UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 WASHINGTON,
        D.C. 20549
 FORM
        10-K
 
 T ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
        1934
 FOR
        THE
        FISCAL YEAR ENDED DECEMBER 31, 2006
 £ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
        ACT
        OF 1934
 FOR
        THE
        TRANSITION PERIOD ENDED ___________
 
 COMMISSION
        FILE NUMBER: 000-33491
 
 CDSS
        WIND
        DOWN INC.
 (EXACT
        NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 DELAWARE
              75-2873882(STATE
                  OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
              (I.R.S.
                  EMPLOYER IDENTIFICATION NO.)
 
 TWO
        LINCOLN CENTRE, SUITE 1600, 5420 LBJ FREEWAY, DALLAS, TEXAS 75240
 (ADDRESS
        OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
 (214)
        520-9292
 (REGISTRANT’S
        TELEPHONE NUMBER, INCLUDING AREA CODE)
 
 SECURITIES
        REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
 SECURITIES
        REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
 COMMON
        STOCK, PAR VALUE $.01 PER SHARE
 (TITLE
        OF
        CLASS)
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes £ No T
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act. Yes £ No T
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes T No £
 
 Indicate
        by check mark if disclosure of delinquent filers in response to Item 405
        of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K. T
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
        accelerated filer £ Accelerated filer £ Non-accelerated filer T
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act). Yes T No £
 
 The
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates computed by reference to the price at which common equity
        was
        last sold, or the average of the bid and asked price of such common equity,
        as
        of the last business day of the registrant’s most recently completed second
        fiscal quarter (June 30, 2006) was $15,447,851.
 
 As
        of
        March 29, 2007, there were 34,318,230 shares of common stock, $.01 par value
        per
        share, outstanding.
 
 DOCUMENTS
        INCORPORATED BY REFERENCE
 
 None
  
  CDSS
        WIND DOWN INC.
 FORM
        10-K
 ANNUAL
        REPORT
 FOR
        THE
        YEAR ENDED
 DECEMBER
        31, 2006
 
 **Table
                  of Contents**
              
              **Page****PART
                  I**Item
                  1.
              Business
              3Item
                  1A.
              Risk
                  Factors
              5Item
                  1B.
              Unresolved
                  Staff Comments
              7Item
                  2.
              Properties
              7Item
                  3.
              Legal
                  Proceedings
              7Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              9**Part
                  II**Item
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder
                  Matters and Issuer Purchases of Equity Securities
              10Item
                  6.
              Selected
                  Financial Data
              12Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              13Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              24Item
                  8.
              Financial
                  Statements and Supplementary
                  Data
              24Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting
                  and Financial Disclosure
              24Item
                  9A.
              Controls
                  and Procedures
              24Item
                  9B.
              Other
                  Information
              25**Part
                  III**Item
                  10.
              Directors,
                  Executive Officers and Corporate Governance
              26Item
                  11.
              Executive
                  Compensation
              30Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              35Item
                  13.
              Certain
                  Relationships and Related Transactions, And
                  Director Independence
              35Item
                  14.
              Principal
                  Accountant Fees and Services
              37**Part
                  IV**Item
                  15.
              Exhibits
                  and Financial Statement
                  Schedules
              38Signatures
  2
 *Table
            of Contents*
  **PART
        I**
 
 **CAUTIONARY
        STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**
 
 This
        report on Form 10-K contains forward-looking statements within the meaning
        of
        the Private Securities Litigation Reform Act of 1995. CDSS Wind Down Inc.,
        f/k/a
        Citadel Security Software Inc. (“CDSS”, “Citadel” or the “Company”) bases these
        forward-looking statements on its expectations and projections about future
        events, which CDSS has derived from the information currently available to
        it.
        In addition, from time to time, CDSS or its representatives may make
        forward-looking statements orally or in writing. Furthermore, forward-looking
        statements may be included in CDSS’s filings with the Securities and Exchange
        Commission or press releases or oral statements made by or with the approval
        of
        one of CDSS's executive officers. For each of these forward-looking statements,
        CDSS 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 CDSS’s future performance,
        including but not limited to:
 
 ·
              any
                  statements regarding the execution, timing and expenses associated
                  with
                  the complete dissolution of CDSS;
 ·
              any
                  statements regarding the disposition of our existing
                  assets;
 ·
              any
                  statements regarding the settlement of outstanding liabilities;
                  and
 ·
              any
                  statements regarding liquidating distributions, if and when, to
                  our
                  Stockholders.
 
 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. 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. Forward-looking statements are subject to
        certain known and unknown 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 CDSS:
 
 ·
              our
                  ability to accurately estimate the expenses associated with executing
                  our
                  plan of complete liquidation and dissolution;
 ·
              our
                  ability to successfully resolve all our outstanding creditor claims
                  and
                  ongoing litigation; and
 ·
              those
                  described under Risk Factors included in Item 1A of this document.
 
 Forward-looking
        statements are only predictions as of the date they are made and are not
        guarantees of performance. All forward-looking statements included in this
        document are based on information available to CDSS on the date of this Report
        on Form 10-K. Readers are cautioned not to place undue reliance on
        forward-looking statements. The forward-looking events discussed in this
        Report
        on Form 10-K and other statements made from time to time by CDSS or its
        representatives may not occur, and actual events and results may differ
        materially and are subject to risks, uncertainties and assumptions about
        CDSS
        including without limitation those discussed elsewhere in this Form 10-K
        under
        the heading Risk Factors as well as those discussed elsewhere in this Form
        10-K,
        and the risks discussed in our Securities and Exchange Commission filings.
        Except for their ongoing obligations to disclose material information as
        required by the federal securities laws, CDSS 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-K and in other statements made from time-to-time by CDSS or its
        representatives might not occur.
 
 “CDSS,”
        the "Company," “we,” “us,” and “our” refer to CDSS Wind Down Inc. f/k/a Citadel
        Security Software Inc. Hercules®, AssetGuardTM, ConnectGuardTM, Secure PCTM and
        NetOFFTM are trademarks or registered trademarks of McAfee, Inc. Other trademarks
        that may be mentioned in this Form 10-K are intellectual property of their
        respective owners.
 
 **ITEM
        1. BUSINESS**
 
 **INTRODUCTION**
 
 On
        December 4, 2006, Citadel Security Software Inc. and its subsidiaries closed
        the
        sale of substantially all of its assets ("Asset Sale") to McAfee Security,
        LLC,
        a Delaware limited liability company and a wholly owned subsidiary of McAfee,
        Inc., pursuant to the Asset Purchase Agreement (the "Asset Purchase Agreement")
        between and McAfee, Inc. and a subsidiary ("McAfee"). On December 12, 2006
        Citadel Security Software Inc. changed its name to CDSS Wind Down Inc. The
        Asset
        Purchase Agreement provides for the acquisition of substantially all of the
        assets (the "Assets") and the assumption of certain identified liabilities
        (the
        "Assumed Liabilities") of CDSS by McAfee (collectively, the "Sale"). The
        cash
        consideration received by CDSS for the purchase of the Assets and operating
        expense reimbursement was $60,020,579 in immediately available funds. CDSS
        anticipates that it will make distributions to its common stockholders after
        payment of all transaction costs, liabilities, preferred stock and other
        cash
        payments following expiration of a 30-day indemnification period, and subject
        to
        holding back any indemnification or other required amounts. An initial
        distribution of $0.50 per share was made on January 5, 2007 to stockholders
        of
        record on January 2, 2007. CDSS anticipates that it will make additional
        estimated distributions to stockholders of $0.02 to $0.04 per share in one
        or
        more distributions to its common stockholders after payment of transaction
        costs, liabilities, and other cash payments, and subject to holding back
        any
        indemnification or other required amounts.
  3
 *Table
            of Contents*
  CDSS
        was
        incorporated in Delaware in December 1996. Our principal executive offices
        are
        located at Two Lincoln Centre, Suite 1600, 5420 LBJ Freeway, Dallas, Texas
        75240, and the telephone number for that location is (214) 520-9292. Our
        annual
        reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
        Form
        8-K, amendments to those reports and other Securities and Exchange Commission,
        or “SEC,” filings are electronically filed with, or furnished to, the SEC. In
        addition, the public may read and copy materials filed by CDSS with the SEC
        at
        the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C.
        20549. On April 30, 2004 the Company’s stock moved from the National Association
        of Securities Dealers (NASD) Over-the-Counter Bulletin Board (OTCBB) exchange
        to
        the NASDAQ Capital Market and traded under the symbol "CDSS". On May 5, 2006
        the
        Company's stock moved to the OTCBB following a delisting notice form the
        NASDAQ
        for failure to meet the $1 per share minimum trading price. On January 11,
        2007
        the trading symbol became "CWDW" resulting from the name change. CDSS's website
        can be found at www.CDSSWD.com. The contents of our website are not incorporated
        into, or otherwise to be regarded as a part of, this Annual Report on Form
        10-K.
        Our common stock trades on the OTCBB under the symbol “CWDW”.
 
 Prior
        to
        the Asset Sale, CDSS formerly provided enterprise vulnerability management
        and
        policy compliance and enforcement software solutions that enable organizations
        to reduce the risk associated with computer network vulnerabilities. CDSS
        developed and marketed full life cycle vulnerability management software
        solutions under the Hercules® brand name powered by automated vulnerability
        remediation technology which allows enterprises to neutralize security
        vulnerabilities across Windows, Linux, Mac and Unix platforms. The Company's
        prior business was formed in 1996 as the result of the acquisition of several
        technology businesses operated by a business incubator from 1996 through
        May 17,
        2002 at which time CDSS was spun out from its former parent as a standalone
        company. The business was operated as standalone company from May 17, 2002
        until
        the sale of substantially all of its assets to McAfee on December 4,
        2006.
 
 **PLAN
        OF COMPLETE LIQUIDATION AND DISSOLUTION**
 
 As
        of
        March 29, 2007 and at December 31, 2006, we had not filed a certificate of
        dissolution in Delaware; however at a Special Meeting of Stockholders held
        on
        December 1, 2006, our stockholders approved a plan of liquidation and
        dissolution (the "Plan of Dissolution"), previously approved by our board
        of
        directors on October 13, 2006. In connection with the closing of the Asset
        Sale
        on December 4, 2006, our business and operations were effectively transferred
        to
        McAfee pursuant to the Asset Purchase Agreement, and we no longer have any
        significant operating assets or contracts, and our activities are limited
        to:
 
 ·
              filing
                  a certificate of dissolution with the Secretary of State of the
                  State of
                  Delaware and thereafter remaining in existence as a non-operating
                  entity
                  for three years;
 
 ·
              selling
                  any of our remaining assets;
 
 ·
              paying
                  or settling the obligations owed to our remaining
                  creditors;
 
 ·
              terminating
                  or settling any of our remaining commercial agreements, relationships
                  or
                  outstanding obligations;
 
 ·
              resolving
                  any outstanding litigation;
 
 ·
              collecting
                  any outstanding amounts due to
                  CDSS;
 
 ·
              establishing
                  a contingency reserve for payment of our expenses and
                  liabilities;
 
 ·
              completing
                  of tax filings;
 
 ·
              complying
                  with our Securities and Exchange Commission reporting requirements;
                  and
 
 ·
              making
                  distributions to our stockholders.
 
 Delaware
        law provides that, following the approval of the plan of liquidation and
        dissolution by the stockholders, the board of directors may take such actions
        as
        it deems necessary in furtherance of the dissolution of CDSS and the wind
        up of
        its operations and affairs. Notwithstanding stockholder authorization or
        consent
        to the Plan of Dissolution and its contemplated transactions, the Board of
        Directors may modify, amend or abandon the Plan of Dissolution and its
        contemplated transactions without further action by the stockholders to the
        extent permitted by law.
 
 As
        of
        March 29, 2007 and at December 31, 2006, we had not filed a certificate of
        dissolution because we had not yet settled all of our outstanding obligations.
        At December 31, 2006 our projections of operating expenses and liquidation
        costs
        and assumption that we settle our lease liability at an amount that provides
        available funds for the final distribution, we estimate that the amount
        ultimately distributed to our common stockholders will be in the range of
        $0.52
        to $0.54 per share. An initial distribution of $0.50 per share was made on
        January 5, 2007 to stockholders of record on January 2, 2007. The distribution
        of the remaining $0.02 to $0.04 could be made following any reduction for
        any
        valid indemnification claims by McAfee (the period for making a claim expired
        on
        January 3, 2007), additional liabilities we may incur, and the ultimate
        settlement amounts of our liabilities including our office lease. The actual
        amount available for distribution, if any, could be substantially less if
        we
        discover additional liabilities or claims or incur unexpected or greater
        than
        expected expenses. Although our Board of Directors has not established a
        firm
        timetable for the remaining liquidating distributions, the Board of Directors
        intends to, subject to contingencies inherent in winding up our business,
        make
        such distributions as promptly as practicable and periodically as we convert
        our
        remaining assets to cash and pay our remaining liabilities and obligations
        subject to law.
  4
 *Table
            of Contents*
  Following
        the 30-day indemnity period following the closing of the Asset Sale (which
        expired on January 3, 2007), the satisfaction of the holdback provisions
        of the
        Asset Purchase Agreement and payment of our initial liquidating distribution
        (paid on January 5, 2007), our board of directors may, at any time, turn
        our
        management over to a third party to complete the liquidation of our remaining
        assets and distribute any remaining proceeds from the Asset Sale to our
        stockholders pursuant to the plan of liquidation and dissolution. This
        third-party management may be in the form of a liquidating trust, which,
        if
        adopted by our board of directors, would succeed to all of our assets,
        liabilities and obligations. Our board of directors may appoint one or more
        of
        its members, one or more of our officers or a third party to act as trustee
        or
        trustees of such liquidating trust. If, however, all of our assets are not
        distributed within three years after the date our certificate of dissolution
        is
        filed with the State of Delaware, we will transfer our remaining assets to
        a
        liquidating trust if we have not already done so.
 
 During
        the liquidation of our assets, we may pay our officers, directors, employees,
        and agents, or any of them, compensation for services rendered in connection
        with the implementation of the plan of liquidation and dissolution. At December
        31, 2006 we had four employees, including our CEO and CFO all involved in
        the
        wind down of the company pursuant to the Plan of Dissolution.
 
 **ITEM
        1A. RISK FACTORS**
 
 In
        addition to other information in this Form 10-K, the following risk factors
        should be carefully considered in evaluating us and our liquidation and
        dissolution because such factors may have a significant impact on the execution
        of our Plan of Dissolution and the timing and amount of liquidating
        distributions, if any, to our stockholders. As a result of the risk factors
        set
        forth below and elsewhere in this Form 10-K, and the risks discussed in our
        other Securities and Exchange Commission filings, actual results could differ
        materially from those projected in any forward-looking statements.
 
 **WE
        CANNOT ASSURE YOU OF THE EXACT AMOUNT OR TIMING OF ANY FUTURE DISTRIBUTION
        TO
        OUR STOCKHOLDERS UNDER THE PLAN OF DISSOLUTION.**
 
 The
        liquidation and dissolution process is subject to numerous uncertainties
        and may
        not result in any remaining capital for future distribution to our stockholders.
        The precise nature, amount and timing of any future distribution to our
        stockholders will depend on and could be delayed by, among other things,
        sales
        of our non-cash assets, claim settlements with creditors, settlement of
        remaining obligations under operating leases, and unexpected or greater than
        expected expenses. Furthermore, we cannot provide any assurances that we
        will
        actually make additional distributions. The estimates we have provided are
        based
        on currently available information, and actual distribution payments, if
        any,
        could be substantially less than the range we have estimated. Any amounts
        to be
        distributed to our stockholders may be less than the price or prices at which
        our common stock has recently traded or may trade in the future. Furthermore,
        notwithstanding stockholder authorization or consent to the Plan of Dissolution
        and its contemplated transactions, the Board of Directors may modify, amend
        or
        abandon the Plan of Dissolution and its contemplated transactions without
        further action by the stockholders to the extent permitted by law.
 
 **OUR
        COMMON STOCK IS CONTINUING TO TRADE EVEN THOUGH WE ARE IN THE PROCESS OF
        LIQUIDATION AND LIQUIDATING DISTRIBUTIONS, IF ANY, MAY BE BELOW ANY TRADING
        PRICE.**
 
 Our
        common stock continues to trade on the OTCBB under the symbol “CWDW.” Trading in
        our stock is inherently risky, highly speculative and the market for our
        stock
        is highly illiquid. The only value associated with our shares is the right
        to
        receive further distributions as part of the liquidation process. Because
        of the
        difficulty in estimating the amount and timing of the liquidating distributions,
        and due to the other risk factors discussed herein, our common stock may
        be
        subject to significant volatility and may trade above the amount of any
        liquidating distribution that is made.
 
 **WE
        MAY NOT BE ABLE TO SETTLE ALL OF OUR OBLIGATIONS TO
        CREDITORS.**
 
 If
        we do
        not settle all of our obligations to creditors we may be prevented from
        completing our Plan of Dissolution. Our obligations to creditors include,
        among
        other things, lease obligations for office space and contractual obligations
        to
        vendors. As part of the wind down process, we will attempt to settle our
        obligations with our creditors including the office leases in Dallas, Texas
        and
        Reston, Virginia. At December 31, 2006, we are obligated under an operating
        lease for office space until October 2012 with a buyout option that may be
        exercised in October 2008 for a payment of approximately $1.4 million. We
        expect
        that we will be able to sublet the office space at prices at or above the
        current rental rate and have recorded an estimated settlement liability of
        approximately $1,554,000, however no assurances can be made that we will
        be able
        to find a subtenant acceptable to the landlord or at a rental rate that would
        allow us to settle the lease liability at an amount that would leave funds
        available for a distribution to stockholders. Furthermore, a sublease
        arrangement may require us to maintain our legal entity status as a Delaware
        corporation until the expiration of the lease liability in October 2012.
        Any
        inability to reach settlement with our creditors could delay or even prevent
        us
        from completing the Plan of Dissolution in a reasonable time and therefore
        amounts required to settle our obligations to creditors would be in excess
        of
        our estimates at December 31, 2006 and would reduce the amount of remaining
        capital available for future distribution to stockholders.
  5
 *Table
            of Contents*
  **WE
        WILL CONTINUE TO INCUR CLAIMS, LIABILITIES AND EXPENSES THAT WILL REDUCE
        THE
        AMOUNT AVAILABLE FOR DISTRIBUTION OUT OF THE LIQUIDATION TO STOCKHOLDERS.**
 
 Claims,
        liabilities and expenses from operations, such as operating costs, directors’
and officers’ insurance, income, franchise, payroll and local taxes, legal,
        accounting and consulting fees and miscellaneous office expenses, will continue
        to be incurred as we wind down. These expenses will reduce the amount of
        assets
        available for future distribution out of the liquidation to stockholders.
        If
        available cash is not adequate to provide for our obligations, liabilities,
        expenses and claims, we may not be able to distribute meaningful cash out
        of the
        liquidation, or any cash at all, to our stockholders.
  **WE
        MAY BE SUBJECT TO FINAL EXAMINATIONS BY TAXING AUTHORITIES ACROSS VARIOUS
        JURISDICTIONS WHICH MAY IMPACT THE AMOUNT OF TAXES THAT WE PAY AND THE ULTIMATE
        DISTRIBUTIONS TO OUR STOCKHOLDERS**
 
 In
        evaluating the exposure associated with various tax filing positions, we
        accrue
        charges for probable exposures. At December 31, 2006, we believe we have
        appropriately accrued for probable exposures. To the extent we were not to
        prevail in matters for which accruals have been established or be required
        to
        pay amounts in excess of these accruals, our effective tax rate in a given
        financial statement period could be materially affected. Significant judgment
        is
        required in determining our provision for income taxes. In the ordinary course
        of business, there are many transactions for which the ultimate tax outcome
        is
        uncertain. Our reported results may be subject to final examination by taxing
        authorities. Because many transactions are subject to varying interpretations
        of
        the applicable federal, state or foreign tax laws, our reported tax liabilities
        and taxes may be subject to change at a later date upon final determination
        by
        the taxing authorities. The impact of this final determination on our estimated
        tax obligations could increase or decrease amounts of cash available for
        distribution to our stockholders, perhaps significantly.
 
 **OUR
        ASSUMPTIONS REGARDING THE FEDERAL TAX CONSEQUENCES OF THE ASSET SALE MAY
        BE
        INACCURATE.**
 
 The
        Asset
        Sale was a taxable transaction to us for United States federal income tax
        purposes and we will recognize gain on the proposed asset sale under the
        Asset
        Purchase Agreement. We do not believe, however, that there will be material
        tax
        payable by us, other than approximately $894,000 of federal Alternative Minimum
        Tax (“AMT”) as a result of limitations on the use of net operating losses under
        AMT rules. We believe we have sufficient usable net operating losses to offset
        substantially all of the income or gain recognized by us for “regular” federal
        income tax purposes as a result of the asset sale (i.e., other than AMT).
        After filing of federal income tax returns by us and our subsidiaries, we
        believe that we will have net operating losses of approximately $45,000,000
        to
        offset taxable income for the year ended December 31, 2006, including losses
        arising prior to and after the date of our 2002 spinoff from our former parent
        company. We expect that our taxable income, including the gain on the Asset
        Sale, for federal income tax purposes will be less than available net operating
        loss carryforwards of approximately $45,000,000. Therefore, we will not set
        aside any material amounts specifically for the payment of any tax liability,
        other than the $894,000 AMT payment that we will make. However, there can
        be no
        assurance that the Internal Revenue Service or relevant state tax authorities
        will ultimately assent to our tax treatment of the asset sale or the net
        operating losses. To the extent the Internal Revenue Service or any relevant
        state tax authorities ultimately prevail in recharacterizing the tax treatment
        of the asset sale or the net operating losses, there may be adverse tax
        consequences to us and our stockholders, including that we could owe income
        taxes on up to the entire purchase price and our common stockholders would
        not
        receive any distributions or be required to return any distributions they
        have
        received.
 
 **OUR
        ASSUMPTION THAT WE WILL NOT HAVE TO PAY TEXAS FRANCHISE TAX AS A RESULT OF
        THE
        CLOSING OF THE ASSET PURCHASE AGREEMENT MAY BE INACCURATE.**
 
 We
        do not
        believe we will be obligated to pay any Texas franchise tax as a result of
        the
        closing of the transaction. Beneficial ownership of all of our assets was
        held
        by our subsidiary Canberra Operating, L.P., a Texas limited partnership,
        and
        Texas franchise tax did not apply to dispositions of assets by limited
        partnerships. To confirm our position, following the closing we applied to
        the
        Texas Comptroller of Public Accounts for a statement that no franchise or
        sales
        tax was due as a result of the closing of the Asset Purchase Agreement. If
        the
        Texas Comptroller challenges our position, we could be required to pay the
        Texas
        franchise tax, which would further reduce the amount we could distribute
        to our
        stockholders or our stockholders could be required to return any distributions
        they have received.
 
 **DISTRIBUTION
        OF CASH OUT OF THE LIQUIDATION, IF ANY, TO OUR STOCKHOLDERS COULD BE DELAYED.**
 
 Although
        our Board of Directors has not established a firm timetable for distributions
        to
        our stockholders out of the liquidation, the Board of Directors intends,
        subject
        to contingencies inherent in winding down our business, to make such
        distributions as promptly as practicable as creditor and litigant claims
        are
        paid or settled. However, we are currently unable to predict the precise
        timing
        of any such distributions. The timing of such distributions will depend on
        and
        could be delayed by, among other things, the timing of sales of our non-cash
        assets, claim settlements with creditors and the settlement of any outstanding
        litigation matters. Additionally, a creditor could seek an injunction against
        the making of such distributions to our stockholders on the grounds that
        the
        amount to be distributed was needed to provide for the payment of our
        liabilities and expenses. Any action of this type could delay or substantially
        diminish the amount available for such distribution to our stockholders.
  6
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            of Contents*
  **IF
        WE FAIL TO CREATE AN ADEQUATE CONTINGENCY RESERVE FOR PAYMENT OF OUR EXPENSES
        AND LIABILITIES, EACH STOCKHOLDER COULD BE HELD LIABLE FOR PAYMENT TO OUR
        CREDITORS OF HIS OR HER PRO RATA SHARE OF AMOUNTS OWED TO CREDITORS IN EXCESS
        OF
        THE CONTINGENCY RESERVE, UP TO THE AMOUNT ACTUALLY DISTRIBUTED TO SUCH
        STOCKHOLDER.**
 
 In
        the
        event we fail to create an adequate contingency reserve for payment of our
        expenses and liabilities, each stockholder could be held liable for payment
        to
        our creditors of such stockholder’s pro rata share of amounts owed to creditors
        in excess of the contingency reserve, up to the amount actually distributed
        to
        such stockholder.
 
 Although
        the liability of any stockholder is limited to the amounts previously received
        by such stockholder from us (and from any liquidating trust or trusts) in
        the
        dissolution, this means that a stockholder could be required to return all
        distributions previously made to such stockholder and receive nothing from
        us
        under the Plan of Dissolution. Moreover, in the event a stockholder has paid
        taxes on amounts previously received, a repayment of all or a portion of
        such
        amount could result in a stockholder incurring a net tax cost if the
        stockholder’s repayment of an amount previously distributed does not cause a
        commensurate reduction in taxes payable. While we will endeavor to make adequate
        reserves for all known and contingent liabilities, there is no guarantee
        that
        the reserves established by us will be adequate to cover all such expenses
        and
        liabilities.
 
 **WE
        WILL CONTINUE TO INCUR THE EXPENSES OF COMPLYING WITH PUBLIC COMPANY REPORTING
        REQUIREMENTS.**
 
 We
        have
        an obligation to continue to comply with the applicable reporting requirements
        of the Securities Exchange Act of 1934, as amended, referred to as the “Exchange
        Act,” even though compliance with such reporting requirements is economically
        burdensome until we are fully dissolved.
 
 **OUR
        BOARD OF DIRECTORS MAY AT ANY TIME TURN MANAGEMENT OF THE LIQUIDATION OF
        CDSS
        OVER TO A THIRD PARTY, AND SOME OR ALL OF OUR DIRECTORS MAY RESIGN FROM OUR
        BOARD AT THAT TIME.**
 
 Our
        Board
        of Directors may at any time turn the management of CDSS over to a third
        party
        to complete the liquidation of our remaining assets and distribute the available
        proceeds to our stockholders, and some or all of our directors may resign
        from
        our board at that time. If management is turned over to a third party and
        all of
        our directors resign from our board, the third party would have sole control
        over the liquidation process, including the sale or distribution of any
        remaining assets.
 
 **IF
        WE LOSE THE SERVICES OF ANY OF OUR KEY PERSONNEL, INCLUDING OUR CHIEF EXECUTIVE
        OFFICER, CHIEF FINANCIAL 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, Richard Connelly, our Chief Financial Officer, and
        our
        directors. Our business could be negatively impacted if we were to lose the
        services of one or more of these persons. Richard Connelly has provided notice
        of his resignation, effective April 2, 2007 following completion of the Asset
        Sale, and our business may suffer as a result of his resignation if we are
        unable to obtain replacement services on acceptable terms.
  **ITEM
        1B. UNRESOLVED STAFF COMMENTS**
 
 None
 
 **ITEM
        2. PROPERTIES**
 
 At
        December 31, 2006 we have approximately 33,500 square feet of office space
        under
        lease in Dallas, Texas, our former headquarters, and 6,300 square feet of
        office
        space under lease in Reston, Virginia. The average monthly rent over the
        term of
        the leases for this space is approximately $52,200 per month and $12,000
        per
        month, respectively, exclusive of annual operating expenses charged separately
        by the landlords. We believe that both leases have commercially reasonable
        terms. The Dallas, Texas office lease expires in October 2012, with a buyout
        option that may be exercised in October 2008 for a payment of approximately
        $1.4
        million. We are seeking to sublease this facility and expect to continue
        to meet
        our rent obligations under this lease until a subtenant or other arrangement
        with the landlord is consummated. The Reston, Virginia office lease expires
        in
        May 2007. We expect to meet the monthly rent obligations of this lease until
        its
        expiration in May 2007.
 
 We
        maintain fire and casualty insurance that we believe adequately covers our
        leased properties against loss.
 
 **ITEM
        3. LEGAL PROCEEDINGS**
 
 **Securities
        and Derivative Litigation Settled**
 
 In
        January, February and March 2005, seven virtually identical lawsuits were
        filed
        against CDSS, Steven B. Solomon, the Company’s Chief Executive Officer and a
        Director, and Richard Connelly, the Company’s Chief Financial Officer. These
        suits were consolidated in one action styled Ruth R. Lentz v. Citadel Security
        Software, Inc., et al., Civil Action No. 3:05-CV-0100-D, in the United States
        District Court for the Northern District of Texas. Each case was filed on
        behalf
        of a putative class of persons and/or entities who purchased CDSS’s securities
        between February 12, 2004 and December 16, 2004, inclusive. The suits sought
        recovery of unspecified damages under Sections 10(b) and 20(a) of the Securities
        Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.
        The
        suits were filed after CDSS’s announcement on December 17, 2004 that the
        Company’s projection of revenue and earnings for the full year 2004 would be
        less than previously projected. On May 25, 2005, the court appointed a lead
        plaintiff and approved plaintiff's selection of lead counsel. On August 19,
        2005, the lead plaintiff filed a consolidated complaint. On October 18, 2005,
        the defendants filed a motion to dismiss this consolidated
        action.
  7
 *Table
            of Contents*
  On
        April
        1, 2005, a stockholder derivative suit styled Harry Brantley, derivatively
        on
        behalf of Citadel Security Software Inc. v. Steven B. Solomon, Richard Connelly,
        Chris A. Economou, John Leide and Joe M. Allbaugh, Cause No. 05-03117-L,
        was
        filed in the 193rd State District Court in Dallas County, Texas on behalf
        of
        CDSS against certain of the Company’s officers and directors: Steven B. Solomon,
        the Chief Executive Officer and a Director of the Company; Richard Connelly,
        the
        Company’s Chief Financial Officer; and Chris A. Economou, John Leide and Joe M.
        Allbaugh, Directors of the Company. The suit also named the Company as a
        nominal
        defendant. Based on allegations substantially similar to the federal securities
        action, the suit asserted claims for the defendants’ alleged violations of state
        law, including breaches of fiduciary duties, abuse of control, gross
        mismanagement, waste of corporate assets, and unjust enrichment that allegedly
        occurred during the same period of time at issue in the federal securities
        action. The suit sought the recovery of damages, fees, costs, equitable and/or
        injunctive remedies, and disgorgement of all profits, benefits and other
        compensation. On July 5, 2005, the Court entered an order staying and
        administratively closing this case subject to being reopened upon the motion
        of
        any party.
 
 On
        April
        28, 2005, a stockholder derivative suit styled Hans J. Baier, derivatively
        on
        behalf of Nominal Defendant, Citadel Security Software Inc., v. Steven B.
        Solomon, Richard Connelly and Chris Economou, Civil Action No. 3-05CV-0846-D,
        was filed in United States District Court for the Northern District of Texas,
        Dallas Division, against certain of the Company’s officers and directors: Steven
        B. Solomon, the Chief Executive Officer and a Director of the Company, Richard
        Connelly, the Company’s Chief Financial Officer and Chris Economou, a Director
        of the Company. The suit also names the Company as a nominal defendant. Based
        on
        allegations substantially similar to the federal securities action, the suit
        asserted claims for the defendants’ alleged violations of state law, including
        breaches of fiduciary duties, abuse of control, gross mismanagement, waste
        of
        corporate assets and unjust enrichment for the same period of time at issue
        in
        the federal securities action. The suit also purported to assert a claim
        against
        Steven B. Solomon and Richard Connelly pursuant to a federal statute for
        reimbursement of bonuses, profits and compensation. On September 12, 2005,
        the
        Court entered an order staying this case until thirty (30) days after the
        Court
        rules on the pending motion to dismiss filed by the defendants in the
        consolidated federal securities action described above.
 
 In
        September 2006, the parties in the above-described securities and derivative
        suits applied for a Preliminary Order (“Preliminary Order”) approving settlement
        of all of these suits and the fairness of the terms and conditions of the
        settlement. The hearing was held on December 15, 2006 and the Preliminary
        Order
        was approved by the court. Liabilities under this settlement were fully covered
        under the Company's insurance policies.
 
 **Meyers
        Litigation Settled**
 
 On
        April
        8, 2005, Meyers Associates, L.P. f/k/a Roan/Meyers Associates, L.P. and f/k/a
        Janssen-Meyers Associates, L.P. (“Meyers”) filed a lawsuit in the Court of
        Chancery of the State of Delaware, in New Castle County, against the Company,
        CT
        Holdings, Inc. f/k/a Citadel Technology, Inc. and f/k/a Citadel Computer
        Systems, Inc. (“CT Holdings”) and certain current and former officers and
        directors of the Company and/or CT Holdings, including Steven B. Solomon,
        the
        Chief Executive Officer and a Director of the Company, Chris A. Economou,
        a
        Director of the Company, Lawrence Lacerte, a former Director of the Company,
        and
        Phillip J. Romano, a former Director of the Company (the “Individual
        Defendants”). The suit alleged that in connection with an action filed in the
        Supreme Court of New York, New York County, to enforce a Settlement Term
        Sheet
        executed on July 7, 2000 by Meyers and CT Holdings, Meyers was awarded a
        judgment against CT Holdings in the amount of $3 million plus interest on
        the
        judgment at the rate of 9% from October 31, 2000 until the date of entry
        of that
        judgment and thereafter at the statutory rate (the “Judgment”). CT Holdings
        appealed the Judgment. The suit alleged that CT Holdings’ May 2002 spin-off of
        its interests in CDSS to CT Holdings’ stockholders rendered CT Holdings
        insolvent and constituted a fraudulent conveyance to defraud CT Holdings’
creditors, including Meyers. The suit asserted fraudulent conveyance claims
        against CDSS and CT Holdings pursuant to Delaware statutory and common law.
        The
        suit also asserted a claim against CDSS for successor liability as the alleged
        successor in interest or alter ego of CT Holdings. The suit alleged that
        the
        Individual Defendants who were officers and/or directors of CT Holdings at
        the
        time of the spin-off breached fiduciary duties allegedly owed to creditors
        of CT
        Holdings, including Meyers, by approving and allowing the spin-off transaction.
        The suit sought to void the spin-off transaction or alternatively, to hold
        CDSS
        liable for the Judgment including interest, to recover damages against the
        Individual Defendants in an amount not less than the Judgment including
        interest, plus an unspecified amount of punitive, consequential and incidental
        damages, as well as attorneys’ fees and costs.
 
 On
        August
        23, 2006, CDSS and certain other parties entered into a Release and Settlement
        Agreement ("Agreement") by and among Meyers and their related parties
        (collectively, the "Meyers Released Parties") on the one hand and defendants
        CT
        Holdings Enterprises, CDSS, Steven B. Solomon, Chris A. Economou, Lawrence
        Lacerte, Mark Rogers, Phillip J. Romano, Axel Sawallich, George Sharp and
        Gilbert Gertner (collectively "Defendants") on the other hand. The Agreement
        provides for the settlement of litigation filed by Meyers Associates against
        defendants CDSS, CT Holdings Enterprises, certain of CDSS's current and former
        directors and officers Steven B. Solomon, Chris E. Economou, Lawrence Lacerte,
        Mark Rodgers, Phillip J. Romano and Axel Sawallich in the Court of Chancery
        of
        the State of Delaware in and for New Castle County (the "Delaware Action")
        asserting various claims, and other litigation against CT Holdings and its
        former officers and directors (the "Actions"). Pursuant to the Agreement,
        CDSS
        paid the sum of $1,250,000 to Meyers Associates, of which $250,000 was paid
        in
        August 2006 and the remaining $1,000,000 was paid on November 1, 2006. As
        a
        result of the payments, the Defendants were released by the Plaintiffs from
        all
        claims in the Actions 91 days after the payments, subject to the terms and
        conditions of the agreement. The $1,250,000 settlement is presented in the
        statement of operations as a “Litigation settlement” for the period ended
        December 4, 2006.
  8
 *Table
            of Contents*
  From
        time
        to time, CDSS may be subject to additional legal claims incidental to CDSS’s
        business. The Company may suffer an unfavorable outcome as a result of one
        or
        more claims including the specific items discussed previously. CDSS does
        not
        expect the final resolution of these claims, individually or in the aggregate,
        to have a material adverse effect on the Company’s financial position. However,
        depending on the amount and timing of unfavorable resolutions of claims against
        CDSS, or the costs of settlement or litigation, the Company’s ability to
        dissolve the Company in a timely manner and make distributions to stockholders
        could be materially adversely affected.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 At
        a
        Special Meeting of Stockholders on December 1, 2006 the following proposals
        were
        approved:
  Number
                  of SharesVoted
                  For
              
              Voted
                  Against
              
              Abstain
              
              Broker
                  Non-VotesProposal
                  No. 1 — to approve the proposed sale of substantially all of Citadel’s
                  assets to McAfee Security, LLC, a wholly-owned subsidiary of McAfee,
                  Inc.,
                  pursuant to an Asset Purchase Agreement.
              
              
              15,926,528
              
              
              704,260
              
              
              65,524
              
              
              0Proposal
                  No. 2 — to approve the Plan of Complete Liquidation and Dissolution of
                  Citadel, including the liquidation and dissolution of Citadel as
                  contemplated thereby, following the sale of substantially all of
                  Citadel’s
                  assets to McAfee Security, LLC.
              
              
              15,890,171
              
              
              740,589
              
              
              65,552
              
              
              0Proposal
                  No. 3 — to approve a certificate of amendment to our Amended and Restated
                  Certificate of Incorporation, to remove the name “Citadel Security
                  Software” following the sale of substantially all of Citadel’s assets to
                  McAfee Security, LLC.
              
              
              15,831,998
              
              
              741,240
              
              
              123,074
              
              
              0Proposal
                  No. 4 - to consider and act upon such other matters as may come
                  before the
                  meeting.
              
              
              14,997,226
              
              
              1,530,152
              
              
              168,934
              
              
              0
  9
 *Table
            of Contents*
  **PART
        II**
  **ITEM
        5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
        STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
        SECURITIES**
 
 **MARKET
        INFORMATION**
 
 On
        May
        20, 2002 the Company’s stock began trading on the Over-The-Counter Bulletin
        Board under the symbol CDSS. In April, 2004 the Company's stock began trading
        on
        the NASDAQ Capital Market under the symbol CDSS. On May 5, 2006 the Company's
        stock moved to the OTCBB following a delisting notice form the NASDAQ for
        failure to meet the $1 per share minimum trading price and other listing
        criteria. On January 11, 2007 the trading symbol became "CWDW" resulting
        from
        the name change to CDSS Wind Down Inc.
 
 As
        of
        March 29, 2007, the last sales price per share of the Company’s common stock, as
        reported by the OTCBB, was $0.017 per share. The following table presents
        the
        quarterly range of high and low closing prices for our common stock from
        January
        1, 2005 through December 31, 2006, as reported by The NASDAQ Capital Market
        and
        the Over-The-Counter Bulletin Board for the respective periods the stock
        was
        traded on these markets (high and low quotations from the Over-The-Counter
        Bulletin Board reflect inter-dealer prices, and all prices do not reflect
        retail
        markup, markdown or commission, and may not necessarily represent actual
        transactions).
 
 HIGH
              
              LOWYEAR
                  ENDED DECEMBER 31, 20061st
                  Quarter
              
              $
              0.85
              
              $
              0.242nd
                  Quarter
              
              $
              0.79
              
              $
              0.453rd
                  Quarter
              
              $
              0.54
              
              $
              0.324th
                  Quarter
              
              $
              0.52
              
              $
              0.43YEAR
                  ENDED DECEMBER 31, 20051st
                  Quarter
              
              $
              2.55
              
              $
              1.022nd
                  Quarter
              
              $
              1.40
              
              $
              0.753rd
                  Quarter
              
              $
              1.09
              
              $
              0.604th
                  Quarter
              
              $
              0.60
              
              $
              0.31
 
 At
        December 31, 2006 there were approximately 752 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. An initial dividend distribution of $0.50 per share was
        made on
        January 5, 2007 to stockholders of record on January 2, 2007. The anticipated
        distribution of the estimated remaining $0.02 to $0.04 per share will be
        made
        following any reduction for any valid indemnification claims by McAfee (the
        period for making a claim expired on January 3, 2007), additional liabilities
        and expenses we may incur, and the ultimate settlement amounts of our
        liabilities. The actual amount available for distribution, if any, could
        be
        substantially less if we discover additional liabilities or claims or incur
        unexpected or greater than expected expenses. Although our Board of Directors
        has not established a firm timetable for the remaining liquidating
        distributions, the Board of Directors intends to, subject to contingencies
        inherent in winding up our business, make such distributions as promptly
        as
        practicable and periodically as we convert our remaining assets to cash and
        pay
        our remaining liabilities and obligations subject to law.
 
 **RECENT
        SALES OF UNREGISTERED SECURITIES**
 
 During
        the year ended December 31, 2006, we issued 450,000 unregistered shares as
        a
        result of exercise of options by our CEO and CFO. Pursuant to the terms of
        the
        Asset Sale to McAfee and the resulting deemed change of control, we amended
        our
        employment agreements with Mr. Solomon, our CEO, to provide that, if the
        Asset
        Sale was completed, and in consideration of his non-competition agreement
        with
        McAfee, Mr. Solomon would agree to forgive our obligation to pay him a bonus
        and
        cancel his stock option agreements and, in exchange, we would issue him
        3,650,000 shares of common stock of which 400,000 shares have not been
        registered. We also amended our agreement with Mr. Connelly, our CFO, to
        provide
        that, if the Asset Sale was completed, Mr. Connelly would agree to forgive
        our
        obligation to pay him a bonus and cancel a stock option agreement for 50,000
        shares of common stock and, in exchange, we would issue him 50,000 unregistered
        shares of common stock. The
        Company agreed with Mr. Joe Allbaugh, a director, that upon a deemed change
        of
        control the Company would pay Mr. Allbaugh a bonus equal to the aggregate
        exercise price of 100,000 of the options granted to him. In October 2006,
        the
        Company amended its agreement with Mr. Allbaugh to provide that, upon completion
        of the asset sale, Mr. Allbaugh would agree to forgive the Company's obligation
        to pay him the bonus and cancel his stock options and, in exchange, the Company
        would issue him 100,000 shares of common stock. As a result of these amendments,
        Messrs. Solomon, Connelly and Allbaugh will receive distributions on their
        shares, on the same basis as other common stockholders. The Company issued
        these
        shares to Messrs. Solomon, Connelly and Allbaugh on December 18,
        2006.
  10
 *Table
            of Contents*
  **EQUITY
        COMPENSATION PLANS**
 
 The
        2002
        Stock Incentive Plan, as amended (the "Plan") was adopted by the board of
        directors and approved by the stockholders of CDSS. 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 eligible
        officers, directors, employees and consultants. A total of 3,000,000 shares
        of
        common stock were reserved for issuance under the terms of the 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. Since the inception of the plan we have granted 4,435,000 awards under
        the
        Plan through December 4, 2006, the date of the Asset Sale. Options cancelled
        since the inception of the Plan due to employee terminations amounted to
        3,418,276 and were added back to the options available for future grants
        under
        the Plan. Option holders under the Plan have exercised 437,224 options since
        the
        inception of the Plan through December 4, 2006. Due to the Asset Sale 1,719,000
        outstanding options were exercisable on December 4, 2006; 579,500 stock options
        became eligible for the cash out program discussed below, and 1,139,500 were
        cancelled. No options were outstanding or exercisable at December 31, 2006.
        The
        options granted have a term of 10 years and generally vest over periods of
        up to
        three years. The underlying shares of the initial 1,500,000 shares of common
        stock in the Plan were registered on Form S-8 in July 2003.
 
 The
        board
        of directors had also granted options outside of the Plan. These options
        are not
        covered under a plan approved by the stockholders. Options had been granted
        to
        officers, directors, employees, stockholders and consultants to the Company.
        The
        options granted have a term of 10 years or less. At December 4, 2006 there
        were
        2,751,250 options outstanding that had been awarded outside of the Plan,
        of
        which 2,323,714 were exercisable and 427,536 were unvested and not subject
        to
        acceleration. As a result of the Asset Sale, 3,700,000 were exercised, 1,282,500
        cancelled by their terms, and 793,750 were eligible for the cash-out program.
        At
        December 31, 2006, 675,000 options awarded outside of the Plan were outstanding
        and exercisable at a weighted average exercise price of $2.04 per
        share.
 
 Plan
                  category
              
              (a)
                Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              
              Number
                  of securities available for future issuance under equity compensation
                  plans [excluding securities reflected in column (a)]Equity
                  compensation plans approved by security holders
              
              
              -
              
              
              -
              
              
              2,562,776Equity
                  compensation plans not approved by security holders
              
              
              675,000
              
              
              $2.04
              
              
              Not
                  Applicable
 
 Please
        refer to NOTE N - STOCK OPTIONS AND WARRANTS in the Financial Statements
        for a
        discussion of the changes in the option awards under the Plan and outside
        the
        Plan resulting from the Asset Sale.
  11
 *Table
            of Contents*
  **ITEM
        6. SELECTED FINANCIAL DATA**
 
 The
        following selected consolidated financial data should be read in conjunction
        with the consolidated financial statements and the notes to the consolidated
        financial statements and “Management’s Discussion and Analysis of Financial
        Condition and Results of Operations,” which are included elsewhere in this
        report. Our historical results are not necessarily indicative of results
        for any
        future periods.
 
 The
        information on changes to our net assets since the adoption of the liquidation
        basis of accounting on December 4, 2006 is presented in the table below in
        a
        format consistent with our consolidated financial statements under Item 15
        of
        this annual report on Form 10-K. The following tables present summarized
        consolidated financial information including net assets in liquidation, changes
        in net assets in liquidation, balance sheet information, operating results
        on
        the liquidation and going concern basis for the respective periods.
 Liquidation
                  Basis As of December 31,
                2006Statement
                  of Net Assets:Total
                  assets
              
              $
              28,293,338Total
                  liabilities
              
              
              10,597,331Net
                  assets in liquidation at December 31, 2006
              
              $
              17,696,007Number
                  of common shares outstanding at December 31, 2006
              
              
              34,318,230Net
                  asset value per share outstanding
              
              $
              0.52Statement
                  of Changes in Net Assets:Shareholders'
                  deficit at December 4, 2006
              
              $
              19,377,524Liquidation
                  basis adjustmentsAdjusts
                  liabilities to fair value
              
              
              513,211Accrue
                  estimated lease settlement costs
              
              
              (1,014,275
              )Wind-down
                  operating expenses
              
              
              (1,307,242
              )Interest
                  income
              
              
              126,789Net
                  assets in liquidation at December 31, 2006
              
              $
              17,696,007
   For
                  the Period
                January
                  1, 2006 to
                December
                  4,
              
              Years
                  Ended December 31,Statement
                  of Operations Data
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002(1)Revenue
              
              $
              12,191,853
              
              $
              10,287,095
              
              $
              15,253,155
              
              $
              5,856,296
              
              $
              1,311,800Operating
                  income (loss)
              
              
              (18,712,666
              )
              
              (18,158,207
              )
              
              (7,873,594
              )
              
              (1,951,739
              )
              
              (1,865,981
              )Gain
                  on sale of assets
              
              
              55,546,329
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              
              34,525,408
              
              
              (18,562,879
              )
              
              (7,839,025
              )
              
              (5,248,581
              )
              
              (2,346,895
              )Net
                  income (loss) to common shareholders
              
              
              34,525,408
              
              
              (19,156,907
              )
              
              (8,719,362
              )
              
              (5,248,581
              )Net
                  income (loss) per shareBasic
              
              $
              1.13
              
              $
              (0.64
              )
              $
              (0.30
              )
              $
              (0.24
              )
              $
              (0.17
              )Diluted
              
              $
              0.83
              
              $
              (0.64
              )
              $
              (0.30
              )
              $
              (0.24
              )
              $
              (0.17
              )Shares
                  used in calculationBasic
              
              
              30,518,230
              
              
              29,976,179
              
              
              29,336,894
              
              
              22,134,040
              
              
              13,874,488Diluted
              
              
              41,461,599
              
              
              29,976,179
              
              
              29,336,894
              
              
              22,134,040
              
              
              13,874,488
 
 Years
                  Ended December 31,Balance
                  Sheet Data
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002Cash
                  and cash equivalents
              
              $
              28,053,007
              
              $
              1,320,376
              
              $
              9,838,154
              
              $
              5,092,161
              
              $
              12,829Working
                  capital (deficit)
              
              
              17,696,007
              
              
              (5,749,000
              )
              
              3,488,298
              
              
              2,042,601
              
              
              (3,428,158
              )Total
                  assets
              
              
              28,293,338
              
              
              14,465,419
              
              
              22,408,510
              
              
              9,734,130
              
              
              1,537,949Deferred
                  revenue
              
              
              -
              
              
              5,078,670
              
              
              2,943,023
              
              
              2,805,195
              
              
              150,193Long-term
                  debt
              
              
              -
              
              
              3,750,000
              
              
              1,989,393
              
              
              -
              
              
              -Preferred
                  stock
              
              
              -
              
              
              15,669,987
              
              
              10,701,847
              
              
              -
              
              
              -Total
                  equity (deficit)
              
              
              -
              
              
              (864,892
              )
              
              10,792,520
              
              
              4,770,761
              
              
              (2,326,900
              )Net
                  assets in liquidation
              
              
              17,696,077
              
              
              -
              
              
              -
              
              
              -
              
              
              -
  12
 *Table
            of Contents*
  (1)
        Prior
        to May 17, 2002 certain of the Company's former parent’s assets, liabilities and
        expenses were allocated to CDSS based on an estimate of the proportion of
        amounts allocable to CDSS, 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 CDSS are a reasonable representation of the costs that would have been
        incurred if CDSS had performed these functions as a standalone
        company.
 
 **ITEM
        7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 On
        December 4, 2006, CDSS closed the sale of substantially all of its assets
        to
        McAfee pursuant to the Asset Purchase Agreement between with McAfee. On December
        12, 2006 Citadel Security Software Inc. changed its name to CDSS Wind Down
        Inc.
        The Asset Purchase Agreement provided for the acquisition of substantially
        all
        of the assets (the "Assets") and the assumption of certain identified
        liabilities (the "Assumed Liabilities") of CDSS by McAfee (collectively,
        the
        "Sale"). The cash consideration received by CDSS for the purchase of the
        Assets
        and operating expense reimbursement was $60,020,579 in immediately available
        funds. CDSS anticipates that it will make an estimated total distribution
        to
        stockholders of $0.52 to $0.54 per share in one or more distributions to
        its
        common stockholders after payment of transaction costs, liabilities, preferred
        stock and other cash payments following the expiration of a 30-day
        indemnification period (January 3, 2007), and subject to holding back any
        indemnification or other required amounts. An initial distribution of $0.50
        per
        share was made on January 5, 2007 to stockholders of record on January 2,
        2007.
        CDSS anticipates that it will make additional estimated distributions to
        stockholders of $0.02 to $0.04 per share in one or more distributions to
        its
        common stockholders after payment of transaction costs, liabilities, and
        other
        cash payments, and subject to holding back any indemnification or other required
        amounts.
 
 As
        of
        March 29, 2007 and at December 31, 2006, we had not filed a certificate of
        dissolution in Delaware; however at a Special Meeting of Stockholders held
        on
        December 1, 2006, our stockholders approved a plan of liquidation and
        dissolution (the "Plan of Dissolution"), previously approved by our board
        of
        directors on October 13, 2006. Notwithstanding stockholder authorization
        or
        consent to the Plan of Dissolution and its contemplated transactions, the
        Board
        of Directors may modify, amend or abandon the Plan of Dissolution and its
        contemplated transactions without further action by the stockholders to the
        extent permitted by law. In connection with the closing of the Asset Sale
        on
        December 4, 2006, our business and operations were effectively transferred
        to
        McAfee pursuant to the Asset Purchase Agreement, and we no longer have any
        significant operating assets or contracts, and our activities are limited
        to:
 
 ·
              filing
                  a certificate of dissolution with the Secretary of State of the
                  State of
                  Delaware and thereafter remaining in existence as a non-operating
                  entity
                  for three years;
 
 ·
              selling
                  any of our remaining assets;
 
 ·
              paying
                  or settling the obligations owed to our remaining
                  creditors;
 
 ·
              terminating
                  or settling any of our remaining commercial agreements, relationships
                  or
                  outstanding obligations;
 
 ·
              resolving
                  any outstanding litigation;
 
 ·
              collecting
                  any outstanding amounts due to
                  CDSS;
 
 ·
              establishing
                  a contingency reserve for payment of our expenses and
                  liabilities;
 
 ·
              completing
                  of tax filings;
 
 ·
              complying
                  with our Securities and Exchange Commission reporting requirements;
                  and
 
 ·
              making
                  distributions to our stockholders.
 
 Delaware
        law provides that, following the approval of the Plan of Dissolution by the
        stockholders, the Board of Directors may take such actions as it deems necessary
        in furtherance of the dissolution of CDSS and the wind up of its operations
        and
        affairs. Notwithstanding stockholder authorization or consent to the Plan
        of
        Dissolution and its contemplated transactions, the Board of Directors may
        modify, amend or abandon the Plan of Dissolution and its contemplated
        transactions without further action by the stockholders to the extent permitted
        by law.
 
 Prior
        to
        the Asset Sale, CDSS formerly provided enterprise vulnerability management
        and
        policy compliance and enforcement software solutions that enable organizations
        to reduce the risk associated with computer network vulnerabilities. CDSS
        developed and marketed full life cycle vulnerability management software
        solutions under the Hercules® brand name powered by automated vulnerability
        remediation technology which allows enterprises to neutralize security
        vulnerabilities across Windows, Linux, Mac and Unix platforms. The Company's
        prior business was formed in 1996 as the result of the acquisition of several
        technology businesses operated by a business incubator from 1996 through
        May 17,
        2002 at which time CDSS was spun out from its former parent as a standalone
        company. The business was operated as standalone company from May 17, 2002
        until
        the sale of substantially all of its assets to McAfee on December 4,
        2006.
  13
 *Table
            of Contents*
  **LIQUIDATION
        BASIS OF ACCOUNTING**
 
 As
        of
        March 29, 2007 and at December 31, 2006, we had not filed a certificate of
        dissolution pending settlement of all of our liabilities, however the
        consolidated financial statements for the period December 4, 2006 to December
        31, 2006 were prepared on the liquidation basis of accounting. Under the
        liquidation basis of accounting, assets are stated at their estimated net
        realizable values and liabilities are stated at their estimated settlement
        amounts, which estimates will be periodically reviewed and adjusted.
        Uncertainties as to the precise net value of our non-cash assets and the
        ultimate amount of our liabilities make it impracticable to predict the
        aggregate net value that may ultimately be distributable to stockholders.
        Claims, liabilities and future expenses for operations, although currently
        declining in the aggregate, will continue to be incurred with execution of
        the
        plan. These costs will reduce the amount of net assets available for ultimate
        distribution to stockholders. Although we do not believe that a precise estimate
        of those expenses can currently be made, we believe that available cash and
        amounts received from Asset Sale will be adequate to provide for our
        obligations, liabilities, operating costs and claims, and to make cash
        distributions to stockholders. If available cash is not adequate to provide
        for
        our obligations, liabilities, operating costs and claims, estimated future
        distributions of cash to our stockholders will be reduced.
 
 The
        valuation of assets at their net realizable value and liabilities at their
        anticipated settlement amounts necessarily requires many estimates and
        assumptions. In addition, there are substantial risks and uncertainties
        associated with carrying out the liquidation of the Company’s existing
        operations. The valuations presented in the accompanying Statement of Net
        Assets
        in Liquidation represent estimates, based on present facts and circumstances,
        of
        the net realizable values of assets and costs associated with carrying out
        the
        dissolution and liquidation plan based on the assumptions set forth below.
        The
        actual values and costs are expected to differ from the amounts shown herein
        and
        could be greater or lesser than the amounts recorded. Accordingly, it is
        not
        possible to predict the aggregate amount that will ultimately be distributable
        to stockholders and no assurance can be given that the amount to be received
        in
        liquidation will equal or exceed the net assets in liquidation per share
        in the
        accompanying Statement of Net Assets in Liquidation or the price or prices
        at
        which our Common Stock has generally traded or is expected to trade in the
        future. The cautionary statements regarding estimates of net assets in
        liquidation set forth in the Forward-Looking Statements portion of this report
        are incorporated herein by reference.
 
 Based
        on
        our projections of operating expenses and liquidation costs as of December
        31,
        2006, we estimate that the total amount of liquidating distributions will
        range
        from $0.52 to $0.54 per common share. An initial distribution of $0.50 per
        share
        was made on January 5, 2007 to stockholders of record on January 2, 2007.
        The
        estimate of the remaining amounts of liquidating distributions that could
        be
        available is in a range of $0.02 to $0.04 per share. The actual amount available
        for distribution, if any, could be substantially less if we discover additional
        liabilities or claims or incur unexpected or greater than expected expenses.
        We
        are subject to litigation, the outcome of which is not presently known and
        which
        may increase our expenses and reduce cash available for distribution to
        stockholders. In addition, we may be subject to final examination by taxing
        authorities; thus amounts presently estimated for taxes may vary from ultimate
        amounts, which may cause our final distributions to change perhaps
        significantly. Although our Board of Directors has not established a firm
        timetable for the liquidating distributions, the Board of Directors intends
        to,
        subject to contingencies inherent in winding up our business, make such
        distributions as promptly as practicable and periodically as we convert our
        remaining assets to cash and pay our remaining liabilities and obligations
        subject to law.
 
 Following
        the 30-day indemnity period following the closing of the Asset Sale (which
        expired on January 3, 2007), the satisfaction of the holdback provisions
        of the
        Asset Purchase Agreement and the payment of our initial liquidating distribution
        (paid on January 5, 2007), our Board of Directors may, at any time, turn
        our
        management over to a third party to complete the liquidation of our remaining
        assets and distribute any remaining proceeds from the Asset Sale to our
        stockholders pursuant to the plan of liquidation and dissolution. This
        third-party management may be in the form of a liquidating trust, which,
        if
        adopted by our board of directors, would succeed to all of our assets,
        liabilities and obligations. Our board of directors may appoint one or more
        of
        its members, one or more of our officers or a third party to act as trustee
        or
        trustees of such liquidating trust. If, however, all of our assets are not
        distributed within three years after the date our certificate of dissolution
        is
        filed with the State of Delaware, we will transfer our remaining assets to
        a
        liquidating trust if we have not already done so.
 
 During
        the liquidation of our assets, we may pay our officers, directors, employees,
        and agents, or any of them, compensation for services rendered in connection
        with the implementation of the plan of liquidation and dissolution. At December
        31, 2006 we had four employees, including our CEO and CFO, all involved in
        the
        wind down of the company pursuant to the Plan of Dissolution. Our CFO has
        provided notice of his resignation, effective April 2, 2007 following
        completion of the Asset Sale.
 
 **Stock-Based
        Compensation**
 
 On
        December 16, 2004, the Financial Accounting Standards Board issued SFAS No.
        123
        (revised 2004), Share-Based Payment (“SFAS No. 123R”), which is a revision of
        SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123R
        supersedes APB Opinion No. 25, and amends SFAS No. 95, “Statement of Cash
        Flows”. Generally, the approach in SFAS No. 123R is similar to the approach
        described in SFAS No. 123. However, SFAS 123R requires all share-based payments
        to employees, including grants of employee stock options, to be recognized
        in
        the income statement based on their fair values. Pro forma disclosure is
        no
        longer an alternative. The Company adopted the modified prospective method
        of
        SFAS No. 123R on January 1, 2006.
  14
 *Table
            of Contents*
  The
        adoption of SFAS No. 123R required the Company to record substantial non-cash
        stock compensation expenses. While the adoption of SFAS 123R was not expected
        to
        have a significant effect on the Company's financial condition or cash flows,
        it
        did have a significant effect on the Company's results of operations for
        the
        period January 1, 2006 to December 4, 2006. The future impact of the adoption
        of
        SFAS 123R cannot be predicted at this time because it will depend on the
        levels
        of share-based payments granted by the Company in the future. However, had
        the
        Company adopted SFAS 123R in prior periods, the impact of the standard would
        have approximated the impact of SFAS 123 as described in the pro forma net
        loss
        attributable to common stockholders.
 
 **CRITICAL
        ACCOUNTING POLICIES AND ESTIMATES**
 **For
        the periods ending on or prior to December 4, 2006**
 
 The
        discussion and analysis of our financial condition and results of operations
        are
        based on our consolidated financial statements, which have been prepared
        in
        accordance with accounting principles generally accepted in the United States
        of
        America (“GAAP”). The preparation of these financial statements requires us to
        make estimates, assumptions and judgments that affect the reported amounts
        of
        assets, liabilities, revenues and expenses, and related disclosures of
        contingent assets and liabilities. For each reporting period prior to December
        4, 2006, we evaluated the estimates, assumptions and judgments, including
        those
        related to bad debts, returns and allowances, software capitalization and
        technological obsolescence as well as litigation. We based our estimates
        on
        historical experience and on various other assumptions that were believed
        to be
        reasonable under the circumstances, the results of which formed the basis
        for
        making judgments about the carrying value of assets and liabilities. Actual
        results may materially differ from these estimates under different assumptions
        or conditions. If actual results were to differ from these estimates materially,
        the resulting changes could have had a material adverse effect on our financial
        statements.
 
 We
        have
        identified below the accounting policies for revenue recognition, software
        costs
        and stock based compensation which we believe are most critical to our prior
        business operations. These policies are discussed throughout Management's
        Discussion and Analysis, where such policies affect our reported and expected
        financial results.
 
 **Revenue
        Recognition**
 
 Significant
        management judgment and estimates must be made and used in connection with
        the
        revenue recognized in any accounting period. Material differences may result
        in
        the amount and timing of our revenue for any period if our management made
        different judgments or utilized different estimates. Our customers consisted
        of
        large and small corporations, healthcare organizations, financial institutions
        and government and educational agencies. Our revenue recognition policies
        were
        designed to follow the guidance provided by Statement of Position (SOP) 97-2,
        "Software Revenue Recognition," as amended by SOP 98-9 and Staff Accounting
        Bulletin (SAB) 104, "Revenue Recognition." Revenue from license fees was
        generally recognized when a fixed fee order had been received and delivery
        to
        the customer had occurred. If software media and documentation were shipped
        FOB
“Origin”, license fee revenue was recognized when shipped. If software and media
        documentation were shipped FOB “Destination”, license fee revenue was recognized
        when delivered to the customer. In addition, revenue was recognized only
        when
        the collectibility of the invoiced amounts was probable and acceptance criteria,
        if any, had been met.
 
 Customer
        support contracts provided the customer the right to telephone support, software
        updates, point releases of new features and functionality, and content
        subscriptions provide the customer with vulnerability remediation updates
        on a
        when and if available basis. Content and customer support contracts were
        sold
        separately from the license and the related revenue was recognized ratably
        over
        the term of the support contract. Professional services revenue was recognized
        as the services were performed assuming all other revenue recognition criteria
        had been met. In arrangements that included multiple elements, including
        perpetual software licenses and maintenance and/or services, revenue was
        allocated to the undelivered components based on vendor specific objective
        evidence (“VSOE”) and recognized based on management’s estimate of the fair
        value of each undelivered component as described in SOP 97-2, SOP 98-9 and
        SAB
        104.
 
 Customers
        could obtain a license from our direct sales organization, or license products
        through promotions or agreements with independent third party resellers and
        strategic partners. Our products were not licensed through retail distribution
        channels. Once properly licensed for an evaluation or permanent installation,
        the customer had the media and documentation shipped directly to them. A
        customer could return a product only under very limited circumstances during
        the
        first thirty to ninety days from the date of shipment for a replacement if
        the
        media was damaged or for a full refund if the software did not perform in
        accordance with written specifications. Accordingly, we recorded a provision
        for
        returns against license revenue in the same period the revenue was recorded.
        The
        provision was subject to estimation by management and was based on historical
        product returns, the average invoice size, revenue volume and other known
        data
        as well as market and economic conditions.
 
 CDSS
        utilized a sell-through business model for distributors and resellers under
        which revenue was recognized on products sold through distributors and resellers
        at the time the distributors and resellers licensed the products to the
        end-user. When distributor and resellers agreements provided for a contractual
        right of return, future price concessions, or minimum purchase commitments,
        we
        recorded an estimated allowance for returns and allowances based on historical
        returns and other facts and circumstances known at the time the estimate
        was
        made. When payment was contingent upon the distributor’s future licensing of
        products we deferred revenue until payment was received. Revenue generated
        from
        products licensed through various marketing channels where the right of return
        might expressly or implicitly exist was reduced by reserves for estimated
        product returns. Such reserves were estimates developed by management based
        on
        returns history and current economic and market trends.
  15
 *Table
            of Contents*
  As
        a
        convenience to government customers, our products could be licensed through
        government contractors, including systems integrators. These government
        contractors and systems integrators held the preferred purchasing and
        contracting vehicles for use by the various government agencies to purchase
        information technology products and services including our products and
        services. Our contracts with these government contractors generally did not
        contain an express right of return, however, these government contractors
        could
        order products in advance of receiving the order from the government agency.
        Under the sell-through method of accounting we deferred revenue recognition
        until the government contractor was authorized to deliver the products to
        the
        end user government agency and all other contingencies had lapsed.
 
 We
        also
        offered our products to customers under subscription licenses with one-year
        to
        three-year terms. The customer could renew the subscription at the end of
        the
        subscription term or could convert the subscription into a perpetual use
        license
        at any time for an additional fee. Under a subscription license the customer
        received the right to use the product, to post sale customer support and
        to
        content (i.e., the vulnerability remedy updates) for the term of the
        subscription and for as long as the customer meets its payment obligation.
        The
        subscription fee payment was generally due in equal payments at the beginning
        of
        the subscription term and then on each anniversary date thereafter. Revenue
        from
        subscriptions was recognized ratably over the term of the subscription. If
        a
        customer failed to adhere to the payment terms of the subscription, the revenue
        recognized was limited to the ratable recognition of the amount of payments
        actually received.
 
 In
        June
        2005 we announced the availability of our Hercules product under a usage
        based
        pricing model which provided the end-user customer a method to pay for the
        use
        of the product on a transaction-by-transaction basis. Assuming all other
        requirements for revenue recognition had been met, the revenue from the
        transaction fees were accounted for based upon the transaction fees earned
        during a reporting period.
 
 **Software
        Development Costs**
 
 We
        followed 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) was recorded at the lower of acquisition cost or net realizable
        value. We developed software for licensing to our customers and capitalized
        software development costs when technological feasibility had been established.
        Technological feasibility generally occurs at the time a detailed design
        and
        analysis plan is completed and programming of the software code begins. Software
        development costs that qualified for capitalization included the salaries
        and
        benefits of the software engineers assigned to the projects, internal and
        external quality assurance testing costs, overhead allocations primarily
        associated with facilities costs, the costs of outsourced development activities
        and costs of independent product testing and certification labs. Software
        development costs not qualifying for capitalization were expensed and classified
        as product development expense in the statements of operations. Product
        development expense and the capitalization rate fluctuated from period to
        period
        depending upon the number and status of software development projects that
        were
        in process and the related number of people assigned to those projects.
 
 Purchased
        software and capitalized software development costs were amortized using
        the
        greater of the revenue method or the straight-line method with useful lives
        ranging from one to three years. Amortization expense was classified in costs
        of
        revenue in the statements of operations. Our products operated on or with
        other
        third party operating systems and software. When determining the useful life
        of
        a product, we considered factors such as the current state of the technology,
        the operating systems upon which our products ran, competitive products and
        the
        potential use of our products by the end user. Technological advances in
        software operating systems and other software technologies upon which our
        products rely could shorten the expected life cycle of some versions of our
        products. We made an assessment of the useful lives of our products at each
        balance sheet date. If that assessment determined that a shortened product
        life
        had occurred, we amortized the remaining unamortized balances over the new
        estimated useful life of the product and provided disclosure regarding a
        change
        in estimate in the notes to the financial statements pursuant to FASB Statement
        of Financial Accounting Standard No. 154 “Accounting for Changes and Error
        Corrections”.
 
 Our
        product development strategy had been architected for the current and future
        releases of Microsoft Windows, UNIX, Linux, Mac and other well established
        operating systems. We believe that this cross platform strategy reduced 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 competing products.
 
 We
        evaluated the estimated net realizable value of each software product at
        each
        balance sheet date. Our estimate was 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. If the net book value exceeded the
        estimate of net realizable value, we recorded a write-down to net realizable
        value on each product affected.
 
 **Stock-Based
        Compensation**
 
 On
        December 16, 2004, the Financial Accounting Standards Board issued SFAS No.
        123
        (revised 2004), Share-Based Payment (“SFAS No. 123R”), which is a revision of
        SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123R
        supersedes APB Opinion No. 25, and amends SFAS No. 95, “Statement of Cash
        Flows”. Generally, the approach in SFAS No. 123R is similar to the approach
        described in SFAS No. 123. However, SFAS 123R requires all share-based payments
        to employees, including grants of employee stock options, to be recognized
        in
        the income statement based on their fair values. Pro forma disclosure is
        no
        longer an alternative. The Company adopted the modified prospective method
        of
        SFAS No. 123R on January 1, 2006.
  16
 *Table
            of Contents*
  The
        adoption of SFAS No. 123R required the Company to record substantial non-cash
        stock compensation expenses. While the adoption of SFAS 123R was not expected
        to
        have a significant effect on the Company's financial condition or cash flows,
        it
        did have a significant effect on the Company's results of operations for
        the
        period January 1, 2006 to December 4, 2006. The future impact of the adoption
        of
        SFAS 123R cannot be predicted at this time because it will depend on the
        levels
        of share-based payments granted by the Company in the future. However, had
        the
        Company adopted SFAS 123R in prior periods, the impact of the standard would
        have approximated the impact of SFAS 123 as described in the pro forma net
        loss
        attributable to common stockholders.
 
 **Acceleration
        of Vesting due to Deemed Change of Control and Cash-Out
        Program**
 
 Our
        2002
        stock incentive plan, which we refer to as our "stock option plan," provides
        that all stock options outstanding under the stock option plan fully vested
        in
        connection with the closing of the Asset Sale. As permitted by our stock
        option
        plan, we accelerated the vesting of 941,453 unvested options effective 15
        days
        before the scheduled closing of the Asset Sale. Our stock option plan also
        provides that, in the discretion of our board of directors, any holder of
        stock
        options outstanding at the closing of a deemed change of control may receive
        a
        payment equal to the difference between the price received by stockholders
        in
        the deemed change of control and the exercise price of such holder's stock
        option. We refer to this provision as the "cash-out program." We implemented
        the
        cash-out program in connection with the closing of the Asset Sale and the
        subsequent distributions to our stockholders. As a result, holders of options
        that remain unexercised on the record date of our initial anticipated
        liquidating distribution will receive from us, at the same time liquidating
        distributions are made to holders of our common stock, cash payments equal
        to
        the product of the total number of shares that were subject to such option
        immediately prior to the closing of the Asset Sale, and the amount per share
        then being distributed in respect of our common stock. However, these cash
        payments will be paid only to the extent, if any, per share liquidating
        distributions in respect of our common stock exceed the per share exercise
        price
        of such option.
 
 Employees,
        officers, directors and consultants also hold stock options granted outside
        the
        2002 stock incentive plan ("outside-the-plan"). Seven individuals hold one
        or
        more "outside-the-plan" options with exercise prices below $0.54 per share.
        All
        of such "in-the-money" options were fully vested. We entered into agreements
        with the holders of these options to provide for a cash-out component similar
        to
        the options issued under the stock option plan. The individual holders of
        these
        options include Mr. Carl Banzhof, our former Chief Technology Officer and
        Messrs. Connelly and Solomon, each of whom is an executive officer, as well
        as
        two of our directors, Mr. Chris A. Economou and Major General (Retired) John
        A.
        Leide.
 
 On
        December 4, 2006, an aggregate of 8,270,250 stock options were fully vested,
        of
        which 941,453 became fully vested as a result of the deemed change of control.
        Total stock compensation expense for the period January 1, 2006 to December
        4,
        2006 was $4,557,008 of which $914,160 was attributable to the vesting
        acceleration and $111,000 was associated with the vesting of shares of
        restricted stock. Of the fully vested stock options at December 4, 2006,
        an
        aggregate of 1,373,250 stock options were eligible to receive a payment
 under the cash-out program. The remaining 6,897,000 stock options expired
        by the terms of the stock option agreements and the 2002 stock incentive
        plan
        where applicable. At December 31, 2006 a cash-out program liability of $255,510
        was accrued, assuming that the maximum per share distribution of $0.54 per
        share
        would be available for distribution to stockholders. On January 5, 2007 an
        aggregate payment of $200,610 was made to holders of stock options eligible
        under the cash-out program. The aggregate payment represented the difference
        between the $0.50 per share distribution to stockholders and each option
        holder's per share exercise price, multiplied by the number of options eligible
        for the cash-out payment.
 
 Non-cash
        stock compensation expense is included in the statement of operations for
        the
        Period January 1, 2006 to December 4, 2006. No stock compensation expense
        is
        included in the statements of operations prior to the adoption of SFAS No.
        123R
        on January 1, 2006.
 
 For
                  the Period
                January
                  1, 2006 to
                December
                  4, 2006Costs
                  of Revenue
              
              $
              129,466Selling
                  general and administrative expense
              
              
              3,773,430Product
                  Development expense
              
              
              654,112Impact
                  on net loss to common shareholders
              
              $
              4,557,008Impact
                  on net income per share to common shareholdersBasic
              
              $
              0.15Diluted
              
              $
              0.11
  17
 *Table
            of Contents*
  **RESULTS
        OF OPERATIONS**
 **For
        the period January 1, 2006 to December 4, 2006**
 **and the years ended December 31, 2005 and 2004**
 
 In
        connection with the Asset Sale and the adoption of the Plan of Dissolution,
        we
        will not generate revenues from sales of products or services in the future.
        We
        have ceased all sales and marketing efforts related to the sales of products
        and
        services, and therefore, will not incur costs of revenues in the future.
        Following the Asset Sale, substantially all of our employees (other than
        our
        CEO, CFO and two additional employees) were offered employment with McAfee
        or
        terminated their employment with CDSS. As a result, we will no longer incur
        software development expense or sales and marketing expenses. Our general
        and
        administrative expense will decrease substantially due to a reduction in
        personnel and a decrease in activity due to the wind down of CDSS.
 
 The
        following discussion of results of operations for the period from January
        1,
        2006 through December 4, 2006 compared to the years ended December 31, 2005
        and
        2004 does not contain comparable periods. A comparison of the results of
        operations for this period is provided to present a discussion of general
        trends
        in the final operating results of the Company.
 
 **Revenue**
 
 The
        components of revenue for the period January 1, 2006 to December 4, 2006
        and the
        years ended December 31, 2005 and 2004 are as follows:
 
 For
                  the Period
                January
                  1, 2006 to
                December
                  4,
              
              Years
                  Ended December 31,Revenue
              
              2006
              
              2005
              
              2004License
                  fees
              
              $
              4,937,764
              
              $
              2,568,453
              
              $
              12,361,585Content,
                  subscription and customer support services
              
              
              6,184,723
              
              
              4,867,542
              
              
              2,786,937Professional
                  services
              
              
              1,069,366
              
              
              2,851,100
              
              
              104,633Total
                  Revenue
              
              $
              12,191,853
              
              $
              10,287,095
              
              $
              15,253,155
 
 Revenue
        was derived from the licensing of the Company's security software products.
        A
        license to our software provided the customer the right to use the software on a
        perpetual basis. When licensing our products, we required all customers to
        enter
        into a separate contract for customer support services (telephone and email
        support, rights to software updates and bug fixes, on a when and if available
        basis). In addition to perpetual licenses and customer support contracts,
        we
        offered our Hercules solution on an annual or multi-year subscription basis.
        Hercules customers also contracted for Hercules content, i.e. continuous
        online
        access to the Hercules remedies that were updated frequently. Professional
        services revenue primarily consisted of revenue from training and implementation
        assistance offered to the customer as an optional follow on sale to the software
        license.
 
 The
        composition mix of the customer orders for license, content and services
        varied
        from customer-to-customer and period-to-period. Generally, initial customer
        orders had a high license fee component whereas in the following year the
        customer generally ordered the annual renewal of support, content and optional
        services which are recognized as the services are performed, which added
        a
        higher variability to revenue than for orders received from repeat
        customers.
 
 Total
        revenue for the period January 1, 2006 to December 4, 2006 increased $1,904,758,
        or 19% over total revenue for the year 2005 primarily due to a higher volume
        of
        software product orders received during the period January 1, 2006 to December
        4, 2006 versus the year ended December 31, 2005. During the period January
        1,
        2006 to December 4, 2006 we received orders of approximately $12 million
        for
        software licenses, content, support and professional services, including
        $4.0
        million from BAE Systems, Inc., a systems integrator for the Defense Information
        Systems Agency under the Department of Defense ("DoD") and $5.2 million from
        RS
        Information Services, Inc., a systems integrator for the Department of Energy
        (“DoE”). During 2005 we received orders of $11.3 million for software, content,
        support and professional services including repeat orders for software, content,
        support and services from the DoD for $2.4 million and a $1.6 million support
        services renewal order from the Department of Veteran Affairs ("VA"). Total
        revenue for the year ended December 31, 2004 benefited from large orders
        received from three customers, the Department of Defense ("DoD") for $8.6
        million, the Department of Veteran Affairs ("VA") for $5.0 million, and a
        $1.7
        million order from MCI, Inc. The 2004 orders had a higher mix of license
        fee
        revenue than the orders received in subsequent periods. The orders received
        subsequent to the year 2004 were more heavily weighted toward customer support,
        content and professional services contracts.
 
 Revenue
        recognized from content, subscription, and customer support services contracts
        was recognized ratably over the term of the contract. Revenue from content,
        subscription and customer support services contracts grew $1,317,181, or
        27%, in
        the period January 1, 2006 to December 4, 2006 over the year 2005 and $2,080,605
        or 75% in the year 2005 over the year 2004 primarily due to new orders and
        renewals of annual support contracts which put a higher aggregate value of
        these
        types of contracts in force period versus period.
  18
 *Table
            of Contents*
  Professional
        services consisted of optional training, implementation and security consulting
        services offered to customers. Revenue from professional services engagements
        fluctuated period to period due to the fluctuation in billable hours scheduled
        and performed during the periods presented. Lower billable hours incurred
        drove
        lower revenue in the period January 1, 2006 to December 4, 2006 versus the
        year
        2005. Likewise higher billable hours drove higher revenue in the year 2005
        over
        the year 2004.
 
 The
        revenue distribution by industry segments was as follows:
 
 For
                    the Period January 1, 2006 to December 4,
                
                
                Years
                    Ended December 31,Industry
                    Segment
                
                
                2006
                
                
                2005
                
                
                2004Government
                
                
                82%
                
                
                58%
                
                
                82%Corporate
                
                
                12%
                
                
                25%
                
                
                12%Financial
                    institutions
                
                
                5%
                
                
                13%
                
                
                4%Education
                
                
                -%
                
                
                1%
                
                
                1%All
                    other
                
                
                1%
                
                
                3%
                
                
                1%
 
 Revenue
        from customers representing 10% or more of total revenue was as follows:
 
 For
                  the Period
                January
                  1, 2006 to
                December
                  4,
              
              Years
                  Ended December 31,End
                  User Customer:
              
              2006
              
              2005
              
              2004Defense
                  Information Systems Agency
              
              
              27
              %
              
              32
              %
              
              39
              %Department
                  of Veteran Affairs
              
              
              12
              %
              
              21
              %
              
              41
              %Department
                  of Energy
              
              
              34
              %
              
              -
              
              
              -
 
 **Costs
        of Revenue**
 
 The
        components of costs of revenue are as follows:
 
 For
                  the Period
                January
                  1, 2006 to
                December
                  4,
              
              Years
                  Ended December 31,Costs
                  of revenue
              
              2006
              
              2005
              
              2004Software
                  amortization
              
              $
              2,191,690
              
              $
              2,192,115
              
              $
              1,287,927Content,
                  subscription and customer support services costs
              
              
              1,339,799
              
              
              1,667,581
              
              
              1,478,633Professional
                  services
              
              
              316,178
              
              
              645,202
              
              
              29,028Shipping
                  and other costs
              
              
              219,838
              
              
              161,805
              
              
              36,496Total
                  Costs of Revenue
              
              $
              4,067,505
              
              $
              4,666,703
              
              $
              2,832,084
 
 **Software
        Amortization**
 
 Software
        amortization began at the time a new product or new version of a product
        was
        available for licensing. The estimated useful life used to amortize the
        capitalized value of released products was three years or less. Lower
        capitalizable software development costs during the period January 1, 2006
        to
        December 4, 2006 resulted in software amortization being relatively flat
        with
        software amortization expense recorded for the year ended December 31, 2005.
        As
        a result of an increase in the average amounts of capitalizable software
        development costs, software amortization expense increased $904,188, or 70%,
        in
        the year ended December 31, 2005 versus the year ended December 31, 2004.
 
 The
        comparison of unamortized capitalized software development costs to the net
        realizable value of the capitalized software at December 31, 2005 of $4,431,322
        and December 31, 2004 of $4,048,452 indicated that the unamortized capitalized
        software balances at December 31, 2005 did not exceed net realizable value.
        Accordingly, no write-down was required during the year ended December 31,
        2005.
        The net realizable value analysis involves assumptions as to future product
        revenue and as a result, there can be no assurance that we will successfully
        achieve those future revenue forecasts or that an unexpected technological
        change in operating systems or other technologies will not impair the recorded
        values or require us to change our estimated useful lives in the
        future.
  19
 *Table
            of Contents*
  **Content,
        Subscription and Customer Support Services Costs**
 
 Under
        post sale customer support services agreements, customers received the right
        to
        telephone support as well as the right to software point releases and software
        updates on a when and if available basis. In addition to these services,
        Hercules customers received frequent updates to the vulnerability remedies
        via
        Internet access to the V-Flash content remediation database. The costs
        associated with these contractual obligations were classified as costs of
        revenue and included the salaries, benefits and other direct and indirect
        expenses of the personnel assigned to the post sale customer support function
        plus similar expenses associated with the remediation security engineers
        that
        wrote the vulnerability remedies and managed the remedy content database.
        The
        costs associated with the customer support and security remediation group
        were
        largely dependent upon the number of people assigned to these functions.
 
 The
        content, subscription, and customer support services costs for the period
        January 1, 2006 to December 4, 2006 and the year ended December 31, 2005
        were
        $1,339,799 and $1,667,581, respectively. The total decrease in content,
        subscription, and customer support services costs of $327,782 or 20%, for
        the
        period January 1, 2006 to December 4, 2006 as compared to the year ended
        December 31, 2005 were primarily attributable to approximately one less month
        of
        costs and to a decrease in the number of employees performing these functions.
        Included in content, subscription, and customer support services costs for
        the
        period January 1, 2006 to December 4, 2006 was $129,466 of stock compensation
        expense of which $47,109 represents the stock compensation expense related
        to
        the acceleration of the vesting of the stock options held by employees included
        in these functions resulting from the deemed change of control. No stock
        compensation expense related to stock options was recorded  as content,
        subscription and customer support service costs in periods prior to January
        1,
        2006.
 
 The
        content, subscription, and customer support services costs for the year December
        31, 2004 was $1,478,633. The total increase in customer support services
        costs
        of $188,948 or 13% in the year 2005 over the year 2004 was primarily
        attributable to increases in direct costs, higher year over year insurance
        costs
        associated with the customer support and remediation security engineer personnel
        and additional costs for database services incurred in 2005 but not in 2004.
 
 **Professional
        Services Costs**
 
 Professional
        services costs included the direct costs and indirect overhead costs associated
        with the personnel performing the service engagements. In addition, to meet
        demand, services engagements were supplemented with personnel from other
        functions within the Company or with outside third party consultants. When
        this
        occurred, the direct costs and overhead associated with these personnel in
        the
        performance of services engagements were charged to professional services
        costs.
        Professional services costs during the period January 1, 2006 to December
        4,
        2006 decreased versus the year ended December 31, 2005 due to a lower number
        of
        billable consulting and training services hours performed during the period
        January 1, 2006 to December 4, 2006 versus the year 2005. The increase in
        professional services costs during the year ended December 31, 2005 versus
        2004
        is directly attributed to an increase in the number of consulting and training
        services engagements performed during 2005 over 2004.
 
 **Shipping
        and Other Costs**
 
 Shipping
        and other costs included freight costs, preparation of media and documentation,
        costs of third party products shipped with Hercules, third party royalties
        for
        technology embedded in Hercules and costs related to the Hercules Security
        Appliance. Shipping and other costs for the period January 1, 2006 to December
        4, 2006 and the year 2005 were $219,838 and $161,133, respectively, representing
        an increase of $58,033, or 36%, primarily due to increases in costs associated
        with third party software royalties and appliance hardware purchases. Shipping
        and other costs for the years ended December 31, 2005 and 2004 were $161,805
        and
        $36,496, respectively. The $125,309 increase was primarily due to increases
        in
        costs associated with third party software royalties and appliance hardware
        purchases.
  **Selling,
        General and Administrative Expenses**
 
 For
        the
        period January 1, 2006 to December 4, 2006 and for the year 2005 we incurred
        selling, general and administrative ("SG&A") expenses of $15,434,977 and
        $19,577,780, respectively. The decrease of $4,142,803 is primarily due to
        actions taken in the fourth quarter of 2005 to reduce personnel and a reduction
        in marketing expenditures during 2006. Offsetting this expense reduction
        is
        $3,773,430 of stock compensation expense of which $726,615 represents the
        stock
        compensation expense related to the acceleration of the vesting of the stock
        options held by employees included in these functions resulting from the
        deemed
        change of control. Stock compensation expense included in SG&A for the years
        ended December 31, 2005 and 2004 totaled $37,000 and $129,995, repectively.
        We
        incurred SG&A expense of $19,577,780 and $17,550,485 for the years ended
        December 31, 2005 and 2004, respectively, representing an increase of
        $2,027,295, or 12%. The increase resulted from an increase in the number
        of
        personnel in these functions causing higher pay and benefits costs, travel
        and
        entertainment expenses, marketing expenses, professional fees and higher
        rent
        and other infrastructure costs.
 
 **Product
        Development Expense**
 
 We
        capitalized software development costs at the time technological feasibility
        was
        established, which generally occurred at the time the design and analysis
        plan
        was completed and software code programming began. The costs and expenses
        that
        qualified for capitalization primarily consisted of salaries, benefits and
        the
        direct and indirect costs associated with the development staff or with the
        specific development projects. Costs and expenses that did not qualify for
        capitalization and all costs and expenses incurred prior to technological
        feasibility were expensed and classified as product development expense in
        the
        statement of operations. A summary of gross product development expense,
        product
        development expense net of capitalized development costs and the capitalization
        rate for the period January 1, 2006 to December 4, 2006 and the years ended
        December 31, 2005 and 2004 are presented in the table below.
  20
 *Table
            of Contents*
  
 For
                  the Period
                January
                  1, 2006 to
                December
                  4,
              
              Years
                  Ended December 31,2006
              
              2005
              
              2004Product
                  development expense, net of capitalized software development
                  costs
              
              
              2,390,390
              
              $
              2,443,864
              
              $
              1,995,612Software
                  development costs capitalized
              
              
              1,254,584
              
              
              2,574,984
              
              
              3,261,210Gross
                  product development expense
              
              
              3,644,974
              
              
              5,018,848
              
              
              5,256,822Capitalized
                  costs as a percentage of gross product development expense
              
              
              34
              %
              
              51
              %
              
              62
              %
 
 The
        decreases in gross product development expense of $1,373,874 for the period
        January 1, 2006 to December 4, 2006 versus the year 2005 and $237,974 for
        the
        year 2005 versus the year 2004, respectively, were primarily due to decreases
        in
        total pay and benefits expenses associated with decreases in the number software
        development engineers and quality assurance engineers employed during the
        respective periods presented. Offsetting this decrease in gross product
        development expense was $654,112 of stock compensation expense of which $140,436
        represents the stock compensation expense related to the acceleration of
        the
        vesting of the stock options held by employees included in this function
        resulting from the deemed change of control. No stock compensation expense
        is
        included in product development expense for the years ended December 31,
        2005
        and 2004.
 
 The
        capitalization rate, which is the percentage of capitalized costs to total
        gross
        product development costs for the period, also impacts product development
        expense, net of capitalized development costs. The decrease in the
        capitalization rate from 51% for the year 2005 to 34% for the period January
        1,
        2006 to December 4, 2006 is primarily due to higher levels of non-capitalizable
        costs and expenses. The decrease in the capitalization rate in the year 2005
        versus the year 2004 was also due to higher levels of non-capitalizable costs
        and expenses that had not reached technological feasibility and therefore
        were
        not capitalizable.
 
 **Depreciation
        and Amortization of Property And Equipment**
 
 Depreciation
        and amortization of property and equipment for the period January 1, 2006
        to
        December 4, 2006 of $1,455,112 compares to $1,756,955 for the year 2005.
        The
        decrease of $301,843 or 17%, is primarily the result of one month less
        depreciation and amortization as well as lower average balances of depreciable
        property and equipment in the period January 1, 2006 to December 4, 2006.
        The
        estimated useful lives of the property and equipment range from one to eight
        years. Depreciation and amortization of property and equipment for the year
        ended December 31, 2004 was $670,782. The increase of $1,086,173 or 162%
        in the
        year 2005 over 2004 is due to the increase in the average balances of
        depreciable property, equipment and leasehold improvement purchases in the
        last
        six months of 2004.
 
 **Officer
        Severance and Bonus**
 
 As
        a
        result of the Asset Sale we accrued $6,306,536 for payments to our CEO, CFO
        and
        two other officers for severance and deemed change of control bonuses pursuant
        to employment agreements and the terms of the asset purchase
        agreement.
 
 **Litigation
        Settlement**
 
 As
        discussed in NOTE P - COMMITMENTS AND CONTINGENCIES contained in the
        consolidated financial statements found elsewhere in this report, on August
        23,
        2006, CDSS and certain other parties entered into a Release and Settlement
        Agreement (“Settlement’) that provides for the settlement of a lawsuit filed by
        Meyers Associates, L.P. f/k/a Roan/Meyers Associates, L.P. and f/k/a
        Janssen-Meyers Associates, L.P. (“Meyers”) in the Court of Chancery of the State
        of Delaware, in New Castle County, against the Company, CT Holdings Enterprises
        (CDSS’s former parent company) and certain current and former officers and
        directors of the Company and/or CT Holdings Enterprises. Pursuant to the
        Settlement CDSS has paid $1,250,000 to Meyers releasing all defendants from
        claims under all Meyers lawsuits. This expense has been presented in the
        statement of operations separately as “litigation settlement” for the period
        January 1, 2006 to December 4, 2006.
 
 **Interest
        Income**
 
 Cash
        in
        excess of funds required for operating expenses is invested in a money market
        fund which generates interest income. Interest income for the period January
        1,
        2006 to December 4, 2006 and the years 2005 and 2004 was $16,515, $67,588
        and
        $107,261, respectively. The decline in interest income in each period is
        directly attributable to lower average balances of cash available for
        investment.
  21
 *Table
            of Contents*
  **Interest
        Expense**
 
 Interest
        expense for the period January 1, 2006 to December 4, 2006 was $1,433,208
        compared to $472,260, of interest expense for the year 2005. The $960,948
        increase in interest expense was due to increases in factored accounts
        receivable balances, interest on a $3 million note payable to our CEO entered
        into in August 2006 and interest related to the long-term note entered into
        in
        October 2004 as well as prepayment fees of $500,000 and $187,500 for the
        payment
        of the notes payable to our CEO and Lawrence Lacerte, respectively, from
        the
        proceeds of the asset sale to McAfee. Interest expense for the years 2005
        and
        2004 was $472,260 and $82,612, respectively. The $389,648 increase in interest
        expense in the year 2005 was the result of higher levels of average long-term
        debt balances outstanding during 2005 versus 2004. We anticipate that we
        will
        not incur additional interest expense as we repaid our indebtedness following
        the Asset Sale.
 
 **Gain
        Related to the Asset Sale**
 
 On
        December 4, 2006, CDSS closed the sale of substantially all of its assets
        to
        McAfee, pursuant to the Asset Purchase Agreement. The Asset Purchase Agreement
        provided for the acquisition of substantially all of the Assets and the
        assumption of the Assumed Liabilities of CDSS by McAfee (collectively, the
        "Sale"). The cash consideration received by CDSS for the purchase of the
        Assets
        and operating expense reimbursement was $60,020,579 in immediately available
        funds. The use of proceeds is discussed in Liquidity and Capital Resources.
        The
        gain on the sale was as follows:
 
 Proceeds
                  from Sale
              
              $
              60,020,579Transaction
                  costsInvestment
                  banking fees
              
              
              782,334Professional
                  fees
              
              
              1,285,005Net
                  cash proceeds
              
              
              57,953,240Assets
                  sold or written offAccounts
                  receivable
              
              
              102,860Property
                  and equipment, net
              
              
              3,671,116Capitalized
                  software development costs, net
              
              
              3,494,215Other
              
              
              647,935Liabilities
                  assumed or derecognizedDeferred
                  revenue
              
              
              (4,716,562
              )Other
              
              
              (792,653
              )Gain
                  on asset sale
              
              $
              55,546,329
 
 **Preferred
        Stock Dividends and Other Non Cash Items Included in Net Loss To Common
        Stockholders**
 
 The
        statements of operations present preferred stock dividends, the accretion
        of the
        beneficial conversion feature of the Series A Convertible Preferred Stock
        (the
“Series A Shares”), the non-cash fair value adjustments related to the
        modifications to the terms of the Series A Shares and related warrants, and
        the
        non-cash fair value adjustments related to modification to the terms of the
        Series B Convertible Preferred Stock (the “Series B Shares”) and related
        warrants as adjustments to the net loss so as to arrive at net loss to common
        stockholders.
 
 At
        the
        stockholders meeting in July 2005 the stockholders approved the modifications
        to
        the terms of the Series A Shares which included waiving of the dividend payments
        effective on May 9, 2005. The estimated fair value of the benefit related
        to the
        waived dividends of $1,826,000 resulted in an increase to additional paid
        in
        capital and a decrease to the net loss to common stockholders for the year
        ended
        December 31, 2005. Through May 9, 2005 the Series A Preferred Stock accrued
        dividends at a rate of 5% if paid in cash, or 6% if paid in shares of our
        common
        stock. The dividends were payable on April 1, July 1, October 1 and January
        1 of
        each year. For the year ended December 31, 2005 we accrued $268,750 of
        dividends, which are shown as an increase to the loss to common stockholders,
        and paid $456,250. No dividends accrue on the Series B Shares. During the
        year
        ended December 31, 2004, we had accrued dividends of $187,500 and paid $477,439
        of dividends.
 
 The
        Series A Shares were issued along with warrants for 1.2 million shares of
        common
        stock. The relative fair values of the Series A Shares and the warrants were
        computed and as a result, it was determined that the relative fair value
        of the
        beneficial conversion feature of the Series A Shares was approximately $985,000,
        which was being accreted to additional paid in capital over the four year
        term
        of the preferred stock and shown as an increase to the loss to common
        stockholders. For the year ended December 31, 2005 $141,145 of the beneficial
        conversion feature was accreted to loss to common stockholders. At September
        30,
        2005 the Company determined that the beneficial conversion feature no longer
        existed due to the relationship between the new preferred conversion price
        ($3/common share) and CDSS’s stock price; thus, we reversed the unaccreted
        balance of the conversion feature of $628,107, resulting in a decrease to
        additional paid in capital and an increase to the net loss to common
        stockholders for the year ended December 31, 2005. For the year ended December
        31, 2004, accretion related to the beneficial conversion feature was
        $215,397.
  22
 *Table
            of Contents*
  In
        May
        2005, in connection with the issuance of the Series B Shares, we entered
        into an
        Exchange Agreement with Satellite to exchange the Series A Warrants for Exchange
        Warrants to purchase up to 1.2 million shares of common stock at an initial
        exercise price of $1.75. The fair value of the Series A Warrants on May 9,
        2005
        was estimated and compared to the estimated fair value of the Exchange Warrants
        and the excess in the fair value of the Exchange Warrants over the Series
        A
        Warrants resulted in a net increase to additional paid in capital and a net
        increase to the net loss to common stockholders of $274,800 for the year
        ended
        December 31, 2005.
 
 At
        the
        stockholders meeting in July 2005 the stockholders also approved an amendment
        to
        the Series A Shares to reduce the conversion price from $5 to $3. The fair
        value
        of the Series A Shares immediately prior to the conversion price change was
        estimated using a Black-Scholes options pricing model and compared to the
        fair
        value of the Series A Shares immediately following the approval of the
        conversion price change, resulting in a decrease to additional paid in capital
        and an increase to the net loss to common stockholders of $1,064,000 for
        the
        year ended December 31, 2005.
 
 In
        October 2005, Satellite agreed to permit CDSS to issue a senior security
        in
        consideration for a reduction in the exercise price of their 4,038,710 Exchange
        and Series B warrants from $1.75 per share to $1.56 per share. The fair value
        of
        the warrants immediately prior to the conversion price change was estimated
        and
        compared to the fair value of the warrants immediately following the conversion
        price change, resulting in an increase to additional paid in capital and
        an
        decrease to the net loss to common stockholders of $43,226.
 
 In
        connection with the Asset Sale, the Series A and Series B Shares were
        redeemed.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 We
        received $60,020,579 in gross proceeds from the Asset Sale and paid transaction
        costs for investment banking fees of $782,334 and professional fees of
        $1,285,005. Pursuant to the Asset Purchase Agreement the remaining proceeds
        were
        used to redeem all of our shares of preferred stock outstanding for $18,840,000
        and to repay notes payable, advances and accrued interest of approximately
        $8,172,000, including approximate $4,044,000 of payments to our CEO for a
        working capital advance under a note payable in August 2006. In addition
        we were
        required to pay or otherwise settle accrued liabilities of approximately
        $12,648,000 at December 4, 2007, including officer severance, non-competition
        and bonus payments of approximately $6,306,000, accrued employee compensation
        liabilities of approximately $1,500,000, payment of approximately $256,000
        to
        employees holding in-the-money stock options, income taxes payable of
        approximately $894,000, lease obligations of approximately $1,555,000 and
        estimated wind down expense of $1,100,000.
 
 Cash
        and
        cash equivalents were $28,053,007 at December 31, 2006 and we had $10,597,331
        of
        liabilities representing an estimate of amounts required to settle all
        liabilities during the wind down period prior to liquidation of the Company.
        Following the settlement of its liabilities the Company estimates that a
        total
        of $0.52 to $0.54 per share may be made to shareholders. A distribution of
        $0.50
        per share was paid to shareholders on January 5, 2007. The remaining $0.02
        to
        $0.04 per share is expected to be distributed following the settlement of
        any
        remaining liabilities, primarily wind down costs and settlement of the Company's
        office lease obligations.
 
 These
        estimates are based on assumptions regarding the Company’s ability to settle
        outstanding obligations to creditors and resolve outstanding liabilities.
        If
        there are delays, or the Company is not successful in achieving these
        objectives, actual costs incurred during liquidation may increase, reducing
        net
        assets available in liquidation. The Company’s reported results may be subject
        to final examination by taxing authorities. Because many transactions are
        subject to varying interpretations of the applicable federal, state or foreign
        tax laws, our reported tax liabilities and taxes may be subject to change
        at a
        later date upon final determination by the taxing authorities. The impact
        of
        this final determination on our estimated tax obligations could increase
        or
        decrease amounts of cash available for distribution to our shareholders,
        perhaps
        significantly. Following the final distribution to shareholders it is expected
        that the Company will be liquidated.
  23
 *Table
            of Contents*
  **CONTRACTUAL
        OBLIGATIONS**
 
 A
        summary
        of our contractual obligations at December 31, 2006 is as follows:
 
 **Contractual
                  Obligations**
              
              **Total**
              
              **Less
                  than 1 Year**
              
              **1
                  - 3 Years**
              
              **3
                  - 5 Years**
              
              **More
                  than 5 Years**Long-term
                  debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Capital
                  lease obligations
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Operating
                  lease obligations (1)
              
              
              4,205,037
              
              
              673,812
              
              
              2,151,077
              
              
              1,380,148
              
              
              -Purchase
                  obligations
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Other
                  contractual obligations reflected on the registrant's balance sheet
                  under
                  GAAP
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
              
              
              4,205,037
              
              
              673,812
              
              
              2,151,077
              
              
              1,380,148
              
              
              -
 
 (1)
        The
        operating lease is for office space in Dallas, Texas and for Reston, Virginia
        for a portion of the first year. The operating lease commitments above reflect
        contractual and reasonably assured rent escalations under the lease
        arrangements.
 
 In
        addition to the contractual obligations above and as permitted under Delaware
        law, we have agreements whereby we indemnify our officers and directors for
        certain events or occurrences while the officer or director is, or was,
        serving at our request in such capacity. The maximum potential amount of
        future
        payments we could be required to make under these indemnification agreements
        is
        not limited; however, we have director and officer insurance coverage that
        reduces our exposure and may enable us to recover a portion of any amounts
        paid.
 
 **OFF-BALANCE
        SHEET ARRANGEMENTS**
 
 The
        Company has no off-balance sheet arrangements that have had, or are reasonably
        likely to have, a current or future effect on the Company’s financial condition,
        changes in financial condition, revenues or expenses, results of operations,
        liquidity, capital expenditures or capital resources that is material to
        investors.
 
 **ITEM
        7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
 
 **Interest
        Rate Risk**
 
 We
        have
        limited exposure to financial market risks, including changes in interest
        rates.
        We consider all highly liquid investments purchased with a maturity of three
        months or less to be cash equivalents. Cash in excess of operating funds
        is
        invested in a money market fund. For the period January 1, 2006 to December
        4,
        2006, we had interest income of $16,515 earned on funds invested in the money
        market investments. Interest expense on borrowed funds during the period
        January
        1, 2006 to December 4, 2006 was $1,433,208.
 
 **ITEM
        8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
        DATA**
 
 The
        Financial Statements for the years ended December 31, 2006, 2005 and 2004
        and
        supplementary data are found following the signature page of this report.
 
 **ITEM
        9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE**
 
 None.
 
 **ITEM
        9A. CONTROL AND PROCEDURES**
 
 The
        Company’s management, including the Company’s principal executive officer and
        principal financial officer, has evaluated the effectiveness of the Company’s
        disclosure controls and procedures (as defined in Rules 13(a) - 15(e) and
        15(d)
        - 15(e) under the Securities Exchange Act of 1934) as of the year ended December
        31, 2006, the period covered by the Annual Report on Form 10-K. Based upon
        that
        evaluation, the Company’s principal executive officer and principal financial
        officer have concluded that the disclosure controls and procedures were
        effective as of December 31, 2006 to provide reasonable assurance that
        information required to be disclosed in the reports the Company files or
        submits
        under the Exchange Act is recorded, processed, summarized and reported, within
        the time periods specified in the Commission’s rules and forms, and that
        information required to be disclosed in the reports the Company files or
        submits
        is accumulated and communicated to management, including our principal executive
        and principal financial officers, as appropriate to allow timely decisions
        regarding required disclosure.
 
 Our
        significant personnel reductions during 2006 have affected the overall control
        environment. However, management does not believe that these personnel
        reductions have had a significant impact on the effectiveness of the operation
        of the Company’s disclosure controls and procedures.
  24
 *Table
            of Contents*
  There
        has
        been no change in our internal controls over financial reporting that occurred
        during the period covered by this Annual Report on Form 10-K that has materially
        affected or is reasonably likely to materially affect, our internal controls
        over financial reporting.
 
 **Inherent
        Limitation on the Effectiveness of Internal Controls**
  The
        effectiveness of any system of internal control over financial reporting,
        including CDSS’s, is subject to inherent limitations, including the exercise of
        judgment in designing, implementing, operating, and evaluating the controls
        and
        procedures, and the inability to eliminate misconduct completely. Accordingly,
        any system of internal control over financial reporting, including CDSS’s, can
        only provide reasonable, not absolute assurances. In addition, projections
        of
        any evaluation of effectiveness to future periods are subject to the risk
        that
        controls may become inadequate because of changes in conditions, or that
        the
        degree of compliance with the policies or procedures may deteriorate. We
        intend
        to continue to monitor and upgrade our internal controls as necessary or
        appropriate for our business, but cannot assure you that such improvements
        will
        be sufficient to provide us with effective internal control over financial
        reporting.
 
 **ITEM
        9B. OTHER INFORMATION**
 
 None.
  25
 *Table
            of Contents*
  **PART
        III**
 
 **ITEM
        10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
        GOVERNANCE**
 
 The
        following sets forth the names of our directors at March 29, 2007, their
        principal occupations and the year in which each current director of CDSS
        initially joined the Board of Directors and the year in which their term
        as
        director expires.
 
 Name
              
              Age
              
              Position
                  with Company
              
              Director
                  Since
              
              Term
                  ExpiresSteven
                  B. Solomon
              
              42
              
              Chairman
                  of the Board, President, Chief Executive Officer,
                  Secretary
              
              1996
              
              2007Major
                  General (Ret) John Leide
              
              69
              
              Director
              
              2001
              
              2007Chris
                  A. Economou
              
              51
              
              Director
              
              2001
              
              2008Joe
                  M. Allbaugh
              
              54
              
              Director
              
              2003
              
              2009Mark
                  Rogers
              
              46
              
              Director
              
              2005
              
              2009
 
 **STEVEN
        B. SOLOMON** has served as a director and the President and Chief
        Executive Officer of CDSS since its formation in December 1996, as President
        and
        Chief Executive Officer of CT Holdings Enterprises, Inc. ("CT Holdings")
        since
        May 1997 and as a director of CT Holdings since February 1996. Until May
        2004
        Mr. Solomon served 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. Mr. Solomon
        also served from May 2000 to August 2006 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 CDSS since December 2001. His military career includes
        service in infantry, special operations, security and intelligence matters
        for
        more then 30 years, including four combat tours. He served as Director of
        Intelligence, J-2, United States Central Command, and performed in that capacity
        during the Gulf War for General Schwarzkopf throughout Operations Desert
        Shield
        and Desert Storm. During his final 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, and Director, Defense Human Intelligence Service
        (DHS),
        for the Department of Defense. Upon retirement from the US Army in 1995,
        John
        was appointed president of the Global Information Technologies strategic
        business unit with Electronic Data Systems (EDS) and served in that position
        until 1997. He then joined Avenue Technologies of Alexandria, Virginia, a
        defense and security information superiority company, where he served as
        Executive Vice President from 1997 to 1999. General Leide then assumed duties
        as
        President of Appenine Associates Ltd., an international defense and security
        services company from 1999 to 2003. John also served as a Senior Executive
        Advisor to General Dynamics Land Systems from 2000 to 2004. He presently
        serves
        as senior consultant to a number of national and international intelligence
        and
        security companies and governmental agencies, in strategic, operational,
        tactical and security matters. Major General Leide has been inducted into
        both
        the United States Military Intelligence Hall of Fame and the United States
        Defense Attaché Hall of Fame.
 
 **CHRIS
        A. ECONOMOU** has
        served as a director of CDSS since November 2001 and as a director of CT
        Holdings Enterprises Inc. since February 1996, and as a director of LoneStar
        Hospitality Corp. from June 1993 until its merger with CT Holdings Enterprises
        Inc. 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.
 
 **JOE
        M. ALLBAUGH** joined
        the Company as a director of CDSS in December 2003. Since March 2003, Mr.
        Allbaugh has served as President and CEO of The Allbaugh Company, LLC, a
        Washington, D.C. based corporate strategy and consulting firm with offices
        in
        Austin, Texas and Oklahoma City, Oklahoma. As the former Director of the
        Federal
        Emergency Management Agency (FEMA) from February 15, 2001 to March 1, 2003,
        Mr.
        Allbaugh managed an agency with 2,500 employees and an annual budget of $3
        billion. After the 9/11 terrorist attacks on the World Trade Center,
        Pennsylvania and the Pentagon, Mr. Allbaugh played a critical role in
        coordinating the federal government’s response to the attacks, a response and
        recovery that exceeded $8.8 billion. He was also a member of the President’s
        Homeland Security Advisory Council. From January 1995 to July 1999, Mr. Allbaugh
        served as Chief of Staff to then-Governor George W. Bush. From July 1999
        to
        December 2000 Mr. Allbaugh served as the National Campaign Manager for
        Bush-Cheney 2000 Inc. where he successfully organized and managed a $192
        million
        presidential campaign.
 
 **MARK
        ROGERS** has
        served as a director of the Company since July 2005. Mr. Rogers is the President
        of Alchemy Ventures, Inc., a firm that designs, structures and funds alternative
        investment products. He also advises start-up companies with strategy and
        financings including mergers and acquisitions. He has served as a director
        of CT
        Holdings since July 1996.
  26
 *Table
            of Contents*
  The
        Board
        of Directors consists of a majority of “independent directors” as such term is
        defined in the Nasdaq Stock Market Marketplace Rules. The Board of Directors
        has
        determined that Joe M. Allbaugh, Chris A. Economou, Major General (Ret.)
        John
        Leide and Mark Rogers are independent directors, based on representations
        from
        each such director that they meet the relevant NASDAQ and SEC
        definitions.
 
 **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 is elected each year.
        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.
 
 **Meetings
        and Committees of the Board of Directors**
 
 During
        fiscal year 2006, there were twenty-four meetings of the Board of Directors.
        All
        directors attended 75% or more of the aggregate of meetings of the Board
        and
        their committees held during their respective terms, with the exception of
        Joe
        M. Allbaugh. In addition, the Board took action by written consent two
        times.
 
 CDSS’s
        board of directors established three standing committees to assist in the
        discharge of its responsibilities. These committees include an audit committee
        composed exclusively of outside directors, Mr. Economou, General Leide and
        Mr.
        Rogers, an executive committee and a compensation committee. The executive
        committee has authority to act 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. The executive committee did
        not
        meet or take action by written consent in 2006. CDSS’s board of directors may
        also establish such other committees as it deems appropriate, in accordance
        with
        applicable Delaware law and CDSS’s by-laws.
 
 The
        Compensation Committee reviews and recommends to the Board the compensation
        and
        employee benefits of officers of the Company and administers the 2002 Stock
        Incentive Plan, as amended. The Compensation Committee met two times and
        took
        action by written consent two times during fiscal year 2006, and at March
        28,
        2007 consisted of Messrs. Allbaugh, Economou and Leide, all of whom are
        independent directors as defined in the Nasdaq Stock Market Marketplace
        Rules.
 
 The
        Board
        does not have a nominating committee, as nominations are made by the independent
        members of the Board as a whole.
 
 The
        Board
        seeks to identify qualified individuals to become board members and determine
        the composition of the Board and its committees. When considering a potential
        director candidate, the Board looks for personal and professional integrity,
        demonstrated ability and judgment and business experience. The Board will
        review
        and consider director nominees recommended by stockholders. There are no
        differences in the manner in which the Board evaluates director nominees
        based
        on whether the nominee is recommended by a stockholder.
 
 The
        Company’s by-laws provide that any stockholder wishing to present a nomination
        for the office of director must do so in writing delivered to the Company.
        To be
        timely, a stockholder’s notice shall be delivered to the Secretary at the
        principal executive offices of the Corporation not less than 45 or more than
        75
        days prior to the first anniversary (the anniversary) of the date on which
        the
        Corporation first mailed its proxy materials for the preceding year’s annual
        meeting of stockholders; provided, however, that if the date of the annual
        meeting is advanced more than 30 days prior to or delayed by more than 30
        days
        after the anniversary of the preceding year’s annual meeting, notice by the
        stockholder to be timely must be so delivered not later than the close of
        business on the later of (i) the 90th day prior to such annual meeting or
        (ii)
        the 10th day following the day on which public announcement of the date of
        such
        meeting is first made. Each notice must set forth: (a) the name and address
        of
        the stockholder who intends to make the nomination and of the person or persons
        to be nominated; (b) a representation that the stockholder is a holder of
        record
        of stock of the Company entitled to vote at such meeting and intends to appear
        in person or by proxy at the meeting to nominate the person or persons specified
        in the notice; (c) a description of all arrangements or understandings between
        the stockholder and each nominee and any other person or persons (naming
        such
        person or persons) relating to the nomination or nominations; (d) the class
        and
        number of shares of the Company which are beneficially owned by such stockholder
        and the person to be nominated as of the date of such stockholder’s notice and
        by any other stockholders known by such stockholder to be supporting such
        nominees as of the date of such stockholder’s notice; (e) such other information
        regarding each nominee proposed by such stockholder as would be required
        to be
        included in a proxy statement filed pursuant to the proxy rules of the
        Securities and Exchange Commission; and (f) the consent of each nominee to
        serve
        as a director of the Company if so elected.
 
 The
        Audit
        Committee meets with the Company’s financial management and independent
        registered public accounting firm and reviews the accounting principles and
        the
        scope and control of the Company’s financial reporting practices, and makes
        reports and recommendations to the Board with respect to audit matters. The
        Audit Committee also recommends to the Board the appointment of the firm
        selected to be independent certified public accountants for the Company and
        monitors the performance of such firm; reviews and approves the scope of
        the
        annual audit and evaluates with the independent certified public accountants
        the
        Company’s annual audit and annual financial statements; and reviews with
        management the status of internal accounting controls and internal audit
        procedures and results. The Audit Committee met seven times during fiscal
        year
        2006 and took action by written consent two times. The Audit Committee is
        required to have at least two members, each of whom must be “independent
        directors” as defined in the Marketplace Rules of the Nasdaq Stock Market.
        Messrs. Economou, Leide and Rogers are the current members of the Audit
        Committee. The Board has determined that Messrs. Economou, Leide and Rogers
        are
        financially literate in the areas that are of concern to the Company, and
        are
        able to read and understand fundamental financial statements. The Board has
        also
        determined that Messrs. Economou, Leide and Rogers each meet the independence
        requirements set forth in the Marketplace Rules of the Nasdaq Stock
        Market.
  27
 *Table
            of Contents*
  The
        Securities and Exchange Commission (“SEC”) has adopted rules to implement
        certain requirements of the Sarbanes-Oxley Act of 2002 pertaining to public
        company audit committees. One of the rules adopted by the SEC requires a
        company
        to disclose whether it has an “audit committee financial expert” serving on its
        audit committee. In addition, SEC regulations and NASDAQ listing standards
        require the Company to have a financial expert on our Audit Committee. Based
        on
        its review of the criteria of an audit committee financial expert under the
        rule
        adopted by the SEC, the Board of Directors believes that Mr. Rogers is as
        an
        audit committee financial expert.
 
 The
        Company’s Board of Directors has adopted a written charter for the Audit
        Committee of the Board. A copy of the written Audit Committee charter was
        attached as an exhibit to the proxy statement for CDSS’s 2004 annual stockholder
        meeting and is available on the CDSS’s website, www.cdsswd.com .
 
 Corporate
        governance guidelines
 
 The
        Board
        has adopted corporate governance guidelines. The guidelines govern, among
        other
        things, Board member responsibilities, committee composition and charters.
        A
        copy of the corporate governance guidelines may be requested and obtained
        for
        free from the Company.
 
 **Information
        Regarding Executive Officers**
 
 Listed
        below is certain information concerning individuals who served as executive
        officers of CDSS during 2006.
 
 **Name**
              
              **Age**
              
              **Position
                  with Company**
              
              **Employed
                  Since**Steven
                  B. Solomon
              
              42
              
              Chairman
                  of the Board, President, Chief Executive Officer,
                  Secretary
              
              1996Richard
                  Connelly
              
              55
              
              Chief
                  Financial Officer
              
              2002(1)Carl
                  Banzhof
              
              39
              
              Chief
                  Technology Officer
              
              1996(2)Robert
                  Humphrey
              
              48
              
              Executive
                  Vice President - Chief Marketing Officer
              
              2005(2)David
                  Helffrich
              
              48
              
              Executive
                  Vice President - Development
              
              2004(2)Randy
                  Schirman
              
              45
              
              Executive
                  Vice President - Sales
              
              2005(2)Robert
                  B. Dix, Jr.
              
              54
              
              Executive
                  Vice President - Government Affairs & Corporate
                  Development
              
              2004(2)
 
 (1)
              Provided
                  notice of resignation effective April 2, 2007 following the Asset
                  Sale.
 (2)
              Resigned
                  on December 4, 2006 as a result of the Asset Sale and deemed change
                  of
                  control.
 
 **STEVEN
        B. SOLOMON** has
        served as a director and the President and Chief Executive Officer of CDSS
        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.
        Until May 2004 Mr. Solomon served 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. From May 5, 2000 to August 2006, 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
        provided notice of his resignation effective April 2, 2007 following the
        Asset Sale. Mr. Connelly also serves as Chief Financial Officer of CT Holdings.
        Mr. Connelly initially served as a financial consultant to CDSS 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., from September 1998 through
        November 2000 at JusticeLink, Inc., and from April 1997 through July 1998
        at
        AnswerSoft, Inc. From February 1987 through March 1997, Mr. Connelly served
        in
        various financial management capacities at Sterling Software Inc., including
        Vice President Corporate Controller, Vice President Treasurer and Group Vice
        President Finance & Administration of Sterling’s Systems Management
        Group.
  28
 *Table
            of Contents*
  **CARL
        E. BANZHOF** served
        as Chief Technology Officer of the Company since November 2001 until the
        consummation of the Asset Sale on December 4, 2006, and of CT Holdings since
        July 1997 until May 2002, 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.
 
 **ROBERT
        HUMPHREY** joined
        CDSS in February 2005 and served as Executive Vice President - Chief Marketing
        Officer until the consummation of the Asset Sale on December 4, 2006. From
        October 2002 to February 2005 Mr. Humphrey was Co-Founder and Managing Partner
        of the Waterstreet Management Group, a strategic consulting and investment
        banking services firm. As CEO of OpenDesign, Inc. from July 2001 to September
        2002 he directed the initial launch of the company. Mr. Humphrey was a Venture
        Partner with Insight Capital Partners from February 2000 to July 2001with
        responsibility for the firm’s portfolio of enterprise software companies.
        Humphrey spent five years with i2 Technologies, Inc. from February 1995 to
        January 2000 where he served as the chief marketing and business development
        executive responsible for overall marketing strategy and execution. Prior
        to
        2000, Humphrey spent nine years with Unisys Corporation (formerly Burroughs
        Corporation) in a variety of sales and marketing roles.
 
 **DAVID
        HELFFRICH** joined
        CDSS in February 2004 and served as Executive Vice President - Development
        until
        the consummation of the Asset Sale on December 4, 2006. Mr. Helffrich has
        more
        than 20 years of experience in the software industry, including design and
        development responsibilities for application development tools for software
        developers, Server I/O products for Storage Area Networks, and quality
        monitoring and evaluation products for the Call Center market. Prior to CDSS,
        Mr. Helffrich served as Vice President of Development for etalk Corporation
        from
        April 2002. Before etalk, he was General Manager of the Server I/O business
        unit
        for Interphase Corporation from June 2000. From August 1984 to May 2000,
        Mr.
        Helffrich gained his knowledge and experience in software development while
        working in various technology positions at Texas Instruments in the TI Software
        Division (acquired by Sterling Software in July 1997), moving up to Vice
        President of Development for the Application Development Group of Sterling
        Software, a $750 million producer of software development tools for the
        application, storage, Internet, and federal markets.
 
 **RANDY
        SCHIRMAN** joined
        CDSS in August 2005 and served as Executive Vice President of Sales until
        the
        consummation of the Asset Sale on December 4, 2006. Mr. Schirman was responsible
        for the company’s overall sales strategy for commercial business. Prior to
        joining CDSS, Mr. Schirman served as Vice President of Sales for DeepNines
        Technologies, a software company, from April 2004 until July 2005. Prior
        to
        DeepNines Technologies, Mr. Schirman was at NetScreen, a software company,
        from
        2000 to 2004 as Vice President of Sales for the Provider Services market,
        where
        he managed one of the company’s sales divisions selling comprehensive security
        solutions to the airline, energy, federal, state and local government,
        media/communications, retail conglomerates, and telecommunications
        markets.
 
 **ROBERT
        B. DIX, JR.** joined
        CDSS in December 2004 as executive vice president for government affairs
        and
        corporate development and served in that capacity until the consummation
        of the
        Asset Sale on December 4, 2006. Prior to joining the Company, Mr. Dix served
        during the 108th Congress as the Staff Director for the House Government
        Reform
        Subcommittee on Technology, Information Policy, Intergovernmental Relations
        and
        the Census from January 2003 until December 2004. In that role, Mr. Dix worked
        with Subcommittee Chairman Adam Putnam and Government Reform Committee Chairman
        Tom Davis on the federal government’s use of technology and the support of the
        President’s Management Agenda. Mr. Dix worked on government-wide issues such as
        e-government, information sharing, and securing federal government computer
        networks and desktops against cyber attacks. Previously Mr. Dix served the
        Congress as a Senior Professional Staff member to the House Oversight
        Subcommittee on the District of Columbia during the late 1990’s. Prior to
        joining the Technology Subcommittee, Mr. Dix served as the President and
        Chief
        Operating Officer for FedComp, Inc., a financial services sector software
        development firm headquartered in Northern Virginia from November 2000 until
        November 2002. Mr. Dix also served as the President of SportsCombine, Inc.,
        a
        Northern Virginia-based start-up technology company in the content management
        space from January 2000 until November 2000.
 
 **Section
        16(a) Beneficial Owner Reporting Compliance**
 
 Section
        16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and
        directors, and persons who own more than ten percent of a registered class
        of
        the Company’s equity securities, to file reports of ownership and changes in
        ownership with the SEC. Officers, directors and greater than ten-percent
        stockholders are required by SEC regulation to furnish the Company with copies
        of all Section 16(a) forms they file.
 
 Based
        solely on its review of the copies of such forms received by it, and written
        representations from certain reporting persons that no Section 16(a) forms
        were
        required for those persons, the Company believes that during 2005 all filing
        requirements applicable to its officers, directors, and greater than ten-percent
        stockholders were complied with.
  29
 *Table
            of Contents*
  **Code
        of Ethics**
 
 Our
        Board
        of Directors adopted a Code of Business Conduct for all of our directors,
        officers and employees and a Code of Ethics for our CEO and Senior Financial
        Executives in March 2004. Stockholders may request a free copy of our Code
        of
        Business Conduct and Code of Ethics from:
 
 CDSS
        Wind
        Down Inc.
 Attention:
        Investor Relations
 Two
        Lincoln Centre, Suite 1600
 5420
        LBJ
        Freeway
 Dallas,
        Texas 75240
 214/520-9292
 
 To
        date,
        there have been no waivers under our Code of Business Conduct and Ethics.
        We
        will post any waivers, if and when granted, of our Code of Business Conduct
        and
        Ethics on our website at www.cdsswd.com.
 
 **ITEM
        11 EXECUTIVE COMPENSATION**
 
 ***Compensation
        Discussion and Analysis.***
 
 Prior
        to
        the sale of substantially all of our assets to McAfee in December 2006, our
        compensation policy reflected a commitment to an executive compensation plan,
        which enabled us to attract, retain and motivate highly qualified management
        professionals. Following the Asset Sale, our compensation philosophy is designed
        to retain the services of our senior executives to complete the wind down
        of our
        company and the settlement of our remaining obligations. The following
        discussion relates to our compensation policies prior to the Asset Sale.
        Our
        compensation philosophy was to directly align executive compensation with
        the
        financial performance of the organization. We believe that the relationship
        between executive compensation and our performance will create benefit for
        all
        stockholders.
 
 The
        executive compensation program has been developed by the Board using various
        factors which include historical earnings, and review of industry competition
        executive compensation plans. The key elements of the executive compensation
        program are base salary, annual bonus and stock options and restricted stock
        grants.
 
 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 to executive officers, 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 stockholders
        and
        encourages executive officers to adopt a strong stockholder 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 CDSS.
  30
 *Table
            of Contents*
  ***Executive
        Compensation.***
 
 The
        following table lists the annual compensation for our CEO, CFO, and our three
        other most highly compensated executive officers in 2006 (referred to as
        named
        executive officers) for the fiscal years 2006, 2005, and 2004.
  **2006
                    SUMMARY COMPENSATION TABLE****Name
                    and Principal Position**
                
                **Year**
                
                **Salary
                    ($)**
                
                **Bonus
                    ($)**
                
                **StockAwards
                    ($)**
                
                
                
                **Option
                    Awards ($) (17)**
                
                **All
                    Other Compensation ($)**
                
                
                
                **Total
                    ($)**$
                690,000
                
                
                (2
                )Steven
                    B. Solomon
                
                
                2006
                
                $
                225,000
                
                $
                331,250
                
                $
                1,971,000
                
                
                (1
                )
                $
                -
                
                
                5,399,234
                
                
                (3
                )
                **$**
                11,733,269Chief
                         Executive Officer
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                68,535
                
                
                (4
                )3,048,250
                
                
                (5
                )2005
                
                
                225,000
                
                
                225,000
                
                
                -
                
                
                
                
                
                -
                
                
                33,660
                
                
                (6
                )
                
                483,6602004
                
                
                225,000
                
                
                225,000
                
                
                -
                
                
                
                
                
                -
                
                
                87,291
                
                
                (7
                )
                
                537,29195,557
                
                
                (2
                )82,125
                
                
                (5
                )Richard
                    Connelly (a)
                
                
                2006
                
                
                185,000
                
                
                -
                
                
                27,000
                
                
                (8
                )
                
                -
                
                
                95,557
                
                
                (9
                )
                
                574,808Chief
                    Financial Officer
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                95,557
                
                
                (10
                )24,069
                
                
                (11
                )65,500
                
                
                (12
                )6,652
                
                
                (14
                )
                
                291,2662005
                
                
                185,000
                
                
                75,000
                
                
                18,500
                
                
                (13
                )
                
                -
                
                
                6,114
                
                
                (15
                )2004
                
                
                185,000
                
                
                75,000
                
                
                -
                
                
                
                
                
                -
                
                
                14,876
                
                
                (15
                )
                
                274,87618,598
                
                
                (11
                )
                
                315,048Robert
                    Humphrey (b)
                
                
                2006
                
                
                162,055
                
                
                109,395
                
                
                -
                
                
                
                
                
                -
                
                
                25,000
                
                
                (5
                )EVP
                    Chief Marketing Officer
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,652
                
                
                (14
                )2005
                
                
                155,750
                
                
                79,594
                
                
                18,500
                
                
                (13
                )
                
                538,200
                
                
                2,723
                
                
                (15
                )
                
                801,41991,451
                
                
                (2
                )Randy
                    Schirman (c)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                91,450
                
                
                (3
                )EVP
                    Sales
                
                
                2006
                
                
                162,055
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                136,806
                
                
                (16
                )
                
                520,88114,119
                
                
                (11
                )25,000
                
                
                (5
                )38,424
                
                
                (16
                )2005
                
                
                72,917
                
                
                -
                
                
                18,500
                
                
                (13
                )
                
                268,000
                
                
                6,652
                
                
                (14
                )
                
                407,1272,634
                
                
                (15
                )Robert
                    B. Dix, Jr. (d)EVP
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                79,427
                
                
                (2
                )Government
                    Affairs and Corporate Development
                
                
                2006
                
                
                138,904
                
                
                -
                
                
                
                
                
                
                
                
                -
                
                
                79,426
                
                
                (3
                )
                
                339,83217,075
                
                
                (11
                )25,000
                
                
                (5
                )8,760
                
                
                (14
                )
                
                180,2112005
                
                
                150,000
                
                
                -
                
                
                18,500
                
                
                (13
                )
                
                -
                
                
                2,951
                
                
                (15
                )2004
                
                
                8,017
                
                
                -
                
                
                -
                
                
                
                
                
                213,900
                
                
                -
                
                
                
                
                
                221,917
  (a)
              Mr.
                  Connelly submitted his notice of resignation effective April 2, 2007
                  following completion of the Asset
                  Sale.
 (b)
              Mr.
                  Humphrey was employed from February 9, 2005 until his resignation
                  due to
                  the deemed change of control on December 4,
                  2006.
 (c)
              Mr.
                  Schirman was employed from August 1, 2005 until his resignation
                  due to the
                  deemed change of control on December 4,
                  2006.
 (d)
              Mr.
                  Dix was employed from December 13, 2004 until his resignation due
                  to the
                  deemed change of control on December 4,
                  2006.
 (1)
              FAS
                  123R grant date value of 3,650,000 shares of common stock issued
                  in
                  exchange for the forgiveness of the Company’s obligation to pay Mr.
                  Solomon a bonus and the cancellation of his stock options for 3,650,000
                  shares of stock.
 (2)
              Deemed
                  change of control bonus payment resulting from the Asset Sale completed
                  on
                  December 4, 2006.
 (3)
              Payment
                  to our CEO for entering into a non-competition agreement payment
                  including
                  estimated tax gross up of
                  $4,184,146.
  31
 *Table
            of Contents*
  (4)
              Includes
                  a car allowance of $11,400, payment of unused vacation of $18,127,
                  compensation of $24,358 related to an incentive award trip, and
                  payments
                  of $14,650 for life, health and disability insurance premiums including
                  the income tax gross up on the payment of the
                  premiums.
 (5)
              Dividend
                  on common stock owned by the named executive paid January 5, 2007
                  representing the first distribution payment to stockholders of
                  $0.50 per
                  share as a result of the Asset Sale completed on December 4,
                  2006
 (6)
              Includes
                  a car allowance of $11,400, compensation of $11,599 related to
                  annual
                  incentive award trip, and payments of $10,661 for life, health
                  and
                  disability insurance premiums including the income tax gross up
                  on the
                  payment of the premiums.
 (7)
              Includes
                  a payment of $21,150 for unused vacation, a car allowance of $11,400,
                  compensation of $29,758 related to annual incentive award trip,
                  and
                  payments of $24,983 for life, health and disability insurance premiums
                  including the income tax gross up on the payment of the
                  premiums.
 (8)
              FAS
                  123R value of 50,000 shares of common stock issued in exchange
                  for the
                  forgiveness of the Company's obligation to pay Mr. Connelly a bonus
                  and
                  the cancellation of his stock options for 50,000 shares of
                  stock.
 (9)
              Severance
                  payment resulting from the Asset Sale completed on December 4,
                  2006.
 (10)
              Retention
                  bonus payable to Mr. Connelly on March 31,
                  2007.
 (11)
              Includes
                  payments of unused vacation pursuant to the terms of the Asset
                  Sale and
                  payments of life, health and disability insurance premiums plus
                  income tax
                  gross up on the payment of the premiums.
 (12)
              Stock
                  option cash out payment to holders of options that remained unexercised
                  on
                  the record date of the initial anticipated liquidating distribution
                  received from us, at the same time liquidating distributions are
                  made to
                  holders of common stock, cash payments equal to the product of
                  the total
                  number of shares that were subject to such option immediately prior
                  to the
                  closing of the Asset Sale, and the amount per share then being
                  distributed
                  in respect of our common stock. The first payment was made on January
                  5,
                  2007 contemporaneously with the dividend of $0.50 per share made
                  to
                  stockholders. An additional $0.02 to $0.04 per share could be distributed
                  in the future.
 (13)
              FAS
                  123R value of 50,000 shares of restricted common stock issued on
                  December
                  19, 2005 including the related tax gross-up.
 (14)
              Tax
                  gross up on restricted stock award on December 19,
                  2005.
 (15)
              Includes
                  payments of life, health and disability insurance premiums plus
                  income tax
                  gross up on the payment of the premiums.
 (16)
              Commissions
                  earned.
 (17)
              Aggregate
                  FAS 123R value of Named Executive's option awards at dates of
                  grant.
  32
 *Table
            of Contents*
 
 ***Grants
        of Plan Based Awards***
 
 No
        awards
        were granted to any named executive officer during the year ended December
        31,
        2006. Our CEO, CFO and the named executive officers held no stock options
        at
        December 31, 2006.
 
 ***Options
        Exercises and Stock Vested***
 **2006
                    OPTION EXERCISES AND STOCK VESTED TABLE****Option
                    Awards**
                
                **Stock
                    Awards****Name**
                
                **Number
                    of Shares Acquired on Exercise**
                  **(#)**
                
                **Value
                    Realized**
                  **on
                    Exercise**
                  **($)**
                
                **Number
                    of Shares Acquired on Vesting**
                  **(#)**
                
                **Value
                    Realized on Vesting**
                  **($)**Steven
                    B. SolomonChief
                    Executive Officer
                
                
                3,650,000
                
                $
                1,825,000
                (1)
                
                -
                
                
                -Richard
                    Connelly
                
                
                50,000
                
                
                25,000
                (1)Chief
                    Financial Officer
                
                
                375,000
                
                
                65,500
                (2)
                
                50,000
                (3)
                $
                25,000
                (4)Robert
                    HumphreyEVP
                    Chief Marketing Officer
                
                
                -
                
                
                -
                
                
                50,000
                (3)
                
                25,000
                (4)Randy
                    SchirmanEVP
                    Sales
                
                
                -
                
                
                -
                
                
                50,000
                (3)
                
                25,000
                (4)Robert
                    B. Dix, Jr.EVP
                    Government Affairs and Corporate Development
                
                
                -
                
                
                -
                
                
                50,000
                (3)
                
                25,000
                (4)
 (1)
        The
        value represents $0.50 per share distributed to shareholders in the first
        distribution on January 5, 2007 paid to the named executive on January 5,
        2007,
        the date of the first distribution to shareholders as a result of the Asset
        Sale
        completed on December 4, 2006. An additional $0.02 to $0.04 per share could
        be
        distributed in the future.
 
 (2)
        Pursuant to the terms of the Asset Sale, holders of in-the-money stock options
        were paid cash for the difference between the option exercise price and the
        $0.50 per share first distribution payment on January 5, 2007. An additional
        $0.02 to $0.04 per share could be distributed in the future.
 
 (3)
        Pursuant to the Asset Sale and deemed change of control on December 4, 2006
        the
        stock awards, granted in December 2005, became fully vested.
 
 (4)
        Represents $0.50 per share distributed to shareholders in the first distribution
        on January 5, 2007. An additional $0.02 to $0.04 per share could be distributed
        in the future.
 
 ***Pension
        Benefits and Nonqualified Deferred Compensation Plans***
 
 The
        Company does not have any pension plan or nonqualified deferred compensation
        plans. The CEO and named executives were eligible to participate in the
        Company's 401(k) Plan which is open to all employees. The Company did not
        make
        any matching contributions to the 401(k) Plan in 2006.
 
 ***Deemed
        Change of Control Payments***
 
 Deemed
        change of control and severance payments to the named executives resulting
        from
        the Asset Sale are disclosed in the "2006 Summary Compensation Table" under
        the
        column "All Other Compensation."
  33
 *Table
            of Contents*
  ***Directors
        Compensation***
 
 **2006
                  DIRECTOR COMPENSATION TABLE****Name**
              
              **Fees
                  Earned or Paid in Cash($)**
              
              **All
                  Other Compensation($)**
              
              **Total
                  ($)**Joe
                  M. Allbaugh
              
              $
              5,000
              
              $
              50,0001
              (1)
              $
              55,000Mark
                  Rogers
              
              
              5,000
              
              
              1,715
              (2)
              
              6,715Major
                  General (Ret) John Leide
              
              
              5,000
              
              
              548
                11,250
              (2)
                (4)
              
              5,548Chris
                  Economou
              
              
              5,000
              
              
              5,769
                11,250
              (3)
                (4)
              
              10,769
 
 (1)
        The
        cash value of 100,000 shares of common stock issued to Mr. Allbaugh in exchange
        for the forgiveness of the Company’s obligation to pay Mr. Allbaugh a bonus and
        the cancellation of his stock options for 100,000 shares of stock based on
        the
        value of the first distribution to shareholders on January 5, 2007 of $0.50
        per
        share. An additional $0.02 to $0.04 per share could be distributed in the
        future.
 
 (2)
        Travel expense reimbursements.
 
 (3)
        Payment of health insurance premiums.
 
 (4)
        Stock
        option cash out payment to holders of options that remained unexercised on
        the
        record date of the initial distribution to shareholders received from us,
        at the
        same time distributions are made to holders of common stock, cash payments
        equal
        to the product of the total number of shares that were subject to such option
        immediately prior to the closing of the Asset Sale, and the amount per share
        then being distributed in respect of our common stock. The first distribution
        payment was made on January 5, 2007 contemporaneously with the dividend of
        $0.50
        per share made to stockholders. An additional $0.02 to $0.04 per share could
        be
        distributed in the future.
 
 ***Report
        of the Compensation Committee*** **
 
 The
        Compensation Committee, which is composed solely of independent members of
        the
        Board of Directors, assists the Board in fulfilling its responsibilities
        with
        regard to compensation matters, and is responsible under its Committee charter
        for determining the compensation of our executive officers. In previous proxy
        statements, the Committee submitted reports that sought to describe in detail
        the philosophy and execution of our executive compensation. In accordance
        with
        SEC rules that are now effective for this and future proxy statements, a
        new
“Compensation Discussion and Analysis” section includes this information. In
        addition, the “Executive Compensation” section includes more information
        concerning the compensation of our listed officers than has been published
        previously. In this regard, the Compensation Committee has reviewed and
        discussed the “Compensation Discussion and Analysis” section with management,
        including our Chief Executive Officer, Steven B. Solomon. Based on this review
        and discussion, the Compensation Committee recommended to the Board of Directors
        that the “Compensation Discussion and Analysis” section be included in our 2006
        Annual Report on Form 10-K.
 
 **Compensation
        Committee**
 Joe
        M.
        Allbaugh
 Chris
        A.
        Economou
 Major
        General (Ret.) John Leide
 
 The
        foregoing Compensation Committee Report shall not be deemed “filed” with the
        Securities and Exchange Commission or subject to the liabilities of Section
        18
        of the Securities Exchange Act of 1934.
  34
 *Table
            of Contents*
  **ITEM
        12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
        MANAGEMENT AND RELATED STOCKHOLDER MATTERS**
 
 As
        of
        March 29, 2007, there were issued and outstanding approximately 34,318,230
        shares of common stock. There were no shares of Preferred Stock outstanding
        following their redemption in connection with the Asset Sale. There is no
        other
        class of voting security of CDSS issued or outstanding. The following table
        sets
        forth the number of shares of common stock beneficially owned as of March
        29,
        2007, by (i) each person known to the Company to own more than 5% of the
        common
        stock, (ii) each director, (iii) each executive officer and (iv) all directors,
        and 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 29, 2007 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.
 
 Name
                  and Address
              
              Number
                  of Shares Beneficially Owned
              
              Approximate
                  Percent Of ClassSteven
                  B. Solomon
              
              
              6,096,499
              
              
              17.76
              %Richard
                  Connelly
              
              
              164,250
              
              
              0.48
              %Major
                  General (Ret) John Leide78
                  Clubhouse DrivePalm
                  Coast, Florida 32137
              
              
              226,100
              (1)
              
              0.66
              %Joe
                  M. Allbaugh101
                  Constitution Avenue, NW, Suite 525 EastWashington,
                  DC 20001-2133
              
              
              375,000
              (1)
              
              1.09
              %Chris
                  Economou150
                  North Federal Highway, Suite 210Fort
                  Lauderdale, Florida 33301
              
              
              406,100
              (1)
              
              1.18
              %Mark
                  Rogers751
                  Laurel St., #119San
                  Carlos, California 94070
              
              
              242,875
              (2)
              
              0.71
              %All
                  Officers and directors as a group(6 people)
              
              
              7,510,824
              (3)
              
              21.48
              %
 
 (1)  Includes
        200,000 immediately exercisable stock options.
 
 (2)  Includes
        50,000 immediately exercisable stock options.
 
 (3)  Includes
        650,000 immediately exercisable stock options.
 
 **ITEM
        13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
        DIRECTOR INDEPENDENCE**
 
 On
        August
        11, 2006, the Company’s CEO loaned $3 million to the Company pursuant to an
        unsecured promissory note on terms and conditions approved by the disinterested
        directors of the Company. The note provided for 12% interest and a maturity
        date
        of January 12, 2007. On December 4, 2006 $3,614,411 was repaid to our CEO
        including the $3 million principal, $114,411 of accrued interest through
        December 4, 2006 and a prepayment fee of $500,000.
 
 To
        meet
        short term working capital requirements, the Company's CEO advanced
        approximately $1.7 million to the Company during the period January 1, to
        December 4, 2006. All amounts were repaid to our CEO prior to December 31,
        2006
        from the proceeds of the Asset Sale. From time-to time in 2005, the Company’s
        CEO, advanced funds to the Company to meet short-term working capital needs.
        The
        total amount advanced during 2005 was approximately $881,000, all of which
        was
        repaid to the CEO prior to December 31, 2005, except for approximately $81,000
        reimbursed to the CEO in January 2006.
 
 In
        connection with the Asset Sale completed on December 4, 2006, we entered
        into an
        Agreement dated as of December 4, 2006 (the "Agreement") with CT Holdings
        Enterprises (our former parent company). Pursuant to this
        Agreement:
 
 1.
              we
                  and CT Holdings canceled and terminated the Tax Disaffiliation
                  Agreement
                  dated as of May 17, 2002, and Transition Services Agreement dated
                  as of
                  May 17, 2002 between us and CT
                  Holdings;
 
 2.
              each
                  party released the other from all outstanding liabilities to each
                  other;
 
 3.
              we
                  assigned to CT Holdings the causes of action and rights of CDSS
                  related to
                  claims against CDSS's insurance carrier related to prior
                  litigation;
  35
 *Table
            of Contents*
  4.
              CT
                  Holdings waived any and all rights in and to any of the assets
                  transferred
                  by CDSS pursuant to the asset purchase agreement;
                  and
 
 5.
              CT
                  Holdings waived any prohibition or restriction to the transactions
                  contemplated by the asset purchase agreement set forth in the Agreement
                  and Plan of Distribution dated as of May 17, 2002 between us and
                  CT
                  Holdings or otherwise.
 
 Since
        May
        2002, CDSS has been a party to a transition services agreement with CT Holdings,
        its former parent. The agreement provided that CT Holdings and CDSS 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 CDSS
        may
        need transitional assistance and support. The transition services agreement
        provided generally that each of CDSS and CT Holdings would 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 extended
        for a
        one year term, but could be terminated earlier under certain circumstances,
        including a default, and or could be renewed for additional one-year terms.
        In
        August 2005, the Board of Directors approved the extension of the transition
        services agreement until May 2006, later extended to December 4, 2006.
        Initially, CT Holdings agreed to pay CDSS a monthly fee of $20,000, subject
        to
        adjustment on a quarterly basis. The fee was adjusted to $7,500 per month
        beginning in May 2004, and further adjusted to $10,000 per quarter in August
        2005. The Company believed that the terms and conditions of the transition
        services agreement were as favorable to CDSS as those available from unrelated
        parties for a comparable arrangement. During the period January 1, 2006 to
        December 4, 2006 the company had recorded approximately $36,700 of fees due
        from
        CT Holdings pursuant to the transition services agreement. During the year
        ended
        December 31, 2005 the Company had recorded approximately $65,000 of fees
        due
        from CT Holdings pursuant to the transition services agreement. Since the
        inception of the transition services agreement CDSS had not recognized any
        income from the fees charged to CT Holdings due to the uncertainty of
        collection, thereby including the full costs of the services provided to
        CT
        Holdings in general and administrative expense .
        As a
        result of the Asset Sale consummated on December 4, 2006, all amounts owed
        to
        CDSS by CT Holdings under the transition services agreement of approximately
        $687,000 were released and because CDSS had not recognized any income from
        the
        fees earned under the transition services agreement there was no impact to
        the
        statement of operations or financial condition of the Company for the
        forgiveness of the amounts owed to CDSS by CT Holdings.
 
 In
        April
        2003, a CT Holdings legal claim associated with a lawsuit was settled for
        $225,000 in cash. CDSS advanced $225,000 to CT Holdings in return for a demand
        note payable bearing interest at 12% per year and a release for any potential
        claims pertaining to the CT Holdings litigation. Accrued interest on the
        note at
        December 4, 2006 was approximately $102,000. Since CT Holdings has had a
        significant cash deficiency and stockholder’s deficit this demand note
        receivable plus accrued interest had been fully reserved as there was no
        assurance that the note would be collected. As a result of the Asset Sale
        consummated on December 4, 2006 all amounts owed to CDSS by CT Holdings were
        released and because CDSS had fully reserved the note plus all accrued interest
        through December 4, 2006 there was no impact to the statement of operations
        or
        financial condition of the Company for the forgiveness of the note and accrued
        interest owed to CDSS by CT Holdings.
 
 During
        the years ended December 31, 2006 and 2005, the Company incurred legal fees
        in
        the amount of approximately $565,000 and $263,000, respectively to a law
        firm in
        which an attorney (who is a partner and who was a former CT Holdings employee)
        is a relative of CDSS’s CEO. Amounts owed to the law firm at December 31, 2006
        and 2005, were $47,356 and $10,786, respectively.
 
 ***Director
        Independence.***
 
 Each
        of
        our non-employee directors qualifies as “independent” in accordance with the
        published listing requirements of NASDAQ: Major General (Retired) John Leide,
        Chris A. Economou, Mark Rogers and Joe M. Allbaugh. Mr. Solomon does not
        qualify
        as independent because he is a CDSS employees. The NASDAQ rules have both
        objective tests and a subjective test for determining who is an “independent
        director.” The objective tests state, for example, that a director is not
        considered independent if he or she is an employee of the company or is a
        partner in or executive officer of an entity to which the company made, or
        from
        which the company received, payments in the current or any of the past three
        fiscal years that exceed 5% of the recipient’s consolidated gross revenue for
        that year. The subjective test states that an independent director must be
        a
        person who lacks a relationship that, in the opinion of the Board, would
        interfere with the exercise of independent judgment in carrying out the
        responsibilities of a director.
  36
 *Table
            of Contents*
  **ITEM
        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
 
 Fees
        for
        services KBA Group LLP provided during fiscal years 2006 and 2005:
 
 (1)
        Audit
        Fees:
 
 Fees
        for
        audit services provided by KBA Group LLP total approximately $139,000 for
        2006
        and approximately $126,000 for 2005, including fees associated with the annual
        audit, the reviews of the Company’s quarterly reports on Form 10-Q and review of
        registration statements.
 
 (2)
        Non-Audit Related Fees:
 
 KBA
        Group
        LLP did not bill the Company any non-audit related fees during 2006 or
        2005.
 
 (3)
        Tax
        Fees:
 
 KBA
        Group
        LLP did not bill the Company any tax fees during 2006 or 2005.
 
 (4)
        All
        Other Fees:
 
 KBA
        Group
        LLP did not bill the Company any other fees during 2006 or 2005.
 
 (5)
        Audit
        Committee’s Pre-Approval Policies and Procedures
 
 (i)
        The
        audit committee of the board of directors approves the scope of services
        and
        fees of the independent Registered Public Accounting Firm on an annual basis,
        generally prior to the beginning of the services.
 
 (ii)
        The
        audit committee of the board of directors approved 100% of the fees for the
        services above.
  37
 *Table
            of Contents*
  **PART
        IV**
 
 **ITEM
        15. EXHIBITS AND FINANCIAL STATEMENT
        SCHEDULE**
 
 The
        exhibits listed in the accompanying index to exhibits are filed or incorporated
        by reference as part of this Annual Report.
 
 **Financial
        Statements**
 
 The
        following financial statements are filed as a part of this report under "Item
        8
        -Financial Statements and Supplementary Data" following the signature page
        of
        this report.
 
 Report
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Statement of Net Assets in Liquidation, December 31, 2006
              F-3Consolidated
                  Statement of Changes in Net Assets in Liquidation, from the period
                  December 5, 2006 to December 31, 2006
              F-4Consolidated
                  Balance Sheet, December 31, 2005
              F-5Consolidated
                  Statements of Operations for the period from January 1, 2006 to
                  December
                  4, 2006 and for the years ended December 31, 2005 and 2004
              F-6Consolidated
                  Statement of Stockholders' Equity (Deficit) for the period from
                  January 1,
                  2006 to December 4, 2006 and for the years ended December 31, 2005
                  and
                  2004
              F-7Consolidated
                  Statements of Cash Flows for the period January 1, 2006 toDecember
                  4, 2006 and for the years ended December 31, 2005 and 2004
              F-8Notes
                  to Consolidated Financial Statements
              F-9
 
 **Consolidated
        Financial Statement Schedule**
  The
        following consolidated financial statement schedule for the years ended December
        31, 2006, 2005 and 2004 is filed as part of this Form 10K and should be read
        in
        conjunction with CDSS's Consolidated Financial Statements. Schedules not
        included below have been omitted because they are not applicable or are not
        required or because the required information is included in the Consolidated
        Financial Statements or Notes thereto.
  **Schedule
        II - Valuation and Qualifying Accounts**
 
 Description
              
              Balance
                  at Beginning of Period-
              
              Additions
                  Charged to Costs and Expenses-
              
              Charged
                  to Other-
              
              Deductions
              
              Balance
                  at End of Period-**Year
                  ended December 31, 2006**Allowance
                  for doubtful accounts
              
              
              100,000
              
              
              -
              
              
              -
              
              
              (100,000)
              (a)
              
              -Allowance
                  for returns
              
              
              109,000
              
              
              -
              
              
              -
              
              
              (109,000)
              (b)
              
              -**Year
                  ended December 31, 2005**Allowance
                  for doubtful accounts
              
              
              100,000
              
              
              2,496
              
              
              -
              
              
              (2,496
              )
              
              100,000Allowance
                  for returns
              
              
              109,000
              
              
              -
              
              
              46,233
              
              
              (46,233
              )
              
              109,000**Year
                  ended December 31, 2004**Allowance
                  for doubtful accounts
              
              
              27,575
              
              
              61,946
              
              
              10,479
              
              
              -
              
              
              100,000Allowance
                  for returns
              
              
              50,925
              
              
              -
              
              
              68,554
              
              
              (10,479
              )
              
              109,000
 
 (a)
        $100,000 deduction consists of $45,157 write off of uncollectible account
        plus
        $54,843 reversal of 12.4.06 balance to Gain on Sale related to the sale of
        accounts receivable to McAfee
 (b)
        $109,000 deduction relates to reversal of 12.4.06 balance to Gain on Sale
        related to the sale of accounts receivable to McAfee
  38
 *Table
            of Contents*
  **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-K
        to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 Date: April
                  2, 2007
              CDSS
                  WIND DOWN INC.By:
                  /s/ STEVEN B. SOLOMONSteven
                  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-K 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:
 
 SIGNATURE
              
              TITLE
              
              DATE/s/
                  STEVEN B. SOLOMON
              
              President,
                  Chief Executive Officer and Director
              
              April
                  2, 2007Steven B. Solomon
              
              (Principal
                  Executive Officer)/s/
                  RICHARD CONNELLY
              
              Chief
                  Financial Officer
              
              April
                  2, 2007Richard Connelly
              
              (Principal
                  Financial and Accounting Officer)/s/
                  JOHN LEIDE
              
              Director
              
              April
                  2, 2007Major General(Ret)John Leide/s/
                  CHRIS A. ECONOMOU
              
              Director
              
              April
                  2, 2007Chris A. Economou/s/
                  MARK ROGERS
              
              Director
              
              April
                  2, 2007Mark Rogers/s/
                  JOE M. ALLBAUGH
              
              Director
              
              April
                  2, 2007Joe M. Allbaugh
  39
 *Table
            of Contents*
  **INDEX
        TO EXHIBITS**
 
 Exhibit
                  Number
              
              Description2.1
              
              Asset
                  Purchase Agreement, dated as of October 2, 2006, by and among Citadel
                  Security Software Inc., Citadel Security Software International,
                  LLC,
                  Canberra Operating, L.P., Canberra, LLC, McAfee, Inc., and McAfee
                  Security, LLC (filed as Exhibit 2.1 to the Form 8-K filed by the
                  Company
                  on October 3, 2006 and incorporated herein by
                  reference)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)3.3
              
              Certificate
                  of Designation, Rights and Preferences of Series A Convertible
                  Preferred
                  Stock (filed as Exhibit 3.1 to the Form 8-K filed by the Company
                  on
                  February 10, 2004 and incorporated by reference herein)3.4
              
              Certificate
                  of Designation, Rights and Preferences of Series B Convertible
                  Preferred
                  Stock (filed as Exhibit 3.1 to the Form 8-K filed by the Company
                  on May
                  10, 2005 and incorporated by reference herein)3.5
              
              Certificate
                  of Amendment of Amended and Restated Certificate of Incorporation
                  (filed
                  as Exhibit 3.1 to the Form S-3/A filed by the Company on August
                  1, 2005
                  and incorporated herein by reference)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)4.2
              
              Form
                  of Warrant to Purchase Common Stock (filed as Exhibit 4.1 to the
                  Form 8-K
                  filed by the Company on February 10, 2004 and incorporated by reference
                  herein)4.3
              
              Registration
                  Rights Agreement, dated as of February 9, 2004 by and among CDSS
                  and the
                  entities whose names appear on the signature pages thereof (filed
                  as
                  Exhibit 4.2 to the Form 8-K filed by the Company on February 10,
                  2004 and
                  incorporated by reference herein)4.4
              
              Form
                  of Senior Promissory Note (filed as exhibit 4.1 to the Form 8-K
                  filed by
                  the Company on September 8, 2004 and incorporated by reference
                  herein)4.5
              
              Loan
                  and Security Agreement between CDSS and Comerica Bank (filed as
                  Exhibit
                  10.1 to the Form 10-QSB filed by the Company on May 13, 2004 and
                  incorporated by reference herein)4.6
              
              Intellectual
                  Property Security Agreement between CDSS and Comerica Bank (filed
                  as
                  Exhibit 10.2 to the Form 10-QSB filed by the Company on May 13,
                  2004 and
                  incorporated by reference herein)4.7
              
              Form
                  of Warrant to Purchase Stock (filed as Exhibit 10.3 to the Form
                  10-QSB
                  filed by the Company on May 13, 2004 and incorporated by reference
                  herein)4.8
              
              First
                  Amendment to Loan and Security Agreement between Comerica and Comerica
                  Bank (filed as Exhibit 99.1 to the Form 8-K filed by the Company
                  on
                  December 30, 2004 and incorporated by reference herein)4.9
              
              Second
                  Amendment to Loan and Security Agreement between Comerica and Comerica
                  Bank (filed as Exhibit 4.9 to the Form 10-KSB filed by the Company
                  on
                  March 31,2005 and incorporated by reference herein)4.10
              
              Commitment
                  Letter dated February 28, 2006 between CDSS and Comerica Bank (filed
                  as
                  Exhibit 99.1 to the Form 8-K filed by the Company on February 28,
                  2005 and
                  incorporated herein by reference)4.11
              
              Form
                  of Warrant to Purchase Common Stock issued to Satellite (filed
                  as Exhibit
                  4.1 to the Form 8-K filed by the Company on May 10, 2005 and incorporated
                  herein by reference)4.12
              
              Registration
                  Rights Agreement dated as of May 9, 2005 between CDSS and Satellite
                  entities whose names appear on the signature pages thereof (filed
                  as
                  Exhibit 4.2 to the Form 8-K filed by the Company on May 10, 2005
                  and
                  incorporated herein by reference)
  40
 *Table
            of Contents*
  4.13
              
              Exchange
                  Agreement dated as of May 9, 2005 between CDSS and Satellite Strategic
                  Finance Associates, LLC (filed as Exhibit 4.3 to the Form 8-K filed
                  by the
                  Company on May 10, 2005 and incorporated herein by reference)4.14
              
              Form
                  of Series C Warrant to Purchase Common Stock (filed as Exhibit
                  4.4 to the
                  Form 8-K filed by the Company on May 10, 2005 and incorporated
                  herein by
                  reference)4.15
              
              Third
                  Amendment to Loan and Security Agreement dated as of June 30, 2005
                  between
                  CDSS and Comerica Bank (filed as Exhibit 99.1 to the Form 8-K filed
                  by the
                  Company on July 1, 2005 and incorporated herein by reference)4.16
              
              Certificate
                  of Amendment of Certificate of Designations, Preferences and Rights
                  of
                  Series A Convertible Preferred Stock (filed as Exhibit 4.12 to
                  the Form
                  S-3/A filed by the Company on August 1, 2005 and incorporated herein
                  by
                  reference)4.17
              
              Fourth
                  Amendment to Loan and Security Agreement dated as of August 22,
                  2005
                  between CDSS and Comerica Bank (filed as Exhibit 4.1 to the Form
                  8-K filed
                  by the Company on August 26, 2005 and incorporated herein by reference)4.18
              
              Warrant
                  (filed as Exhibit 4.2 to the Form 8-K filed by the Company on August
                  26,
                  2005 and incorporated herein by reference)4.19
              
              Fifth
                  Amendment to Loan and Security Agreement dated as of September
                  15, 2005
                  between CDSS and Comerica Bank (filed as Exhibit 4.1 to the Form
                  8-K filed
                  by the Company on September 16, 2005 and incorporated herein by
                  reference)4.20
              
              Warrant
                  to Purchase Stock (filed as Exhibit 4.2 to the Form 8-K filed by
                  the
                  Company on September 16, 2005 and incorporated herein by reference)4.21
              
              Loan
                  and Security Agreement dated as of October 10, 2005 between CDSS
                  and
                  Lawrence Lacerte (filed as Exhibit 4.1 to the Form 8-K filed by
                  the
                  Company on October 12, 2005 and incorporated herein by reference)4.22
              
              Intellectual
                  Property Security Agreement dated as of October 10, 2005 between
                  CDSS and
                  Lawrence Lacerte (filed as Exhibit 4.2 to the Form 8-K filed by
                  the
                  Company on October 12, 2005 and incorporated herein by reference)4.23
              
              Agreement,
                  dated as of October 2, 2006, by and among Citadel Security Software
                  Inc.,
                  Satellite Strategic Finance Associates, LLC and Satellite Strategic
                  Finance Partners, Ltd. (filed as Exhibit 4.1 to the Form 8-K filed
                  by the
                  Company on October 3, 2006 and incorporated herein by
                  reference)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
              
              Office
                  Lease Agreement between CDSS and Metropolitan Life Insurance Company
                  (filed as Exhibit 10.1 to the Form 10-QSB filed with the Commission
                  on
                  August 16, 2004 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)
  41
 *Table
            of Contents*
 
 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)10.11
              
              Form
                  of Amendment No. 1 to Stock Purchase Warrant issued by the Registrant
                  to
                  certain accredited investors (filed as Exhibit 99.1 to the Registrant’s
                  Current Report on Form 8-K filed with the Commission April 21,
                  2003 and
                  incorporated by reference herein)10.12
              
              Form
                  of Stock Purchase Warrant issued by the Registrant to certain accredited
                  investors (filed as Exhibit 99.2 to the Registrant’s Current Report on
                  Form 8-K filed with the Commission April 21, 2003 and incorporated
                  by
                  reference herein)10.13
              
              Engagement
                  letter, dated December 10, 2002, between DHR International Inc.
                  and the
                  Registrant. (filed as Exhibit 10.13 to the Company’s Registration
                  Statement on Form SB-2 (registration number 333- 104777) filed
                  with the
                  Commission on June 30, 2003 and incorporated by reference
                  herein)10.14
              
              Advisory
                  Agreement, dated November 11, 2002, between Merriman Curhan Ford
& Co.
                  (formerly known as RTX Securities Corporation) and the Registrant.
                  (filed
                  as Exhibit 10.14 to the Company’s Registration Statement on Form SB-2
                  (registration number 333- 104777) filed with the Commission on
                  June 30,
                  2003 and incorporated by reference herein)10.15
              
              Engagement
                  letter related to private placement dated December 9, 2002 between
                  Merriman Curhan Ford & Co. (formerly known as RTX Securities
                  Corporation) and the Registrant. (filed as Exhibit 10.15 to the
                  Company’s
                  Registration Statement on Form SB-2 (registration number 333- 104777)
                  filed with the Commission on June 30, 2003 and incorporated by
                  reference
                  herein)10.16
              
              Warrant
                  Agreement between the Registrant and Merriman Curhan Ford & Co. dated
                  January 29,2003. (filed as Exhibit 10.16 to the Company’s Registration
                  Statement on Form SB-2 (registration number 333- 104777) filed
                  with the
                  Commission on June 30, 2003 and incorporated by reference herein)10.17
              
              Promissory
                  Note, dated September 11, 2002, payable by the Registrant to the
                  order of
                  Eagle Equity I, L.P. (filed as Exhibit 10.17 to the Company’s Registration
                  Statement on Form SB-2 (registration number 333- 104777) filed
                  with the
                  Commission on June 30, 2003 and incorporated by reference
                  herein)10.18
              
              Stock
                  Purchase Agreement, dated September 11, 2002, among the Registrant,
                  Lawrence E. Steinberg, Michael A. Hershman, and Ari Reubin. (filed
                  as
                  Exhibit 10.18 to the Company’s Registration Statement on Form SB-2
                  (registration number 333- 104777) filed with the Commission on
                  June 30,
                  2003 and incorporated by reference herein)10.19
              
              Promissory
                  Note, dated December 9, 2002, payable by the Registrant to the
                  order of
                  Ken Schnitzer, including Guaranty by Steven B. Solomon, Chief Executive
                  Officer of the Registrant in favor of Ken Schnitzer. (filed as
                  Exhibit
                  10.19 to the Company’s Registration Statement on Form SB-2 (registration
                  number 333- 104777) filed with the Commission on June 30, 2003
                  and
                  incorporated by reference herein)10.20
              
              Notice
                  of Conversion, dated April 23, 2003, by Kenneth Schnitzer. (filed
                  as
                  Exhibit 10.20 to the Company’s Registration Statement on Form SB-2
                  (registration number 333- 104777) filed with the Commission on
                  June 30,
                  2003 and incorporated by reference herein)10.21
              
              Option
                  agreement dated November 4, 2002 between the registrant and Marc
                  Still.
                  (filed as Exhibit 10.21 to the Company’s Registration Statement on Form
                  SB-2 (registration number 333- 104777) filed with the Commission
                  on June
                  30, 2003 and incorporated by reference herein10.22
              
              Promissory
                  Note dated June 5, 2002 payable by the Registrant to Aspen Advisors,
                  LP.
                  (filed as Exhibit 10.22 to the Company’s Registration Statement on Form
                  SB-2 (registration number 333- 104777) filed with the Commission
                  on June
                  30, 2003 and incorporated by reference herein)10.23
              
              Consultant
                  Agreement dated April 24, 2003 between the Registrant and CEOcast,
                  Inc.
                  (filed as Exhibit 10.23 to the Company’s Registration Statement on Form
                  SB-2 (registration number 333- 104777) filed with the Commission
                  on June
                  30, 2003 and incorporated by reference herein)
  42
 *Table
            of Contents*
 
 10.24
              
              Warrant
                  Agreement between the Registrant and Merriman Curhan Ford & Co. dated
                  April 21, 2003. (filed as Exhibit 10.24 to the Company’s Registration
                  Statement on Form SB-2 (registration number 333- 104777) filed
                  with the
                  Commission on June 30, 2003 and incorporated by reference
                  herein)10.25
              
              Securities
                  Purchase Agreement, dated as of February 9, 2004 by and among CDSS
                  and the
                  entities whose names appear on the signature pages thereof (filed
                  as
                  Exhibit 10.1 to the Form 8-K filed by the Company on February 10,
                  2004 and
                  incorporated by reference herein)10.26
              
              Employment
                  Agreement dated as of November 17, 2003 between Registrant and
                  Ed Krupa
                  (filed as Exhibit 10.26 to the Form 10-KSB filed with the Commission
                  on
                  March 15, 2004 and incorporated by reference)10.27
              
              Employment
                  Agreement dated as of April 1, 2003 between Registrant and Richard
                  Connelly (filed as Exhibit 10.27 to the Form 10-KSB filed with
                  the
                  Commission on March 15, 2004 and incorporated by
                  reference)10.28
              
              Amendment
                  No. 1 to Employment Agreement dated as of October 1, 2003 between
                  Registrant and Steven B. Solomon (filed as Exhibit 10.28 to the
                  Form
                  10-KSB filed with the Commission on March 15, 2004 and incorporated
                  by
                  reference)10.29
              
              Amendment
                  No. 1 to Employment Agreement dated as of October 1, 2003 between
                  Registrant and Richard Connelly (filed as Exhibit 10.29 to the
                  Form 10-KSB
                  filed with the Commission on March 15, 2004 and incorporated by
                  reference)10.30
              
              Software
                  License and Service Agreement between CDSS and DigitalNet Government
                  Solutions, LLC (filed as Exhibit 10.1 the Form 10-QSB filed with
                  the
                  Commission on November 15, 2004 and incorporated herein by
                  reference)10.31
              
              Securities
                  Purchase Agreement dated as of May 9, 2005 between CDSS and entities
                  whose
                  names appear on the signature pages thereof (filed as Exhibit 10.1
                  to the
                  Form 8-K filed by the Company on May 10, 2005 and incorporated
                  herein by
                  reference)10.32
              
              Consultant
                  Agreement dated as of April 24, 2005 between CDSS and CEOcast,
                  Inc. (filed
                  as Exhibit 10.2 to the Form S-3 filed by the Company on June 8,
                  2005 and
                  incorporated herein by reference)10.33
              
              Factoring
                  Agreement between the Company and Allied Capital Partners, L.P.
                  (filed as
                  Exhibit 4.1 to the Form 8-K filed by the Company on October 31,
                  2005 and
                  incorporated herein by reference)10.34
              
              Software
                  License and Service Agreement between CDSS and DigitalNet Government
                  Solutions, LLC (filed as Exhibit 10.1 the Form 10-QSB filed with
                  the
                  Commission on November 15, 2004 and incorporated herein by reference)10.35
              
              Form
                  of Change of Control Agreement for each of Messrs. Carl Banzhof,
                  Richard
                  Connelly, Robert Dix, Dave Helffrich, Robert Humphrey and Randy
                  Schirman
                  (filed as Exhibit 10.1 to the Form 8-K filed by the Company on
                  December
                  21, 2005 and incorporated herein by reference)10.36
              
              Form
                  of Change of Control Agreement for Steven B. Solomon (filed as
                  Exhibit
                  10.2 to the Form 8-K filed by the Company on December 21, 2005
                  and
                  incorporated herein by reference)10.37
              
              Form
                  of Restricted Stock Award Agreement for Executives (filed as Exhibit
                  10.3
                  to the Form 8-K filed by the Company on December 21, 2005 and incorporated
                  herein by reference)10.38
              
              Promissory
                  Note, dated as of August 11, 2006 payable to the order of Steven
                  B.
                  Solomon (filed as Exhibit 10.1 to the Form 10-Q filed by the Company
                  for
                  the quarter ended June 30, 2006 and incorporated herein by
                  reference)10.39
              
              Release
                  and Settlement Agreement by and among Plaintiff Meyers Associates,
                  L.P.
                  f/k/a Roan-Meyers Associates, L.P. and f/k/a Janssen-Meyers Associates,
                  L.P. and their related parties on the one hand and Defendants CT
                  Holdings
                  Enterprises Inc., f/k/a CT Holdings, Inc. f/k/a Citadel Technology,
                  Inc.
                  and f/k/a Citadel Computer Systems, Inc., Citadel, Steven B. Solomon,
                  Chris A. Economou, Lawrence Lacerte, Mark Rogers, Phillip J. Romano,
                  Axel
                  Sawallich, George Sharp and Gilbert Gertner on the other hand (filed
                  as
                  Exhibit 10.1 to the Form 8-K filed by the Company on August 29,
                  2006 and
                  incorporated herein by reference)10.40
              
              Form
                  of Support Agreement between each director and executive officer
                  of
                  Citadel Security Software Inc. and McAfee, Inc., dated as of October
                  2,
                  2006 (filed as Exhibit 10.1 to the Form 8-K filed by the Company
                  on
                  October 3, 2006 and incorporated herein by
                  reference)
  43
 *Table
            of Contents*
 
 10.41
              
              Amendment
                  to Agreements with Steven B. Solomon, between Steven B. Solomon
                  and
                  Citadel Security Software Inc., dated as of November 3, 2006 (filed
                  as
                  Exhibit 10.1 to the Form 8-K filed by the Company on November 9,
                  2006 and
                  incorporated herein by reference)10.42
              
              Amendment
                  to Agreements with Richard Connelly, between Richard Connelly and
                  Citadel
                  Security Software Inc., dated as of November 3, 2006 (filed as
                  Exhibit
                  10.2 to the Form 8-K filed by the Company on November 9, 2006 and
                  incorporated herein by reference)10.43
              
              Amendment
                  to Agreements with Carl Banzhof, between Carl Banzhof and Citadel
                  Security
                  Software Inc., dated as of November 3, 2006 (filed as Exhibit 10.3
                  to the
                  Form 8-K filed by the Company on November 9, 2006 and incorporated
                  herein
                  by reference)10.44
              
              Amendment
                  to Agreements with David Helffrich, between David Helffrich and
                  Citadel
                  Security Software Inc., dated as of November 3, 2006 (filed as
                  Exhibit
                  10.4 to the Form 8-K filed by the Company on November 9, 2006 and
                  incorporated herein by reference)10.45
              
              Amendment
                  to Agreements with Robert Humphrey, between Robert Humphrey and
                  Citadel
                  Security Software Inc., dated as of November 3, 2006 (filed as
                  Exhibit
                  10.5 to the Form 8-K filed by the Company on November 9, 2006 and
                  incorporated herein by reference)10.46
              
              Amendment
                  to Agreements with Robert Dix, between Robert Dix and Citadel Security
                  Software Inc., dated as of November 3, 2006 (filed as Exhibit 10.6
                  to the
                  Form 8-K filed by the Company on November 9, 2006 and incorporated
                  herein
                  by reference)10.47
              
              Form
                  of Option Agreement Amendment between Citadel Security Software
                  Inc. and
                  each of Chris Economou, Jack Leide, Carl Banzhof and Richard Connelly
                  (filed as Exhibit 10.7 to the Form 8-K filed by the Company on
                  November 9,
                  2006 and incorporated herein by reference)10.48
              
              Amendment
                  to Agreement with Joe Allbaugh, between Citadel Security Software
                  Inc. and
                  Joe Allbaugh, dated as of November 3, 2006 (filed as Exhibit 10.8
                  to the
                  Form 8-K filed by the Company on November 9, 2006 and incorporated
                  herein
                  by reference)10.49
              
              Amendment
                  to Agreement with Randy Schirman, between Randy Schirman and Citadel
                  Security Software Inc., dated as of December 2, 2006 (filed as
                  Exhibit
                  10.1 to the Form 8-K filed by the Company on December 8, 2006 and
                  incorporated herein by reference)21
              
              Subsidiaries
                  of the Registrant, filed herewith.24.1
              
              Power
                  of Attorney (included as part of the signature page of this Annual
                  Report
                  on Form 10-K).31.1
              
              Certification
                  of Principal Executive Officer, filed herewith.31.2
              
              Certification
                  of Principal Financial Officer, filed herewith.32.1
              
              Certification
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to 18
                  U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002, filed herewith.
  44
 *Table
            of Contents*
  **CDSS
        WIND DOWN INC.**
 **DECEMBER
        31, 2006**
 **TABLE
        OF CONTENTS**
  PageReport
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Statement of Net Assets in Liquidation, December 31, 2006
              F-3Consolidated
                  Statement of Changes in Net Assets in Liquidation, from the period
                  December 5, 2006 to December 31, 2006
              F-4Consolidated
                  Balance Sheet, December 31, 2005
              F-5Consolidated
                  Statements of Operations for the period from January 1, 2006 to
                  December
                  4, 2006 and for the years ended December 31, 2005 and 2004
              F-6Consolidated
                  Statement of Stockholders' Equity (Deficit) for the period from
                  January 1,
                  2006 to December 4, 2006 and for the years ended December 31, 2005
                  and
                  2004
              F-7Consolidated
                  Statements of Cash Flows for the period January 1, 2006 to December
                  4,
                  2006 and for the years ended December 31, 2005 and 2004
              F-8Notes
                  to Consolidated Financial Statements
              F-9
  F
            -
            1
 *Table
            of Contents*
  REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 The
        Board
        of Directors and Stockholders
 CDSS
        Wind
        Down Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of CDSS Wind Down Inc.
        and
        subsidiaries, formerly Citadel Security Software Inc., (the “Company”) as
        of December 31, 2005 and the consolidated statements of operations,
        stockholders’ equity (deficit) and cash flows for the years ended December 31,
        2005 and 2004. We have also audited the consolidated statements of operations,
        stockholders’ equity (deficit) and cash flows for the period from January 1,
        2006 to December 4, 2006 as well as the consolidated statement of net assets
        in
        liquidation as of December 31, 2006, and the related consolidated statement
        of
        changes in net assets in liquidation for the period from December 5, 2006
        to
        December 31, 2006. Our audits also included the financial statement schedule
        appearing under Item 15. These consolidated financial statements and schedule
        are the responsibility of the Company's management. Our responsibility is
        to
        express an opinion on these financial statements and schedule based on our
        audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. The Company is not
        required to have, nor were we engaged to perform, an audit of their internal
        control over financial reporting. Our audits included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit includes examining,
        on a test basis, evidence supporting the amounts and disclosures in the
        financial statements, 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.
 
 As
        described in Note A to the consolidated financial statements, the stockholders
        of the Company approved a plan of liquidation and dissolution on December
        1,
        2006, and the Company commenced liquidation shortly thereafter. As a result,
        the
        Company has changed its basis of accounting for the period subsequent to
        December 4, 2006, from the going-concern basis to a liquidation
        basis.
 
 As
        described in Note A to the consolidated financial statements, effective January
        1, 2006, the Company adopted Statement of Financial Accounting Standards
        No.
        123R, Share-Based Payment.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of CDSS Wind
        Down
        Inc. and subsidiaries as of December 31, 2005 and the consolidated results
        of
        their operations and their cash flows for each of the years ended December
        31,
        2005 and 2004, and for the period from January 1, 2006 to December 4, 2006,
        their net assets in liquidation as of December 31, 2006, and the changes
        in net
        assets in liquidation for the period from December 5, 2006 to December 31,
        2006,
        in conformity with accounting principles generally accepted in the United
        States
        of America applied on the basis described in the preceding paragraph. Also,
        in
        our opinion, the related financial statement schedule, when considered in
        relation to the consolidated financial statements as a whole, presents fairly,
        in all material respects, the information set forth therein.
 
 
 /s/
        KBA
        GROUP LLP
 Dallas,
        Texas
 April
        2, 2007
  F
            -
            2
 *Table
            of Contents*
  CDSS
        WIND
        DOWN INC.
 CONSOLIDATED
        STATEMENT OF NET ASSETS IN LIQUIDATION
 
 DECEMBER
                  31, 2006ASSETSCash
                  and cash equivalents
              
              $
              28,053,007Prepaid
                  expenses and other current assets
              
              
              188,331Other
                  current assets
              
              
              52,000TOTAL
                  ASSETS
              
              $
              28,293,338LIABILITIESAccounts
                  payable and accrued expenses
              
              $
              424,120Accrued
                  payroll tax liabilities
              
              
              63,154Accrued
                  stock option cash-out liability
              
              
              255,510Accrued
                  officer severance and bonus
              
              
              6,306,536Estimated
                  settlement of operating lease liabilities
              
              
              1,554,017Estimated
                  costs to be incurred during liquidation
              
              
              1,100,073Income
                  taxes payable
              
              
              893,921COMMITMENTS
                  AND CONTINGENCIESTOTAL
                  LIABILITIES
              
              $
              10,597,331NET
                  ASSETS IN LIQUIDIATION
              
              $
              17,696,007
 
 The
        accompanying notes are an integral part of this consolidated financial
        statement.
  F
            -
            3
 *Table
            of Contents*
  CDSS
        WIND
        DOWN INC.
 CONSOLIDATED
        STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
 
 PERIOD
                  FROM DECEMBER 5, 2006 to DECEMBER 31, 2006Stockholders’
                  equity at December 4, 2006
              
              $
              19,377,524Liquidation
                  basis adjustments:Adjust
                  liabilities to estimated settlement amounts
              
              
              513,211Accrue
                  estimated net lease settlement costs
              
              
              (1,014,275
              )Wind-down
                  operating expenses
              
              
              (1,307,242
              )Interest
                  income
              
              
              126,789Net
                  assets in liquidation, December 31, 2006
              
              $
              17,696,007
 
 The
        accompanying notes are an integral part of this consolidated financial
        statement.
  F
            -
            4
 *Table
            of Contents*
  CDSS
        WIND
        DOWN INC.
 CONSOLIDATED
        BALANCE SHEET
 (GOING
        CONCERN BASIS)
 
 DECEMBER
                  31, 2005ASSETSCURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              1,320,376Accounts
                  receivable-trade, less allowance of $209,000
              
              
              2,570,090Prepaid
                  expenses and other current assets
              
              
              932,591Total
                  current assets
              
              
              4,823,057PROPERTY
                  AND EQUIPMENT,net
                  of accumulated depreciation of $2,483,398
              
              
              5,126,228CAPITALIZED
                  SOFTWARE DEVELOPMENT COSTS,net
                  of accumulated amortization of $6,625,180
              
              
              4,431,322OTHER
                  ASSETS
              
              
              84,812TOTAL
                  ASSETS
              
              $
              14,465,419LIABILITIES
                  AND STOCKHOLDERS’ DEFICITCURRENT
                  LIABILITIESFactoring
                  line of credit
              
              $
              924,777Accounts
                  payable and accrued expenses
              
              
              3,721,551Accrued
                  compensation and payroll tax obligations
              
              
              1,245,401Current
                  portion of deferred revenue
              
              
              4,680,328Total
                  current liabilities
              
              
              10,572,057LONG-TERM
                  DEBT, LESS CURRENT PORTION
              
              
              3,750,000DEFERRED
                  REVENUE, LESS CURRENT PORTION
              
              
              398,342OTHER
                  NON-CURRENT LIABILITIES
              
              
              609,912COMMITMENTS
                  AND CONTINGENCIESCONVERTIBLE
                  PREFERRED STOCK, $1,000 stated value per share;1,000,000
                  shares authorized;Series
                  A Preferred Stock, 15,000 shares issued and outstanding at December
                  31,
                  2005, liquidation preference of $15,000,000
              
              
              10,422,299Series
                  B Preferred Stock, 7,000 shares issued and outstanding at December
                  31,
                  2005, liquidation preference of $7,000,000
              
              
              5,247,688COMMON
                  STOCK, $.01 par value per share; 100,000,000 shares authorized;
                  30,518,230
                  shares issued and outstanding
              
              
              305,182ADDITIONAL
                  PAID-IN CAPITAL
              
              
              46,179,211ACCUMULATED
                  DEFICIT
              
              
              (63,019,272
              )Total
                  Stockholders’ Deficit
              
              
              (864,892
              )TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIT
              
              $
              14,465,419
 
 The
        accompanying notes are an integral part of this consolidated financial
        statement.
  F
            -
            5
 *Table
            of Contents*
  CDSS
        WIND
        DOWN INC.
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 (GOING
        CONCERN BASIS)
 
 PERIOD
                  FROM
                JANUARY
                  1, 2006 to
                DECEMBER
                  4, 2006
              
              YEAR
                  ENDED
                DECEMBER
                  31, 2005
              
              YEAR
                  ENDED
                DECEMBER
                  31,2004RevenueLicense
                  fees
              
              $
              4,937,764
              
              $
              2,568,453
              
              $
              12,361,585Content,
                  subscription, and customer support services
              
              
              6,184,723
              
              
              4,867,542
              
              
              2,786,937Professional
                  services
              
              
              1,069,366
              
              
              2,851,100
              
              
              104,633Total
                  revenue
              
              
              12,191,853
              
              
              10,287,095
              
              
              15,253,155Costs
                  of revenueSoftware
                  amortization
              
              
              2,191,690
              
              
              2,192,115
              
              
              1,287,927Content,
                  subscription, and customer support services costs
              
              
              1,339,799
              
              
              1,667,581
              
              
              1,478,633Professional
                  services costs
              
              
              316,178
              
              
              645,202
              
              
              29,028Shipping
                  and other costs
              
              
              219,838
              
              
              161,805
              
              
              36,496Total
                  costs of revenue
              
              
              4,067,505
              
              
              4,666,703
              
              
              2,832,084Operating
                  expensesSelling,
                  general and administrative expense
              
              
              15,434,977
              
              
              19,577,780
              
              
              17,550,485Product
                  development expense
              
              
              2,390,390
              
              
              2,443,864
              
              
              1,995,612Depreciation
                  and amortization of property and equipment
              
              
              1,455,112
              
              
              1,756,955
              
              
              670,782Litigation
                  settlement
              
              
              1,250,000
              
              
              -
              
              
              -Officer
                  severance and bonus
              
              
              6,306,536
              
              
              -
              
              
              -Write-off
                  of property and equipment
              
              
              -
              
              
              -
              
              
              77,786Total
                  operating expenses
              
              
              26,837,015
              
              
              23,778,599
              
              
              20,294,665Operating
                  loss
              
              
              (18,712,667
              )
              
              (18,158,207
              )
              
              (7,873,594
              )Interest
                  income
              
              
              16,515
              
              
              67,588
              
              
              107,261Interest
                  expense (including $614,411 to related parties)
              
              
              (1,433,208
              )
              
              (472,260
              )
              
              (82,612
              )Gain
                  related to sale of assets
              
              
              55,546,329
              
              
              -
              
              
              -Other
                  income
              
              
              2,360
              
              
              -
              
              
              9,920Income
                  (loss) before income taxes
              
              
              35,419,329
              
              
              (18,562,879
              )
              
              (7,839,025
              )Provision
                  for income taxes
              
              
              (893,921
              )
              
              -
              
              
              -Net
                  income (loss)
              
              
              34,525,408
              
              
              (18,562,879
              )
              
              (7,839,025
              )Preferred
                  stock dividends
              
              
              -
              
              
              (268,750
              )
              
              (664,940
              )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
              
              
              -Non-cash
                  fair value adjustment for change in Series A preferred stock conversion
                  price
              
              
              -
              
              
              (1,064,000
              )
              
              -Non-cash
                  accretion of preferred stock beneficial conversion feature
              
              
              -
              
              
              (769,252
              )
              
              (215,397
              )Non-cash
                  fair value adjustment for change in exercise price of
                  warrants
              
              
              -
              
              
              (43,226
              )
              
              -Net
                  income (loss) to common shareholders
              
              $
              34,525,408
              
              $
              (19,156,907
              )
              $
              (8,719,362
              )Net
                  income (loss) per share to common shareholders-
                  basic
              
              $
              1.13
              
              $
              (0.
                  64
              )
              $
              (0.30
              )-
                  diluted
              
              $
              0.83
              
              $
              (0.
                  64
              )
              $
              (0.30
              )Weighted
                  average common shares outstanding-
                  basic
              
              
              30,518,230
              
              
              29,976,179
              
              
              29,336,894-
                  diluted
              
              
              41,461,599
              
              
              29,976,179
              
              
              29,336,894
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F
            -
            6
 *Table
            of Contents*
  
 CDSS
        WIND
        DOWN INC.
 CONSOLIDATED
        STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
 (GOING
        CONCERN BASIS)
 
 Preferred
                  StockSeries
                  A
              
              Series
                  B
              
              Common
                  StockNumber
                  ofShares
              
              Amount
              
              Number
                  ofShares
              
              Amount
              
              Number
                  ofShares
              
              Amount
              
              AdditionalPaid-in Capital
              
              AccumulatedDeficit
              
              TotalBalances
                  at December 31, 2003
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              
              27,830,511
              
              $
              278,305
              
              $
              41,109,824
              
              $
              (36,617,368
              )
              $
              4,770,761Issuance
                  of comvertible preferred stock net of transcation fees
              
              
              15,000
              
              
              13,797,283
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,797,283Fair
                  value of warrants issued in conjunction with preferred
                  stock
              
              
              
              
              
              (2,326,184
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,326,184
              
              
              
              
              
              -Fair
                  value of beneficial conversion feature of convertible preferred
                  stock
              
              
              
              
              
              (984,649
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              984,649
              
              
              
              
              
              -Accretion
                  of beneficial conversion feature
              
              
              
              
              
              215,397
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (215,397
              )
              
              
              
              
              -Preferred
                  stock dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (664,939
              )
              
              
              
              
              (664,939
              )Common
                  stock issued pursuant to the exercise of stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              350,219
              
              
              3,502
              
              
              332,555
              
              
              
              
              
              336,057Common
                  stock issued pursuant to the exercise of warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              165,000
              
              
              1,650
              
              
              214,900
              
              
              
              
              
              216,550Exercise
                  of conversion right
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,500,000
              
              
              15,000
              
              
              (15,000
              )
              
              
              
              
              -Fair
                  value of warrants issued in conjunction with bank lines of
                  credit
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              45,838
              
              
              
              
              
              45,838Fair
                  value of stock options with modified terms issued to a former
                  employee
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              129,995
              
              
              
              
              
              129,995Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,839,025
              )
              
              (7,839,025
              )Balances
                  at December 31, 2004
              
              
              15,000
              
              
              10,701,847
              
              
              -
              
              
              -
              
              
              29,845,730
              
              
              298,457
              
              
              44,248,609
              
              
              (44,456,393
              )
              
              10,792,520Fair
                  value adjustment for issuance of exchanged warrants
              
              
              
              
              
              (274,800
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              274,800
              
              
              
              
              
              -Fair
                  value adjustment for Series A preferred stock dividend
                  waiver
              
              
              
              
              
              (1,826,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,826,000
              
              
              
              
              
              -Fair
                  value adjustment for change in Series A preferred stock conversion
                  price
              
              
              
              
              
              1,064,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,064,000
              )
              
              
              
              
              -Fair
                  value adjustment for change in exercise price of warrants issued
                  in
                  conjunction with preferred stock
              
              
              
              
              
              (12,000
              )
              
              
              
              
              (31,226
              )
              
              
              
              
              
              
              
              43,226
              
              
              
              
              
              -Issuance
                  of Series B convertible preferred stock, net of transcation
                  fees
              
              
              
              
              
              
              
              
              7,000
              
              
              6,902,396
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,902,396Fair
                  value of warrants issued in conjunction with Series B preferred
                  stock
              
              
              
              
              
              
              
              
              
              
              
              (1,623,482
              )
              
              
              
              
              
              
              
              1,623,482
              
              
              
              
              
              -Accretion
                  of preferred stock beneficial conversion feature
              
              
              
              
              
              769,252
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (769,252
              )
              
              
              
              
              -Fair
                  value of warrants issued in conjunction with bank
                  covenants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              64,321
              
              
              
              
              
              64,321Preferred
                  stock dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (268,750
              )
              
              
              
              
              (268,750
              )Common
                  stock issued pursuant to the exercise of stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              112,500
              
              
              1,125
              
              
              34,875
              
              
              
              
              
              36,000Common
                  stock issued in lieu of cash for director's fee
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              110,000
              
              
              1,100
              
              
              86,900
              
              
              
              
              
              88,000Common
                  stock issued in lieu of cash for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              50,000
              
              
              500
              
              
              46,000
              
              
              
              
              
              46,500Restricted
                  common stock issued as compensation to directors and
                  officers
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              400,000
              
              
              4,000
              
              
              144,000
              
              
              
              
              
              148,000Deferred
                  compensation to officers
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (111,000
              )
              
              
              
              
              (111,000
              )Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (18,562,879
              )
              
              (18,562,879
              )Balances
                  at December 31, 2005
              
              
              15,000
              
              
              10,422,299
              
              
              7,000
              
              
              5,247,688
              
              
              30,518,230
              
              
              305,182
              
              
              46,179,211
              
              
              (63,019,272
              )
              
              (864,892
              )Redemption
                  of preferred stock
              
              
              (15,000
              )
              
              (10,422,299
              )
              
              (7,000
              )
              
              (5,247,688
              )
              
              
              
              
              
              
              
              (3,170,013
              )
              
              
              
              
              (18,840,000
              )Stock-based
                  compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,800,000
              
              
              38,000
              
              
              4,408,008
              
              
              
              
              
              4,446,008Deferred
                  compensation to officers
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              111,000
              
              
              
              
              
              111,000Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              34,525,408
              
              
              34,525,408Balance
                  at December 4, 2006
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              
              34,318,230
              
              $
              343,182
              
              $
              47,528,206
              
              $
              (28,493,864
              )
              $
              19,377,524
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F
            -
            7
 *Table
            of Contents*
  CDSS
        WIND
        DOWN INC.
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (GOING
        CONCERN BASIS)
 
 PERIODFROM
                JANUARY
                  1, 2006 to
                DECEMBER
                  4, 2006 YEAR
              
              YEAR
                  ENDED
                DECEMBER
                  31, 2005
              
              YEAR
                  ENDED
                DECEMBER
                  31,2004CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income (loss)
              
              $
              34,525,408
              
              $
              (18,562,879
              )
              $
              (7,839,025
              )Adjustments
                  to reconcile net income (loss) to net cash used in operating
                  activities:Gain
                  on sale of assets to McAfee
              
              
              (55,546,329
              )
              
              -
              
              
              -Depreciation
                  and amortization
              
              
              3,646,802
              
              
              3,949,070
              
              
              1,958,709Write-off
                  of property and equipment
              
              
              -
              
              
              -
              
              
              77,786Provision
                  for returns, allowances and bad debts
              
              
              825
              
              
              46,233
              
              
              130,500Stock-based
                  compensation expense
              
              
              4,557,008
              
              
              37,000
              
              
              129,995Amortization
                  of deferred credit for tenant incentive recorded as leasehold
                  improvements
              
              
              (95,843
              )
              
              (104,554
              )
              
              -Amortization
                  of debt issuance costs recorded as interest expense
              
              
              32,812
              
              
              130,192
              
              
              16,052Common
                  stock issued in lieu of cash for director’s fee
              
              
              -
              
              
              46,500
              
              
              -Common
                  stock, warrants and stock issued in lieu of cash for
                  services
              
              
              -
              
              
              88,000
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable - trade
              
              
              2,466,405
              
              
              (2,000,574
              )
              
              952,905Prepaid
                  expenses and other current assets
              
              
              34,611
              
              
              533,764
              
              
              (1,198,994
              )Other
                  assets
              
              
              -
              
              
              (24,743
              )
              
              (10,014
              )Accounts
                  payable and accrued expenses
              
              
              506,
                  430
              
              
              1,247,405
              
              
              898,611Accrued
                  compensation and payroll tax obligations
              
              
              328,367
              
              
              (168,269
              )
              
              645,225Accrued
                  officer severance and bonus
              
              
              6,306,536
              
              
              -
              
              
              -Income
                  taxes payable
              
              
              893,921
              
              
              -
              
              
              -Deferred
                  revenue
              
              
              (362,107
              )
              
              2,135,647
              
              
              137,828NET
                  CASH USED IN OPERATING ACTIVITIES
              
              
              (2,705,154
              )
              
              (12,647,208
              )
              
              (4,100,422
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchases
                  of property and equipment
              
              
              -
              
              
              (1,174,067
              )
              
              (5,038,193
              )Capitalized
                  software development costs
              
              
              (1,254,584
              )
              
              (2,574,984
              )
              
              (3,261,210
              )NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (1,254,584
              )
              
              (3,749,051
              )
              
              (8,299,403
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from sale of assets to McAfee, net of transaction
                  costs
              
              
              57,953,240
              
              
              -
              
              
              -Redemption
                  of preferred stock
              
              
              (18,840,000
              )
              
              -
              
              
              -Net
                  proceeds from issuance of preferred stock
              
              
              -
              
              
              6,902,396
              
              
              13,797,283Borrowings
                  of long-term debt
              
              
              -
              
              
              4,500,000
              
              
              3,500,000Payments
                  of long-term debt
              
              
              (3,750,000
              )
              
              (4,066,667
              )
              
              (183,334
              )Proceeds
                  from note payable to an officer
              
              
              3,000,000
              
              
              -
              
              
              -Payment
                  of note payable to an officer
              
              
              (3,000,000
              )
              
              -
              
              
              -Debt
                  issue costs
              
              
              -
              
              
              (42,500
              )
              
              (26,396
              )Payment
                  of preferred stock dividends
              
              
              -
              
              
              (456,250
              )
              
              (477,439
              )Advances
                  from an officer
              
              
              1,678,171
              
              
              880,741
              
              
              -Payments
                  on notes and advances from related parties
              
              
              (1,753,643
              )
              
              (800,016
              )
              
              (16,903
              )Net
                  (payments) advances from factoring accounts receivable
              
              
              (924,777
              )
              
              924,777
              
              
              -Proceeds
                  from exercise of warrants
              
              
              -
              
              
              -
              
              
              216,550Proceeds
                  from exercise of stock options
              
              
              -
              
              
              36,000
              
              
              336,057NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              34,362,991
              
              
              7,878,481
              
              
              17,145,818Net
                  increase (decrease) in cash and cash equivalents
              
              
              30,403,253
              
              
              (8,517,778
              )
              
              4,745,993Cash
                  and cash equivalents at the beginning of the year
              
              
              1,320,376
              
              
              9,838,154
              
              
              5,092,161Cash
                  and cash equivalents at the end of the period
              
              $
              31,723,629
              
              $
              1,320,376
              
              $
              9,838,154
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F
            -
            8
 *Table
            of Contents*
  CDSS
        WIND
        DOWN INC.
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS (continued)
 (GOING
        CONCERN BASIS)
 
 PERIODFROM
                JANUARY
                  1, 2006 to
                DECEMBER
                  4, 2006
              
              YEAR
                  ENDED
                DECEBMER
                  31,2005
              
              YEAR
                  ENDED
                DECEMBER
                  31, 2004Supplemental
                  cash flow information:Interest
                  paid
              
              $
              1,308,485
              
              $
              256,417
              
              $
              54,989Income
                  taxes paid
              
              $
              -
              
              $
              -
              
              $
              -Non-cash
                  investing items:Leasehold
                  improvements funded by landlord
              
              $
              -
              
              $
              -
              
              $
              836,448Non-cash
                  financing items:Accretion
                  of convertible preferred stock beneficial conversion
                  feature
              
              $
              -
              
              $
              769,252
              
              $
              215,397Fair
                  value of warrants issued in connection with sale of preferred
                  stock
              
              $
              -
              
              $
              1,623,482
              
              $
              2,326,184Fair
                  value of warrants issued in conjunction with bank lines of credit
                  recorded
                  as deferred financing costs
              
              $
              -
              
              $
              64,321
              
              $
              45,838Fair
                  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
              
              $
              -Fair
                  value adjustment for change in exercise price of warrants issued
                  in
                  conjunction with preferred stock
              
              $
              -
              
              $
              43,226
              
              $
              -Preferred
                  stock dividend accrued
              
              $
              -
              
              $
              -
              
              $
              187,500Beneficial
                  conversion feature of convertible preferred stock
              
              $
              -
              
              $
              -
              
              $
              984,649Issuance
                  of common stock through exercise of exchange right by
                  officer
              
              $
              -
              
              $
              -
              
              $
              15,000
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F
            -
            9
 *Table
            of Contents*
  **CDSS
        WIND DOWN INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006**
 
 **NOTE
        A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 ***Description
        of Business***
 
 On
        December 4, 2006, Citadel Security Software Inc. and its subsidiaries
        (collectively, "Citadel" or the “Company”) closed the sale of substantially all
        of its assets to McAfee Security, LLC, a Delaware limited liability company
        and
        a wholly owned subsidiary of McAfee, Inc., pursuant to the Asset Purchase
        Agreement (the "Asset Purchase Agreement") between and McAfee, Inc. and a
        subsidiary ("McAfee"). On December 12, 2006 Citadel Security Software Inc.
        changed its name to CDSS Wind Down Inc. (“CDSS”). The Asset Purchase Agreement
        provides for the acquisition of substantially all of the assets (the “Assets”)
        and the assumption of certain identified liabilities of CDSS by McAfee
        (collectively, the "Sale"). The cash consideration received by CDSS for the
        purchase of the Assets and operating expense reimbursement was $60,020,579
        in
        immediately available funds. CDSS anticipates that it will make distributions
        to
        its common stockholders after payment of all transaction costs, liabilities,
        preferred stock and other cash payments following expiration of a 30-day
        indemnification period, and subject to holding back any indemnification or
        other
        required amounts. A distribution of $0.50 per share was made on January 5,
        2007
        to shareholders of record on January 2, 2007.
 
 CDSS
        was
        incorporated in Delaware in December 1996. Our principal executive offices
        are
        located at Two Lincoln Centre, Suite 1600, 5420 LBJ Freeway, Dallas, Texas
        75240. On April 30, 2004 the Company’s stock moved from the National Association
        of Securities Dealers (NASD) Over-the-Counter Bulletin Board (OTCBB) exchange
        to
        the NASDAQ Capital Market and traded under the symbol "CDSS". On May 5, 2006
        the
        Company's stock moved to the OTCBB following a delisting notice form the
        NASDAQ
        for failure to meet the $1 per share minimum trading price. On January 11,
        2007
        the trading symbol became "CWDW" resulting from the name change.
 
 CDSS
        formerly provided enterprise vulnerability management and policy compliance
        and
        enforcement software solutions that enable organizations to reduce the risk
        associated with computer network vulnerabilities. CDSS developed and marketed
        full life cycle vulnerability management software solutions under the Hercules®
brand name powered by automated vulnerability remediation technology which
        allows enterprises to neutralize security vulnerabilities across Windows,
        Linux,
        Mac and Unix platforms. Hercules 4.1 was the latest version of the software
        with
        features that could be licensed separately including Compliance Manager,
        Remediation Manager, Patch Manager, AssetGuard, ConnectGuard and Enterprise
        Reporting. In addition, Hercules 4.1 was available in two formats, as
        traditional enterprise software or as software pre-installed on a hardware
        appliance. The Company also announced the second quarter of 2006 availability
        of
        Hercules Flashbox, an appliance for security content management that assists
        with the management of security content across widely distributed networks
        or
        networks disconnected from the Internet. With Citadel’s solutions, enterprises
        were able to realize cost and process efficiencies, proactively manage the
        latest threats and vulnerabilities, and demonstrate compliance with corporate
        mandates or government legislation. The Company's prior business was formed
        in
        1996 as the result of the acquisition of several technology businesses operated
        by a business incubator from 1996 through May 17, 2002 at which time CDSS
        was
        spun out from its former parent as a standalone company. The business was
        operated as a standalone company from May 17, 2002 until the sale of
        substantially all of its assets to McAfee on December 4, 2006.
 
 ***Plan
        of Complete Liquidation and Dissolution***
 
 At
        a
        Special Meeting of Stockholders held on December 1, 2006, the Company’s
        stockholders approved a plan of liquidation and dissolution (the "Plan of
        Dissolution"), previously approved by the board of directors on October 13,
        2006. In connection with the closing of the asset sale on December 4, 2006,
        the
        Company’s business and operations were effectively transferred to McAfee
        pursuant to the Asset Purchase Agreement, and CDSS no longer have any
        significant operating assets or contracts, and the Company’s activities are
        limited to:
 
 ·
              filing
                  a certificate of dissolution with the Secretary of State of the
                  State of
                  Delaware and thereafter remaining in existence as a non-operating
                  entity
                  for three years;
 
 ·
              selling
                  any of the Company’s remaining
                  assets;
 
 ·
              paying
                  or settling the obligations owed to the Company’s remaining
                  creditors;
 
 ·
              terminating
                  or settling any of the Company’s remaining commercial agreements,
                  relationships or outstanding
                  obligations;
 
 ·
              resolving
                  any outstanding litigation;
  F
            -
            10
 *Table
            of Contents*
 
 ·
              collecting
                  any outstanding amounts due to
                  CDSS;
 
 ·
              establishing
                  a contingency reserve for payment of the Company’s expenses and
                  liabilities;
 
 ·
              completing
                  of tax filings;
 
 ·
              complying
                  with Securities and Exchange Commission reporting requirements;
                  and
 
 ·
              making
                  distributions to stockholders.
 
 Delaware
        law provides that, following the approval of the plan of liquidation and
        dissolution by the stockholders, the board of directors may take such actions
        as
        it deems necessary in furtherance of the dissolution of CDSS and the wind
        up of
        its operations and affairs.
 
 Based
        on
        projections of operating expenses and liquidation costs as of December 31,
        2006
        the Company estimates that the amount ultimately distributed to common
        stockholders will be in the range of $0.52 to $0.54 per share. An initial
        distribution of $0.50 per share was made on January 5, 2007 to shareholders
        of
        record on January 2, 2007. The distribution of the remaining $0.02 to $0.04
        will
        be made following any reduction for any valid indemnification claims by McAfee
        (the period for making a claim expired on January 3, 2007), additional
        liabilities the Company may incur, and the ultimate settlement amounts of
        liabilities. The actual amount available for distribution, if any, could
        be
        substantially less if we discover additional liabilities or claims or incur
        unexpected or greater than expected expenses. Although the board of directors
        has not established a firm timetable for the remaining liquidating
        distributions, the board of directors intends to, subject to contingencies
        inherent in winding up the business, make such distributions as promptly
        as
        practicable and periodically as the Company converts remaining assets to
        cash
        and pays remaining liabilities and obligations subject to law.
 
 Following
        the 30-day indemnity period following the closing of the Sale (which expired
        on
        January 3, 2007), the satisfaction of the holdback provisions of the Asset
        Purchase Agreement and payment of the initial liquidating distribution (paid
        on
        January 5, 2007),the board of directors may, at any time, turn the management
        of
        the Company over to a third party to complete the liquidation of remaining
        assets and distribute any remaining proceeds from the Sale to stockholders
        pursuant to the Plan of Dissolution. This third-party management may be in
        the
        form of a liquidating trust, which, if adopted by the board of directors,
        would
        succeed to all of the Company’s assets, liabilities and obligations. The board
        of directors may appoint one or more of its members, one or more of our officers
        or a third party to act as trustee or trustees of such liquidating trust.
        If,
        however, all of our assets are not distributed within three years after the
        date
        our certificate of dissolution is filed with the State of Delaware, the Company
        will transfer all remaining assets to a liquidating trust if it had not already
        done so.
 
 During
        the liquidation of the its assets, the Company may pay its officers, directors,
        employees, and agents, or any of them, compensation for services rendered
        in
        connection with the implementation of the Plan of Dissolution. At December
        31,
        2006 CDSS had four employees, including our CEO and CFO, all involved in
        the
        wind down of the Company pursuant to the Plan of Dissolution.
 
 ***Basis
        of Presentation***
 
 The
        accompanying consolidated financial statements of CDSS and its wholly-owned
        subsidiaries have been prepared in accordance with generally accepted accounting
        principles. All significant intercompany accounts and transactions have been
        eliminated in consolidation. Certain prior year amounts have been reclassified
        to conform to current year presentation.
 
 The
        consolidated financial statements for the period January 1, 2006 to December
        4,
        2006 and for the years ended December 31, 2005 and 2004 were presented on
        the
        going concern basis of accounting, which contemplates realization of assets
        and
        satisfaction of liabilities in the normal course of business. As a result
        of the
        stockholders’ approval the Plan of Dissolution and the imminent nature of the
        liquidation, the Company adopted the liquidation basis of accounting for
        all
        periods subsequent to December 4, 2006. This basis of accounting is considered
        appropriate when, among other things, liquidation of a company is probable
        and
        the net realizable values of assets are reasonably determinable. Under this
        basis of accounting, assets are valued at their estimated net realizable
        values
        and liabilities are stated at their estimated settlement amounts.
 
 ***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 reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenue and expenses during the reporting period.
        Actual
        results could differ from those estimates.
 
 The
        preparation of consolidated financial statements using the liquidation basis
        of
        accounting requires the Company to make assumptions, judgments and estimates
        that can have a significant impact on our reported net assets in liquidation.
        Management bases its assumptions, judgments and estimates on the most recent
        information available and various other factors believed to be reasonable
        under
        the circumstances. Actual results could differ materially from these estimates
        under different assumptions or conditions. On a regular basis management
        evaluates its assumptions, judgments and estimates and makes changes
        accordingly. The Company believes that the assumptions, judgments and estimates
        involved in the accounting for the estimated costs to be incurred during
        liquidation have the greatest potential for impact on the CDSS consolidated
        financial statements and considers these estimates to be critical accounting
        policies.
  F
            -
            11
 *Table
            of Contents*
  ***Estimated
        Accrued Liquidation Costs***
 
 The
        Company has applied the liquidation basis of accounting in its financial
        statements assuming that it will be liquidated in approximately twelve months
        if
        all liabilities are settled including the lease obligations for the Company's
        office facilities. Under the liquidation basis of accounting, the Company
        accrued approximately $1,554,000 for the expected remaining lease obligations
        related to its Dallas and Virginia office space. Costs and expenses of
        approximately $1,100,000 expected to be incurred during the wind down period
        prior to liquidation were accrued at December 31, 2006. These costs and expenses
        include compensation, benefits and employment taxes for four employees retained
        to assist with the wind down, legal, accounting and professional fees, and
        insurance premiums, as well as other administrative expenses anticipated
        to be
        incurred during the twelve month period of the wind down. Also, in accordance
        with the liquidation basis of accounting, the Company recorded an adjustment
        of
        approximately $265,000 to adjust liabilities to estimated settlement amounts.
        These estimates are based on assumptions regarding the Company’s ability to
        settle outstanding obligations to creditors and resolve outstanding liabilities.
        If there are delays, or the Company is not successful in achieving these
        objectives, actual costs incurred during liquidation may increase, reducing
        net
        assets available in liquidation. The Company’s reported results may be subject
        to final examination by taxing authorities. Because many transactions are
        subject to varying interpretations of the applicable federal, state or foreign
        tax laws, our reported tax liabilities and taxes may be subject to change
        at a
        later date upon final determination by the taxing authorities. The impact
        of
        this final determination on our estimated tax obligations could increase
        or
        decrease amounts of cash available for distribution to our shareholders,
        perhaps
        significantly.
 
 ***Revenue
        Recognition***
 
 Prior
        to
        the Sale, the Company's customers consisted of large and small corporations,
        healthcare organizations, financial institutions and government and educational
        agencies. The Company's revenue recognition policies were designed to follow
        the
        guidance provided by Statement of Position (“SOP”) 97-2, “Software Revenue
        Recognition,” as amended by SOP 98-9 and Staff Accounting Bulletin (“SAB”) 104,
“Revenue Recognition.” Revenue from license fees was generally recognized when a
        fixed fee order had been received and delivery to the customer had occurred.
        If
        software media and documentation were shipped FOB “Origin”, license fee revenue
        was recognized when shipped. If software media and documentation were shipped
        FOB “Destination”, license fee revenue was recognized when delivered. In
        addition, revenue was recognized only when the collectibility of the invoiced
        amounts was probable and acceptance criteria, if any, had been met.
 
 Customer
        support contracts provided the customer the right to telephone support, software
        updates, point releases of new features and functionality; and content
        subscriptions provided the customer with vulnerability remediation content
        updates on a when and if available basis. Content and customer support contracts
        included access to the vulnerability remediation content database for the
        term
        of the agreement and were sold separately from the license. The related revenue
        was recognized ratably over the term of the support contract. Professional
        services revenue was recognized as the services were performed assuming all
        other revenue recognition criteria were met. In arrangements that included
        multiple elements, including perpetual software licenses and maintenance
        and/or
        services, revenue was allocated to the various elements based on vendor specific
        objective evidence (“VSOE”) and recognized based on management's estimate of the
        fair value of each component as described in SOP 97-2, SOP 98-9 and SAB 104.
 
 Customers
        could obtain a license from Citadel's direct sales organization, or license
        products through promotions or agreements with independent third party resellers
        and strategic partners. The Company's products were not licensed through
        retail
        distribution channels. A customer could return a product only under very
        limited
        circumstances during the first thirty to ninety days from the date of shipment
        for a replacement if the media is damaged or for a full refund if the software
        did not perform in accordance with written specifications. Accordingly, the
        Company recorded a provision for returns against license revenue in the same
        period the revenue was recorded. The provision was subject to estimation
        by
        management and had been based on historical product returns, average invoice
        size, revenue volume and other known data as well as market and economic
        conditions. An allowance for returns, allowances and bad debts of $209,000
        was
        estimated and recorded at December 31, 2005. As a result of the Sale, the
        Company will no longer generate receivable balances from sales revenue. At
        December 31, 2006, the Company had no receivables.
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  Citadel
        utilized a sell-through business model for distributors and resellers under
        which revenue was recognized on products sold through distributors and resellers
        at the time the distributors and resellers license the products to the end-user.
        When distributor and reseller agreements provided for a contractual right
        of
        return, future price concessions, or minimum purchase commitments, Citadel
        recorded an estimated allowance for returns and allowances based on historical
        returns and other facts and circumstances known at the time the estimate
        was
        made. When payment was contingent upon the distributor's future licensing
        of
        products, Citadel recognized revenue upon sell-through by the reseller or
        distributor. Revenue generated from products licensed through various marketing
        channels where the right of return might expressly or implicitly exist was
        reduced by reserves for estimated product returns. Such reserves were estimates
        developed by management based on returns history and current economic and
        market
        trends. Management determined that no reserve for returns from distributors
        and
        resellers was required at December 31, 2005.
 
 Under
        the
        Company’s sell-through business model, and as a convenience to government
        customers, the Company’s products could be licensed through government
        contractors, including system integrators. These government contractors held
        the
        preferred purchasing and contracting vehicles for the various government
        agencies to purchase information technology products and services including
        the
        Company’s products and services. The Company typically entered into a
        subcontract with these prime contractors to sell through to the government
        agency. The Company’s contracts with these government contractors generally did
        not contain an express right of return; however, these government contractors
        may order products in advance of receiving the order from the government
        agency.
        When the government contractor has not delivered the product to the end user
        customer, the Company deferred revenue recognition until the government
        contractor had received confirmation of delivery to the end user agency or
        the
        Company had received payment for the product and any contingencies had lapsed.
 
 The
        Company also offered its products to customers under subscription licenses
        with
        one-year to three-year terms. The customer could renew the subscription at
        the
        end of the subscription term or convert the subscription into a perpetual
        use
        license at any time for an additional fee. Under a subscription license the
        customer received the right to use the product, to post sale customer support
        and to content (i.e., the vulnerability remedy updates) for the term of the
        subscription and for as long as the customer met its payment obligation.
        The
        subscription fee payment was generally due in equal payments at the beginning
        of
        the subscription term or on a monthly basis and then on each anniversary
        date
        thereafter. Revenue from subscriptions was recognized ratably over the term
        of
        the subscription. If a customer failed to adhere to the payment terms of
        the
        subscription, the revenue recognized was limited to the ratable recognition
        of
        the amount of payments actually received. For the period from January 1,
        2006 to
        December 4, 2006, the Company had approximately $242,000 of contracts under
        subscription of which the Company recognized approximately $190,000 of
        subscription revenue. For year ended December 31, 2005, the Company had
        approximately $109,000 of contracts under subscription of which the Company
        recognized approximately $44,000 of subscription revenue.
 
 In
        June
        2005 Citadel announced the availability of the Company’s Hercules product under
        a usage based pricing model which provides the end-user customer a method
        to pay
        for the use of the product on a transaction-by-transaction basis. Assuming
        all
        other requirements for revenue recognition had been met, the revenue from
        the
        transaction fees are accounted for based upon the transaction fees earned
        during
        a reporting period. No transaction fee revenue was recorded as of December
        31,
        2006.
 
 ***Software
        Development Costs***
 
 Prior
        to
        the Sale, the Company followed the guidance provided in Statement of Financial
        Accounting Standards (“SFAS”) No. 86 “Accounting for the Costs of Computer
        Software to Be Sold, Leased, or Otherwise Marketed” regarding the accounting for
        the costs of developing its products. Purchased software (i.e., software
        acquired from a third party) was recorded at the lower of acquisition cost
        or
        net realizable value. The Company developed software for licensing to its
        customers and capitalized software development costs when technological
        feasibility has been established. Technological feasibility generally occurred
        at the time a detailed design and analysis plan was completed and programming
        of
        the software code began. Software development costs that qualified for
        capitalization included the salaries and benefits of the software engineers
        assigned to the projects, internal and external quality assurance testing
        costs,
        overhead allocations primarily associated with facilities costs, the costs
        of
        outsourced development activities and costs of independent product testing
        and
        certification labs. Software development costs that did not qualify for
        capitalization were expensed and classified as product development expense
        in
        the statements of operations as incurred. Product development expense and
        the
        capitalization rate fluctuated from period to period depending upon the number
        and status of software development projects that were in process and the
        related
        number of people assigned to those projects.
 
 Purchased
        software and capitalized software development costs were amortized using
        the
        greater of the revenue method or the straight-line method with useful lives
        ranging from one to five years. Amortization of capitalized software development
        cost was classified in costs of revenue on the statements of operations.
        The
        Company’s products operated on or with other third party operating systems and
        software. When determining the useful life of a product, the Company considered
        factors such as the current state of the technology, operating systems upon
        which the Company’s products operated, competitive products and the potential
        use of its products by the end user. The Company made an assessment of the
        useful lives of its products at each quarterly balance sheet date.
  F
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  The
        Company evaluated the estimated net realizable value of each software product
        at
        each quarterly balance sheet date. The Company’s estimate was based on
        historical and forecasted net revenue for each product. Net revenue was the
        product revenue reduced by the estimated costs of revenue and, if in
        development, the estimated cost to complete the development of the product.
        If
        the net book value exceeded the estimate of net realizable value, the Company
        would have recorded a write-down to net realizable value on each product
        affected. The Company determined that no write-down of capitalized software
        development costs was required at December 31, 2005 or through the period
        January 1, 2006 to December 4, 2006. Citadel’s SecurePC and NetOFF products were
        no longer actively marketed beginning in January 2006 and customer support
        for
        these products will cease in April 2007. These legacy products were fully
        amortized in prior years and as a result, there was no write-off required
        for
        any capitalized software development costs or purchased software associated
        with
        these products.
 
 A
        summary
        of capitalized costs, expenses and amortization discussed above is presented
        in
        the following table:
 
 Period
                  from
                January
                  1, 2006 to
                December
                  4, 2006
              
              Year
                  Ended
                December
                  31, 2005
              
              Year
                  Ended
                December
                  31,2004Product
                  development expense, net of capitalized software development
                  costs
              
              $
              2,390,390
              
              $
              2,443,864
              
              $
              1,995,612Software
                  development costs capitalized
              
              $
              1,254,584
              
              $
              2,574,984
              
              $
              3,261,210Software
                  amortization expense
              
              $
              2,191,690
              
              $
              2,192,115
              
              $
              1,287,927
 
 ***Net
        Loss per Common Share***
 
 Prior
        to
        the Sale, the Company reported net income (loss) per share in accordance
        with
        SFAS No. 128, *Earnings
        per Share.* Basic
        net
        income (loss) per common share is computed by dividing net loss to common
        shareholders by the weighted average number of shares of common stock
        outstanding during the period. Diluted net income (loss) per share is computed
        using the weighted average number of common shares outstanding plus potentially
        dilutive common shares using the treasury stock method at the average market
        price during the reporting period, including the assumed conversions of dilutive
        securities such as preferred stock, options, and warrants.
 
 Period
                    from January 1, 2006 to December 4, 2006
                
                Year
                    Ended December 31, 2005
                
                Year
                    Ended December 31, 2004Basic
                    income (loss) per share to common shareholder:Net
                    income (loss) to common shareholders
                
                $
                34,525,408
                
                $
                (19,156,907
                )
                $
                (8,719,362
                )Weighted
                    average number of common shares outstanding during the
                    period
                
                
                30,518,230
                
                
                29,976,179
                
                
                29,336,894Basic
                    net income (loss) per share to common shareholders
                
                $
                1.13
                
                $
                (0.64
                )
                $
                (0.30
                )Diluted
                    income (loss) per share to common shareholder:Net
                    income (loss) to common shareholders
                
                $
                34,525,408
                
                $
                (19,156,907
                )
                $
                (8,719,362
                )Weighted
                    average number of common shares outstanding during the
                    period
                
                
                30,518,230
                
                
                29,976,179
                
                
                29,336,894Shares
                    issuable from assumed exercise of options
                
                
                1,427,240Shares
                    issuable from assumed conversion of preferred stock
                
                
                9,516,129
                
                
                -
                
                
                -Total
                    shares for purposes of calculating diluted net income (loss)
                    per share
                
                
                41,461,599
                
                
                29,976,179
                
                
                29,336,894Diluted
                    net income (loss) per share to common shareholders
                
                $
                0.83
                
                $
                (0.64
                )
                $
                (0.30
                )
 
 For
        the
        period from January 1, 2006 to December 4, 2006 the weighted average shares
        outstanding were 30,518,230 and the diluted weighted average shares outstanding
        were 41,461,599. The dilutive effect of stock options for 4,623,250 shares
        of
        common stock has been included in the computation of diluted income per share
        to
        common shareholders for this period. In addition, the effect of the "as if"
        conversion of the preferred stock into 9,516,129 shares of common stock has
        been
        included in the diluted income per share computation. The effect of Citadel
        stock options for 3,097,000 shares of Citadel common stock and 4,336,641
        Citadel
        warrants outstanding at December 4, 2006 have been excluded from the weighted
        average shares computation as they are antidilutive. In addition, the effect
        of
        the “as if” conversion of the preferred stock outstanding at December 4, 2006
        into 9,516,129 shares of common stock has been excluded from the computation
        of
        net loss per share to common shareholders as the effect is antidilutive.
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  For
        the
        years ended December 31, 2005 and 2004, basic and diluted net loss per common
        share are identical because the number of shares assumed in the conversion
        of
        the preferred stock, and the exercise of common stock options and warrants
        outstanding would be antidilutive and are therefore excluded from the
        computation of diluted loss per common share.
 
 The
        effect of Citadel stock options for 8,843,250 shares of Citadel common stock
        and
        4,336,641 Citadel warrants outstanding at December 31, 2005 have been excluded
        from the weighted average shares computation as they are antidilutive. In
        addition, the effect of the “as if” conversion of the preferred stock
        outstanding at December 31, 2005 into 9,516,129 shares of common stock has
        been
        excluded from the computation of net loss per share to common shareholders
        as
        the effect is antidilutive. The weighted average number of outstanding common
        shares was 29,976,179 for the year ended December 31, 2005.
 
 The
        effect of Citadel stock options for 7,993,000 shares of Citadel common stock
        and
        1,434,881 Citadel warrants outstanding at December 31, 2004 have been excluded
        from the weighted average shares computation as they are antidilutive. In
        addition, the effect of the “as if” conversion of the preferred stock
        outstanding at December 31, 2004 into 3,000,000 shares of common stock has
        been
        excluded from the computation of net loss per share to common shareholders
        as
        the effect is antidilutive. For the year ended December 31, 2004, the weighted
        average number of outstanding common shares was 29,336,894.
 
 ***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.
 
 ***Accounts
        Receivable***
 
 Prior
        to
        the Sale, trade accounts receivable were stated at the amount the Company
        expected to collect. The Company maintained allowances for doubtful accounts
        for
        estimated losses resulting from the inability of its customers to make required
        payments. Management considered the following factors when determining the
        collectibility of specific customer accounts: customer credit worthiness,
        past
        transaction history with the customer, current economic industry trends,
        and
        changes in customer payment terms. If the financial condition of the Company’s
        customers were to deteriorate, adversely affecting their ability to make
        payments, additional allowances would be required. Based on management’s
        assessment, the Company provided for estimated uncollectible amounts through
        a
        charge to expense and a credit to a valuation allowance. Balances that remain
        outstanding after the Company has used reasonable collection efforts were
        written off through a charge to the valuation allowance and a credit to accounts
        receivable. In addition, the Company maintained an allowance for returns,
        payment discounts, and other allowances based on historical returns and payment
        discounts and allowances that may be offered to customers from time-to-time
        or
        as incentive to make payments to the Company sooner than the customer’s
        contractual payment terms. Returns, payment discounts and other adjustments
        were
        charged to the allowance when incurred. The Company provided for returns,
        discounts and other allowances as a reduction of revenue and a credit to
        the
        valuation allowance.
 
 At
        December 31, 2005 trade receivables included amounts factored to Allied Capital
        Partners, L.P. (“Allied”) in the amount of $1,177,916. A factoring line of
        credit balance was also owed to Allied in the amount of $924,777 and was
        secured
        by these receivables. During the period from January 1, 2006 to December
        4,
        2006, pursuant to the terms of the Allied agreements, Citadel received
        $5,099,225 of cash as a result of factoring $6,253,962 of trade accounts
        receivable with Allied. The remaining balance of $1,154,736 was held in reserve
        by Allied until the customer accounts receivable were collected. The Company
        had
        the right, and was obligated, to repurchase transferred receivables under
        the
        Allied agreements and, therefore, the transaction did not qualify as a sale
        under the terms of SFAS No. 140, “Accounting for Transfers and Servicing of
        Financial Assets and Extinguishments of Liabilities”. Total repayments of
        advances of $6,024,002 were made in the period from January 1, 2006 to December
        4, 2006.
 
 ***Impairment
        of Long-Lived Assets***
 
 Prior
        to
        the Sale, in accordance with SFAS No. 144, “Accounting for the Impairment or
        Disposal of Long-Lived Assets”, the Company reviewed its long-lived assets for
        impairment whenever events or changes in circumstances indicated that the
        carrying amount of an asset may not be recoverable and exceeds its fair value.
        If conditions indicated an asset might be impaired, the Company would have
        estimated the future cash flows expected to result from the use of the asset
        and
        its eventual disposition. The impairment, if any, would have been measured
        by
        the amount by which the asset exceeds its fair value typically represented
        by
        quoted marked values or, when and if available, the future discounted cash
        flow
        associated with the asset.
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 *Table
            of Contents*
  ***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***
 
 Prior
        to
        the Sale, the Company expensed costs associated with advertising as they
        are
        incurred and included these costs in selling, general and administrative
        expense. Advertising expense, including design and production of product
        collaterals, industry trade shows and printing, for the period from January
        1,
        2006 to December 4, 2006 and for the years ended December 31, 2005, and 2004
        was
        approximately $763,000, $1,573,000 and $1,183,000, respectively.
 
 ***Stock-Based
        Compensation***
 
 On
        January 1, 2006, the Company adopted the modified prospective method of SFAS
        No.
        123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which is a revision
        of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”).
        SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting
        for Stock Issued to Employees,” (“APB Opinion No. 25”), and amends SFAS No. 95,
“Statement of Cash Flows”. SFAS No. 123R requires all share-based payments to
        employees, including grants of employee stock options, to be recognized in
        the
        income statement based on their fair values. Pro forma disclosure is no longer
        an alternative. Under the modified prospective application, SFAS No. 123R
        is
        applied to new awards and to awards modified, repurchased or cancelled after
        the
        effective date. Compensation cost for the portion of awards for which requisite
        service has not been rendered that are outstanding as of the effective date
        is
        recognized as the requisite service is rendered on or after the effective
        date.
        The compensation cost for that portion of awards is based on the grant date
        fair
        value of those awards as calculated for pro-forma disclosures under SFAS
        No.
        123. CDSS’s consolidated financial statements as of and for the period from
        January 1, 2006 to December 4, 2006 reflect the impact of adopting SFAS No.
        123R. In accordance with the modified prospective method, the consolidated
        financial statements for the prior periods have not been restated to reflect,
        and do not include, the impact of SFAS No. 123R.
 Stock-based
        compensation expense recognized during the period is based on the value of
        the
        portion of the stock-based payment awards that is ultimately expected to
        vest.
        As stock-based compensation expense recognized in the statement of operations
        for 2006 is based on awards ultimately expected to vest, it has been reduced
        for
        estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated
        at the
        time of grant and revised, if necessary, in subsequent periods if actual
        forfeitures differ from those estimates.
 
 The
        Company calculates the fair value of each option award on the date of grant
        using the Black-Scholes option pricing model. The Company’s computation of
        expected volatility is based on historical volatility. The Company’s computation
        of expected life was determined based on historical experience of similar
        awards, giving consideration to the contractual terms of the awards, vesting
        schedules and expectation of future employee behavior. The interest rate
        for the
        periods within the contractual life of the award is based on the U.S. Treasury
        yield curve in effect at the time of the grant.
 
 The
        adoption of SFAS No. 123R required the Company to record substantial non-cash
        stock compensation expenses. While the adoption of SFAS No. 123R did not
        have a
        significant effect on the Company's financial condition or cash flows, it
        did
        have a significant effect on the Company's results of
        operations.
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 *Table
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  ***Pro
        Forma Information for Periods Prior to the Adoption of SFAS No.
        123R***
 
 If
        the
        Company had recognized compensation expense on a straight-line basis over
        the
        vesting term of the options based upon the fair value at the grant date for
        options granted to employees, officers and directors during years ended December
        31, 2005 and 2004, the pro forma effect on net loss attributable to common
        shareholders and net loss per share attributable to common shareholders would
        have been as follows:
  2005
              
              2004Net
                  loss to common shareholders as reported
              
              $
              (19,156,907
              )
              $
              (8,719,362
              )Add:
                  Stock-based employee compensation expense included in reported
                  net
                  loss
              
              
              37,000
              
              
              129,995Deduct:
                  Stock-based employee compensation expense determined under fair
                  value
                  based method
              
              
              (1,838,922
              )
              
              (1,916,398
              )Pro
                  forma net loss to common shareholders
              
              $
              (20,958,829
              )
              $
              (10,505,765
              )Net
                  loss per share to common shareholders:As
                  reported - basic and diluted
              
              $
              (0.64
              )
              $
              (0.30
              )Pro
                  forma - basic and diluted
              
              $
              (0.70
              )
              $
              (0.36
              )
 
 Prior
        to
        January 1, 2006, the Company accounted for stock-based employee compensation
        arrangements in accordance with the provisions of APB Opinion No. 25 and
        complied with the disclosure provisions of SFAS No. 123, as amended by SFAS
        No.
        148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an
        amendment of FASB Statement No. 123,” (“SFAS No. 148”). Under APB Opinion No.
        25, compensation expense for employees is based on the excess, if any, on
        the
        date of grant, of the fair value of the Company's stock over the exercise
        price
        and is recognized on a straight-line basis over the vesting term of the option.
 
 The
        Company accounts for equity instruments issued to non-employees based upon
        the
        fair value of the awards. 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.
 
 ***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.
 
 ***Recent
        Accounting Pronouncements***
 
 On
        July
        13, 2006 the FASB issued the Financial Interpretation No. 48, Accounting
        for uncertainty in income taxes ("FIN48"). FIN 48 clarifies the
        accounting for income taxes by prescribing the minimum recognition threshold
        a
        tax position is required to meet before being recognized in the financial
        statements. It also provides guidance on derecognition, measurement,
        classification, interest and penalties, accounting in interim periods,
        disclosure and transition and, clearly scopes income taxes out of FASB Statement
        No. 5, Accounting for Contingencies. FIN 48 applies to all tax positions
        related
        to income taxes subject to FASB Statement No. 109, Accounting for Income
        Taxes,
        (FAS 109). This includes tax positions considered to be “routine” as well as
        those with a high degree of uncertainty. FIN 48 is effective for fiscal years
        beginning after December 15, 2006. The Company does not expect the adoption
        to
        have a material impact on the Company’s financial statements.
 
 In
        July
        2006, the FASB issued FASB Statement No. 157, Fair Value Measurements. This
        new
        standard provides guidance for using fair value to measure assets and
        liabilities. The statement clarifies that for items that are not actively
        traded, fair value should reflect the price in a transaction with a market
        participant, including an adjustment for risk, and establishes a fair value
        hierarchy that prioritizes the information used to develop the assumptions
        market participants would use when pricing the asset or liability. SFAS No.
        157
        is effective for fiscal years beginning after November 15, 2007, and interim
        periods within those fiscal years. This statement becomes effective as of
        January 1, 2007, and while expected to require additional disclosures, is
        not
        expected to have a material impact on the results of operations or financial
        condition.
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 *Table
            of Contents*
  **NOTE
        B - SALE TO MCAFEE**
 
 On
        December 4, 2006, CDSS closed the sale of substantially all of its assets
        to
        McAfee, pursuant to the Asset Purchase Agreement. The Asset Purchase Agreement
        provided for the acquisition of substantially all of the assets and the
        assumption of the certain liabilities of CDSS by McAfee. The cash consideration
        received by CDSS for the asset purchase was $60,020,579 in immediately available
        funds, before transaction costs of approximately $2,067,000. The gain on
        the sale was as follows:
 
 Proceeds
                  from Sale
              
              $
              60,020,579Cash
                  transaction costsInvestment
                  banking fees
              
              
              782,334Professional
                  fees
              
              
              1,285,005Net
                  proceeds
              
              
              57,953,240Assets
                  sold or written offAccounts
                  receivable
              
              
              102,860Property
                  and equipment, net
              
              
              3,671,116Capitalized
                  software development costs, net
              
              
              3,494,215Other
              
              
              647,935Liabilities
                  assumed or derecognizedDeferred
                  revenue
              
              
              (4,716,562
              )Other
              
              
              (792,653
              )Gain
                  on sale
              
              $
              55,546,329
 
 Following
        the closing, the Company redeemed all of its shares of preferred stock
        outstanding for $18,840,000 and repaid notes payable, advances and accrued
        interest of approximately $8,172,000, including approximately $4,044,000
        of
        payments to the Company's CEO. The Company is required under the Asset Purchase
        Agreement to pay or otherwise settle its outstanding liabilities of
        approximately $12,648,000 at December 4, 2007, including officer severance,
        non-competition and bonus payments of approximately $6,306,000, accrued employee
        compensation liabilities of approximately $1,500,000, the payment of
        approximately $256,000 to employees holding in-the-money stock options, income
        taxes payable of approximately $894,000, lease obligations of approximately
        $1,555,000 and estimated wind down expense of $1,100,000. Following the
        settlement of its liabilities the Company estimates that a distribution dividend
        may be made to shareholders of $0.52 to $0.54 per share. A distribution dividend
        of $0.50 per share was paid to shareholders on January 5, 2007. The remaining
        $0.02 to $0.04 per share is expected to be distributed following the settlement
        of any remaining liabilities, primarily wind down costs and settlement of
        the
        Company's office lease obligations. These estimates are based on assumptions
        regarding the Company’s ability to settle outstanding obligations to creditors
        and resolve outstanding liabilities. If there are delays, or the Company
        is not
        successful in achieving these objectives, actual costs incurred during
        liquidation may increase, reducing net assets available in liquidation. The
        Company’s reported results may be subject to final examination by taxing
        authorities. Because many transactions are subject to varying interpretations
        of
        the applicable federal, state or foreign tax laws, our reported tax liabilities
        and taxes may be subject to change at a later date upon final determination
        by
        the taxing authorities. The impact of this final determination on our estimated
        tax obligations could increase or decrease amounts of cash available for
        distribution to our shareholders, perhaps significantly.
 
 **NOTE
        C - CONCENTRATION OF CREDIT RISK**
 
 Financial
        instruments that potentially subject the Company to concentrations of credit
        risk are principally cash and cash equivalents. At December 31, 2006, the
        Company had approximately $27.9 million in cash and cash equivalents at
        financial institutions which were in excess of the FDIC insured limits. The
        Company invests excess cash through banks, primarily in highly liquid money
        market accounts.
 
 With
        respect to accounts receivable prior to the Sale, the Company performed credit
        evaluations of its customers’ financial condition and did not require
        collateral. Allowances for credit losses were maintained at levels considered
        adequate by management. At December 31, 2005, approximately 91% of the Company’s
        gross accounts receivable was due from BAE Systems, Inc., a U.S. government
        systems integrator.
  F
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            18
 *Table
            of Contents*
  **NOTE
        D - PREPAID EXPENSES AND OTHER CURRENT ASSETS**
 
 Prepaid
        expenses and other current assets at consisted of:
 
 December
                  31,2006
              
              2005Prepaid
                  commissions
              
              $
              -
              
              $
              380,147Prepaid
                  marketing and advertising expenses
              
              
              -
              
              
              336,131Prepaid
                  insurance premiums
              
              
              94,035
              
              
              148,772Prepaid
                  office rent
              
              
              76,872
              
              
              -Prepaid
                  software and hardware maintenance contracts
              
              
              -
              
              
              65,296Other
              
              
              17,424
              
              
              2,245$
              188,331
              
              $
              932,591
 
 **NOTE
        E - PROPERTY AND EQUIPMENT**
 
 All
        of
        the Company’s property and equipment was acquired by McAfee as a result of the
        Sale. Prior to the Sale, the Company’s property and equipment was stated at cost
        and depreciation was computed using the straight-line method over the estimated
        useful lives ranging from one to eight years. Amortization of leasehold
        improvements was computed using the straight-line method over the lesser
        of the
        useful life of the asset or the remaining term of the lease. At December
        31,
        2005, property and equipment consisted of:
 
 Useful
                  life (in years)
              
              2005Furniture
              
              1
                  - 8
              
              $
              1,088,112Office
                  equipment
              
              1
                  - 5
              
              
              393,281Computer
                  equipment and internal use software
              
              1
                  - 5
              
              
              3,678,648Leasehold
                  improvements
              
              2
                  - 8
              
              
              2,449,5857,609,626Less
                  accumulated depreciation and amortization
              
              
              
              
              
              (2,483,398
              )Net
                  property and equipment
              
              
              
              
              $
              5,126,228
 
 In
        May
        2004 the Company signed an 8 year lease for approximately 33,500 square feet
        of
        office space in Dallas, Texas. The Company moved into the new office space
        in
        November 2004 and at that time abandoned certain furniture, equipment and
        leasehold improvements in place at the prior office resulting in a write-off
        during the year ended December 31, 2004 of property and equipment of $77,786.
        The write-off consisted of following assets:
 
 Furniture
              
              $
              240,232Office
                  equipment
              
              
              87,101Computer
                  equipment and internal use software
              
              
              761,804Leasehold
                  improvements
              
              
              143,4941,232,631Less
                  accumulated depreciation and amortization
              
              
              (1,154,845
              )Net
                  property and equipment
              
              $
              77,786
  **NOTE
        F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES**
 
 Accounts
        payable and accrued expenses consisted of:
  December
                    31,2006
                
                2005Accounts
                    payable, trade
                
                $
                299,429
                
                $
                2,475,077Accrued
                    rent
                
                
                -
                
                
                717,730Accrued
                    property, sales and franchise taxes
                
                
                48,964
                
                
                171,739Accrued
                    interest payable
                
                
                -
                
                
                103,750Other
                    accrued expenses
                
                
                75,727
                
                
                253,255$
                424,120
                
                $
                3,721,551
  F
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            19
 *Table
            of Contents*
  **NOTE
        G - ACCRUED COMPENSATION AND PAYROLL TAX OBLIGATIONS**
 
 Accrued
        compensation and payroll tax obligations consisted of:
 
 December
                  31,2005Accrued
                  commissions and incentive compensation
              
              $
              724,579Accrued
                  vacation pay
              
              
              301,777Payroll
                  tax obligations
              
              
              219,045$
              1,245,401
 
 **NOTE
        H - ESTIMATED LEASE SETTLEMENT COSTS**
 
 At
        December 31, 2006, estimated costs to settle lease agreements was approximately
        $1,554,000 representing estimated lease payments for the expected wind down
        period, estimated new tenant lease concessions and real estate commissions
        for
        the Company's office lease obligations at December 31, 2006. These estimates
        are
        based on assumptions regarding the Company’s ability to settle the lease
        obligation on terms acceptable to the Company. If there are delays, or the
        Company is not successful in achieving these objectives, actual costs incurred
        during lease negotiations may increase, reducing net assets available in
        liquidation.
 
 **NOTE
        I - INCOME TAXES**
 
 The
        significant components of the Company's deferred tax liabilities and assets
        consisted of:
 
 December
                  31,Deferred
                  tax assets (liabilities):
              
              2006
              
              2005Net
                  operating loss carryforwards
              
              $
              85,000
              
              $
              11,306,000Accounts
                  receivable allowance
              
              
              -
              
              
              71,000Accrued
                  expenses
              
              
              549,000
              
              
              601,000Long-term
                  deferred revenue
              
              
              -
              
              
              135,000Stock
                  compensation expense
              
              
              19,000
              
              
              (38,000
              )Accrued
                  liquidation costs
              
              
              385,000
              
              
              -Prepaid
                  expenses
              
              
              -
              
              
              (129,000
              )Capitalized
                  software development costs
              
              
              -
              
              
              (1,507,000
              )Property
                  and equipment
              
              
              -
              
              
              (581,000
              )Total
                  deferred tax assets
              
              
              1,038,000
              
              
              9,858,000Valuation
                  allowance
              
              
              (1,038,000
              )
              
              (9,858,000
              )Total
                  deferred tax assets, net
              
              $
              -
              
              $
              -
 
 The
        difference between the provision for income taxes and the amount computed
        by
        applying the federal statutory rate of 35% to income (loss) before provision
        for
        income taxes is explained below:
 
 Years
                  Ended December 31,2006
              
              2005
              
              2004Benefit
                  computed at federal statutory rate
              
              
              11,808,000
              
              $
              (6,311,000
              )
              $
              (2,665,000
              )Increase
                  (decrease) in valuation allowance
              
              
              (8,820,000
              )
              
              6,369,000
              
              
              2,457,000Alternative
                  minimum tax on asset sale
              
              
              894,000
              
              
              -
              
              
              -Net
                  operating loss carryforward
              
              
              (4,326,000
              )
              
              -
              
              
              -Share
                  based compensation
              
              
              1,684,000
              
              
              -
              
              
              -Tax
                  rate differential
              
              
              (290,000
              )
              
              -
              
              
              -Permanent
                  differences
              
              
              45,000
              
              
              215,000
              
              
              208,000Other
              
              
              (101,000
              )
              
              (273,000
              )
              
              -$
              894,000
              
              $
              -
              
              $
              -
 
 For
        federal income tax purposes, at December 31, 2006 the Company had a net
        operating loss carryforward of approximately $200,000. In
        2002,
        the Company was spun out of its former parent in a pro rata stock dividend
        distribution to shareholders of the former parent. At that time, there was
        uncertainty of the availability approximately $12 million of net operating
        loss
        carryforwards related to the Company's business but incurred by the former
        parent. As a result, the Company elected not to consider these net operating
        losses in its tax computations until such time that the tax position could
        be
        clarified. In 2006, the Company clarified its tax position regarding these
        net
        operating loss carryforwards and determined that the $12 million could be
        utilized to offset future earnings of the Company and has adjusted the tax
        computation to reflect the availability of these net operating losses. At
        December 31, 2005 $33 million of estimated net operating losses were available
        to the Company. During 2006 approximately $45 million of net operating losses
        were utilized to offset taxes on 2006 pre-tax income and a liability for
        alternative minimum tax of approximately $894,000 was provided. 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 2024. A valuation allowance has been recorded for the
        entire
        amount of the net deferred tax asset due to uncertainty of realization.
  F
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 *Table
            of Contents*
  **NOTE
        J - LONG-TERM DEBT**
 
 On
        April
        15, 2004 the Company completed a Loan and Security Agreement (the “Original
        Agreement”) with Comerica Bank (“Comerica”), securing credit lines aggregating
        $3,500,000. Of this amount, $750,000 was a revolving line of credit which
        if
        used would be secured by accounts receivable defined in the Original Agreement
        and bear interest at 1.5% above Comerica’s prime lending rate. The remaining
        $2,750,000 credit line was available in two tranches to fund capital equipment
        expenditures through December 31, 2004. These loans would be secured by the
        capital equipment acquired with the proceeds of the borrowings and bear interest
        at 1.75% above Comerica’s prime lending rate. Through December 30, 2004 the
        Company used the full amount of the $2,750,000 credit line to fund capital
        expenditures during 2004. The revolving line of credit remained unused as
        of
        December 30, 2004 and on that date Citadel and Comerica entered into a First
        Amendment to Loan and Security Agreement (the “First Amendment”), pursuant to
        which Comerica and Citadel agreed to amend the Original Agreement to convert
        $750,000 of available indebtedness under the Original Agreement from revolving
        indebtedness to equipment financing. Comerica advanced this $750,000 to Citadel
        on December 31, 2004. During 2004, the Company made payments against the
        borrowings of $183,334.
 
 During
        2005, Citadel entered into four amendments (the “Amendments”) to the Original
        Agreement. Citadel and Comerica agreed to modify the existing financial
        covenants to require the Company to maintain its minimum cash balance at
        $1,000,000 and eliminate the liquidity ratio test and EBITDA requirements.
        Per
        the Amendments, Citadel's minimum cash balance requirement of $1,000,000
        would
        be waived from August 15, 2005 until the earlier of (i) the date on which
        Citadel raises additional equity capital or (ii) September 30, 2005. 
Following October 1, 2005, Citadel would be required to maintain a minimum
        cash
        balance of $1,500,000.  In addition, as of October 1, 2005, Citadel's
        monthly payments on one tranche of its loans from Comerica would increase
        from
        $22,727 plus interest, to $72,727 per month. The Amendments also provided
        for an
        additional revolving credit line of up to $750,000 based on a borrowing base
        of
        up to 80% of Citadel’s eligible accounts receivable. The loan would bear
        interest at Comerica’s prime rate plus 1.75% and had a maturity date of
        September 30, 2005. On September 15, 2005, Citadel borrowed $750,000 pursuant
        to
        an additional revolving credit line provided by a Fifth Amendment bringing
        the
        total principal amounts due to Comerica Bank to approximately $3.1 million.
        The
        other material terms of the credit facilities, including interest rate,
        security, and final maturity, remained the same as under the Original Agreement,
        as amended.
 
 In
        2004,
        Comerica received warrants to purchase 9,881 shares of common stock at an
        exercise price of $5.06 per share at a Black-Scholes fair value of approximately
        $45,838. In 2005, Comerica received warrants for 18,050 of common stock at
        an
        exercise price of $1.79 per share at a Black-Scholes fair value of approximately
        $31,317 and warrants for 45,000 shares of common stock at an exercise price
        of
        $1.56 per share at a Black-Scholes fair value of approximately $33,005. The
        fair
        value of the warrants was recorded as debt issue costs and an increase to
        additional paid in capital. Debt issue costs are amortized to interest expense
        at the greater of the interest method or straight-line over the remaining
        term
        of the debt. For the years ended December 31, 2005 and 2004, debt issue cost
        amortization included in interest expense was $130,192 and $16,052,
        respectively.
 
 On
        October 10, 2005 Citadel and Lawrence Lacerte ("Lacerte") entered into a
        Loan
        and Security Agreement and Intellectual Property Security Agreement (the
        “Agreements”). Under the Agreements, Lacerte agreed to advance $3.75 million to
        Citadel with a maturity date of October 10, 2007 and an interest rate of
        12%.
        The proceeds of the loan were used to retire principal amounts due to Comerica
        on October 10, 2005 of approximately $2.9 million and for general working
        capital purposes. As a result of the retirement of the Comerica notes payable,
        the loan and security agreement, as amended, between Citadel and Comerica,
        including debt covenants, was terminated. The terms of the Agreements require
        quarterly interest payments and payment of the principal balance at maturity.
        The loan is secured by a security interest in the Company’s assets except trade
        accounts receivable. Citadel has agreed to pay a five percent (5%) premium
        to
        Lacerte upon early repayment of the loans or upon a deemed change in control,
        and paid a one percent (1%) loan origination fee. For the period from January
        1,
        2006 to December 4, 2006 debt issue cost amortization related to the note
        payable to Lacerte included in interest expense was $32,812. The obligations
        under the Agreements may be accelerated in the event of a default under the
        Agreements, including a failure to pay amounts when due or a breach of the
        Agreements by Citadel. Satellite, holder of the Series A and Series B
        convertible preferred stock, agreed to permit Citadel to issue the senior
        security to Lacerte in consideration for a reduction in the exercise price
        of
        their warrants to purchase approximately 4.0 million shares of the Company’s
        common stock issued in conjunction with the Series A and Series B convertible
        preferred stock from $1.75 per share to $1.56 per share, as discussed in
        NOTE M
        - REDEEMABLE PREFERRED STOCK. On December 4, 2006, as a result of the Sale,
        the
        note payable to Lacerte was settled for $4,018,750 consisting of $3,750,000
        principle, $81,250 accrued interest and $187,500 early repayment premium
        recorded as interest expense. The December 31, 2005 balance of the note payable
        to Lacerte was $3,750,000 and was classified as long-term debt on the balance
        sheet.
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 *Table
            of Contents*
  **NOTE
        K - OTHER NON-CURRENT LIABILITIES**
 
 In
        accordance with FASB Technical Bulletin No. 88-1 “Issues Relating to Accounting
        for Leases”, tenant improvement allowances are recognized as deferred rent
        credits and amortized over the lease term as a reduction of rent expense
        on the
        consolidated statements of income and as a component of operating activities
        on
        the consolidated statement of cash flows. During the year ended December
        31,
        2004, the Company entered into a lease agreement with an eight year term
        for new
        office space in Dallas, Texas. The lease agreement included a lease incentive
        for tenant improvements of $836,448 which was recorded as leasehold improvements
        and deferred rent liability. At December 4, 2006, $104,556 representing
        current deferred rent and $505,356 representing a non-current liability for
        deferred rent were offset against the gain on the sale of assets to McAffe.
        At
        December 31, 2005, $104,556 was recorded as current deferred rent and
        $609,912 has been recorded as a non-current liability. The current and
        non-current deferred rent liabilities were being amortized as an offset to
        rent expense over the lease term.
 
 **NOTE
        L -**  **COMMON
        STOCK**
 
 ***Common
        Stock Issued in 2004***
 
 In
        February 2004, the Company’s CEO exercised an exchange right and the Company
        issued 1,500,000 shares of common stock to the CEO. The exchange right was
        issued to the CEO in June 2001 in connection with the CEO funding and granting
        a
        guarantee of participation by CT Holdings, the Company's former parent, in
        a
        bank bridge loan of an affiliate of CT Holdings. The exchange right permitted
        the CEO to exchange up to 5,000,000 (pre 1:1000 reverse split) shares of
        the
        affiliate into up to 6,000,000 shares of CT Holdings common stock including
        the
        right to any dividends. This right resulted in a commitment by CDSS upon
        exercise of the exchange right to issue up to 1,500,000 shares of CDSS common
        stock. The exercise of this exchange right was conditional upon compliance
        with
        first refusal and co-sale rights by the affiliated company and its majority
        shareholder. The Company has accounted for this issuance as an increase of
        $15,000 to the par value of common stock and recording an offsetting reduction
        to additional paid capital.
 
 Also
        during 2004, the Company issued 350,219 and 165,000 shares of common stock
        pursuant to the exercise of stock options and warrants for total proceeds
        of
        $336,057 and $216,550, respectively. See NOTE N - STOCK OPTIONS AND WARRANTS
        for
        additional details.
 
 ***Common
        Stock Issued in 2005***
 
 In
        2005,
        the Company issued 110,000 shares of common stock to an investor relations
        firm
        for payment of services in lieu of cash.  The fair value of the common
        stock of $88,000 was recorded as a charge to selling, general and administrative
        expense with a credit to common stock for the par value and to additional
        paid-in capital for the excess over par value.  In addition, the Company
        issued 112,500 shares of its common stock upon the exercise of employee stock
        options in return for cash of $36,000 received for the aggregate exercise
        price
        of the options.
 
 Also
        in
        2005, the Company issued 50,000 shares of common stock in lieu of cash to
        a
        board member for director’s fees. The fair value of the common stock of $46,500
        was recorded as a charge to selling, general and administrative expense with
        a
        credit to common stock for par value and to additional paid in capital for
        the
        excess over par value.
 
 On
        December 21, 2005, the Company granted 50,000 shares of restricted stock
        to each
        of six executives and 25,000 shares of restricted stock to each of the Company’s
        four outside directors. The shares of restricted stock issued to the executives
        vest in one year or upon a deemed change in control if the executive remains
        employed with the Company (unless terminated without cause), and the shares
        of
        restricted stock issued to the directors are immediately vested. The fair
        value
        of the restricted stock was based on the closing market value of Citadel’s stock
        on the grant date. The $37,000 fair value of the directors’ 100,000 shares of
        restricted stock was recorded as general and administrative expense in 2005.
        The
        $111,000 fair value of the executives’ 300,000 shares of restricted stock was
        recorded as a decrease to additional paid in capital and was amortized to
        compensation expense over the one year vesting period.
 
 On
        December 21, 2005, the Company issued 50,000 shares of restricted stock to
        each
        of six executives and 25,000 shares of restricted stock to each of the Company’s
        four outside directors. The shares of restricted stock issued to the executives
        vest in one year or upon a deemed change in control if the executive remains
        employed with the Company (unless terminated without cause), and the shares
        of
        restricted stock issued to the directors are immediately vested. The fair
        value
        of the restricted stock was based on the closing market value of the Company’s
        stock on the grant date. The $37,000 fair value of the directors’ 100,000 shares
        of restricted stock was recorded as general and administrative expense in
        2005.
        The $111,000 fair value of the executives’ 300,000 shares of restricted stock
        was recorded as a decrease to additional paid in capital and was amortized
        to
        compensation expense over the one year vesting period. At December 31, 2006
        all
        300,000 shares of restricted stock issued to the executives had
        vested.
  F
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 *Table
            of Contents*
  ***Common
        Stock Issued in 2006***
 
 During
        the year ended December 31, 2006 the Company issued 450,000 unregistered
        shares
        as a result of exercise of options by the CEO and CFO. Pursuant to the terms
        of
        the Sale to McAfee and the resulting deemed change of control, the Company
        amended its employment agreements with Mr. Solomon, the CEO, to provide that,
        if
        the Sale was completed, and in consideration of his non-competition agreement
        with McAfee, Mr. Solomon would agree to forgive CDSS’s obligation to pay him a
        bonus and cancel his stock option agreements and, in exchange, the Company
        would
        issue him 3,650,000 shares of common stock of which 400,000 shares have not
        been
        registered. The Company also amended its agreement with Mr. Connelly, the
        CFO,
        to provide that, if the Sale was completed, Mr. Connelly would agree to forgive
        CDSS’s obligation to pay him a bonus and cancel a stock option agreement for
        50,000 shares of common stock and, in exchange, the Company would issue him
        50,000 unregistered shares of common stock. The Company agreed with Mr. Joe
        Allbaugh, a director that upon a deemed change of control the Company would
        pay
        Mr. Allbaugh a bonus equal to the aggregate exercise price of 100,000 of
        the
        options granted to him. In October 2006, the Company amended its agreement
        with
        Mr. Allbaugh to provide that, upon completion of the asset sale, Mr. Allbaugh
        would agree to forgive the Company's obligation to pay him the bonus and
        cancel
        his stock options and, in exchange, the Company would issue him 100,000 shares
        of common stock. As a result of these amendments, Messrs. Solomon, Connelly
        and
        Allbaugh will receive distributions on their shares, on the same basis as
        other common stockholders. The Company issued these shares to Messrs. Solomon,
        Connelly and Allbaugh on December 18, 2006. Approximately $2,052,000 was
        recorded as stock compensation expense related to these
        modifications.
 
 **NOTE
        M - REDEEMABLE** **PREFERRED
        STOCK**
 
 Pursuant
        to the Preferred Holder Agreement dated October 2, 2006 between CDSS, Satellite
        Strategic Finance Associates, LLC and Satellite Strategic Finance Partners,
        Ltd., the Company redeemed its outstanding shares of Series A and Series
        B
        Convertible Preferred Stock for $18.84 million on December 15, 2006. The
        Preferred Holder Agreement also requires an additional payment of up to $4.71
        million to the extent distributions to CDSS's common stockholders exceed
        $19.75
        million or $0.57 per share. The Company has estimated that the distribution
        to
        shareholders is expected to be in a range of $0.51 to $0.54 per share and
        therefore the Company does not expect to exceed $19.75 million or $0.57 per
        share. A summary of the issuances and the terms and conditions of the Series
        A
        and Series B Convertible Preferred Stock follows:
 
 ***Series
        A Convertible Preferred Stock (“Series A Shares”)***
 
 On
        February 10, 2004 the Company completed a private placement of $15,000,000
        in
        gross proceeds for the issuance of 15,000 shares of its Series A Shares and
        five-year warrants (“Series A Warrants”) for 1.2 million shares of common stock.
        Net proceeds received were approximately $13,797,000 after payment of placement
        fees of $1,125,000 as well as legal, accounting and filing fees of approximately
        $78,000. The placement agents for the transaction also received warrants
        (with
        the same terms and conditions as the Series A Warrants) to purchase 225,000
        shares of common stock at an exercise price of $5.15 per share, a premium
        to the
        market price at the commitment date. Using the Black-Scholes pricing model,
        the
        fair value of the Series A Shares, the Series A Warrants and the placement
        agents warrants were estimated at approximately $11,471,000, $1,915,000 and
        $411,000, respectively, with the fair value of all of the warrants recorded
        as a
        credit to additional paid in capital. Using the relative fair values of the
        Series A Shares and the warrants, the Company estimated the non-cash relative
        fair value of the Series A Share beneficial conversion feature to be
        approximately $985,000, which was recorded as an increase to additional paid
        in
        capital. For the year ended December 31, 2004, $215,397 of the beneficial
        conversion feature was accreted and during the first nine months of 2005,
        $141,145 of the beneficial conversion feature was accreted. In the third
        quarter
        of 2005, in conjunction with the revised terms and conditions of the Series
        A
        Shares approved at the Company’s annual stockholder’s meeting, as well as a
        decline in the market price of the Company’s common stock, the Company
        determined that the beneficial conversion feature no longer existed and
        accordingly, fully accreted the remaining unaccreted fair value of the
        beneficial conversion feature related to the Series A Shares of $628,107,
        representing a decrease to additional paid-in capital and an increase to
        the net
        loss to common shareholders.
 
 On
        May 9,
        2005, in connection with the issuance of the Series B preferred stock (discussed
        below), CDSS and Satellite entered into an Exchange Agreement where CDSS
        agreed
        to exchange the Series A Warrants for Exchange Warrants to purchase up to
        1.2
        million shares of Common Stock at an initial exercise price of $1.75, subject
        to
        adjustment upon certain events, including as a result of the sale of equity
        securities by the Company at a price below the exercise price of the Warrants.
        On May 9, 2005, 1 million shares of the Exchange Warrants became immediately
        exercisable. The remaining 200,000 became exercisable upon shareholder approval
        in July 2005. The Warrants issued are exercisable (in whole or in part) at
        any
        time on or before the expiration of their 10-year terms. The fair value of
        the
        Series A Warrants on May 9, 2005 was estimated and compared to the estimated
        fair value of the Exchange Warrants and the excess in the fair value of the
        Exchange Warrants over the Series A Warrants resulted in a net increase to
        additional paid in capital and a net increase to the net loss to common
        shareholders of $274,800.
 
 In
        October 2005, Satellite agreed to permit CDSS to issue a senior security
        in
        consideration for a reduction in the exercise price of their 1,200,000 Exchange
        Warrants from $1.75 per share to $1.56 per share. The fair value of the Exchange
        Warrants immediately prior to the conversion price change was estimated and
        compared to the fair value of the Exchange Warrants immediately following
        the
        conversion price change, resulting in an increase to additional paid in capital
        and an decrease to the net loss to common shareholders of
        $12,000.
  F
            -
            23
 *Table
            of Contents*
  The
        Series A Shares had a maturity of four years and were convertible into common
        stock of CDSS at a conversion price of $5.00 per share, a premium over the
        closing price on the commitment date of the transaction. The conversion and
        exercise prices were subject to adjustment in certain events, and the investor
        had the right to require the Company to redeem the securities in cash at
        101% of
        the liquidation preference of the Series A Shares in the event that (i) CDSS
        failed to issue shares of common stock and deliver certificates representing
        such shares to the holder as and when required upon conversion of the Series
        A
        Shares or upon conversion of the Series A/Exchange Warrants (and such failure
        continues for ten business days), (ii) CDSS failed to file the registration
        statement as required by the terms of the transaction documents, or (iii)
        a
        change in control occurred.
 
 The
        Series A Shares had a liquidation preference in an amount equal to their
        stated
        value of $1,000 per share plus accrued and unpaid dividends. Holders of the
        Series A Shares had liquidation preference rights over common stockholders.
        The
        Company also had the right to automatically convert the Series A Shares into
        common stock upon achieving certain milestones. Upon maturity, the Company
        would
        pay the holders of Series A Shares cash equal to the aggregate liquidation
        preference of the Series A Shares, or, if certain conditions are met, including
        the listing of the Company’s common stock on the New York Stock Exchange, NASDAQ
        National Market, or NASDAQ Capital Market, the Company would pay the holders
        in
        shares of common stock. Holders of the Series A Shares had no voting rights
        with
        respect to the business, management or affairs of the Company; provided that
        the
        Company provided each holder with prior notification of each meeting of
        stockholders.
 
 Prior
        to
        the July 2005 shareholders meeting, dividends on the Series A Shares were
        payable quarterly in cash at a 5% annual rate or 6% if paid in shares of
        common
        stock at the Company’s option and if certain milestones were met. The Company
        paid $477,439 of preferred stock dividends during 2004 and had accrued dividends
        payable $187,500 at December 31, 2004. The Company paid $456,250 of preferred
        stock dividends in 2005. In July 2005, the holder of the Series A Shares
        agreed
        to waive the dividend requirements of the Series A Shares upon shareholder
        approval obtained at the shareholders meeting. The estimated fair value of
        the
        benefit related to the waiver of dividends of $1,826,000 resulted in an increase
        to additional paid in capital and a decrease to the net loss to common
        shareholders.
 
 Also
        in
        July 2005, the Company obtained shareholder approval for the possible issuance
        of common stock in excess of 19.99% of the number of shares of common stock
        outstanding on the closing date (as a result of possible adjustment to the
        conversion price), as required under the applicable listing requirements
        of the
        NASDAQ Capital Market, to increase its authorized number of shares common
        stock
        to 100,000,000, and to amend the Certificate of Designations of its Series
        A
        Shares to reduce the conversion price from $5 to $3. The fair value of the
        Series A Shares immediately prior to the conversion price change was estimated
        and compared to the fair value of the Series A Shares immediately following
        the
        approval of the conversion price change, resulting in a decrease to additional
        paid in capital and an increase to the net loss to common shareholders of
        $1,064,000.
 
 ***Series
        B Convertible Preferred Stock (“Series B Shares”)***
 
 On
        May 9,
        2005, the Company entered into agreements with Satellite related to a private
        placement for up to $11 million, consisting of up to 11,000 shares of Series
        B
        Shares, convertible into approximately 7.1 million shares of common stock
        at the
        initial conversion price of $1.55, and Series B Warrants to purchase
        approximately 2.8 million shares of the Company’s common stock at an initial
        exercise price of $1.75 per share, subject to adjustment upon certain events,
        including as a result of the sale of equity securities by the Company at
        a price
        below the exercise price of the Series B Warrants, in a private placement
        to
        accredited investors under Regulation D of the Securities Act of 1933, as
        amended.
 
 On
        May 9,
        2005, Citadel completed the sale to Satellite of $7 million of the $11.0
        million
        private placement of the Series B Shares (convertible into approximately
        4.5
        million shares of common stock at the initial conversion price) and Series
        B
        Warrants to purchase approximately 1.8 million shares of common stock. Net
        proceeds received were approximately $6,902,000 after payment of approximately
        $98,000 of legal fees. The relative fair value of the Series B Shares and
        the
        Series B Warrants were estimated at approximately $5,796,000 and $1,204,000,
        respectively. The fair value of the Series B Warrants is recorded as a credit
        to
        additional paid in capital. The proceeds from the preferred stock financing
        were
        used for working capital and general corporate purposes.
 
 The
        Company had a put option to sell up to an additional $4 million of Series
        B
        Shares (convertible into approximately 2.6 million common shares) and Series
        B
        Warrants to purchase approximately 1 million shares of common stock at an
        exercise price of $1.75 per share, upon satisfaction of certain milestones,
        including shareholder approval, which was obtained at the annual meeting
        in July
        2005, effectiveness of the registration statement covering the resale of
        the
        securities issued in the first tranche and a minimum bid price. The registration
        statement became effective in September 2005, however, the minimum bid
        requirement was not met and the put option expired. Pursuant to the requirements
        of the put option, the Company issued approximately 1 million additional
        Series
        B Warrants to the investor in August 2005. The fair value of these additional
        Series B Warrants was estimated at approximately $419,000 and is recorded
        as a
        credit to additional paid in capital. The Series B Warrants are exercisable
        (in
        whole or in part) at any time on or before the expiration of their 10-year
        terms.
  F
            -
            24
 *Table
            of Contents*
  In
        October 2005, Satellite agreed to permit CDSS to issue a senior security
        in
        consideration for a reduction in the exercise price of their 2,838,710 Series
        B
        Warrants from $1.75 per share to $1.56 per share. The fair value of the Series
        B
        Warrants immediately prior to the conversion price change was estimated and
        compared to the fair value of the Series B Warrants immediately following
        the
        conversion price change, resulting in an increase to additional paid in capital
        and a decrease to the net loss to common shareholders of $31,226.
 
 The
        Series B Shares had a maturity of four years and were convertible into common
        stock of CDSS, initially at a conversion price of $1.55 per share. The
        conversion and exercise prices were subject to adjustment in certain events,
        and
        the investor had the right to require the Company to redeem the securities
        in
        cash at 101% of the liquidation preference of the Series B Shares in the
        event
        that (i) any representation or warranty of the company made in the transaction
        documents failed to be true and correct in all material respects, (ii) the
        Company failed to perform in all material respects its covenants and agreements
        in the transaction documents, or (iii) a liquidation event occurred. If a
        change
        in control occurred, a holder could require the Company to repurchase such
        holder’s Series B Shares in cash at 120% of the liquidation preference.
 
 The
        Series B Shares had a liquidation preference in an amount equal to their
        stated
        value of $1,000 per share and were pari passu securities with the Series
        A
        Shares. The Series B Shares did accrue dividends (unless CDSS declared dividends
        on its common stock). The Company had the right to automatically convert
        the
        Series B Shares into common stock upon achieving certain milestones. Upon
        maturity, the Company would pay the holders of Series B Shares cash equal
        to the
        aggregate liquidation preference of the Series B Shares, or, if certain
        conditions were met, including the listing of the Company’s common stock on the
        New York Stock Exchange, NASDAQ National Market, or NASDAQ Capital Market,
        the
        Company would pay the holders in shares of common stock. The Series B Shares
        were generally non-voting securities, except for certain protective provisions
        where the holders of Series B Shares were entitled to vote as a separate
        class.
 
 **NOTE
        N - STOCK OPTIONS AND WARRANTS**
 
 ***Adoption
        of SFAS No. 123R***
 
 CDSS
        adopted SFAS No. 123R using the modified prospective transition method beginning
        January 1, 2006. Accordingly, during the period from January 1, 2006 to December
        4, 2006, the Company recorded stock-based compensation expense for options
        granted prior to, but not yet vested, as of January 1, 2006, as if the fair
        value method required for pro forma disclosure under SFAS No. 123 were in
        effect
        for expense recognition purposes, adjusted for estimated forfeitures. For
        options granted after January 1, 2006, the Company has recognized compensation
        expense based on the estimated grant date fair value method using the
        Black-Scholes valuation model. Compensation expense is recognized on a
        straight-line basis over the vesting period of the options. SFAS No. 123R
        requires that stock-based compensation expense be based on awards that are
        ultimately expected to vest. As a result of the Sale and the resulting stock
        option transactions, stock-based compensation for the period from January
        1,
        2006 to December 4, 2006 has been adjusted for actual forfeitures.
 
 ***Stock-based
        Compensation Plans***
 
 The
        2002
        Stock Incentive Plan (the "Plan") was adopted by the board of directors and
        approved by the shareholders of CDSS. The Plan authorizes the board of directors
        or a committee, which administers the plan, to grant stock options, stock
        appreciation rights, restricted stock and deferred stock awards to eligible
        officers, directors, employees and consultants. A total of 3,000,000 shares
        of
        common stock were reserved for issuance under the terms of the 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. Since the inception of the plan CDSS has granted 4,435,000 awards under
        the Plan through December 4, 2006, the date of the Sale. Options cancelled
        since
        the inception of the Plan due to employee terminations amounted to 3,418,276
        and
        were added back to the options available for future grants under the Plan.
        Option holders under the Plan have exercised 437,224 options since the inception
        of the Plan through December 4, 2006. Due to the Sale, 1,719,000 outstanding
        options were exercisable on December 4, 2006; 579,500 stock options became
        eligible for the cash out program discussed below, and 1,139,500 were
        cancelled. No options were outstanding or exercisable at December 31, 2006
        under
        the plan. The options granted had a term of 10 years and generally vested
        over
        periods of up to three years. The underlying shares of the initial 1,500,000
        shares of common stock in the Plan were registered on Form S-8 in July 2003.
 
 In
        addition, the Company granted options outside of the Plan. These options
        are not
        covered under a plan approved by the stockholders. Options have been granted
        to
        officers, directors, employees, stockholders and consultants to the Company.
        The
        options granted have a term of 10 years or less and generally vest over periods
        of from one to three years. At December 4, 2006 there were 2,751,250
        options outstanding that had been awarded outside of the Plan of
        which 2,323,714 were exercisable and 427,536 were unvested and not subject
        to acceleration. As a result of the Sale, 3,700,000 were exercised, 1,282,500
        cancelled by their terms, 793,750 were eligible for the cash-out program.
        At
        December 31, 2006, 675,000 options awarded outside of the Plan were outstanding
        and exercisable at a weighted average exercise price of $2.04 per
        share.
  F
            -
            25
 *Table
            of Contents*
  ***Acceleration
        of Vesting due to Deemed Change of Control and Cash-Out
        Program***
 
 The
        Plan
        provides that all stock options outstanding under the stock option plan will
        fully vest in connection with the closing of the Sale. As permitted by the
        Plan,
        we accelerated the vesting of 941,453 unvested options effective 15 days
        before
        the scheduled closing of the Sale. The Plan also provides that, in the
        discretion of the board of directors, any holder of stock options outstanding
        at
        the closing of a deemed change of control may receive a payment equal to
        the
        difference between the price received by stockholders in the deemed change
        of
        control and the exercise price of such holder's stock option “Cash-out
        Program”). The Company implemented the Cash-out Program in connection with the
        closing of the Sale and the subsequent distributions to stockholders. As
        a
        result, holders of options that remain unexercised on the record date of
        the
        initial anticipated liquidating distribution received from the Company, at
        the
        same time liquidating distributions are made to holders of the Company’s common
        stock, cash payments equal to the product of the total number of shares that
        were subject to such option immediately prior to the closing of the Sale,
        and
        the amount per share then being distributed in respect of the Company’s common
        stock. However, these cash payments were paid only to the extent, if any,
        per
        share liquidating distributions in respect of the Company’s common stock exceed
        the per share exercise price of such option.
 
 Employees,
        officers, directors and consultants also held stock options granted outside
        the
        Plan ("Outside-the-Plan"). Seven individuals held one or more Outside-the-Plan
        options with exercise prices below $0.54 per share. All of such "in-the-money"
        options were fully vested. CDSS entered into agreements with the holders
        of
        these options to provide for a cash-out component similar to the options
        issued
        under the Plan.
 
 On
        December 4, 2006, an aggregate of 8,270,250 stock options were fully vested,
        of
        which 941,453 became fully vested as a result of the deemed change of control.
        Total stock compensation expense for the period January 1, 2006 to December
        4,
        2006 was $4,557,008 of which $914,160 was attributable to the vesting
        acceleration and $111,000 was associated with the vesting of shares of
        restricted stock. Of the fully vested stock options at December 4, 2006,
        an
        aggregate of 1,373,250 stock options were eligible to receive a payment of
        under
        the cash-out program. The remaining 6,897,000 stock options expired by the
        terms
        of the stock option agreements and the 2002 stock incentive plan where
        applicable. At December 31, 2006 a Cash-out Program liability of $255,510
        was
        accrued, assuming that the maximum per share distribution of $0.54 per share
        would be available for distribution to shareholders. On January 5, 2007 an
        aggregate payment of $200,610 was made to holders of stock options eligible
        under the Cash-out Program. The aggregate payment represented the difference
        between the $0.50 per share distribution to shareholders and each option
        holder's per share exercise price, multiplied by the number of options eligible
        for the cash-out payment.
 
 Non-cash
        stock compensation expense is included in the statement of operations for
        the
        Period January 1, 2006 to December 4, 2006.  Stock
        compensation expense included in the statements of operations for the years
        ended December 31, 2005 and 2004 totaled $37,000 and $129,995, respectively,
        all
        of which was recorded as selling, general and administrative
        expense.
 For
                  the Period
                January
                  1, 2006 to
                December
                  4, 2006Costs
                  of Revenue
              
              $
              129,466Selling
                  general and administrative expense
              
              
              3,773,430Product
                  Development expense
              
              
              654,112Impact
                  on net loss to common shareholders
              
              $
              4,557,008Impact
                  on net income per share to common shareholdersBasic
              
              $
              0.15Diluted
              
              $
              0.14
  F
            -
            26
 *Table
            of Contents*
  ***Valuation
        Assumptions***
 
 The
        Company calculated the fair value of each option award on the date of grant
        using the Black-Scholes option pricing model. The following assumptions were
        used for each respective period:
 
 2006
              
              2005
              
              2004Risk-free
                  interest rates
              
              
              4.29%-5.03%
              
              
              3.85%
              
              
              2.55%Expected
                  lives
              
              
              5.8
                  years
              
              
              5.0
                  years
              
              
              5.0
                  yearsDividend
                  yield
              
              
              0%
              
              
              0%
              
              
              0%Expected
                  volatility
              
              
              97%-121%
              
              
              109%
              
              
              124%Weighted-average
                  volatility
              
              
              111%
              
              
              109%
              
              
              124%
 
 The
        Company’s computation of expected volatility is based on historical volatility.
        The Company’s computation of expected life was determined based on historical
        experience of similar awards, giving consideration to the contractual terms
        of
        the awards, vesting schedules and expectation of future employee behavior.
        The
        interest rate for the periods within the contractual life of the award is
        based
        on the U.S. Treasury yield curve in effect at the time of the
        grant.
 
 ***Stock
        Option Activity***
 
 The
        following table summarizes the activity under the Plan for the year ended
        December 31, 2006:
 
 2002
                  Stock Incentive Plan2006
              
              2005
              
              2004Shares
              
              Weighted
                  Average Exercise Price
              
              Weighted
                  Average Remaining Contractual Term
              
              Aggregate
                  IntrinsicValue
              
              Shares
              
              Weighted
                  Average Exercise Price
              
              Shares
              
              Weighted
                  Average Exercise PriceOutstanding
                  at the beginning of the year
              
              
              2,327,000
              
              $
              1.59
              
              
              
              
              
              
              
              
              1,318,000
              
              $
              2.73
              
              
              1,018,500
              
              $
              1.47Granted
              
              
              134,000
              
              $
              0.45
              
              
              
              
              
              
              
              
              1,899,000
              
              $
              1.13
              
              
              854,000
              
              $
              3.86Exchanged
                  for common stock
              
              
              (100,000
              )
              $
              0.00
              
              
              
              
              
              
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -Exercised
              
              
              -
              
              $
              -
              
              
              
              
              
              
              
              
              -
              
              $
              -
              
              
              (176,889
              )
              $
              1.07Cash-out
                  Program
              
              
              (579,500
              )
              $
              0.40
              
              
              
              
              
              
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -Cancelled
              
              
              (1,781,500
              )
              $
              1.93
              
              
              
              
              
              
              
              
              (890,000
              )
              $
              2.41
              
              
              (377,611
              )
              $
              2.59Outstanding
                  at theend of the year
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              
              2,327,000
              
              $
              1.59
              
              
              1,318,0000
              
              $
              2.73Vested
                  and expected to vest at December 31, 2006
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -Options
                  exercisable at December 31, 2006
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
 
 The
        following table summarizes the activity outside the Plan for the year ended
        December 31, 2006:
 
 Outside
                  the Plan2006
              
              2005
              
              2004Shares
              
              Weigthed
                  Average Exercise Price
              
              Weighted
                  Average Remaining Contractual Term
              
              Aggregate
                  Intrinsic Value
              
              Shares
              
              Weighted
                  Average Exercise Price
              
              Shares
              
              Weighted
                  Average Exercise PriceOutstanding
                  at the beginning of the year
              
              
              6,516,250
              
              $
              0.99
              
              
              
              
              
              
              
              
              6,675,000
              
              $
              1.17
              
              
              5,827,500
              
              $
              0.72Granted
              
              
              -
              
              $
              -
              
              
              
              
              
              
              
              
              825,000
              
              $
              1.32
              
              
              1,447,500
              
              $
              3.69Exchanged
                  for common stock
              
              
              (3,700,000
              )
              $
              0.00
              
              
              
              
              
              
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -Exercised
              
              
              -
              
              $
              -
              
              
              
              
              
              
              
              
              (112,500
              )
              $
              0.32
              
              
              (173,330
              )
              $
              0.85Cash-out
                  Program
              
              
              (793,750
              )
              $
              0.32
              
              
              
              
              
              
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -Cancelled
              
              
              (1,347,500
              )
              $
              2.36
              
              
              
              
              
              
              
              
              (871,250
              )
              $
              2.74
              
              
              (426,670
              )
              $
              3.25Outstanding
                  at theend of the year
              
              
              675,000
              
              $
              2.04
              
              
              7.36
                  years
              
              $
              -
              
              
              6,516,250
              
              $
              0.99
              
              
              6,675,000
              
              $
              1.17Vested
                  and expected to vest at December 31, 2006
              
              
              675,000
              
              $
              2.04
              
              
              7.36
                  years
              
              $
              -Options
                  exercisable at December 31, 2006
              
              
              675,000
              
              $
              2.04
              
              
              7.36
                  years
              
              $
              -
 
 The
        aggregate intrinsic value is calculated as the difference between the exercise
        price of the underlying awards and the quoted price of the Company’s common
        stock that were ”in-the-money” at December
        31, 2006. At December 31, 2006, no options were “in-the-money”.
  F
            -
            27
 *Table
            of Contents*
  The
        weighted average grant-date fair value of options granted in the years ended
        December 31, 2006, 2005 and 2004 was $0.38, $0.44 and $3.75, respectively.
        The
        total intrinsic value of options exercised during the years ended December
        31,
        2005 and 2004 was $26,802 and $1,019,012 respectively.
 
 As
        of
        December 31, 2006, there was no unrecognized compensation cost related to
        unvested stock options.
 
 ***Modifications
        to Option Terms***
 
 Pursuant
        to the terms of certain option agreements and the Asset Purchase Agreement,
        Mr.
        Solomon, CEO, Mr. Connelly, CFO and Mr. Allbaugh, a director were issued
        3,650,000, 50,000 and 100,000 shares of common stock, respectively in return
        for
        cancelling their stock option agreements and forgoing a cash bonus equaling
        the
        exercise price of their options. See NOTE L - COMMON STOCK for further
        discussion. Pursuant to SFAS123(R) the change in the terms of the option
        award
        is a modification of the award requiring a charge to income for the difference
        between the fair value of the stock option immediately before the modification
        and immediately following the modification. The fair value of these awards
        of approximately $2,052,000 has been recorded as a charge to stock
        compensation expense with an offset to Additional Paid in Capital. In addition,
        the Company modified certain options held by seven individuals including
        officers, directors and employees that were issued outside the Citadel incentive
        stock award plan. The modification of the awards was to provide the cash
        out
        component to the option award. The fair value of the awards immediately prior
        to
        the modification and immediately after the modification was determined to
        be
        equal because the modification for the cash out provision did not affect
        any of
        the components of the Black-Scholes valuation model.
 
 During
        the year ended December 31, 2004 the Company agreed to modify the option
        agreement to extend the exercise termination date for one terminated employee
        and accordingly recognized the estimated fair value of the stock options
        of
        approximately $130,000 which is included in general and administrative
        expense.
 
 ***Warrants***
 
 The
        warrants issued during 2005 and 2004 were issued in conjunction with the
        debt
        and equity financing transactions (see NOTE M - REDEEMABLE PREFFERED STOCK).
        The
        proceeds from the 165,000 exercise of warrants during the year ended December
        31, 2004 was $216,550.
 
 Outstanding
                  WarrantsNumber
                  of warrants
              
              Weighted
                  average exercise priceBalance
                  at December 31, 2003
              
              
              165,000
              
              $
              1.31Issued
              
              
              1,434,881
              
              $
              5.15Exercised
              
              
              (165,000
              )
              $
              1.31Cancelled
              
              
              -
              
              
              -Balance
                  at December 31, 2004
              
              
              1,434,881
              
              $
              5.15Issued
              
              
              4,101,760
              
              $
              1.56Exercised
              
              
              -
              
              
              -Cancelled
              
              
              (1,200,000
              )
              $
              5.15Balance
                  at December 31, 2005
              
              
              4,336,641
              
              $
              1.76Cancelled
              
              
              (4,336,641
              )
              $
              1.76Balance
                  at December 31, 2006
              
              
              -
              
              
              -
 
 In
        December 2006, as a result of the Sale, and pursuant to the Preferred Holder
        Agreement dated October 2, 2006 between CDSS, Satellite Strategic Finance
        Associates, LLC and Satellite Strategic Finance Partners, Ltd., all of the
        Company’s warrants outstanding were cancelled in conjunction with the
        $18,840,000 redemption of the Series A and Series B Convertible Preferred
        Stock.
 
 **NOTE
        O - EMPLOYEE BENEFIT PLANS**
 
 The
        Company sponsors the Citadel Security Software Inc. 401(k) Retirement Savings
        Plan (the “Plan”) for all eligible employees of the Company. Under the terms of
        the Plan, employees could make contributions to the Plan. The Company did
        not
        make contributions to the Plan during the years ended December 31, 2006,
        2005
        and 2004.
  F
            -
            28
 *Table
            of Contents*
  **NOTE
        P - COMMITMENTS AND CONTINGENCIES**
 
 ***Leases***
 
 The
        Company leases office space for its corporate headquarters in Dallas, Texas
        under an operating lease, the base term of which expires in October 2012.
        The
        Company also has an office lease for space in Reston, Virginia that expires
        in
        April 2007. The Company plans to continue paying for the Virginia office
        lease
        through the expiration of that lease in at the end of April 2007. At December
        31, 2006 the Company retains the obligation for the lease of the Dallas office
        and has been reviewing alternatives for the subletting or buy-out of the
        lease,
        however no agreement has been executed, and no assurance can be made that
        an
        agreement to sublease the property will be entered into in the future, or
        a at
        an amount acceptable to the Company. Lease termination penalties may be assessed
        for early lease settlement based on original agreements. As of December 31,
        2006, the accrual for estimated lease settlements was approximately $1,554,000.
        This estimate is based on assumptions regarding the Company’s ability to settle
        the lease obligation on terms acceptable to the Company. If there are delays,
        or
        the Company is not successful in achieving these objectives, actual costs
        incurred during lease negotiations may increase, reducing net assets available
        in liquidation.
 
 Both
        leases contain escalation provisions. In accordance with SFAS No. 13 “Accounting
        for Leases”, FASB Technical Bulletin 88-1 “Issues Relating to Accounting for
        Leases”, and FASB Technical Bulletin 85-3 “Accounting for Operational Leases
        with Scheduled Rent Increases”, the Company records rent expense on facility
        leases on a straight-line basis. Citadel does not have any obligations that
        extend beyond the base terms of these leases. Rent expense for the period
        from
        January 1, 2006 to December 4, 2006 and for years ended December 31, 2005
        and
        2004 was $675,746, $808,180 and $522,803, respectively.
 
 ***Warranty
        Provision and Guarantees***
 
 FASB
        Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
        Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45)
        requires certain guarantees to be recorded at fair value and requires a
        guarantor to make disclosures, even when the likelihood of making any payments
        under the guarantee is remote. Prior to the Sale, for those guarantees and
        indemnifications that do not fall within initial recognition and measurement
        requirements of FIN 45, the Company was required to continue to monitor the
        conditions that were subject to the guarantees and indemnifications, as required
        under existing generally accepted accounting principles, to identify if a
        loss
        had been incurred. If the Company determined that it was probable that a
        loss
        had been incurred, any such estimable loss was recognized.
 
 With
        respect to sale transactions prior to December 4, 2006, under the terms of
        Citadel’s software license agreements, the Company agreed that in the event the
        software sold infringed upon any patent, copyright, trademark, or trade secret
        of a third-party, CDSS would indemnify the customer licensees against any
        loss,
        expense, or liability from any damages that may be awarded against the customer.
        This infringement indemnification was included in all of the Company’s software
        license agreements. In the event the customer could not use the software
        due to
        infringement and the Company could not obtain the right to use, replace or
        modify the license in a commercially reasonable manner so that it no longer
        infringed, then the Company could terminate the license and provide the customer
        a pro-rata refund of the fees paid by the customer for the infringing license.
 
 Under
        the
        terms of CDSS’s customer support services agreements, if the Company was unable
        to resolve a problem within a reasonable time using reasonable commercial
        efforts and after a reasonable number of attempts, the Company would terminate
        the service as of the date of the problem report and the customer would receive
        a pro-rated refund for the unused portion of the customer support services.
        Additionally, under the terms of the Company’s Hercules vulnerability
        remediation updates warranty, the Company warranted that, if qualified customers
        did not receive Hercules vulnerability remediation updates in accordance
        with
        the Company’s service level objectives for remediation and security content
        delivery as stated in the Company’s customer support service agreement, CDSS
        would reimburse the customer for actual information asset losses in excess
        of
        $20,000 (per incident), up to a maximum of $1,000,000 per incident. The Hercules
        vulnerability remediation updated warranty extended for one year, from the
        date
        of the purchase of the customer support agreement covering fully paid CDSS
        software products that had been licensed with the vulnerability remediation
        updates service.
 
 The
        initial recognition and measurement requirements do not apply to the Company’s
        product warranties nor to the provisions contained in the majority of the
        Company’s software license agreements that indemnify licensees of the Company’s
        software from damages and costs resulting from claims alleging that the
        Company’s software infringes the intellectual property rights of a third party.
        The Company has not received any requests for payment under these provisions
        and
        has not been required to make payments pursuant to these provisions. The
        Company
        has not identified any losses that are probable under these provisions and,
        accordingly, the Company has not recorded a liability related to these
        indemnification provisions.
 
 ***Employment
        Agreements and Change of Control Agreements***
 
 On
        December 23, 2005, the Company approved change of control agreements for
        six of
        its executives. The agreements provided for payments of six months of the
        executive’s annual base salary in the event of certain terminations of
        employment following a deemed change of control (“Change of Control Payments”),
        and a payment of one year’s annual base salary in the event the executive
        remains employed with the Company or the successor on the first anniversary
        of
        the date of the agreement, following a deemed change of control (“Stay
        Bonuses”). As a result of the Sale, and in connection with their acceptance of
        employment with McAfee, three of the six executives waived their right to
        receive any Change of Control Payments or Stay Bonuses from CDSS.
  F
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            29
 *Table
            of Contents*
  The
        remaining three executives entered into employment agreements that provided
        for
        payments, that are in addition to the payments under the change of control
        agreements, of six months of the executive’s annual base salary, in the event of
        certain terminations of employment in connection with or following a deemed
        change of control, which includes a sale of all or substantially all of the
        Company's assets (“Employment Severance Payments”). Also, CDSS agreed to make
        the required Change of Control Payments and Employment Severance Payments
        following the closing of the Sale, regardless of whether the remaining
        executives’ employment was terminated. This allowed CDSS to retain the services
        of the remaining executives after the closing, to the extent required in
        connection with the CDSS liquidation and dissolution, without requiring the
        remaining executives to forego their payments. As a result, CDSS made total
        Change of Control Payments and Employment Severance Payments of approximately
        $533,000 to three executives following the Sale, approximately $342,000 of
        which
        as paid in December 2006 and approximately $191,000 of which was made in
        January
        2007 and is included in “officer severance and bonus” in the Consolidated
        Statement of Net Assets in Liquidation at December 31, 2006.
  In
        addition, the Company agreed to pay the CFO a retention bonus of $95,557
        if he
        is still employed with CDSS on March 31, 2007, or earlier if the board of
        directors determines that his services are no longer needed in connection
        with
        CDSS’s liquidation and dissolution. This retention bonus has been accrued as
        part of the officer severance and bonus at December 31,
        2006.
  The
        Company entered into an employment agreement with the CEO, dated October 1,
        2002, as amended on October 1, 2003, as well as a change of control
        agreement dated December 2005 (“CEO Employment Agreements”). The CEO
        Employment Agreements collectively provide, in the event of certain terminations
        following a deemeed change of control, for the following:
  ·
              a
                  payment equal to three times the CEO’s annual base
                  salary;
  ·
              a
                  payment equal to three times the CEO’s annual
                  bonus;
  ·
              an
                  option exercise bonus; and
  ·
              gross-up
                  payments for taxes related to these
                  payments.
  After
        execution of the Asset Purchase Agreement, the Company amended the CEO
        Employment Agreements with to provide that, in lieu of the payments to be
        received under the CEO Employment Agreements, and in consideration of his
        non-competition agreement with McAfee, he will receive, after the completion
        of
        the asset sale, $6,089,234 in a lump sum (which includes tax gross-up) without
        a
        requirement of termination of his employment with CDSS. This amount reflects
        a
        reduction of approximately $500,000 from the amounts to which he would otherwise
        be contractually entitled. This arrangement allows CDSS to retain the services
        of the CEO after the closing, to the extent required in connection with CDSS’s
        liquidation, without requiring the CEO to forego the payments to which he
        is
        entitled. The amended agreement also provides that, in consideration of his
        non-competition agreement with McAfee, the CEO forgives the Company’s obligation
        to pay him a bonus and cancel his stock options and, in exchange, the Company
        will issue him 3,650,000 shares of common stock. (See additional discussion
        in
        NOTE L - COMMON STOCK under the heading “Common Stock Issued in 2006”.) At
        December 31, 2006, $6,089,234 is included in “officer severance and bounus” in
        the Consolidated Statement of Net Assets in Liquidation at December 31,
        2006.
 
 ***Legal
        Proceedings***
 
 ***Securities
        and Derivative Litigation Settled***
 
 In
        January, February and March 2005, seven virtually identical lawsuits were
        filed
        against CDSS, Steven B. Solomon, the Company’s Chief Executive Officer and a
        Director, and Richard Connelly, the Company’s Chief Financial Officer. These
        suits were consolidated in one action styled Ruth R. Lentz v. Citadel Security
        Software, Inc., et al., Civil Action No. 3:05-CV-0100-D, in the United States
        District Court for the Northern District of Texas. Each case was filed on
        behalf
        of a putative class of persons and/or entities who purchased CDSS’s securities
        between February 12, 2004 and December 16, 2004, inclusive. The suits sought
        recovery of unspecified damages under Sections 10(b) and 20(a) of the Securities
        Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.
        The
        suits were filed after CDSS’s announcement on December 17, 2004 that the
        Company’s projection of revenue and earnings for the full year 2004 would be
        less than previously projected. On May 25, 2005, the court appointed a lead
        plaintiff and approved plaintiff's selection of lead counsel. On August 19,
        2005, the lead plaintiff filed a consolidated complaint. On October 18, 2005,
        the defendants filed a motion to dismiss this consolidated action.
 
 On
        April
        1, 2005, a shareholder derivative suit styled Harry Brantley, derivatively
        on
        behalf of Citadel Security Software Inc. v. Steven B. Solomon, Richard Connelly,
        Chris A. Economou, John Leide and Joe M. Allbaugh, Cause No. 05-03117-L,
        was
        filed in the 193rd State District Court in Dallas County, Texas on behalf
        of
        CDSS against certain of the Company’s officers and directors: Steven B. Solomon,
        the Chief Executive Officer and a Director of the Company; Richard Connelly,
        the
        Company’s Chief Financial Officer; and Chris A. Economou, John Leide and Joe M.
        Allbaugh, Directors of the Company. The suit also named the Company as a
        nominal
        defendant. Based on allegations substantially similar to the federal securities
        action, the suit asserted claims for the defendants’ alleged violations of state
        law, including breaches of fiduciary duties, abuse of control, gross
        mismanagement, waste of corporate assets, and unjust enrichment that allegedly
        occurred during the same period of time at issue in the federal securities
        action. The suit sought the recovery of damages, fees, costs, equitable and/or
        injunctive remedies, and disgorgement of all profits, benefits and other
        compensation. On July 5, 2005, the Court entered an order staying and
        administratively closing this case subject to being reopened upon the motion
        of
        any party.
  F
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            30
 *Table
            of Contents*
  On
        April
        28, 2005, a shareholder derivative suit styled Hans J. Baier, derivatively
        on
        behalf of Nominal Defendant, Citadel Security Software Inc., v. Steven B.
        Solomon, Richard Connelly and Chris Economou, Civil Action No. 3-05CV-0846-D,
        was filed in United States District Court for the Northern District of Texas,
        Dallas Division, against certain of the Company’s officers and directors: Steven
        B. Solomon, the Chief Executive Officer and a Director of the Company, Richard
        Connelly, the Company’s Chief Financial Officer and Chris Economou, a Director
        of the Company. The suit also names the Company as a nominal defendant. Based
        on
        allegations substantially similar to the federal securities action, the suit
        asserted claims for the defendants’ alleged violations of state law, including
        breaches of fiduciary duties, abuse of control, gross mismanagement, waste
        of
        corporate assets and unjust enrichment for the same period of time at issue
        in
        the federal securities action. The suit also purported to assert a claim
        against
        Steven B. Solomon and Richard Connelly pursuant to a federal statute for
        reimbursement of bonuses, profits and compensation. On September 12, 2005,
        the
        Court entered an order staying this case until thirty (30) days after the
        Court
        rules on the pending motion to dismiss filed by the defendants in the
        consolidated federal securities action described above.
 
 In
        September 2006, the parties in the above-described securities and derivative
        suits applied for a Preliminary Order (“Preliminary Order”) approving settlement
        of all of these suits and the fairness of the terms and conditions of the
        settlement. The hearing was held on December 15, 2006 and the Preliminary
        Order
        was approved by the court. Liabilities under this settlement were fully covered
        under the Company's insurance policies.
 
 ***Meyers
        Litigation Settled***
 
 On
        April
        8, 2005, Meyers Associates, L.P. f/k/a Roan/Meyers Associates, L.P. and f/k/a
        Janssen-Meyers Associates, L.P. (“Meyers”) filed a lawsuit in the Court of
        Chancery of the State of Delaware, in New Castle County, against the Company,
        CT
        Holdings, Inc. f/k/a Citadel Technology, Inc. and f/k/a Citadel Computer
        Systems, Inc. (“CT Holdings”) and certain current and former officers and
        directors of the Company and/or CT Holdings, including Steven B. Solomon,
        the
        Chief Executive Officer and a Director of the Company, Chris A. Economou,
        a
        Director of the Company, Lawrence Lacerte, a former Director of the Company,
        and
        Phillip J. Romano, a former Director of the Company (the “Individual
        Defendants”). The suit alleged that in connection with an action filed in the
        Supreme Court of New York, New York County, to enforce a Settlement Term
        Sheet
        executed on July 7, 2000 by Meyers and CT Holdings, Meyers was awarded a
        judgment against CT Holdings in the amount of $3 million plus interest on
        the
        judgment at the rate of 9% from October 31, 2000 until the date of entry
        of that
        judgment and thereafter at the statutory rate (the “Judgment”). CT Holdings
        appealed the Judgment. The suit alleged that CT Holdings’ May 2002 spin-off of
        its interests in CDSS to CT Holdings’ shareholders rendered CT Holdings
        insolvent and constituted a fraudulent conveyance to defraud CT Holdings’
creditors, including Meyers. The suit asserted fraudulent conveyance claims
        against CDSS and CT Holdings pursuant to Delaware statutory and common law.
        The
        suit also asserted a claim against CDSS for successor liability as the alleged
        successor in interest or alter ego of CT Holdings. The suit alleged that
        the
        Individual Defendants who were officers and/or directors of CT Holdings at
        the
        time of the spin-off breached fiduciary duties allegedly owed to creditors
        of CT
        Holdings, including Meyers, by approving and allowing the spin-off transaction.
        The suit sought to void the spin-off transaction or alternatively, to hold
        CDSS
        liable for the Judgment including interest, to recover damages against the
        Individual Defendants in an amount not less than the Judgment including
        interest, plus an unspecified amount of punitive, consequential and incidental
        damages, as well as attorneys’ fees and costs.
 
 On
        August
        23, 2006, CDSS and certain other parties entered into a Release and Settlement
        Agreement ("Agreement") by and among Meyers and their related parties
        (collectively, the "Meyers Released Parties") on the one hand and defendants
        CT
        Holdings Enterprises, CDSS, Steven B. Solomon, Chris A. Economou, Lawrence
        Lacerte, Mark Rogers, Phillip J. Romano, Axel Sawallich, George Sharp and
        Gilbert Gertner (collectively "Defendants") on the other hand. The Agreement
        provides for the settlement of litigation filed by Meyers Associates against
        defendants CDSS, CT Holdings Enterprises, certain of CDSS's current and former
        directors and officers Steven B. Solomon, Chris E. Economou, Lawrence Lacerte,
        Mark Rodgers, Phillip J. Romano and Axel Sawallich in the Court of Chancery
        of
        the State of Delaware in and for New Castle County (the "Delaware Action")
        asserting various claims, and other litigation against CT Holdings and its
        former officers and directors (the "Actions"). Pursuant to the Agreement,
        CDSS
        paid the sum of $1,250,000 to Meyers Associates, of which $250,000 was paid
        in
        August 2006 and the remaining $1,000,000 was paid on November 1, 2006. As
        a
        result of the payments, the Defendants were released by the Plaintiffs from
        all
        claims in the Actions 91 days after the payments, subject to the terms and
        conditions of the agreement. The $1,250,000 settlement is presented in the
        statement of operations as a “Litigation settlement” for the period from January
        1, 2006 to December 4, 2006.
  F
            -
            31
 *Table
            of Contents*
  From
        time
        to time, CDSS may be subject to additional legal claims incidental to CDSS’s
        business. The Company may suffer an unfavorable outcome as a result of one
        or
        more claims including the specific items discussed previously. CDSS does
        not
        expect the final resolution of these claims, individually or in the aggregate,
        to have a material adverse effect on the Company’s financial position. However,
        depending on the amount and timing of unfavorable resolutions of claims against
        CDSS, or the costs of settlement or litigation, the Company’s ability to
        dissolve the Company in a timely manner and make distributions to shareholders
        could be materially adversely affected.
 
 **NOTE
        Q - SIGNIFICANT CUSTOMERS**
 
 Prior
        to
        the Sale, the Company operated in one business segment, the security software
        segment, but licenses it software and offers its services to a diverse group
        of
        customers in the Fortune 2000 in many industries, as well as, governmental
        agencies at the federal, state and local levels. The following customers
        represented more than 10% of total revenue in at least one of the periods
        presented below:
 
 Period
                  from
                January
                  1, 2006 to
              
              Years
                  Ended December 31,December
                  4, 2006
              
              2005
              
              2004End
                  User Customer:Defense
                  Information Systems Agency
              
              
              27%
              
              
              32%
              
              
              39%Department
                  of Veteran Affairs
              
              
              12%
              
              
              21%
              
              
              41%Department
                  of Energy
              
              
              34%
              
              
              -
              
              
              -Industry
                  Segment:Government
              
              
              82%
              
              
              58%
              
              
              82%Corporate
              
              
              12%
              
              
              25%
              
              
              12%Financial
                  institutions
              
              
              5%
              
              
              13%
              
              
              4%Education
              
              
              -
              
              
              1%
              
              
              1%All
                  other, primarily health
              
              
              1%
              
              
              3%
              
              
              1%Geographic
                  Segments:United
                  States
              
              
              99%
              
              
              99%
              
              
              100%Outside
                  of the United States
              
              
              1%
              
              
              1%
              
              
              -
 
 **NOTE
        R - RELATED PARTY TRANSACTIONS**
 
 On
        August
        11, 2006, the Company’s CEO loaned $3 million to the Company pursuant to a
        promissory note on terms and conditions approved by the disinterested directors
        of the Company. The note provides for 12% interest and a maturity date of
        January 12, 2007. The note is not secured by any assets of the Company and
        no
        equity or warrants were granted in connection with the note. The note provides
        for a prepayment fee in the amount of $500,000 in connection with any
        prepayment, including in connection with an event of default (including breaches
        of the note’s covenants, bankruptcy events or a material adverse effect on the
        Company’s business), or a deemed change of control. On December 4, 2006, as a
        result of the Sale, this note was settled for $3,614,411 including $3,000,000
        of
        principle, $114,411 accrued interest and $500,000 prepayment fee recorded
        as
        interest expense.
 
 During
        2006 and 2005, the CEO advanced funds to the Company to meet short-term working
        capital needs. The CEO advanced approximately $1.7 million to the Company
        during
        2006, all of which was repaid to the CEO prior to December 31, 2006, except
        for
        $5,253 reimbursed to the CEO in January 2007. The total advances during 2005
        totaled approximately $881,000, all of which was repaid to the CEO prior
        to
        December 31, 2005, except for approximately $81,000 reimbursed to the CEO
        in
        January 2006.
 
 In
        connection with the Sale, CDSS entered into an agreement with CT Holdings on
        December 4, 2006 (the “Agreement”). Pursuant to the Agreement with CT
        Holdings:
 
 1.
              CDSS
                  and CT Holdings canceled and terminated the Tax Disaffiliation
                  Agreement
                  dated as of May 17, 2002, and Transition Services Agreement dated
                  as of
                  May 17, 2002 between CDSS and CT Holdings;
 2.
              Each
                  party released the other from all outstanding liabilities to each
                  other;
 3.
              CDSS
                  assigned to CT Holdings causes of action and rights of CDSS related
                  to
                  claims against CDSS’s insurance carrier related to prior
                  litigation;
 4.
              CT
                  Holdings waived any and all rights in and to any of the assets
                  transferred
                  by CDSS pursuant to the Asset Purchase Agreement;
                  and
 5.
              CT
                  Holdings waived any prohibition or restriction to the transactions
                  contemplated by the asset purchase agreement set forth in the Agreement
                  and Plan of Distribution dated as of May 17, 2002 between CDSS
                  and CT
                  Holdings or otherwise.
 
 As
        part
        of the spin off transaction in May 2002, CDSS entered into a transition services
        agreement with CT Holdings, its former parent. The agreement provided that
        CT
        Holdings and CDSS 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 CDSS may need transitional assistance and support.
        The
        transition services agreement provided generally that each of CDSS 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.
        On
        December 4, 2006, pursuant to the terms of the Agreement discussed above,
        the
        transition services agreement was terminated. For the period from January
        1,
        2006 to December 4, 2006 and for the years ended December 31, 2005 and 2004,
        due
        to the uncertainty of collection, the Company had expensed the fees of
        approximately $632,000, $595,000 and $530,000, respectively, to general and
        administrative expense on a monthly basis as incurred. Approximately $687,000
        of
        amounts due from CT Holdings under the transition services agreement were
        forgiven pursuant to the terms of the Asset Purchase Agreement.
  F
            -
            32
 *Table
            of Contents*
  In
        April
        2003, a CT Holdings legal claim associated with a lawsuit was settled for
        $225,000 in cash. CDSS advanced $225,000 to CT Holdings in return for a demand
        note payable bearing interest at 12% per year and a release for any potential
        claims pertaining to the CT Holdings litigation. Since CT Holdings has a
        significant cash deficiency and stockholder's deficit this demand note
        receivable was fully reserved in the second quarter of 2003 as there can
        be no
        assurance that this note will be collected. On December 4, 2006, pursuant
        to the
        terms of the Agreement discussed above, the $225,000 note and $102,379 accrued
        interest (also fully reserved) was forgiven.
 
 During
        the years ended December 31, 2006, 2005 and 2004 the Company incurred legal
        fees
        in the amount of approximately $565,000, $263,000 and $237,000, respectively,
        to
        a law firm in which an attorney who is a partner and who was a former CT
        Holdings' employee and is a relative CDSS's CEO.
  **NOTE
        S - QUARTERLY INFORMATION (unaudited)**
 2006
                  For the Quarter Ended
              
              October
                  1, 2006 to
              
              January
                  1, 2006 toMarch
                  31
              
              June
                  30
              
              September
                  30
              
              December
                  4, 2006
              
              December
                  4, 2006RevenueLicense
                  fees
              
              $
              3,678,648
              
              $
              899,029
              
              $
              4,068
              
              $
              356,019
              
              $
              4,937,764Content,
                  subscription, and customer support services
              
              
              1,460,233
              
              
              1,695,224
              
              
              1,770,278
              
              
              1,258,988
              
              
              6,184,723Professional
                  services
              
              
              287,168
              
              
              362,277
              
              
              256,044
              
              
              163,877
              
              
              1,069,3665,426,049
              
              
              2,956,530
              
              
              2,030,390
              
              
              1,778,884
              
              
              12,191,853Costs
                  of revenue
              
              
              1,136,457
              
              
              1,082,005
              
              
              1,055,169
              
              
              793,874
              
              
              4,067,505Operating
                  expenses
              
              
              5,006,525
              
              
              4,150,749
              
              
              5,626,720
              
              
              12,053,021
              
              
              26,837,015Operating
                  loss
              
              
              (716,933
              )
              
              (2,276,224
              )
              
              (4,651,499
              )
              
              (11,068,011
              )
              
              (18,712,667
              )Interest
                  expense, net
              
              
              (174,998
              )
              
              (130,341
              )
              
              (201,757
              )
              
              (907,237
              )
              
              (1,414,333
              )Gain
                  on Sale
              
              
              -
              
              
              -
              
              
              -
              
              
              55,546,329
              
              
              55,546,329Loss
                  before income taxes
              
              
              (891,931
              )
              
              (2,406,565
              )
              
              (4,853,256
              )
              
              43,571,081
              
              
              35,419,329Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              (893,921
              )
              
              (893,921
              )Net
                  loss attributable to common shareholders
              
              $
              (891,931
              )
              $
              (2,406,565
              )
              $
              (4,853,256
              )
              $
              42,677,160
              
              $
              34,525,408Net
                  loss per share to common shareholders-
                  basic
              
              $
              (0.03
              )
              $
              (0.08
              )
              $
              (0.16
              )
              $
              1.40
              
              $
              1.13-
                  diluted
              
              $
              (0.03
              )
              $
              (0.08
              )
              $
              (0.16
              )
              $
              1.03
              
              $
              0.83Weighted
                  average shares outstanding-
                  basic
              
              
              30,518,230
              
              
              30,518,230
              
              
              30,518,230
              
              
              30,518,230
              
              
              30,518,230-
                  diluted
              
              
              30,518,230
              
              
              30,518,230
              
              
              30,518,230
              
              
              41,555,579
              
              
              41,461,599
  F
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            33
 *Table
            of Contents*
  2005
                  For the Quarter EndedMarch
                  31
              
              June
                  30
              
              September
                  30
              
              December
                  31
              
              YearRevenueLicense
                  fees
              
              $
              193,858
              
              $
              613,418
              
              $
              765,128
              
              $
              996,049
              
              $
              2,568,453Content,
                  subscription, and customer support services
              
              
              1,160,511
              
              
              1,201,350
              
              
              1,079,483
              
              
              1,426,198
              
              
              4,867,542Professional
                  services
              
              
              385,557
              
              
              878,533
              
              
              349,229
              
              
              1,237,781
              
              
              2,851,1001,739,926
              
              
              2,693,301
              
              
              2,193,840
              
              
              3,660,028
              
              
              10,287,095Costs
                  of revenue
              
              
              1,077,349
              
              
              1,157,640
              
              
              1,171,128
              
              
              1,260,586
              
              
              4,666,703Operating
                  expenses
              
              
              5,631,755
              
              
              6,541,591
              
              
              5,807,592
              
              
              5,797,661
              
              
              23,778,599Operating
                  loss
              
              
              (4,969,178
              )
              
              (5,005,930
              )
              
              (4,784,880
              )
              
              (3,398,219
              )
              
              (18,158,207
              )Interest
                  expense, net
              
              
              (35,000
              )
              
              (41,870
              )
              
              (49,496
              )
              
              (278,306
              )
              
              (404,672
              )Loss
                  before income taxes
              
              
              (5,004,178
              )
              
              (5,047,800
              )
              
              (4,834,376
              )
              
              (3,676,525
              )
              
              (18,562,879
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              
              (5,004,178
              )
              
              (5,047,800
              )
              
              (4,834,376
              )
              
              (3,676,525
              )
              
              (18,562,789
              )Preferred
                  dividends
              
              
              (187,500
              )
              
              (81,250
              )
              
              -
              
              
              -
              
              
              (268,750
              )Non-cash
                  fair value adjustment for exchanged warrants
              
              
              -
              
              
              (274,800
              )
              
              -
              
              
              -
              
              
              (274,800
              )Non-cash
                  fair value adjustment for Series A Shares dividend waiver
              
              
              -
              
              
              -
              
              
              1,826,000
              
              
              -
              
              
              1,826,000Non-cash
                  fair value adjustment for change in Series A Sharesconversion
                  price
              
              
              -
              
              
              -
              
              
              (1,064,000
              )
              
              -
              
              
              (1,064,000
              )Non-cash
                  fair value adjustment for change in exercise price of Exchange
                  and Series
                  B Warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              (43,226
              )
              
              (43,226
              )Non-cash
                  accretion of beneficial conversion feature
              
              
              (61,542
              )
              
              (61,542
              )
              
              (646,168
              )
              
              -
              
              
              (769,252
              )Net
                  loss attributable to common shareholders
              
              $
              (5,253,220
              )
              $
              (5,465,392
              )
              $
              (4,718,544
              )
              $
              (3,719,751
              )
              $
              (19,156,907
              )Net
                  loss per share to common shareholders-
                  basic and diluted
              
              $
              (0.18
              )
              $
              (0.18
              )
              $
              (0.16
              )
              $
              (0.12
              )
              $
              (0.64
              )Weighted
                  average shares outstanding-
                  basic and diluted
              
              
              29,845,730
              
              
              29,877,708
              
              
              30,044,860
              
              
              30,132,513
              
              
              29,976,179
  **NOTE
          S - SUBSEQUENT EVENT**
 
 On
          January 5, 2007 the Company paid approximately $17,159,000 or $0.50 per
          share to
          shareholders of record on January 2, 2007. In addition approximately $201,000
          was paid to holders of in-the-money stock options under the cash-out
          program.
  F
        -
        34