareholders of $746,950, or $0.03 earnings per share, for the third quarter of 2004. For the nine months ended September 30, 2005, the Company had a net loss to common shareholders of $15,437,156, or $(0.52) loss per share, compared to a net loss to common shareholders of $3,038,000, or $(0.10) loss per share, for the same nine month period in 2004.

The Company announced today that, through a combination of a recent reduction in personnel and other operating expenses, it expects to reduce its annual operating costs by approximately $5 million. The effect of the cost reductions will be realized beginning in the fourth quarter of 2005. The Company expects that the expense reductions will accelerate its path to profitability.

"We are focusing our business on profitability and have made significant adjustments to our cost structure," said Steven B. Solomon, CEO of Citadel Security Software Inc. "Due to the investments we have made in our technology portfolio with the release of Hercules 4.0 and the Security-On-Demand Appliance, we are now able to streamline operations even while extending the Hercules product leadership in the marketplace for security policy compliance and remediation. We believe that our sales strategy of focusing on individual business unit opportunities within large enterprises in commercial and government accounts, as well as our growing relationships with managed services providers and channel partners, should provide new opportunities for broader product deployments, sustainable recurring revenue streams and shortened sales cycles."

Recent Highlights include:

    --  First security software performance warranty. The Company
        announced the availability of Hercules SecurePlus(TM), the
        industry's first security software performance warranty, in
        collaboration with AIG Product Development, General Insurance,
        and a pioneer in the fast-growing cyber security insurance
        market. The SecurePlus warranty provides financial protection
        to Hercules customers while promoting a proactive risk
        management and security policy compliance environment in the
        nation's critical computer networks.

    --  New patent allowance. The Company announced that it received a
        Notice of Allowance from the United States Patent and
        Trademark Office for a new patent on its automated
        vulnerability remediation software solution that is licensed
        as part of Hercules. The Company anticipates the patent will
        be issued by the end of 2005. We believe that securing patents
        for its technology will solidify the Company's key assets and
        provide for future competitive advantages.

    --  New leader of sales organization. The Company appointed Randy
        Schirman as Executive Vice President of Sales. Mr. Schirman
        comes to Citadel with extensive experience in the security
        space, with previous executive sales positions at DeepNines
        Technologies and NetScreen, where he demonstrated success in
        building and leading sales teams selling security applications
        across a variety of industries.

    --  Significant new orders. The Company received significant new
        orders of approximately $5.3 million in the third quarter,
        including shipments of nine Hercules Security-On-Demand
        appliances. The orders also represent purchases from new
        customers and recurring product licenses from existing
        customers, new engagements for professional services, and
        customer support services renewals and subscriptions
        representing ratable revenue that will be recognized over
        future periods. New orders include:

            --  an order for $2.4 million from a government systems
                integrator related to an existing U.S. government
                contract for additional content software and services
                to be recognized as software content and services are
                delivered over the next twelve months;

            --  an $875,000 order for content enhancements to an
                existing U. S. government contract was received by the
                Company from a major government systems integrator for
                delivery in the fourth quarter;

            --  a $340,000 order from a global provider of records and
                information management services to aid in the security
                of its network infrastructure;

            --  an order for approximately $220,000 for products and
                services from a top ten U.S. commercial bank;

            --  a $325,000 order from a leading global communications
                provider for renewal of support services.

    --  Favorable change in the Series A Convertible Preferred Stock
        terms. In July, the Company's shareholders approved an
        amendment to the Series A Convertible Preferred Stock terms,
        which reduced the conversion price of the shares from $5.00 to
        $3.00 per share and eliminated the dividends payable on the
        Series A Convertible Preferred Stock. The dividend elimination
        will save the Company approximately $750,000 in annual
        dividend payments.

    --  New $3.75 million debt financing. In October, the Company
        entered into a new $3.75 million loan agreement with a related
        party. Funds were used to retire the existing Comerica Bank
        notes payable with the excess used for working capital
        purposes. Terminating the Comerica facility eliminated all
        debt covenants formerly associated with the Comerica debt and
        provides the Company debt financing at more flexible terms.

    --  New factoring commitment. In October, the Company entered into
        a new factoring agreement with a private investment company.
        Under the agreement, Citadel will offer this company certain
        accounts receivable accounts. Accounts accepted by the
        investment company will be discounted from the face value of
        the accounts according to terms and conditions specified in
        the factoring agreement. The factoring line provides the
        Company additional flexibility and access to funds as Citadel
        generates new accounts.

    --  New subscriber growth. The Company experienced new subscriber
        growth for the 2 Minute Warning, a free, daily security news
        service that educates public, private and academic
        organizations about network security best practices.

Financial Outlook:

Through the date of this press release, Citadel has received orders from which the company expects to recognize approximately $10.5 million of revenue for 2005. The Company further expects to finalize additional contracts by the conclusion of the fourth quarter with some of the entities in its sales pipeline with contract values ranging from $50,000 to multi-millions of dollars. Despite the strong sales pipeline and recognizable revenue of $10.5 million for 2005 expected as of the date of this press release, Citadel has elected to update its business outlook for the balance of the year due to uncertainty surrounding the timing of obtaining new contracts. It now expects full-year 2005 revenue in a range of $12 million to $14 million, compared to its previous outlook of revenue between $18 million and $20 million. In addition to product orders from new and existing customers, Citadel expects new orders to continue to shift to more ratable revenue streams including offerings through managed service providers, professional services, and ratable subscriptions and customer support contracts that Citadel expects will be recognized in future periods. In addition, Citadel anticipates that cash balances and cash provided from collection of accounts receivable, conversions of new orders into cash, and funding availability under its credit agreements, will not require the Company to raise capital to pursue its current business model.

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 617-597-5363 when calling internationally. Please reference Conference I.D. Number 29294167. 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/3q05webcast.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 (NASDAQ:CDSS) 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: uncertainties related to the issuance of a patent by the United States Patent and Trademark Office; the possibility of other intellectual property rights held by third parties related to the technology ; uncertainty related to projected cost savings from restructuring activities; 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; and the company's ability to attract and retain qualified personnel. 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 June 30, 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.
                        Unaudited Balance Sheet

                                                Sept. 30,    Dec. 31,
                                                  2005        2004
                                                ---------   ---------
                                     ASSETS
                                    --------
CURRENT ASSETS
  Cash and cash equivalents                  $   597,703 $ 9,838,154
  Accounts receivable-trade, less allowance
   of $209,000 at September 30, 2005 and
   December 31, 2004                           1,840,119     615,749
  Prepaid expenses and other current assets    1,266,147   1,466,354
                                              ----------- -----------
  Total current assets                         3,703,969  11,920,257

PROPERTY AND EQUIPMENT, net of accumulated
 depreciation of $2,031,106 and $726,444       5,695,452   6,356,362
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net
 of accumulated amortization of $6,031,468
  and $4,433,065                               4,556,556   4,048,452

OTHER ASSETS                                     114,219      83,439
                                              ----------- -----------
  TOTAL ASSETS                               $14,070,196 $22,408,510
                                              =========== ===========

           LIABILITIES AND STOCKHOLDERS' EQUITY
          ------------------------------------
CURRENT LIABILITIES
  Current portion of long-term debt          $        -  $ 1,327,273
  Accounts payable and accrued expenses        3,064,215   3,040,665
  Accrued compensation and payroll tax
   obligations                                 1,193,550   1,413,670
  Preferred stock dividends payable                    -     187,500
  Current portion of deferred revenue          2,778,192   2,462,851
                                            ------------  ------------
  Total current liabilities                    7,035,957   8,431,959

LONG-TERM DEBT, LESS CURRENT PORTION           3,082,577   1,989,393
DEFERRED REVENUE, LESS CURRENT PORTION           560,977     480,172
OTHER NON-CURRENT LIABILITIES                    636,051     714,466


PREFERRED STOCK, $1,000 stated value per
 share; 1,000,000 shares authorized;
   Series A Preferred Stock, 15,000 shares
    issued and outstanding at September 30,
    2005 and December 31, 2004, liquidation
    preference of $15,000,000                 10,434,299  10,701,847
   Series B Preferred Stock, 7,000 shares
    issued and outstanding at September 30,
    2005, liquidation preference of
    $7,000,000                                 5,329,820        -
COMMON STOCK, $.01 par value per share;
  100,000,000 shares authorized;
  30,055,730 and 29,845,730 shares
  issued and outstanding at September 30,
  2005 and December 31, 2004                     300,557     298,457
ADDITIONAL PAID-IN CAPITAL                    46,032,705  44,248,609
ACCUMULATED DEFICIT                          (59,342,747)(44,456,393)
                                            ------------  ------------
  Total Stockholders' Equity                  2,754,634   10,792,520
                                            ------------  ------------
 TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY                                    $14,070,196  $22,408,510
                                            ============  ============

                    CITADEL SECURITY SOFTWARE INC.
                  UNAUDITED STATEMENTS OF OPERATIONS

                         THREE MONTHS ENDED       NINE MONTHS ENDED
                            SEPTEMBER 30,            SEPTEMBER 30,
                         2005        2004         2005        2004
                      ----------  ----------   ----------  ----------
Revenue
  License fees       $   765,128 $ 7,071,477 $  1,572,404 $11,813,554
  Customer support
   services            1,068,428     673,317    3,429,438   1,661,077
  Professional
   services              360,284      28,670    1,625,225      64,747
                      ----------- ----------- ------------ -----------
    Total revenue      2,193,840   7,773,464    6,627,067  13,539,378

Costs of revenue
  Software
   amortization          593,127     339,689    1,598,403     791,412
  Customer support
   services costs        407,405     384,561    1,289,664     987,818
  Professional
   services costs        100,783       8,825      413,917      29,028
  Shipping and other
   costs                  69,813      13,105      104,133      18,279
                      ----------- ----------- ------------ -----------
    Total costs of
     revenue           1,171,128     746,180    3,406,117   1,826,537

Operating expenses
  Selling, general
   and administrative
   expense             4,561,246   5,483,405   14,833,658  12,429,695
  Product development
   expense               798,560     396,069    1,842,620   1,353,169
  Depreciation
   expense               447,786     163,865    1,304,660     405,383
                      ----------- ----------- ------------ -----------
    Total operating
     expenses          5,807,592   6,043,339   17,980,938  14,188,247
                      ----------- ----------- ------------ -----------
    Operating (loss)
     income           (4,784,880)    983,945  (14,759,988) (2,475,406)

Interest income           18,030      29,390       65,155      87,494
Interest expense         (67,526)    (17,343)    (191,521)    (28,712)
Other income expense           -           -            -       9,919
                     ------------------------------------- -----------
(Loss) income before
 income taxes         (4,834,376)    995,992  (14,886,354) (2,406,705)

Provision for income
 taxes                         -           -            -           -
                     -------------------------------------------------
Net (loss) income     (4,834,376)    995,992  (14,886,354) (2,406,705)
Preferred stock
 dividends                     -    (187,500)    (268,750)   (477,440)
Non-cash fair value
 adjustment for
 exchanged warrants            -           -     (274,800)          -
Non-cash fair value
 adjustment for
 Series A Preferred
 Stock dividend
 waiver                1,826,000           -    1,826,000           -
Non-cash fair value
 adjustment for change
 in Series A Preferred
 Stock conversion
 price                (1,064,000)          -   (1,064,000)          -
Non-cash accretion of
 preferred stock
 beneficial conversion
 feature                (646,168)    (61,542)    (769,252)   (153,855)
                      ----------- ----------- ------------ -----------
Net (loss) income to
 common shareholders $(4,718,544)$   746,950 $(15,437,156)$(3,038,000)
                      =========== =========== ============ ===========

Net (loss) income per
 share to common
 shareholders
   - basic           $     (0.16)$      0.03 $      (0.52)$     (0.10)
                      =========== =========== ============ ===========
   - diluted         $     (0.16)$      0.02 $      (0.52)$     (0.10)
                      =========== =========== ============ ===========

Weighted average
 common shares
 outstanding -
    - basic           30,044,860  29,664,109   29,923,496  29,186,053
                      =========== =========== ============ ===========
    - diluted         30,044,860  33,932,949   29,923,496  29,186,053
                      =========== =========== ============ ===========


                    CITADEL SECURITY SOFTWARE INC.
                  UNAUDITED STATEMENTS OF CASH FLOWS

                                                   NINE MONTHS ENDED
                                                      SEPTEMBER 30,
                                                   2005        2004
                                                 --------    --------
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                  $(14,886,354)$(2,406,705)
   Adjustments to reconcile net loss to net
    cash used in operating activities:
      Depreciation and amortization             2,903,064   1,196,795
       Provision for returns, allowances and
        bad debts                                       -     130,500
      Amortization of debt issue costs
       recorded as interest expense                21,299      10,033
      Amortization of deferred credit for
       tenant incentive recorded as leasehold
        improvements                              (78,415)          -
      Common stock issued for services             88,000           -
      Common stock issued for director's
       fees                                        46,500           -
      Changes in operating assets and
       liabilities:
        Accounts receivable-trade              (1,224,370) (6,074,297)
        Prepaid expenses and other current
         assets                                   200,208    (931,682)
        Other assets                               17,243      (6,202)
        Accounts payable and accrued
         expenses                                 670,795   1,876,933
        Accrued compensation and payroll tax
         obligations                             (220,120)  1,415,539
        Deferred revenue                          396,146     510,967
                                              ------------ -----------
      NET CASH USED IN OPERATING ACTIVITIES   (12,066,004) (4,278,119)

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of property and equipment         (1,290,997) (3,206,048)
   Capitalized software development costs      (2,106,506) (2,654,025)
                                              ------------ -----------
      NET CASH USED IN INVESTING ACTIVITIES    (3,397,503) (5,860,073)

CASH FLOWS FROM FINANCING ACTIVITIES
   Net proceeds from issuance of preferred
    stock and warrants                          6,902,396  13,797,283
   Borrowings on long-term debt                   750,000     797,576
   Repayments on long-term debt                  (984,090)          -
   Debt issuance costs                             (5,000)    (26,396)
   Net proceeds from the exercise of
    warrants                                            -     216,549
   Net proceeds from exercise of employee
    stock options                                  16,000     183,552
   Payments on notes and advances from
    related parties                                     -     (16,903)
   Preferred stock dividends paid                (456,250)   (289,939)
                                              ------------ -----------
      NET CASH PROVIDED BY FINANCING
       ACTIVITIES                               6,223,056  14,661,722
                                              ------------ -----------
      Net increase (decrease) in cash and
       cash equivalents                        (9,240,451)  4,523,530
      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                         $    597,703 $ 9,615,691
                                              ============ ===========

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

                                                   NINE MONTHS ENDED
                                                     SEPTEMBER 30,
                                                   2005        2004
                                                ----------  ----------
Non-cash financing items:
   Preferred stock dividends accrued           $        -  $  187,500
                                                ==========  ==========
   Beneficial conversion feature of
    convertible preferred stock                $        -  $  984,649
                                                ==========  ==========
   Accretion of preferred stock beneficial
    conversion feature                         $  769,252  $  153,855
                                                ==========  ==========
   Fair value of warrants issued in connection
    with sale of preferred stock               $1,204,060  $2,326,184
                                                ==========  ==========
   Fair value adjustment for exchanged
    warrants                                   $  274,800  $        -
                                                ==========  ==========
   Fair value adjustment for Series A
    Preferred Stock dividend waiver            $1,826,000  $        -
                                                ==========  ==========
   Fair value adjustment for change in Series
    A Preferred Stock conversion price         $1,064,000  $        -
                                                ==========  ==========
   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       $   64,322  $   45,838
                                                ==========  ==========