Unassociated Document

See accompanying notes to condensed financial statements

CONDENSED BALANCE SHEETS

ASSETS	March 31, 2009			December 31,
CURRENT ASSETS:	(unaudited)			2008
Cash and cash equivalents	$	126,270		$	779,071
Accounts receivable		149,554			204,635
Deferred financing costs, net		126,979			324,200
Prepaid expenses		596,997			689,478
Deferred charges, current		1,326,017			811,542

Total Current Assets		2,325,817			2,808,926

PROPERTY AND EQUIPMENT, net		91,114			94,883
DEFERRED CHARGES, less current portion		545,196			239,983
OTHER ASSETS		32,284			26,196

Total Assets	$	2,994,411		$	3,169,988

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	3,973,196		$	3,798,645
Accrued expenses		399,106			331,229
Accrued expenses - registration rights agreement		53,745			53,745
Deferred revenue, current		5,678,810			4,025,026
Convertible notes payable, net of discount		1,440,914			2,421,529
Capital lease obligation, current		24,585			27,291

Total Current Liabilities		11,570,356			10,657,465

DEFERRED REVENUE, less current portion		1,008,388			527,927
DERIVATIVE LIABILITIES		7,139,757			-
CAPITAL LEASE OBLIGATION, less current portion		13,068			16,776

Total Liabilities		19,731,569			11,202,168

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ DEFICIT:
Common stock, no par value; 50,000,000 shares authorized; 19,226,723 and 17,350,798 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively		8,225,955			6,381,921
Additional paid-in capital		4,942,732			11,398,623
Accumulated deficit		(29,905,845	)		(25,812,724	)

Total Stockholders’ Deficit		(16,737,158	)		(8,032,180	)

Total Liabilities and Stockholders’ Deficit	$	2,994,411		$	3,169,988

Part I, Item 1. Financial Statements (continued)

CONDENSED STATEMENTS OF OPERATIONS

See accompanying notes to condensed financial statements

	For the Three Months Ended
	March 31,			March 31,
	2009			2008

REVENUES:
Net sales	$	3,191,630		$	475,046

COST OF SALES		679,704			73,985

GROSS PROFIT		2,511,926			401,061

OPERATING EXPENSES:
Advertising		3,743,694			269,088
Product development		299,737			109,968
Selling, general and administrative		1,251,557			637,228
Investor relations and other related consulting		1,220,002			200,000
Depreciation and amortization		10,336			9,828
Total Operating Expenses		6,525,326			1,226,112

LOSS FROM OPERATIONS		(4,013,400	)		(825,051	)

OTHER INCOME (EXPENSE):
Change in the value of derivative liabilities		109,058			-
Interest expense		(912,509	)		(650,784	)
Total Other Expense, net		(803,451	)		(650,784	)

LOSS BEFORE INCOME TAX EXPENSE		(4,816,851	)		(1,475,835	)

INCOME TAX EXPENSE		200			200

NET LOSS	$	(4,817,051	)	$	(1,476,035	)

Basic and fully diluted net loss per share	$	(0.27	)	$	(0.10	)

Weighted Average Shares Outstanding:
Basic and fully diluted		17,990,516			14,289,259

Part I, Item 1. Financial Statements (continued)

CONDENSED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed financial statements

	For the Three Months Ended
	March 31, 2009			March 31, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,817,051	)	$	(1,476,035	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount		563,215			315,826
Change in value of derivative liabilities		(109,058	)		-
Depreciation and amortization		10,336			9,828
Compensation expense from vested stock options		85,208			29,505
Amortization of deferred financing costs		236,718			242,588
Shares issued for penalties and interest		35,615			243,081
Shares and warrants issued for services		1,323,038			200,000

Changes in operating assets and liabilities:
Accounts receivable		55,081			(11,695	)
Prepaid expenses		92,481			(7,764	)
Deferred charges		(819,688	)		(20,886	)
Other assets		(6,088	)		(4,538	)
Accounts payable and accrued expenses		242,428			(53,004	)
Deferred revenue		2,134,245			389,629
Cash Flows Used In Operating Activities:		(973,520	)		(143,465	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(6,567	)		-
Cash Flows Used In Investing Activities		(6,567	)		-

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable and notes payable, net of commissions		333,700			160,000
Principal payments on capital lease obligation		(6,414	)		(5,885	)
Proceeds from sale of stock, net of cash issuance costs		-			175,000
Cash Flows Provided by Financing Activities		327,286			329,115

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(652,801	)		185,650

CASH AND CASH EQUIVALENTS, beginning of period		779,071			236,995

CASH AND CASH EQUIVALENTS, end of period	$	126,270		$	422,645

Part I, Item 1. Financial Statements (continued)

CONDENSED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed financial statements

	For the Three Months Ended
	March 31, 2009		March 31, 2008
Supplemental disclosures of cash flow information:
Income taxes paid	$	-	$	-
Cash paid for interest	$	2,132	$	2,813

Supplemental schedule of non-cash financing activities:
Property and equipment acquired through capital lease obligation	$	-	$	2,362
Discount on note payable	$	158,887	$	36,092
Warrants issued in connection with sale of stock	$	18,197	$	118,058
Conversion of notes payable to common stock	$	1,739,943	$	-
Cumulative effect of accounting change to accumulated deficit for derivative liabilities	$	723,930	$	-
Cumulative effect of accounting change to additional paid-in capital for derivative liabilities	$	7,065,940	$	-
Value of new warrants and embedded conversion features recorded to derivative liabilities	$	906,805	$	-

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - INTERIM FINANCIAL STATEMENTS

These unaudited interim financial statements have been prepared by CyberDefender Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) that are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations. These unaudited interim financial statements should be read in conjunction with the audited financial statements and footnotes for the Company for its year ended December 31, 2008 included in the Company’s Annual Report on Form 10-K. The results for the three-month interim period ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year ending December 31, 2009.

NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

The Company, based in Los Angeles, California, is a provider of secure content management software. The Company develops and licenses security software and related services. The Company’s goal is to bring to market advanced solutions to combat and prevent online information theft, unwanted advertisements, spam, Internet viruses, spyware and related computer threats.

Going Concern and Management’s Plans

Historically, the Company’s revenues were derived from subscriptions to CyberDefender Anti-Spyware 2006, which included the initial download and one year of updates. The license to use the software was renewed annually with incentives for early renewals. The Company acquired new users with an online direct purchase offer. The offer, to scan a computer for spyware and then pay for removal of spyware, was broadcast in emails, banners and search ads.

In November 2006, the Company launched its new Internet security suite called CyberDefender FREE 2.0 that is free to the subscriber. Revenues are earned from advertising networks which pay the Company to display advertisements inside the software. CyberDefender Early Detection Center is a version of the same software, without the advertising, which is paid for by the subscriber. The annual subscription rate for the version without ads ranges from $12.99 to $49.99, depending on the marketing or distribution channels used by the Company.

On September 27, 2007, the Company announced the launch of CyberDefenderULTIMATE™ and CyberDefenderCOMPLETE™. These are enhanced versions of its security software. For an annual fee, CyberDefenderULTIMATE™ provides year round support for any software or hardware connected to a subscriber’s computer while CyberDefenderCOMPLETE™ provides a one-time fix to a customer’s computer and year-round unlimited anti-malware support for a subscriber’s computer. These new security suites also include 2 gigabytes of online backup. These products are sold for $99.95 to $299.99, depending on the marketing or distribution channels used by the Company.

On November 20, 2008, the Company announced the launch of CyberDefender Registry Cleaner™. CyberDefender Registry Cleaner™ eliminates clutter and junk that builds up within a computer's registry due to the installation and removal of programs, deletion and creation of files and cached records from Web surfing. The annual subscription rate ranges from $19.99 to $29.98, depending on the marketing or distribution channels used by the Company.

The Company’s interim financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses on a GAAP basis of $4,817,051 during the three months ended March 31, 2009 however, as reflected on the Statement of Cash Flows, the Company’s cash used in operations was $973,520 during the three months ended March 31, 2009. In addition, the Company has negative working capital of $9,244,539, of which a large portion relates to deferred revenue and an accumulated deficit of $29,905,845, of which a large portion relates to non-cash charges for the value of equity issued over the years, at March 31, 2009. These items raise substantial doubt about the Company’s ability to continue as a going concern. The Company is confident that the recent increases in sales volume, as evidenced by sales receipts in the current quarter of more than $5 million, will provide the Company with a significant renewable revenue stream related to the ongoing license renewals of thousands of customers that the Company is acquiring every month. However, until these renewals along with new sales of the products provide the Company with the revenue it needs to attain profitability, the Company intends to continue to raise money for operating capital through sales of its securities or by borrowing money. From inception through March 31, 2009, the Company has raised $6,435,000 from debt financing and $1,810,000 from equity financing to develop software and to build out a management team capable of delivering its products to market. The Company’s ability to continue as a going concern is dependent upon its ability to develop additional sources of capital. Management cannot assure that any future financing arrangements will be available in amounts or on terms acceptable to the Company. If additional future financing is not available or is not available on acceptable terms, the Company may be unable to continue its operations. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Company currently has no firm agreements with any third parties for any future transactions and future financings.

CYBERDEFENDER CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassification

To conform to the current year's presentation, as a result of management's continuing analysis of its operating activities, the Company reclassified $73,985 related to amounts previously classified as operating expense to costs of sales with no effect on previously reported net loss. In addition, the Company reclassified $200,000 related to amounts previously classified as selling, general & administrative to investor relations and other related consulting expense with no effect on previously reported net loss.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. Significant estimates made by management are, among others, realization of accounts receivables, recoverability of prepaid expenses, deferred charges and long-lived assets, value of shares and options/warrants granted, valuation of derivative liabilities and valuation of deferred tax assets. Actual results could differ from those estimates and assumptions.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and investments with original maturities of three months or less.

Property and Equipment

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets ranging from three to seven years, using the straight-line method.

Equipment under Capital Lease

The Company leases certain of its furniture and other equipment under agreements accounted for as capital leases. The assets and liabilities under capital lease are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets under lease. Assets under capital lease are depreciated using the straight-line method over their estimated useful lives.

Fair Value of Financial Instruments

Unless otherwise specified, the Company believes the carrying value of financial instruments approximates their fair value.

Revenue Recognition

The Company recognizes revenue from the sale of software licenses under the guidance of Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” and SEC Staff Accounting Bulletin (“SAB”) No. 101 “Revenue Recognition in Financial Statements” as amended by SAB 104.

Specifically, the Company recognizes revenues from its products when all of the following conditions for revenue recognition are met:

i.		persuasive evidence of an arrangement exists,
ii.		the product or service has been delivered,
iii.		the fee is fixed or determinable, and
iv.		collection of the resulting receivable is reasonably assured.

The Company currently sells four products, CyberDefender Early Detection Center (“EDC”), an antivirus and anti spyware software, CyberDefender Registry Cleaner, CyberDefenderULTIMATE™ and CyberDefenderCOMPLETE™, over the Internet. The Company also offers a backup CD of the EDC software for an additional fee. CyberDefenderCOMPLETE™ offers customers one-time technical support and a license for EDC, while CyberDefenderULTIMATE™ offers customers unlimited technical support for a specified period and a license for EDC. Customers order the product and simultaneously provide their credit card information to the Company. Upon receipt of authorization from the credit card issuer, the Company provides technical support if the customer purchased CyberDefenderULTIMATE™ or CyberDefenderCOMPLETE™ and licenses the customer to download EDC over the Internet. As part of the sales price, the Company provides renewable product support and content updates, which are separate components of product licenses and sales. Term licenses allow customers to use the Company’s products and receive product support coverage and content updates for a specified period, generally twelve months. The Company invoices for product support, content updates and term licenses at the beginning of the term. These revenues contain multiple element arrangements where “vendor specific objective evidence” (“VSOE”) may not exist for one or more of the elements. EDC and CyberDefenderULTIMATE™ are in substance a subscription and the entire fee is deferred and is recognized ratably over the term of the arrangement according to the guidance in SOP 97-2 paragraph 49. Revenue is recognized immediately for the sale of the backup CD, CyberDefender Registry Cleaner and for the portion of the sale of CyberDefenderCOMPLETE™ that relates to the one-time technical support as the Company believes that all of the elements necessary for revenue recognition have occurred.

CYBERDEFENDER CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company also uses third parties to sell its software and therefore evaluates the criteria of Financial Accounting Standards Board ("FASB") Emerging Issues Task Force ("EITF") Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” in determining whether it is appropriate to record the gross amount of revenue and related costs or the net amount earned as commissions. The Company is the primary obligor, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, establishes product specifications, and has the risk of loss. Accordingly, the Company's revenue is recorded on a gross basis.

The Company also offers two products which are free to the subscriber, CyberDefender FREE 2.0 and MyIdentityDefender Toolbar. Revenues are earned from advertising networks which pay the Company to display advertisements inside the software or through the toolbar search. Under the guidance of SAB 104, the Company recognizes revenue from the advertising networks monthly based on a rate determined either by the quantity of the ads displayed or the performance of the ads based on the amount of times the ads are clicked by the user. Furthermore, advertising revenue is recognized provided that no significant Company obligations remain at the end of a period and collection of the resulting receivable is probable. The Company’s obligations do not include guarantees of a minimum number of impressions.

Deferred Charges

The Company uses a third party to provide technical support services associated with the CyberDefenderCOMPLETE™ and CyberDefenderULTIMATE™ products. The costs associated with this service are deferred and amortized against the recognition of the related sales revenue.

In addition, the Company uses a third party to process a portion of its product renewal sales. The Company pays a direct acquisition fee to the processor for each completed sale. These direct acquisition fees are deferred and recognized ratably over the term of the arrangement of the associated sale in accordance with FASB Technical Bulletin 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.” The third party processor refunds any direct acquisition fee on any credit card chargeback or on any product that is returned. The refunds are matched against the associated chargebacks and product returns.

Reserves for Product Returns

The Company’s policy with respect to product returns is defined in its End User License Agreement (“EULA”), which states “...products purchased that are downloadable are refundable within the first 30 days after the date of purchase.” Product returns are generally received within 30 days of the original sale and are charged against the associated sale upon receipt of the return. A chargeback occurs when a customer contacts their issuing credit card company directly to request a refund instead of contacting the Company. The Company’s third party processor is usually notified within 30 days of any chargebacks by the issuing credit card company. The third party processor reduces the amounts due to the Company as a result of any chargeback during the preceding 30 day period. As a result, a majority of chargebacks occur within 30 days of the sale event and are recorded prior to closing the previous month’s accounting records. The Company may voluntarily accept returns from a customer after 30 days of purchase. The returns are charged against revenues upon receipt. As of March 31, 2009 and 2008, the Company had $0 accrued for customer returns and chargebacks, based on historical returns.

Concentrations of Risk

Revenues are concentrated in the software industry which is highly competitive and rapidly changing. Significant technological changes in the industry or customer requirements, or the emergence of competitive products with new technologies or capabilities could adversely affect operating results.

As of March 31, 2009, all of our cash and cash equivalents were maintained at a major financial institution in the United States. At times, deposits held with the financial institution may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, are believed to bear low risk. Effective October 3, 2008, the Emergency Economic Stabilization Act of 2008 raised the Federal Deposit Insurance Corporation deposit coverage limits to $250,000 per owner from $100,000 per owner. This program is currently available through December 31, 2009. As of March 31, 2009, the Company had a balance of approximately $537,000 in excess of the FDIC limit.

Advertising expenses are expensed as incurred and consist primarily of various forms of media purchased from Internet-based marketers and search engines. For the three months ended March 31, 2009 and 2008, advertising expense amounted to $3,743,694 and $269,088, respectively. Advertising purchased from four vendors accounted for 92% and 95% of the Company’s total advertising expense for the three months ended March 31, 2009 and 2008, respectively.

CYBERDEFENDER CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

The Company has adopted the liability method of accounting for income taxes pursuant to Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, deferred income taxes are recorded to reflect tax consequences on future years for the differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”). FIN 48 prescribes recognition thresholds that must be met before a tax position is recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company did not make any adjustment to opening retained earnings as a result of the implementation.

Income Taxes (Continued)

Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The Company’s evaluation was performed for the tax years ended December 31, 2004 through 2008 for U.S. Federal Income Tax and for the tax years ending December 31, 2003 through 2008 for the State of California Income Tax.

The Company does not have any unrecognized tax benefits as of March 31, 2009 that, if recognized, would affect the Company’s effective income tax rate.

The Company’s policy is to recognize interest and penalties related to income tax issues as components of income tax expense. The Company did not recognize or have any accrual for interest and penalties relating to income taxes as of March 31, 2009.

Software Development Costs

The Company accounts for software development costs in accordance with SFAS No. 86, “Computer Software to Be Sold, Leased, or Otherwise Marketed.” Such costs are expensed prior to achievement of technological feasibility and thereafter are capitalized. There have been very limited software development costs incurred between the time the software and its related enhancements have reached technological feasibility and its general release to customers. As a result, all software development costs have been charged to product development expense. For the three months ended March 31, 2009 and 2008, product development costs were $299,737 and $109,968, respectively.

Recently Issued Accounting Pronouncements

The Company has adopted all accounting pronouncements effective before March 31, 2009 which are applicable to the Company.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for the Company beginning January 1, 2009. The Company is evaluating the impact SFAS141R will have on any future business combinations.

NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements(Continued)

Effective January 1, 2009, the Company adopted the provisions of EITF 07-5, " Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result of adopting EITF 07-5, 8,326,036 of the Company’s issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. These warrants have an average exercise price of $1.16 and expiration dates through February 2014. In addition, amounts related to the embedded conversion feature of convertible notes issued previously treated as equity pursuant to the derivative treatment exemption were also no longer afforded equity treatment. As such, effective January 1, 2009, the Company reclassified the fair value of these common stock purchase warrants and the fair value of the embedded conversion features, which both have exercise price reset features, from equity to liability status as if these warrants and embedded conversion features were treated as a derivative liability since the earliest date of issue in September 2006. On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, approximately $7,065,940 to beginning additional paid in capital, $723,930 to opening retained earnings and $6,342,010 to a long-term derivative liability to recognize the fair value of such warrants and embedded conversion features on such date. During the three months ended March 31, 2009, the Company issued 1,192,000 common stock purchase warrants that contained features that required the Company to record the fair value as a derivative liability. In addition, the value related to the embedded conversion feature of convertible notes issued during the current period were also recorded as a derivative liability. The fair value of these common stock purchase warrants and the embedded conversion feature on their respective value date for the three months ended March 31, 2009 was $906,805. The total value of these derivative liabilities declined to $7,139,757 as of March 31, 2009. As such, we recognized a $109,058 gain from the change in fair value of these warrants for the three months ended March 31, 2009.

All future changes in the fair value of these warrants and embedded conversion features will be recognized currently in earnings until such time as the warrants are exercised or expire and the debt is converted to common stock or repaid. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:

	March 31,			January 1,
	2009			2009
Annual dividend yield		0.0	%		0.0	%
Average expected life (years)		3.60			3.78
Risk-free interest rate		2.82	%		2.42	%
Expected volatility		94	%		98	%

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond back to October 2007 when the Company’s shares began trading. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on 10-year U.S. Treasury securities.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, the Company adopted the provisions of SFAS 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year, which we adopted on January 1, 2009. The adoption of SFAS 157 did not have a material effect on the Company’s financial position or results of operations. The book values of cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these instruments.

The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

	•		Level one — Quoted market prices in active markets for identical assets or liabilities;

	•		Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

	•		Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. Liabilities measured at fair value on a recurring basis are summarized as follows (unaudited):

	Level 1		Level 2		Level 3		2009
Fair value of warrants		-	$	6,825,120		-	$	6,825,120
Fair value of embedded conversion feature related to convertible notes		-		314,637		-	$	314,637

Total	$	-	$	7,139,757	$	-	$	7,139,757

The Company has no assets that are measured at fair value on a recurring basis. There were no assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2009.

NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loss Per Share

In accordance with SFAS No. 128, “Earnings Per Share”, the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of March 31, 2009 and 2008, there were 15,329,433 and 10,216,817 shares of potentially dilutive securities outstanding, respectively. As the Company reported a net loss, none of the potentially dilutive securities were included in the calculation of diluted earnings per share since their effect would be anti-dilutive for that reporting period.

Stock Based Compensation

The Company applies SFAS No. 123 (Revised 2004), “Share Based Payment” (“SFAS No. 123R”), which requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” for all share-based payments granted prior to and not yet vested as of January 1, 2006 and share-based compensation based on the grant-date fair value determined in accordance with SFAS No. 123R for all share-based payments granted after January 1, 2006. For non-employee stock based compensation, the Company recognizes an expense in accordance with SFAS No. 123 and values the equity securities based on the fair value of the security on the date of grant. For stock-based awards the value is based on the market value of the stock on the date of grant or the value of services, whichever is more readily available. Stock option awards are valued using the Black-Scholes option-pricing model.

The Company accounts for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with the provisions of EITF Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services”, and EITF Issue No. 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other than Employees”. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

In accordance with EITF Issue No. 00-18, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid expense in its balance sheet.

NOTE 3 – RESTRICTED CASH

Under a credit card processing agreement with a financial institution the Company was required to maintain a security reserve deposit as collateral. The amount of the deposit was at the discretion of the financial institution and as of March 31, 2009 and December 31, 2008 was $15,000. This amount is included in prepaid expenses on the accompanying balance sheets.

NOTE 4 - STOCKHOLDERS’ DEFICIT

Common Stock

On October 18, 2007, the Company began an offering of units. Each unit consisted of 25,000 shares of common stock and a warrant to purchase 18,750 shares of common stock at an exercise price of $1.25 per share. The warrants have a term of five years. Pursuant to the warrant agreements, from and after the warrant issue date, in the event the Company sells common stock for less than the exercise price or issues securities convertible into or exercisable for common stock at a conversion price or exercise price less than the exercise price (a “Dilutive Issuance”), then the exercise price shall be multiplied by a fraction, the numerator of which is the number of shares of common stock sold and issued at the closing of such Dilutive Issuance plus the number of shares which the aggregate offering price of the total number of shares of common stock sold and issued at the closing of such Dilutive Issuance would purchase at the exercise price, and the denominator of which is the number of shares of common stock issued and outstanding on the date of such Dilutive Issuance plus the number of additional shares of common stock sold and issued at the closing of such Dilutive Issuance. As of March 31, 2009, the exercise price per share of the warrants has not been reduced as a result of any Dilutive Issuance. The purchase price was $25,000 per unit.

During February and March, 2008, the Company raised $175,000 through this offering and issued 175,000 shares of common stock and warrants to purchase 131,250 shares of common stock. The warrants issued in connection with the units were valued at $118,058 using the Black-Scholes option pricing model. Issuance costs consisted of a 7% cash fee and an additional warrant to purchase 8,750 shares of common stock with an exercise price of $1.00 per share valued at $7,895 using the Black-Scholes option pricing model. In May 2008, the Company updated the agreement prospectively with the placement agent to increase both the cash and warrant placement fees from 7% to 9% as well as to provide to the placement agent a 2.5% cash expense allowance.

On February 12, 2008, the Company entered into a consulting agreement with New Castle Consulting. Pursuant to this agreement, New Castle provided investor relations services to the Company for a period of 6 months in exchange for payment of $4,500, which was made in conjunction with the execution of the agreement, a monthly fee of $4,500 the payment of which began in March 2008, the issuance of 100,000 shares of restricted common stock valued at $100,000 and an indemnity. As the shares were unforfeitable upon issuance and there was no guarantee of future benefit to be provided, the value of the shares was expensed upon issuance to investor relations and other related consulting expense in the quarter ended March 31, 2008.

On February 14, 2008, the Company entered into a consulting agreement with Kulman IR. Pursuant to this agreement, Kulman was to provide investor relations services to the Company for a period of 12 months in exchange for a monthly fee of $3,500, the issuance of 100,000 shares of restricted common stock valued at $100,000, the payment of pre-approved expenses incurred by Kulman in discharging its obligations under the agreement and cross-indemnities. In regards to the stock that was issued, 50,000 shares vested immediately, 25,000 shares vested on August 7, 2008 and the remaining 25,000 shares were to vest on October 7, 2008. During August 2008, the Company terminated the agreement and cancelled the 25,000 unvested shares. As there was no guarantee of future benefit to be provided, the value of the vested shares was expensed upon issuance to investor relations and other related consulting expense in the quarter ended March 31, 2008.

In February 2009, the Company issued 94,628 shares of restricted common stock valued at $1.10 per share to a vendor as settlement for past services rendered.

See Note 5 for additional shares issued during the three months ended March 31, 2009 related to the convertible notes payable.

On November 11, 2008, the Company entered into a consulting agreement with Newview Consulting L.L.C. (“Newview”) Pursuant to this agreement, Newview will provide investor relations services for a period of 6 months in exchange for warrants to purchase 2,250,000 shares of common stock at a price of $1.25 per share. 900,000 warrants vested immediately with an estimated fair value of $716,997 using the Black-Scholes pricing model, and 270,000 warrants were to vest on the 1st of each month beginning December 1, 2008 and ending April 1, 2009. The 270,000 warrants that vested on December 1, 2008 had an estimated fair value of $204,619 using the Black Scholes pricing model. These warrants have been expensed to investor relations and other related consulting services. Either party may terminate the agreement with fifteen days written notice. At December 31, 2008, 1,080,000 warrants are unvested and forfeitable. At January 1, 2009, the Company amended the vesting schedule in the Newview warrant to vest the remaining 1,080,000 on the first of each month from January 1, 2009 to June 1, 2009 at the rate of 180,000 warrants per month. As such, 540,000 warrants vested during the three months ended March 31, 2009 and the value of $502,891 using the Black Scholes pricing model was expensed to investor relations and other consulting. At March 31, 2009, 540,000 warrants are unvested and forfeitable.

Stock warrants

On January 17, 2009, the Company entered into a two month consulting agreement with Michael Barrett for consulting services relating to financial management and reporting. As part of the agreement, Mr. Barrett was granted warrants to purchase 2,500 shares of common stock with a term of five years at an exercise price of $1.25 per share, per month for the term of the agreement. The fair value of these warrants for the two months was $3,753 using a Black Scholes pricing model and were expensed during the current period to investor relations and other consulting expense.

On October 30, 2008, the Company executed a letter of intent with a subsidiary of Guthy-Renker, Guthy Renker Match, LLC (“GRM”) to create, market and distribute direct response advertisements to sell the Company’s products. GRM is responsible for creating, financing, producing, testing and evaluating a radio commercial to market the Company’s products in exchange for $50,000 and a fully vested, non-forfeitable warrant to purchase 1,000,000 shares of common stock at a price of $1.25 per share with an estimated fair value of $951,495 using the Black-Scholes pricing model. The fair value of the warrant was capitalized at the time of issuance and has been expensed over the five month term of service. For the three months ending March 31, 2009, the Company expensed $570,897 to investor relation and other consulting expense. Subsequent to December 31, 2008, the Company entered into a Media and Marketing Services Agreement with GRM as described below, and amended this warrant.

On March 24, 2009, the Company entered into a Media and Marketing Services Agreement with GRM. Pursuant to the agreement, GRM will provide direct response media campaigns, including radio and television direct response commercials, to promote the Company’s products and services and will purchase media time on the Company’s behalf. During the term of the agreement, which is to continue until August 31, 2010, subject to certain rights of termination, GRM will be the exclusive provider of all media purchasing and direct response production services. On June 23, 2009, assuming that the agreement has not been terminated, the Company will appoint a representative of GRM to the Company’s board of directors. This director will continue to serve throughout the term of the agreement and for so long as GRM owns shares of the Company’s common stock or the right to purchase shares of the Company’s common stock which constitute at least 5% of the Company’s issued and outstanding common stock.

As compensation for GRM’s services, the Company agreed to amend the warrant described above so that the terms were consistent with the warrants described below. None of the amended terms resulted in an accounting change to the warrant. In conjunction with the execution of the Media and Marketing Services Agreement and for creating, financing, producing, testing and evaluating a television commercial to market the Company’s products, the Company issued to GRM a second 5 year warrant for the purchase of 1,000,000 shares of the Company’s common stock at a price of $1.25 per share valued at $712,303 using the Black-Scholes pricing model of which $142,461 was expensed during the three months ended March 31, 2009 to investor relations and other consulting. The fair value of the warrant was capitalized at the time of issuance and will be expensed over the five month expected term of service. This warrant may be exercised only for cash. Finally, the Company agreed to issue to GRM a 5 year warrant for the purchase of 8,000,000 shares of the Company’s common stock at an exercise price of $1.25 per share. This warrant may be exercised only with cash. This warrant will be subject to vesting as follows: for each $2 of media placement costs advanced by GRM on the Company’s behalf, the right to purchase one share of the Company’s common stock will vest. As of March 31, 2009, the right to purchase 50,000 of the 8,000,000 warrant shares has vested and was valued at $35,615 using the Black-Scholes pricing model. The fair value of these 50,000 vested warrants have been expensed to interest expense as the warrants represent compensation to GRM for the advancement of media costs on the Company’s behalf. The remaining 7,950,000 warrants are not guaranteed to vest as they are contingent on GRM advancing media placement costs, as such, these unvested warrants have not been included or accounted for as outstanding dilutive securities at March 31, 2009.

If GRM terminates the agreement due to a breach by the Company in the Company’s performance or as a result of the Company’s discontinuance, dissolution, liquidation, winding up or insolvency, or if the Company terminates the agreement for any reason, any unexpired and unvested rights of GRM to purchase shares of the Company’s common stock pursuant to the agreement will immediately vest. If the Company breaches its payment obligations under the agreement and fails to cure the breach within 15 days after receiving notice from GRM, then the number of warrant shares which would otherwise vest during the month of the delinquent payment will automatically double.

See Note 5 for additional warrants issued during the three months ended March 31, 2009 related to the convertible notes payable.

The following represents a summary of the warrants outstanding at March 31, 2009 and 2008 and changes during the three months then ended:

	Three Months Ended
	March 31, 2009						March 31, 2008

			Weighted						Weighted
	Number		Average		Aggregate		Number		Average		Aggregate
	of		Exercise		Intrinsic		Of		Exercise		Intrinsic
	Warrants		Price		Value		Warrants		Prices		Value

Outstanding, beginning of period		11,029,890	$	1.14				5,741,306	$	1.05

Issued		1,218,300	$	1.25				171,250	$	1.25
Expired/forfeited		-		-				-		-
Exercised		-		-				-		-
Outstanding, end of period		12,248,190	$	1.16				5,912,556	$	1.06

Exercisable, end of period		11,708,190	$	1.15		-		5,912,556	$	1.06		-

The following table summarizes information about warrants outstanding at March 31, 2009:

Exercise Price		Number of Warrant Shares		Weighted Average Remaining Contractual Life (Years)
$	1.00		3,806,600		2.53
$	1.01		779,432		6.69
$	1.20		400,000		3.26
$	1.25		7,262,158		3.84

			12,248,190

The outstanding warrants at March 31, 2009 are held by consultants and other service providers, stockholders, and former noteholders.

In January 2005, the Company adopted the CyberDefender Corporation 2005 Stock Option Plan (sometimes called the CyberDefender Corporation 2005 Equity Incentive Plan and referred to herein as the “2005 Plan”), which consists of equity programs that provide for the granting of Incentive Stock Options or Nonstatutory Stock Options, the issuance of stock appreciation rights, stock purchase rights and awards of stock. Under the terms of the 2005 Plan, the exercise price of options granted may be equal to, greater than or less than the fair market value on the date of grant, the options may have a maximum term of ten years and generally vest over a period of service or attainment of specified performance objectives. The maximum aggregate amount of options that may be granted from the 2005 Plan is 931,734 shares.

Stock options

On October 30, 2006, the Company adopted the Amended and Restated 2006 Equity Incentive Plan (“2006 Plan”) that provides for the granting of Incentive Stock Options or Nonstatutory Stock Options, the issuance of stock appreciation rights, stock purchase rights and awards of stock. Under the terms of the 2006 Plan, the exercise price of options granted may be equal to, greater than or less than the fair market value on the date of grant, the options may have a maximum term of ten years and generally vest over a period of service or attainment of specified performance objectives. The maximum aggregate amount of stock based awards that may be granted from the 2006 Plan is 1,375,000 shares.

On March 31, 2008, the Company granted to Michael Barrett, the Company’s former Chief Financial Officer, an option to purchase 20,000 shares of common stock under the 2006 Plan, at a price of $1.00 per share.

In January 2009, the Company granted Kevin Harris, the Company’s Chief Financial Officer, an option to purchase 200,000 shares of common stock at an exercise price of $1.00 per share, vesting as follows: 25,000 of the option shares will vest upon grant; 25,000 of the option shares will vest three months after the grant date; and the balance of 150,000 option shares will vest in equal monthly increments over the term of his employment agreement. In addition, per the terms of the employment agreement, the Company granted an option to purchase 25,000 shares of common stock at an exercise price of $1.00 per shares, vesting evenly over 24 months, as bonus compensation.

On January 1, 2009, the Company entered into a three month consulting agreement with Unionway International, LLC, an entity controlled by Mr. Bing Liu, for consulting services. As part of the agreement, Mr. Liu has been granted 10-year options to purchase a total of 18,000 shares of common stock at an exercise price of $1.00 per share vesting over the term of the agreement as compensation for 2008 achievements. In addition, Mr. Liu has been granted 10-year options to purchase 5,000 shares of common stock at an exercise price of $1.00 per share vesting 2,500 on January 1, 2009, 1,250 on February 1, 2009 and 1,250 on March 1, 2009.

On January 17, 2009, the Company entered into a two month consulting agreement with Michael Barrett for consulting services relating to financial management and reporting. As part of the agreement, Mr. Barrett was granted options to purchase 2,500 shares of common stock at an exercise price of $1.25 per share, per month for the term of the agreement. The Options are to expire one year from the termination of the agreement.

In January and February 2009, the Company granted to employees options to purchase a total of 38,000 shares of common stock under the 2006 Plan and the 2005 Plan at a price of $1.25 per share.

A summary of stock option activity for the 2005 Plan and 2006 Plan is as follows:

	Three Months ended
	March 31, 2009					March 31, 2008
	Number of Options			Weighted Average Exercise Price		Number of Options			Weighted Average Exercise Price

Outstanding, beginning of period		1,444,084		$	0.83		1,316,384		$	0.75

Granted		291,000		$	1.04		20,000		$	1.00

Exercised		-		$	-		-		$	-

Cancelled		(30,083	)	$	1.22		(32,500	)	$	1.12

Outstanding, end of period		1,705,001		$	0.86		1,303,884		$	0.74

Exercisable, end of period		1,154,016		$	0.75		1,114,988		$	0.69

The weighted-average grant date fair value of options granted during the three months ended March 31, 2009 and 2008 was $0.79 and $0.90 per option, respectively.

As of March 31, 2009 and 2008, 550,985 and 188,896 of the options granted are not vested with an estimated remaining value of $364,408 and $132,110, respectively. At March 31, 2009, 1,154,016 of these options were exercisable with a weighted average remaining contractual term of 7.2 years. The weighted average remaining contractual life of all options outstanding at March 31, 2009 is 7.8 years.

The Company recorded compensation expense associated with the issuance and vesting of stock options of $85,208 and $29,505 for the three months ended March 31, 2009 and 2008, respectively.

There were no stock options exercised during the three months ended March 31, 2009 and 2008.

NOTE 5 - CONVERTIBLE NOTES PAYABLE

On September 12, 2006, the Company entered into a Securities Purchase Agreement with 13 accredited investors pursuant to which it sold 10% secured convertible debentures (the “Debentures”) in the aggregate principal amount of $3,243,378 and common stock purchase warrants to purchase an aggregate of 3,243,378 shares of the Company’s common stock at $1.00 per share (the “Base Conversion Price”). The debenture holders have the right to convert the Debentures into 3,243,378 shares of common stock. The Debentures mature on September 12, 2009 and bear interest at the rate of 10% per year, payable quarterly. If, during the time that the Debentures are outstanding, the Company sells or grants any option to purchase (other than options issued pursuant to a plan approved by our board of directors), or sells or grants any right to reprice its securities, or otherwise disposes of or issues any common stock or common stock equivalents entitling any person to acquire shares of the Company’s common stock at a price per share that is lower than the conversion price of the debentures or that is higher than the Base Conversion Price but lower than the daily volume weighted average price of the common stock, then the conversion price of the Debentures will be reduced. As of March 31, 2009, the conversion price of the Debentures has not been reduced.

Under the terms of the Registration Rights Agreement executed in conjunction with the offering, the Company is obligated to register for resale at least 130% of the shares of its common stock issuable upon the conversion of the Debentures and the exercise of the common stock purchase warrants. However, the agreement also prohibits the Company from registering shares of common stock on a registration statement that total more than one-half of the issued and outstanding shares of common stock, reduced by 10,000 shares.

Pursuant to Amendments No. 1 to the Registration Rights Agreement, the holders of the Company’s Debentures agreed to extend the filing date of the registration statement to October 31, 2006, and pursuant to Amendment No. 2 to the Registration Rights Agreement, the holders of the Company’s Debentures agreed to extend the filing date of the registration statement to November 3, 2006. The Company did not meet the 10 day response period for responding to an SEC request for additional information nor did the Company meet the target registration statement effectiveness date of January 10, 2007. The holders did not agree to waive the liquidated damages that accrued due to the Company’s failure to meet the 10 day period for responding to an SEC request for additional information nor did the holders agree to waive the liquidated damages that accrued due to the Company’s failure to have the registration statement declared effective by January 10, 2007.

In accordance with FASB Staff Position Emerging Issues Task Force (“FSP EITF”) 00-19-02, “Accounting for Registration Payment Arrangements,” the Company believed, at the time the Debentures were issued, that it was probable that it would be in violation of certain filing provisions within the Registration Rights Agreement and recorded $111,897 as a discount to the Debentures. At December 31, 2006, the Company estimated its liquidated damages to be $225,415 and therefore recorded an additional expense of $113,518 in loss on registration rights agreement in the statement of operations. On March 23, 2007 the Company entered into a Consent and Waiver agreement as more fully described below that determined the actual liquidated damages to be $169,917 calculated through March 23, 2007 and covering the period through April 30, 2007, resulting in a $55,498 decrease to the liability.

The Company was also required to make an interest payment to the Debenture holders on April 1, 2007. The Consent and Waiver allowed the Company to make the April 1 interest payment and pay the liquidated damages in one of two ways to be chosen by each holder. For payment of the Debenture holder’s pro rata portion of the April 1 interest payment, the Debenture holder could choose to increase the principal amount of his Debenture by his pro-rata share of the accrued interest amount or accept shares of the Company’s common stock valued at $0.85 per share for this purpose. For payment of the Debenture holders pro rata portion of the liquidated damages, each Debenture holder had the same choice, that is, either to increase his Debenture by the pro rata liquidated damages amount or accept shares of the Company’s common stock valued at $0.85 per share for this purpose. If all the Debenture holders were to choose to accept shares of the Company’s common stock in payment of the April 1 interest payment and the liquidated damages, the Company would be required to issue up to a total of 566,336 shares of the Company’s common stock. The Consent and Waiver allowed the Company to issue these shares without triggering the anti-dilution rights included in the original offering documents. The Company issued 180,187 shares in November and December 2007 as partial payment for these liquidated damages valued at $153,167. At December 31, 2007, $16,750 of these damages remained in accrued expenses - registration rights agreement. The Company issued 15,407 shares in January and February 2008 as partial payment for these liquidated damages valued at $13,097. At December 31, 2008 and March 31, 2009, $3,653 of these damages remained in accrued expenses - registration rights agreement. The Company issued 190,090 shares in November and December 2007 as partial payment for the April 1 interest payment of $161,580. The Company issued 15,669 shares in January and February 2008 as partial payment for the April 1 interest payments of $13,319. At December 31, 2008 and March 31, 2009, $3,859 remained in accrued interest.

The Consent and Waiver allowed the Company to issue to Oceana Partners, LLC, without triggering the anti-dilution rights, 50,000 shares of common stock in consideration for research coverage for a 12-month period.

The Company did not meet the April 30, 2007 date for its registration statement to be declared effective by the SEC. The registration statement became effective on July 19, 2007. As a result, the Company incurred additional liquidated damages for the period May 1 through July 19, 2007 of $132,726. On September 21, 2007 the Company received from the holders of the Debentures a second Consent and Waiver. The holders of the Debentures agreed to accept shares of the Company’s common stock at $0.85 per share instead of cash as payment for the interest due on July 1, 2007 and October 1, 2007 and for damages incurred under the Registration Rights Agreement. The Company issued 135,063 shares in February 2008 as partial payment for these liquidated damages valued at $106,518. The Company issued 94,952 shares in February 2008 as partial payment for the July 1 and October 1, 2007 interest payments of $110,147. At December 31, 2008 and March 31, 2009, $26,213 of these damages remained in accrued expenses - registration rights agreement.

The Company did not meet the August 18, 2007 date to file a second registration statement. As a result, the Company incurred additional liquidated damages for the period August 18 through December 19, 2007 of $194,603. The Company received from the holders of the Debentures a third Consent and Waiver, dated February 13, 2008 and amended on August 19, 2008. The third Consent and Waiver waived the requirement included in the Debentures and the Registration Rights Agreement that the Company file a second registration statement, waived the liquidated damages that accrued from and after December 19, 2007 and waived the payment of any interest that would have accrued on the liquidated damages. The holders of the Debentures agreed to accept either additional debentures or shares of the Company’s common stock at $0.85 per share instead of cash as payment for the interest due on January 1, 2008 and as payment of the liquidated damages accrued prior to December 19, 2007 under the Registration Rights Agreement. In August 2008, a holder of the Debentures converted $6,000 of accrued liquidated damages into 6,000 shares of common stock as more fully described below. In September 2008, the Company issued $64,422 in additional debentures as payment of liquidated damages, which included $4,422 of penalty interest, and $26,868 in additional debentures as payment for quarterly interest due on January 1, 2008, which included $1,868 of penalty interest. The additional debentures had a term of 18 months and are convertible at $0.85 per share. During October and December 2008, the Company issued $349,494 in additional debentures as payment of liquidated damages, quarterly interest, and penalty interest. These additional debentures also have a term of 18 months and are convertible at $0.85 per share. The Company issued 3,750 shares in December 2008 as partial payment for these liquidated damages valued at $3,750. At December 31, 2008 and March 31, 2009, $4,732 remained in accrued expenses - registration rights agreement.

According to the terms of the Debentures, the Company is to make interest payments quarterly on January 1, April 1, July 1 and October 1 until September 2009, when the principal amount and all accrued but unpaid interest will be due. To date, holders of the Debentures have agreed to accept the Company’s securities as payment of the interest obligation, in lieu of cash. The Company failed to make the interest payments that were due on April 1, and July 1, 2008, totaling $139,169. On September 22, 2008 the Company received from the holders of the Debentures a fourth Consent and Waiver of defaults of the Debentures. The holders of the Debentures agreed to accept either additional debentures or shares of the Company’s common stock at $0.85 per share instead of cash as payment for the interest due on April 1, July 1, and October 1, 2008, totaling $205,740. In August 2008, certain holders of the Debentures converted $8,694 of accrued interest into 8,694 shares of common stock as more fully described below. During October and December 2008, the Company issued $349,494 in additional debentures as payment of liquidated damages, quarterly interest, and penalty interest. The additional debentures have a term of 18 months and are convertible at $0.85 per share. The Company issued 6,250 shares in December 2008 as partial payment for interest valued at $6,250. At December 31, 2008, $5,915 remained in accrued interest. The Company recorded $45,916 in accrued interest as of March 31, 2009 for the April 1, 2009 interest payment. The Company intends to make these interest payments in cash.

The holders of certain shares and warrants for the purchase of common stock issued in conjunction with the sale of the Company’s Secured Convertible Promissory Notes during the period from November 2005 through March 2006, which were converted on September 12, 2006, also have certain registration rights. These holders agreed to defer their rights to require registration of their securities on the registration statement the Company filed; however, they have maintained the rights to piggyback on future registration statements filed by the Company.

The Company has accounted for the Debentures according to SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,” FSP EITF 00-19-2, EITF 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios ”, EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments and EITF 07-5 "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”. The Company has accounted for the registration rights arrangement under the guidance of FSP EITF 00-19-2 and the warrants and the embedded conversion feature as derivative liabilities under the guidance of EITF 07-5, see Note 2. The value of the Debentures was allocated between the Debentures, the registration rights arrangement and the warrants, including the beneficial conversion feature, which amounted to $63,689, $111,897 and $3,067,792, respectively. The discount of $3,179,689 related to the registration rights arrangement and the warrants, including the beneficial conversion feature, is being amortized over the term of the Debentures. The Company amortized $398,391 and $221,192 to interest expense for the three months ended March 31, 2009 and 2008, respectively. The remaining unamortized warrant and beneficial conversion feature value is recorded as a discount on the Debentures on the accompanying balance sheet.

In addition, as part of the transaction, the Company paid $217,000, issued 1,000,515 shares of common stock in November 2006 valued at $1,000,515 and issued 217,000 unit purchase options with each unit consisting of 1 share of common stock and a warrant to purchase 1 share of common stock for $1.00 per share in November 2006. The unit purchase options were valued at $374,531 using the Black-Scholes option pricing model. These costs, totaling $1,592,046, are being amortized over the term of the Debentures. The Company recorded amortization of $199,165 and $110,579 to interest expense related to the Debentures during the three months ended March 31, 2009 and 2008. The unamortized amount is recorded as part of the deferred financing costs in the accompanying balance sheet.

In November and December 2007, certain holders of the Debentures converted $460,000 of notes and $48,406 of accrued interest into 508,406 shares of common stock at $1.00 per share. The unamortized discount of $253,481 on the converted notes was recorded as interest expense at the time of the conversion.

In August 2008, certain holders of the Debentures converted $300,000 of principal and $15,468 of accrued interest, accrued liquidated damages and penalty interest into 315,468 shares of common stock at $1.00 per share and 86,601 warrants to purchase shares of the Company’s common stock at $1.25 per share. The unamortized discount of $103,310 on the converted notes was recorded as interest expense at the time of the conversion.

In November and December 2008, certain holders of the Debentures converted $481,408 of principal into 481,408 shares of common stock at $1.00 per share. The unamortized discount of $121,673 on the converted notes was recorded as interest expense at the time of the conversion.

In January 2009, certain holders of the Debentures converted $50,000 of principal into 50,000 shares of common stock at $1.00 per share. The unamortized discount of $10,596 and the unamortized debt issuance costs of $5,297 on the converted notes were recorded as interest expense at the time of the conversion.

In February 2009, certain holders of the Debentures converted $601,439 of principal into 601,439 shares of common stock at $1.00 per share. The unamortized discount of $111,523 and the unamortized debt issuance costs of $55,753 on the converted notes were recorded as interest expense at the time of the conversion. In addition, those same holders converted $207,473 of principal amount and accrued interest of certain other debentures received in 2008 into 244,086 shares of common stock at $0.85 per share.

In March 2009, certain holders of the Debentures converted $854,163 of principal into 854,163 shares of common stock at $1.00 per share. The unamortized discount of $135,759 and the unamortized debt issuance costs of $67,869 on the converted notes were recorded as interest expense at the time of the conversion. In addition, certain holders of the 10% convertible debentures converted $26,868 of principal into 31,609 shares of common stock at $0.85 per share.

On November 21, 2008, the Company entered into a fifth Consent and Waiver agreement whereby the holders of the Debentures agreed to allow the Company to sell up to $1,200,000 in aggregate principal amount of the Company’s 10% Convertible Promissory Notes, due eleven months from the date of issuance and convertible into shares of Common Stock at a conversion price of $1.25 per share. In consideration of the Waiver and the consent provided by the holders, the Company agreed to accelerate the maturity date of the 18 month 10% convertible debentures to September 12, 2009 and the Company agreed and acknowledged that the 2006 warrant shares and the shares of common stock underlying the 18 month 10% convertible debentures issued or issuable to each of the holders in payment of interest and liquidated damages pursuant to prior consent and waiver agreements shall carry “piggyback” registration rights.

Per the Consent and Waiver discussed above, in November and December, 2008 the Company entered into a Securities Purchase Agreement, that also included registration rights, with certain accredited investors to which it sold 10% Convertible Promissory Notes in the aggregate principal amount of $845,000, which may be converted at the price of $1.25 per share (subject to adjustment as discussed below) into an aggregate of 676,000 shares of common stock. In conjunction with the sale of the 10% Convertible Promissory Notes, the Company issued common stock purchase warrants to purchase an aggregate of 338,000 shares of common stock at $1.25 per share. In January 2009, the Company completed the sale and issuance of the Company’s 10% Convertible Promissory Notes. Accordingly, the Company received additional gross proceeds of $355,000, which may be converted at the price of $1.25 per share (subject to adjustment as discussed below) into an aggregate of 284,000 shares of common stock. In conjunction with the sale of the 10% Convertible Promissory Notes, the Company issued common stock purchase warrants to purchase an aggregate of 142,000 shares of common stock at $1.25 per share and paid its placement agent a total of $21,300 in commissions and issued to its placement agent a five-year warrant to purchase an additional 21,300 shares of the Company’s common stock, at an exercise price of $1.25 per share.

If, during the time that the 10% Convertible Promissory Notes are outstanding, we sell or grant any option to purchase (other than options issued to our employees, officers, directors or consultants), or sell or grant any right to re-price our securities, or otherwise dispose of or issue any common stock or common stock equivalents entitling any person to acquire shares of our common stock at a price per share that is lower than the conversion price of these notes, then the conversion price of the 10% Convertible Promissory Notes will be reduced according to the following weighted average formula: the conversion price will be multiplied by a fraction the denominator of which will be the number of shares of common stock outstanding on the date of the issuance plus the number of additional shares of common stock offered for purchase and the numerator of which will be the number of shares of common stock outstanding on the date of such issuance plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at the conversion price. A reduction in the conversion price resulting from the foregoing would allow holders of our 10% Convertible Promissory Notes to receive more than 960,000 shares of our common stock upon conversion of the outstanding principal amount. In that case, an investment in our common stock would be diluted to a greater extent than it would be if no adjustment to the conversion price were required to be made.

The total value of the 10% Convertible Promissory Notes was allocated between the 10% Convertible Promissory Notes and the warrants, including the beneficial conversion feature, which amounted to $595,646 and $604,354, respectively. The discount of $604,354 related to the warrants, including the beneficial conversion feature, is being amortized over the term of the 10% Convertible Promissory Notes. The Company amortized $164,824 to interest expense related to the 10% Convertible Promissory Notes for the three months ended March 31, 2009. The remaining unamortized warrant and beneficial conversion feature value is recorded as a discount on the 10% Convertible Promissory Notes on the accompanying balance sheets. At March 31, 2009, $35,799 of interest has been accrued on these notes.

In addition, as part of the transaction, the Company paid $72,000 and issued common stock purchase warrants to purchase an aggregate of 72,000 shares of common stock at $1.25 per share. The warrants were valued at $65,695 using the Black-Scholes option pricing model. These costs, totaling $137,695, are being amortized over the term of the 10% Convertible Promissory Notes. The Company recorded amortization of $37,553 to interest expense during the three months ended March 31, 2009. The unamortized amount is recorded as part of the deferred financing costs in the accompanying balance sheet.

Convertible notes payable consist of the following:

	March 31, 2009			December 31, 2008
10% debentures outstanding	$	1,902,811		$	3,287,754
Unamortized discount on debentures		(461,897	)		(866,225	)
Convertible notes payable, net	$	1,440,914		$	2,421,529

NOTE 6 - NOTES PAYABLE

7.41% Senior Secured Original Issue Discount Notes

During 2007, the Company sold $864,000 in face amount of its 7.41% Senior Secured Original Issue Discount Notes (“7.41% Notes”) and warrants to purchase 400,000 shares of the Company’s common stock for a purchase price of $800,000. The 7.41% Notes are due one year from issuance with interest at 7.41% payable at maturity. One warrant to purchase 5 shares of the Company’s common stock was issued for every $10 of purchase price paid. The warrants may be exercised at a price of $1.20 per share for a period of 5 years beginning nine months after issuance of the warrant. Pursuant to the warrant agreements, if the Company issues common stock or common stock equivalents at a price lower than the warrant exercise price (the “Base Share Price”), then the warrant exercise price will be reduced to equal the Base Share Price and the number of warrant shares issuable will be increased so that the aggregate exercise price, after taking into account the decrease, will be equal to the aggregate exercise price prior to the adjustment. As of March 31, 2009, the exercise price per share of the warrants has not been reduced as a result of the issuance of any of the Company’s common stock or common stock equivalents. The Company has accounted for the debentures according to SFAS 133, EITF 00-19, EITF 98-5 and EITF 00-27. The Company has accounted for the warrants as equity derivative liability under the guidance of EITF 07-5, see Note 2. The value of the 7.41% Notes was allocated between the original issue discount (“OID”), the warrants and the debentures which amounted to $64,000, $242,352 and $557,648, respectively. The discount related to the OID and warrants of $306,352 will be amortized over the one year term of the 7.41% Notes. The warrants issued in connection with the 7.41% Notes were valued using the Black-Scholes option pricing model.

The Company recorded $0 and $76,588 of interest expense related to the amortization of the discount related to 7.41% Notes and warrants for the three months ended March 31, 2009 and 2008, respectively.

As part of the second Consent and Waiver described above in Note 5, the holders of the Debentures agreed to allow the Company to sell the $864,000 face amount of 7.41% Notes in exchange for warrants to purchase 150,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrants were valued at $128,038 using the Black-Scholes option pricing model with the following assumption: term of 5 years, a risk-free interest rate of 4.52%, a dividend yield of 0% and volatility of 124%. These costs were recorded as deferred financing costs and will be amortized over the term of the 7.41% Notes. As part of the issuance of the 7.41% Notes certain officers of the Company transferred to Oceana Partners and Carlin Capital 400,000 shares of common stock valued at $1.00 per share. The value of $400,000 was recorded as deferred financing cost and was amortized over the term of the 7.41% Notes. The transfer of shares from the officers was recorded in additional paid-in capital.

The Company recorded amortization of deferred financing costs of $0 and $132,010 to interest expense related to the 7.41% Notes during the three months ended March 31, 2009 and 2008, respectively.

NOTE 6 - NOTES PAYABLE (Continued)

Pursuant to the Registration Rights Agreement the Company signed in connection with the offering of the 7.41% Notes, the Company was required to register 125% of the number of shares underlying the related warrants. The Company was required to file a registration statement for this purpose within 180 days following the date that the units were sold, and the Company would be in default of the Registration Rights Agreement if it failed to file the registration statement within 30 days following the expiration of the 180 day period. The Company obtained a Consent and Waiver from the holders of the 7.41% Notes in relation to the liquidated damages under the Registration Rights Agreement. As more fully described below the Company issued 19,616 shares for payment of $19,616 of liquidated damages. As of March 31, 2009 and December 31, 2008, the Company has recorded $19,143 in accrued expenses – registration rights agreement.

During 2008, certain holders of the 7.41% Notes converted their notes in the face amount of $675,000 plus accrued interest of $50,133 and penalties of $19,616 into 744,749 shares of the Company’s common stock and warrants to purchase 558,557 shares of the Company’s common stock at an exercise price of $1.25 per share. As the Company’s negotiated conversion was at a price per share identical to the units described in Note 5, no gain or loss was recorded upon the conversion. The Company issued 67,027 warrants to purchase shares of common stock at $1.00 per share for a term of five years, valued at $81,723 per the Black Scholes pricing model, to the placement agent for this conversion.

At December 31, 2008 all of the 7.41% Notes were converted or paid in full.

Note Payable to Shareholder

In March 2008, Gary Guseinov pledged 750,000 shares of his common stock in CyberDefender Corporation to Michael and Casey DeBaecke in exchange for a loan of $160,000 made to the Company. The pledge was non-recourse to Mr. Guseinov in the event the collateral ws foreclosed upon due to the Company’s failure to pay the loan. So long as there was no event of default in connection with the loan, Mr. Guseinov could continue to vote the shares at any annual or special meeting of the shareholders. The loan was due to be repaid on the earlier of two months from signing of the loan document or two days following the Company’s receipt of over $500,000 in new equity capital following the date of the promissory note evidencing the loan. Additionally, the Company issued warrants to purchase 40,000 shares of the Company’s stock. The warrants may be exercised at a price of $1.25 per share for a period of 5 years. The discount related to the warrants of $36,092 was amortized to interest expense during 2008. The warrants issued in connection with the note were valued using the Black-Scholes option pricing model. The loan plus accrued interest was paid in full on July 30, 2008.