Unassociated Document

10-K 1 v179198_10k.htm Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

o	TRANSITION REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________________

Commission file number 000-53475

CYBERDEFENDER CORPORATION

(Name of registrant in its charter)

California (State or other jurisdiction of incorporation or organization)	65-1205833 (I.R.S. Employer Identification No.)

617 West 7th Street, 10th Floor, Los Angeles, California (Address of principal executive offices)	90017 (Zip Code)

Issuer’s telephone number (213) 689-8631

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o (The registrant is not yet subject to this requirement.)

Indicate by check mark if disclosure of delinquent filers pursuant 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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

Large accelerated filer o Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

o Yes x No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. On June 30, 2009, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $48,575,761.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of March 26, 2010 the number of shares of the registrant’s classes of common stock outstanding was 25,829,675.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to stockholders in connection with our 2010 Annual Meeting of Stockholders are incorporated by reference in Part III herein.

CONTENTS

		Page

	Forward-Looking Statements	i

	Part I

Item 1	Business	1

Item 1A	Risk Factors	10

Item 2	Properties	17

Item 3	Legal Proceedings	17

Item 4	Removed and Reserved	17

	Part II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17

Item 6	Selected Financial Data	19

Item 7	Management’s Discussion and Analysis of Financial Condition and Results Of Operations	19

Item 7A	Quantitative and Qualitative Disclosures About Market Risk	28

Item 8	Financial Statements and Supplementary Data	28

Item 9	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	28

Item 9A	Controls and Procedures	28

Item 9B	Other Information	31

	Part III

Item 10	Directors, Executive Officers and Corporate Governance	31

Item 11	Executive Compensation	31

Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	31

Item 13	Certain Relationships and Related Transactions and Director Independence	31

Item 14	Principal Accountant Fees and Services	31

	Part IV

Item 15	Exhibits, Financial Statement Schedules	32

	Signatures and Certifications	34

	Financial Statements	F-1

Forward-Looking Statements

This report contains forward-looking statements throughout and in particular in the discussion at Item 7 titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These are statements regarding financial and operating performance and results and other statements that are not historical facts. The words “expect,” “project,” “estimate,” “believe,” “anticipate,” “intend,” “plan,” “forecast,” and similar expressions are intended to identify forward-looking statements. Certain important risks, including those discussed in the risk factors set forth in Item 1A of this report, could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of these risks include, among other things:

·	our lack of capital and whether or not we will be able to raise capital when we need it;

·	changes in local, state or federal regulations that will adversely affect our business;

·	our ability to market and distribute or sell our products;

·	whether we will continue to receive the services of certain officers and directors;

·	our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and

·	other uncertainties, all of which are difficult to predict and many of which are beyond our control.

We do not intend to update forward-looking statements. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.

PART I

Item 1. Business

Overview

CyberDefender Corporation is a provider of Internet security software and services to the consumer and small business market.

The volume of online threats has continued to rise over the last several years due in part to the personal computer becoming a major source for communication, entertainment and e-commerce for many consumers. Additionally, the increase in the use of mobile devices such as laptop computers, cell phones and “smart phones” with email and web access capabilities and the increase in popularity of online social networking sites have put a larger percentage of the population at risk for cyber-attacks. Consequently, online security has emerged as a major concern for all users of devices that are capable of accessing the Internet.

Our goal is to be a leading provider of advanced solutions to protect consumers and small businesses against threats such as identity theft, Internet viruses and spyware and to provide remote technical resolution services to those who use our products.

We were incorporated as Network Dynamics in California on August 29, 2003, and changed our name to CyberDefender Corporation (“the Company”, “we”, “us” or “our” in this report) on October 21, 2005. Individuals and small businesses that use personal computers make up our subscriber base, therefore we are not dependent on any single customer or on a few major customers. While our products are available for downloading from our website, which makes them available to anyone in the world, we do not have a significant customer base outside of the United States.

Business Developments and Highlights

During 2009 we took the following actions, among others, to enhance our business:

We formed a strategic relationship with GR Match, LLC (“GRM”), a subsidiary of Guthy-Renker LLC, one of the world's largest direct response marketing companies. This partnership has enabled us to add new marketing channels for our products. GRM provides direct response media campaigns for our products, including radio and television direct response commercials, and purchases media time on our behalf, subject to the terms and conditions defined in the Media Marketing and Services Agreement dated March 24, 2009.

·	We formed a strategic relationship with Wiley Publishing, Inc., owner of the For Dummies® trademark, for use of the For Dummies® trademark in connection with the development, sale, distribution and promotion of a new line of products.

·	We formed a strategic relationship with Microsoft to distribute the Bing toolbar through our products.

·	We added key members to our management team, namely, Kevin Harris as Chief Financial Officer and Steve Okun as Chief Revenue Officer.

·	We improved our call center infrastructure by adding a global IVR system and increased total agents by over 250%.

Business Model

Our business is focused on two areas; computer security software and remote PC repair services.

Firewall and AntiVirus software currently accounts for a majority of the Security Software and Services (“SSS”) market. However, the increasing need to counter “zero-day” attacks, that is, viruses or other exploits that take advantage of a newly discovered vulnerability in a program or operating system before the software developer becomes aware of the vulnerability or fixes it, along with the increasing popularity of “defense-in-depth” strategies, wherein coordinated uses of multiple security countermeasures are used to protect the integrity of information assets, will bring unified threat management solutions to the forefront.

Five specific product areas comprise SSS:

AntiVirus/AntiSpyware: This software identifies and/or eliminates harmful software by scanning hard drives, email attachments, disks, Web pages and other types of electronic traffic for any known or potential viruses, malicious code, trojans or spyware.

Identity Protection services: These are services oriented around credit monitoring and identity protection insurance or guarantees.

Remote PC Repair: These services are designed to repair users PCs via remote access. These services incorporate manual malware removal, system restore and PC optimization.

Online Backup: These are services which protect users’ data from corruption, theft and loss. Online backup allows for quick recovery and remediation.

PC Optimization Software: These products are designed to improve the speed of a PC by eliminating unwanted files, improving memory, and reducing CPU load.

SSS Growth Drivers

Viruses, spyware and social engineering attacks are serious threats facing businesses and consumers today. These threats can be used to steal personal information, enable identity theft, damage or destroy information stored on a computer and cause damage to legitimate software, network performance and productivity. These types of malicious programs are introduced to computers in a number of ways, including, but not limited to:

·	poor browser security as most browsers today are full of security holes that are exploited by hackers and criminals;

·	growing use of the Internet and e-mail as a business tool and preferred communication channel;

·	increased use of mobile devices to access key data;

·	continued rapid increases in spam as the majority of spam sent today originates from zombie machines remotely controlled by spammers;

·	explosive growth in spyware causing theft of confidential information, loss of employee productivity, consumption of large amounts of bandwidth, damage to desktops and a spike in help desk calls; and

·	flaws in operating systems that contribute to the wide range of current Internet security threats, particularly if users do not update their computers with patches.

As a result of the foregoing factors, the SSS market has developed and continues to expand in order to respond to the ever-evolving threats presented by malicious programs.

Current Product Limitations

SSS software vendors have attempted to solve Internet security problems with a variety of software applications. Many vendors rely heavily on the end user to properly install and configure their own security software. In addition, many vendors fail to advocate optimal security software installation because they do not offer customers proper live support access. Although many products exist today to address such security issues, these solutions face many limitations, including the following:

No Real-Time Security - Most antivirus and antispyware software applications do not protect personal computers against real-time threats. If new viruses or spyware exist on the Internet but do not reside in risk definition databases, most personal computers exposed to the threat will be infected. Typical virus protection software requires frequent downloads and updates to work properly. If a user does not download a patch timely, the user’s system may no longer be safe. By the time a new virus is announced, it may already be too late to take action, and an infection may have occurred. Also, new patches may take hours to install, decreasing work productivity.

Inability to Catch all Viruses and Malicious Content – Current threat analysis systems are not capable of detecting all malicious codes. With current security networks, software alone cannot detect unknown attacks – human involvement is required. Not only are threats not detected, but threats that are detected are resolved untimely due to intermittent update systems delaying user alerts.

Use of Social Engineering – The increased use of social engineering attacks by cyber criminals has created a new level of problems for consumers and businesses. Even having adequate security software will not necessarily prevent the attack from happening. Most security software does not address this problem.

No Consumer Education – Most security software vendors rely on consumers to install and configure their personal online security. This has led to incorrect security settings, lack of manual updating and an overall disconnect between the user and security software. In addition, consumers are constantly faced with configuration issues which arise as a result of the installation of 3rd party devices and software, which further complicate security. In order for security to work properly, users must have their systems properly repaired and optimized by trained technicians before security software can be installed and made effective. This requires education and a change in consumer behavior.

Costly Updating - Most antispyware and antivirus software providers use a client-server network infrastructure to distribute new spyware and virus definitions. Such solutions are expensive to maintain as they rely on intensive data centers and networks to deliver updates, thereby using a significant amount of bandwidth, which is expensive to obtain. Also, vendors cannot afford to send threat updates continuously and therefore are slow to distribute them. In fact, many software vendors provide updates on a scheduled basis, rather than as the updates are needed. This may leave the PC vulnerable since threats propagate without a schedule, and therefore a PC which was updated on Monday may be effectively infected on Tuesday. “Freeware” or free antivirus and antispyware software downloads offer minimal updates, leaving the user with a false sense of security.

Every consumer or business using any networked device needs to have some form of Internet security. Many PC owners have two to three forms of security software on their PCs in order to maximize protection against most threats. We provide consumers and small business users with a platform of products and services designed to protect against various types of security attacks.

Our business and technology model is based on incorporating security software with remote PC repair services. CyberDefender believes that most consumers cannot install and configure their security software to work properly and usually require the help of a professional to achieve the optimal security setting.

CyberDefender Technology

Conventional Internet security companies use a cumbersome manual process to identify new threats, analyze threats in labs, and distribute threat updates to their user base. These security companies have to broadcast updates to each personal computer user individually in the network. Serious drawbacks to conventional broadcast updates exist, including the following:

·	Due to the expense related to this process; the network cannot be updated in real-time, and instead is updated in batches which are often spaced days apart;

·	Because broadcasting servers are a single point of distribution, they are vulnerable to “flooding” attacks that prevent clients from getting the needed updates; and

·	A threat may block a client computer’s access to the broadcast server, disabling its ability to download an update for the threat.

We believe that we have addressed these shortcomings by developing the earlyNETWORK, our proprietary collaborative Internet security network, to detect, analyze and quarantine new security threats. We believe the earlyNETWORK provides a unique approach to updating personal computer security. We have developed the earlyNETWORK based on certain technology principles commonly found in a peer-to-peer network infrastructure. A peer-to-peer network does not have the notion of clients or servers, but only equal peer nodes that simultaneously function as both “clients” and “servers” to the other nodes on the network. Therefore, as system demands increase, so does the system’s capacity. The peer-to-peer network infrastructure allows us to provide a fluid, distributed system for alerts and updates, and to incorporate a universal threat definition system.

However, the earlyNETWORK is not a conventional peer-to-peer network because the CyberDefender Alert Server is a required checkpoint for all client activities, thus assuring the integrity of the network. The earlyNETWORK is a controlled publishing network that leverages the power of distributed bandwidth to automatically defend against a wide spectrum of software attacks and provides users with proprietary automated processes that rapidly identify and quarantine both known and emerging threats. Each client has a controlled role in relaying the threat updates to as many as 20 clients, thus allowing continuous release of threat updates. As additional users are added our collaborative security network works better. With more clients, threats are picked up faster and updates occur faster as well, because users of our software find peers more easily than they could an update server. Our earlyNETWORK is designed to reduce the lag time between the identification of a new security threat by our Early Alert Center and notification to the personal computers that are part of the earlyNETWORK. Users of our software who cannot connect with other users will always be able to fall back on the Alert Server which is the central source for threat analysis and notification.

Our earlyNETWORK works as follows. Customers become a part of the earlyNETWORK by downloading and installing one of our internet security products (i.e. CyberDefender Early Detection Center V2.0 or, when it was offered, CyberDefender FREE V2.0), discussed below. Unusual behavior is detected by a personal computer that is part of our earlyNETWORK. The potential threat may be anything from spam to a virus. The program puts the potential threat on standby, and reports it to our Alert Server. The Alert Server compares the threat to existing threat definitions. If the Alert Server does not recognize the threat, the threat is sent to AppHunter for analysis.

AppHunter is an automated system that manages the threat analysis process. First, AppHunter tests the undefined threat on an isolated computer that is automatically wiped clean after each test. Based on the behavior of the test computer, AppHunter ranks the threat on a scale from one to ten. Rankings of five and above are classified as infectious (viruses). Additionally, AppHunter carries out a confidential set of proprietary verifications to ensure that the threat itself is not an attempt to deceive or hack the network.

As there is a wide set of possible attacks that do not qualify as viruses, AppHunter is supplemented by a team of human technicians who classify threats that rank below 5 in severity. Threat definitions are added as quickly as possible to our definition database, which is then updated to our users via our earlyNETWORK. We continually make changes to our technology to make sure that we address as many security concerns as possible.

Using our peer-to-peer technology, Alert Server notifies users of our software of the threat who, in turn, notify up to 20 other users (or “peers”) in an ever-widening circle. This distributed notification process frees up the Alert Server to deal with incoming alerts from clients that have encountered unexpected behavior, and makes the network truly responsive and “in tune” with its users.

This approach is different and, we believe, significantly faster and cheaper than traditional Internet security companies that provide manual, broadcast-updated threat management systems. The nature of traditional Internet security companies, which assume a single point of threat capture, a cumbersome threat analysis system and an intermittent scheduled update system, creates a “coverage gap” which can delay alerts on important new infectious attacks for 12 hours or more. However, our proprietary technology quickly distributes threat updates to all computers that are part of the earlyNETWORK. For example, our system for generating threat reports, the Early Alert Center, first reported the Sasser.E virus at 11:52 p.m. on May 7, 2004. This was one to two days before other security software vendors announced their discoveries of the same virus. We believe that our update process occurs substantially faster than that of any competitive system and that we are the first to provide threat updates in this manner.

Additionally, because the cost of updating our software via the earlyNETWORK is minimal, Alert Server can send out updates as fast as threats are confirmed, which we believe results in superior security coverage. In general, from the time the first client has picked up the new threat to the updating of the network, about an hour passes. The network responds quickly to new threats because it enlists all the machines in the earlyNETWORK to act as listening posts for new threats. As the network grows, updates will grow closer and closer to real time. Our solution works well with existing security software and can operate as an additional layer of security on a personal computer.

Proprietary Technology Overview

The following is a description of our proprietary technologies:

1. Threat Protection Network V1.0 / V2.0 (“TPN”)

Sophisticated threat analysis platform which utilizes CyberDefender’s proprietary threat analysis engine and updating technology.

A patent application covering this technology was filed on September 22, 2005.

2. Secure Peer to Peer Network V1.2/V2.0

Dynamic secure peer-to-peer network which utilizes cloud computing and various proprietary security protocols in order to update PCs against new threats.

A patent application covering this technology was filed on September 22, 2005.

3. CyberHunter V1.0

A proprietary web crawling technology which identifies and collects malware information found on the web and reports it to the TPN.

4. CyberDefender Early Detection Center V2.0

Windows PC Internet security suite designed to protect consumers and small businesses against viruses, spyware, spam and phishing attacks.

5. Web Access Protection – CyberDefender MyIdentityDefender V1.0/V1.5

Proprietary anti-phishing and web access protection technology designed for the Windows Internet Explorer browser.

Products

On November 20, 2006, we began providing a suite of Internet security products called CyberDefender Early Detection Center V2.0 (“EDC”). We also offered CyberDefender FREE V2.0 as a free download in an ad-supported version. There was no trial period and no monthly or annual fee to pay for using CyberDefender FREE V2.0. Instead, we received payments from the advertisers, typically at the end of each month. We stopped offering the free version in late 2009. In addition to EDC, our core product, CyberDefender also markets the following products and services described below. We distribute our software via the Internet and on computer disk. Additionally, we offer technical support services on a one-time basis or via an annual subscription. These services are provided by a combination of in-house and out-sourced technical support representatives. These services are also sold bundled with our software products.

The following is a detailed description of our products and services:

CyberDefender Early Detection Center V2.0 (EDC)

Early Detection Center V2.0 is a Windows PC Internet security suite designed to protect consumers against spyware, viruses, phishing attacks and spam. CyberDefender Early Detection Center utilizes the earlyNETWORK and includes unlimited threat definition updates during the subscription term.

CyberDefender FREE V2.0 (No longer distributed)

FREE V2.0 has the same technology features as the CyberDefender Early Detection Center V2.0. This version was offered free to consumers and is supported by impeded banner advertising. Users can upgrade to the non ad supported version (CyberDefender Early Detection Center V2.0). Users no longer receive unlimited updates as CyberDefender has stopped supporting this version of the software.

CyberDefender Registry Cleaner V1.0

Registry Cleaner V1.0 is Windows PC optimization software designed to improve performance and speed up PC speed. CyberDefender Registry Cleaner V1.0 fixes common Windows registry errors. Users will receive unlimited updates during the subscription term.

CyberDefender FamilyPak

The FamilyPak offers the same technology as CyberDefender Early Detection Center V2.0. FamilyPak is designed for families with multiple PCs or small businesses running multiple PCs.

MyIdentityDefender V1.0

A free Windows Internet Explorer browser plug-in designed to protect users against phishing attacks and dangerous websites, this product is offered for free and generates revenue through an imbedded search engine powered by InfoSpace.

CyberDefender Identity Protection Service

This is an identity protection service offering users basic ID protection features and a $25,000 identity theft insurance policy. This is a monthly subscription product.

CyberDefender Identity Protection Service with Credit Monitoring

This version of the CyberDefender Identity Protection Services includes credit monitoring. This is a monthly subscription product.

AntiSpyware For Dummies®

AntiSpyware For Dummies® is a Windows PC Internet security suite designed to protect consumers against spyware, viruses, phishing attacks and spam. This product utilizes the earlyNETWORK and includes unlimited threat definition updates during the subscription term.

Remote PC Repair Services

Our support services are designed to help customers with a wide range of technical support issues that may be affecting their desktop or laptop PCs. These services are supported around-the-clock by our in-house and outsourced technical support teams.

The following is a description of our remote PC repair services:

CyberDefenderCOMPLETE

CyberDefenderCOMPLETE is a one-time resolution service which provides a live tech-on-call service for any technology problem.

CyberDefenderPREMIUM

CyberDefenderPREMIUM provides unlimited live premium tech-on-call service from 5 am PST to 10 pm PST 7 days per week. This service includes remote PC repair of any technology problem and is sold in annual or multi-year subscriptions. Services are offered primarily through our US based agents. This service also includes a copy of our Antivirus/Antispyware software.

CyberDefenderULTIMATE

CyberDefenderULTIMATE provides unlimited live premium tech-on-call service 24 hours per day and 7 days per week and includes our Antivirus/Antispyware software. The service is sold in annual or multi-year subscriptions. This service gives our customers access to our offshore agents.

Growth Strategy

Our strategy is to continue to grow our business by increasing our customer base, continually offering new products and services, scaling our current marketing channels, adding new marketing channels and forming new strategic alliances.

As a majority of our products and services are offered on a subscription basis, it is important for the growth of our business that customers renew their subscriptions year after year. Historically, we have seen positive renewal numbers and we continue to work on improving the overall renewal rates through several initiatives, most notably partnering with Vindicia, a leading provider of on-demand billing solutions for online merchants.

In 2009, we added new marketing channels, which helped to establish our brands and drive new business. We plan to scale those channels in the coming years. First, we started marketing our products and services under the brands DoubleMySpeed, MyCleanPC, and MaxMySpeed, via direct response commercials on radio and television through our strategic partnership with GRM. Second, we launched the sale of our products in some initial retail locations via our strategic alliance with Allianex Corporation, which will eventually give us an opportunity to sell our products through over 195,000 retail locations worldwide.

Our strategic alliance with Wiley Publishing, Inc., owner of the For Dummies® trademark, allows us to launch a new line of products and services under an established brand name. This license is an exclusive license in North America to brand Internet security products under the For Dummies® brand.

Our continued investment in our call center infrastructure will allow us to provide the services that should result in increases in revenues and average revenues per user and increased endpoint security to our customers.

Customers

Our primary customers are consumers and small business who use personal computers that use the Windows operating systems. Our customers reside primarily in the United States. The number of our customers fluctuates due to the fact that, while we gain new customers on a daily basis, existing customers can cancel or may not renew their subscriptions.

Marketing

We sell our products directly to computer users through online marketing, direct-response marketing and retailers. Our marketing campaigns are designed to drive new customers to our e-commerce web sites where they purchase our products and services. Additionally, our sales staff and outsourced sales team are trained on our cross-selling and up-selling initiatives.

Competition

Internet security markets are competitive and subject to continuous technological innovation. Our competitiveness depends on our ability to offer products that meet customers’ needs on a timely basis. The principal competitive factors of our products are time to market, quality, price, reputation, terms of sales, customer support and breadth of product line.

Some of our competitors include Webroot Software, Sunbelt Software, Kaspersky Labs, McAfee, Symantec, TrendMicro and Computer Associates. In addition, we may face potential competition from operating system providers and network equipment and computer hardware manufacturers. These competitors may provide various security solutions in their current and future products and may limit our ability to penetrate these markets. These competitors have significant advantages due to their ability to influence and control computing platforms and security layers in which our products operate. At this time, we do not represent a competitive presence in the SSS industry.

Intellectual Property

Our software is proprietary and we make every attempt to protect our software technology by relying on a combination of copyright, patent, trade secret and trademark laws and restrictions on disclosure.

On September 22, 2005 we filed two international patent applications with the U.S. Receiving Office under the Patent Cooperation Treaty (PCT). The application titles and serial numbers are "Threat Protection Network", Application No. US2005/034205 and "System for Distributing Information Using a Secure Peer to Peer Network", Application No. US2005/034069. PCT Application No. US2005/034069 was intentionally abandoned. On April 23, 2007, we filed a national stage application for PCT Application No. US2005/034205 in the European Patent Office (EPO). The EPO Application No. is 05821356.2.

On June 29, 2009, we submitted a provisional application to the U.S. Patent and Trademark Office entitled, "System and Method for Operating an Anti-Malware Network on a Cloud Computing Platform", Provisional Application No. 61/221,477.

Our name, CyberDefender, is a registered trademark.

We also license intellectual property from third parties for use in our products and, in the future, we may license our technology to third parties. We face a number of risks relating to intellectual property, including unauthorized use and copying of our software solutions. Litigation may be necessary to enforce our intellectual property rights or to protect trade secrets or trademarks rights.

Employees

We currently employ 181 full time employees and 4 independent contractors. Our employees are segmented by the following functions: corporate, development, engineering, information technology, marketing, customer service, support services, sales and finance and accounting.

Government Regulation and Probability of Affecting Business

The development of our products is generally not subject to government regulation. However, laws and regulations that apply to Internet communications, commerce and advertising are becoming more prevalent. These regulations could affect the costs of communicating on the Internet and adversely affect the demand for our products or otherwise harm our business, results of operations and financial condition. The United States Congress has enacted Internet legislation regarding children’s privacy, copyrights, sending of unsolicited commercial email and spyware. Other laws and regulations, including laws or regulations that could attempt to tax Internet commerce transactions, may be adopted in the future. This legislation could hinder growth in the use of the Internet generally and decrease the acceptance of the Internet as a communications, commercial and advertising medium.

In addition, the growth and development of the market for Internet commerce may prompt calls for more stringent consumer protection laws, such as laws against identity theft, which may impose additional burdens on companies conducting business over the Internet.

While none of the current laws governing Internet commerce has imposed significant burdens on us to date, in the future our business, results of operations and financial condition could be materially and adversely affected by the adoption or modification of laws or regulations relating to the Internet, or the application of existing laws to the Internet or Internet-based advertising.

Item 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. Discussion about important operational risks that our business encounters can be found in Item 1 and in Item 7 of this report, as well as in the discussion below.

Risks Related to Our Business

We have been in business only since August 2003. Our limited operating history makes evaluation of our business difficult.

We were incorporated in the State of California as Network Dynamics in August 2003 and have limited historical financial data upon which to base planned operating expenses or to accurately forecast our future operating results. We have a limited operating history which makes it difficult to evaluate our performance. You must consider our prospects in light of the risks, expenses and difficulties we face as an early stage company with a limited operating history. These risks include uncertainty as to whether we will be able to:

·	increase revenues from sales of our suite of Internet security products and support services;

·	successfully protect our Collaborative Internet Security Network from all security attacks;

·	successfully protect personal computers or networks against all Internet threats;

·	respond effectively to competitive pressures;

·	protect our intellectual property rights;

·	continue to develop and upgrade our technology; and

·	continue to renew our customers’ subscriptions to current and future products and services.

We incurred net losses for our last four fiscal years. We are not certain that our operations will ever be profitable.

We incurred a net loss of $5,507,600 for the fiscal year ended December 31, 2006, a net loss of $5,866,123 for the fiscal year ended December 31, 2007, a net loss of $11,251,772 for the fiscal year ended December 31, 2008 and a net loss of $13,703,131 for the fiscal year ended December 31, 2009. We can provide no assurance as to when, or if, we will be profitable in the future. Even if we achieve profitability, we may not be able to sustain it.

Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures.” Our disclosure controls and procedures are not effective at the reasonable assurance level due to a significant deficiency. Additionally, we have been unable to maintain effective internal controls over our financial reporting in accordance with section 404 of the Sarbanes-Oxley Act of 2002 due to a material weakness. This could have a material adverse effect on our business and stock price.

Included in this Annual Report are reports on our disclosure controls and procedures and on our internal control over financial reporting. As a result of deficiencies in our disclosure controls and procedures and in our internal control over financial reporting, we concluded that neither was effective as of December 31, 2009. In order to remedy these deficiencies we must appoint independent directors and engage in specific compliance training of our directors, officers and employees. We should also modify our existing accounting systems (such as by recruiting and hiring additional employees to assist with accounting functions, purchasing and installing special software and training employees in the use of it, paying for the costs of continuing education for our employees involved with accounting functions, etc.), which will entail substantial costs and take a significant period of time to complete. We anticipate the costs of implementing these remediation initiatives will be approximately $100,000 to $125,000 per year in increased salaries and $50,000 to $100,000 per year in increased legal and accounting expenses.

Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our stock price and could result in our financial statements being unreliable or loss of investor confidence in our financial reports. Additionally, failure to maintain effective internal control over our financial reporting could result in government investigation or sanctions by regulatory authorities.

We sell our products over the Internet, however such activities may not be secure. If a breach of security occurred, our reputation could be damaged and our business and results of operations could be adversely affected.

A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. Our customers authorize us to bill their credit card accounts directly for the purchase price of our products. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication technology to effect secure transmission of confidential information, including customer credit card numbers. There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments will not result in a compromise or breach of the technology used by us to protect customer transaction data. If any such compromise of our security were to occur, it could have a material adverse affect on our reputation and, therefore, on our business and results of operations.

During the past year our business has grown rapidly. If we do not manage this growth carefully, our business and results of operations could be adversely affected.

Since January 1, 2009, our business has grown rapidly. Our sales increased 285% for the year ended December 31, 2009 as compared to the year ended December 31, 2008. Also, the number of full-time employees and consultants we employ grew from 22 full-time employees and 2 independent contractors as of December 31, 2008 to 69 full-time employees and 50 independent contractors as of December 31, 2009. Growth of our business at this pace places a strain on our management and resources and has required, and may continue to require, the implementation of new operating systems, procedures and controls and the expansion of our facilities. Our failure to manage our growth and expansion could adversely affect our business, results of operations and financial condition. Failure to implement new systems effectively or within a reasonable period of time could adversely affect our business and results of operations.

We have made a significant investment in personnel and overhead in anticipation that our growth will continue. If the projections about our growth are mistaken, our operating results could be adversely affected.

During the past two years we have experienced significant growth and we believe that our growth will continue for the immediate future. For that reason we have made significant investments in personnel and overhead. If our growth does not continue, our operating expenses may exceed our revenue, significantly affecting our ability to continue operating. Although we may be able to eliminate or reduce some of the expenses through a reduction in workforce or a reduction in costs, some costs such as rent could not be easily reduced. As a result, our operating results could be adversely affected.

Our Media and Marketing Services Agreement with GRM could be terminated. The termination of this agreement could adversely affect our operating results.

Pursuant to the terms of the Media and Marketing Services Agreement we entered into with GRM, GRM may terminate the agreement if there is a breach or default in performance of any obligation, unless the breach or default is cured within 15 business days following receipt of written notice from the non-breaching party; upon the discontinuance, dissolution, liquidation or winding up of the other party’s business or the insolvency of the other party; or by either party for any reason by giving the other party written notice of the termination at least 30 days prior to the effective date of termination. Additionally, after May 30, 2009, GRM is entitled to terminate the agreement upon 5 days written notice to us in the event that the average media placement costs for any 3 consecutive months during the term are less than $250,000 per month. If we earn significant revenues from our agreement with GRM, but GRM decides to terminate the agreement, our operating results could be adversely affected.

We market our products and services through search engines (for example, Google and Yahoo!), e-mail and display advertising, affiliate marketing and direct response television and radio commercials. If we fail to market our products effectively, our sales could decline and our results of operations would be adversely affected.

We market our products and related services over the Internet, primarily through space purchased from Internet-based marketers and search engines, and via direct response television and radio commercials. During 2009, we spent approximately 75% of our advertising budget on Internet advertising. We cannot assure you that our advertising will perform as we anticipate or that our advertising costs will not increase significantly. If either of these events were to occur, it would have a material, adverse effect on our results of operations.

We face intense competition from other providers of Internet security software. If we cannot offer consumers a reason to use our software instead of the software marketed by our competitors, our business and the results of our operations will be adversely affected.

We have many competitors in the markets for our products. Our competitors include software companies that offer products that directly compete with our products or that bundle their software products with Internet security software offered by another company. End-user customers may prefer purchasing Internet security software that is manufactured by the same company that provides its other software programs because of greater product breadth offered by the company, perceived advantages in price, technical support, compatibility or other issues.

Some of our competitors include WebRoot Software, Kaspersky Labs and Sunbelt Software. Many of our competitors, such as TrendMicro, McAfee and Symantec and Computer Associates have greater brand name recognition and financial, technical, sales, marketing and other resources than we do and consequently may have an ability to influence customers to purchase their products rather than ours. Our future and existing competitors could introduce products with superior features, scalability and functionality at lower prices than our products and could also bundle existing or new products with other more established products in order to compete with us. Our competitors could also gain market share by acquiring or forming strategic alliances with our other competitors. Finally, because new distribution methods offered by the Internet and electronic commerce have removed many of the barriers to entry historically faced by start-up companies in the software industry, we may face additional sources of competition in the future.

If we are unable to develop and maintain new and enhanced Internet security or identity protection products and support services to meet emerging industry standards, our operating results could be adversely affected.

Our future success depends on our ability to address the rapidly changing needs of our customers by developing, acquiring and introducing new products, product updates and services on a timely basis. The success of our business depends on our ability to keep pace with technological developments and emerging industry standards. We intend to commit a portion of our resources to developing new applications for threat research and new security applications for Web 2.0 and social networking environments. However, if we are unable to successfully develop such products or if we develop these products but demand for them does not materialize or occurs more slowly than we expect, we will have expended resources (such as personnel and equipment) and capital without realizing sufficient revenue to recover these costs, and our operating results could be adversely affected.

If we fail to adapt our technologies to new Internet technologies, we could lose customers and key technology partners. This would have a material adverse effect on our revenues, our business and the results of our operations.

Internet technology is constantly evolving to make the user's experience easier and more comprehensive. Our products use Internet technologies. We must constantly monitor new technologies and adapt our technologies to them as appropriate. If we fail to keep our products compatible with the latest Internet technologies, they may not perform adequately and we may lose not only our customers, but those suppliers and partners whose Internet technologies support our products. The loss of our customers or our suppliers and partners would have a material adverse effect on our revenues, our business and the results of our operations.

Because of the constant development of new or improved products in the software industry, we must continually update our products or create new products to keep pace with the latest advances. While we do our best to test these products prior to their release, they may nevertheless contain significant errors and failures, which could adversely affect our operating results.

With the introduction of Windows 7, the most recent operating system from Microsoft, and constant changes in the software industry as new standards and processes emerge, we are required to continually update our suite of Internet security products. While we do our best to test these products prior to their release, due to the speed with which we are required to release new or updated products to remain competitive, they could be released with errors or they may fail altogether. These errors or failures may put the users of our software at risk because their computers will not be adequately protected against spyware, viruses, spam or phishing attacks. We try to reduce this risk by constantly upgrading our software and by working closely with the creators of the operating platforms, particularly Microsoft, to make sure that our software works with the operating platform. However, if our existing suite of Internet security products and our future products fail to perform adequately or fail entirely, our operating results could be adversely affected.

Our ability to effectively recruit and retain qualified officers and directors could be adversely affected if we experience difficulty in maintaining directors' and officers' liability insurance.

We may be unable to maintain insurance as a public company on terms affordable to us to cover liability for claims made against our officers and directors. If we are unable to adequately insure our officers and directors, we may not be able to retain or recruit qualified officers and directors to manage our business.

Loss of any of our key management personnel, particularly our CEO, could negatively impact our business and the value of our common stock.

Our ability to execute our business strategy will depend on the skills, experience and performance of key members of our management team. We depend heavily on the services of Gary Guseinov, our Chief Executive Officer, Igor Barash, our Chief Product Officer and Secretary, Kevin Harris, our Chief Financial Officer, and Steve Okun, our Chief Revenue Officer. We believe that the skills of Mr. Guseinov would be particularly difficult to replace. We have long-term employment agreements with Mr. Guseinov and Mr. Harris. We have entered into an employment agreement with Mr. Barash, but it is “at-will” and does not preclude him from leaving us. While Mr. Barash and Mr. Okun continue to provide services to us, we have no guarantee that they will continue to do so for any particular period of time.

If we lose members of our key management personnel, we may be forced to expend significant time and money in the pursuit of replacements, which could result in both a delay in the expansion of our business and the diversion of limited working capital. We cannot assure you that we will find satisfactory replacements for these key management personnel at all, or on terms that are not unduly expensive or burdensome to our company. We do not maintain key man insurance policies on any of our key officers or employees.

To date, our business has been developed assuming that laws and regulations that apply to Internet communications and e-commerce will remain minimal. Changes in government regulation and industry standards may adversely affect our business and operating results.

We have developed our business assuming that the current state of the laws and regulations that apply to Internet communications, e-commerce and advertising will remain minimal. At this time, complying with these laws and regulations is not burdensome. However, as time exposes various problems created by Internet communications and e-commerce, laws and regulations may become more prevalent. These regulations may address issues such as user privacy, spyware, pricing, intellectual property ownership and infringement, taxation, and quality of products and services. This legislation could hinder growth in the use of the Internet generally and decrease the acceptance of the Internet as a communications, commercial and advertising medium. Changes in current regulations or the addition of new regulations could affect the costs of communicating on the Internet and adversely affect the demand for our products or otherwise harm our business, results of operations and financial condition.

A large portion of our business is the development and distribution of software. If we do not protect our proprietary information and prevent third parties from unauthorized use of our technology, our business could be harmed.

We rely on a combination of copyright, patent, trademark and trade secret laws, confidentiality procedures, contractual provisions and other measures to protect our proprietary information, especially our software codes. All of these measures afford only limited protection. These measures may be invalidated, circumvented or challenged, and others may develop technologies or processes that are similar or superior to our technology. We may not have the proprietary information controls and procedures in place that we need to protect our proprietary information adequately. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our software or obtain or use information that we regard as proprietary, which could harm our business.

Third parties claiming that we infringe their proprietary rights could cause us to incur significant legal expenses and prevent us from selling our products.

As the number of products in the software industry increases and the functionality of these products further overlap, we believe that we may become increasingly subject to infringement claims, which could include patent, copyright and trademark infringement claims. In addition, former employers of our former, current or future employees may assert claims that such employees have improperly disclosed to us the confidential or proprietary information of these former employers. Any such claim, with or without merit, could:

·	be time consuming to defend;

·	result in costly litigation;

·	divert management’s attention from our core business;

·	require us to stop selling, delay providing or redesign our product; and

·	require us to pay monetary amounts as damages or for royalty or licensing arrangements.

Risks Related to Ownership of Our Securities

Our common stock began to be quoted on the OTC Bulletin Board on August 2, 2007. We cannot assure you that an active public trading market for our common stock will develop or be sustained. Even if an active market develops, it may not be possible to sell shares of our common stock in a timely manner.

While our common stock began to be quoted on the OTC Bulletin Board on August 2, 2007, to date an active trading market has not developed and we cannot guarantee you that an active trading market will ever develop. This situation may be attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk averse and may be reluctant to follow a relatively unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, even though our common stock is quoted on the OTC Bulletin Board, there may be periods of several days or more when trading activity in our shares is minimal or nonexistent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Because an active trading market may not develop, it may not be possible to sell shares of our common stock in a timely manner.

Our common stock is considered a “penny stock”. The application of the “penny stock” rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase transaction costs to sell those shares.

Our common stock is a “low-priced” security or “penny stock” under rules promulgated under the Securities Exchange Act of 1934. In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealer’s duties in selling the stock, the customer’s rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions will probably decrease the willingness of broker-dealers to make a market in our common stock, will decrease liquidity of our common stock and will increase transaction costs for sales and purchases of our common stock as compared to other securities.

The stock market in general and the market prices for penny stocks in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad fluctuations may be the result of unscrupulous practices that may adversely affect the price of our stock, regardless of our operating performance.

Shareholders should be aware that, according to SEC Release No. 34-29093 dated April 17, 1991, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources.

Our executive officers and directors, along with their friends and family, own or control approximately 31% of our issued and outstanding common stock, which may limit the ability of our non-management shareholders, whether acting alone or together, to influence our management. Additionally, this concentration of ownership could discourage or prevent a potential takeover that might otherwise result in our shareholders receiving a premium over the market price for our common stock.

Approximately 31% of the issued and outstanding shares of our common stock is owned and controlled by a group of insiders, including current directors and executive officers and their friends and family. Mr. Guseinov, our Chief Executive Officer and President, owns 23% of our issued and outstanding common stock. Such concentrated control may adversely affect the price of our common stock. These insiders may be able to control matters requiring approval by our shareholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our shareholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions that require shareholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. Our non-management shareholders may have no effective voice in our management.

We do not expect to pay dividends for the foreseeable future, and we may never pay dividends.

We currently intend to retain any future earnings to support the development of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by California state law. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.

Limitations on director and officer liability and our indemnification of officers and directors may discourage shareholders from bringing suit against a director.

Our articles of incorporation and bylaws provide, with certain exceptions as permitted by California law, that a director or officer shall not be personally liable to us or our shareholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage shareholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by shareholders on our behalf against a director. In addition, our articles of incorporation and bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by California law. We have also entered into indemnity agreements with our directors and executive officers.

Future sales of our common stock could put downward selling pressure on our shares, and adversely affect the stock price. There is a risk that this downward pressure may make it impossible for an investor to sell his shares at any reasonable price, if at all.

Future sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could put downward selling pressure on our shares, and adversely affect the market price of our common stock.

Item 2. Properties

Our corporate office is located at 617 West 7th Street, 10th Floor, Los Angeles, California. We hold the premises under the terms of a second amendment to a lease that was signed on September 30, 2009. We commenced occupancy of our current space on February 1, 2010. The monthly rent for the initial 14 month period is abated. The base rent starting in month 15 is $36,111 with increases of 3% per year thereafter through 2020. Aside from the monthly rent, we are required to pay our share of the “Common Operating Expenses”, which are all costs and expenses (including property taxes) incurred by the landlord with respect to the operation, maintenance, protection, repair and replacement of the building in which the premises are located and the parcel of land on which the building is located. We occupy approximately 15,876 square feet of office space, or approximately 8.26% of the building.

Item 3. Legal Proceedings

On February 4, 2010, Scott Wade, a former employee, filed an action against the Company in the Superior Court of the State of California, County of Los Angeles, alleging wrongful termination, disability discrimination, failure to pay wages and breach of contract. Mr. Wade seeks an unspecified amount of damages (general and special, statutory and punitive) as well as injunctive relief and attorney’s fees and court costs. The Company believes the threatened claim is without merit and intends to vigorously defend it.

Item 4. Removed and Reserved

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

On August 2, 2007 our common stock was approved for quotation on the OTC Bulletin Board under the symbol “CYDE”. As of March 26, 2010 we have 25,829,675 shares of common stock issued and outstanding and we have approximately 175 record holders of our common stock. This does not include an indeterminate number of shareholders whose shares are held by brokers in street name.

The following table sets forth, for the periods indicated, the high and low bid information per share of our common stock as reported by the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

	PERIOD	HIGH		LOW

Fiscal Year Ended December 31, 2009	First Quarter	$	1.23	$	0.51
	Second Quarter	$	3.49	$	1.15
	Third Quarter	$	3.20	$	1.80
	Fourth Quarter	$	4.79	$	2.04

Fiscal Year Ended December 31, 2008	First Quarter	$	1.06	$	0.61
	Second Quarter	$	2.00	$	0.63
	Third Quarter	$	1.77	$	0.75
	Fourth Quarter	$	1.40	$	0.70

Dividends

We anticipate that any future earnings will be retained for the development of our business and we do not anticipate paying any dividends on our common stock in the foreseeable future.

Sales of Unregistered Securities

For information relating to unregistered securities that were sold during the three months ended December 31, 2009, please see our Current Report on Form 8-K, which was filed with the Securities and Exchange Commission on November 6, 2009.

Securities Authorized for Issuance under Equity Compensation Plans

Our Board of Directors has adopted, and our shareholders have approved, two equity incentive plans for directors, officers, consultants and employees. The CyberDefender Corporation 2005 Equity Incentive Plan (sometimes referred to as the 2005 Stock Option Plan) was adopted by our directors and approved by our shareholders on December 31, 2004 and includes 753,609 shares of our authorized common stock. As of December 31, 2009 there were 18 awards covering a total of 753,233 shares of our common stock outstanding under this plan. The CyberDefender Corporation 2006 Equity Incentive Plan was adopted by our board of directors and approved by our shareholders on October 30, 2006 and includes 2,401,509 shares of our authorized common stock. As of December 31, 2009 there were fifty-three awards covering a total of 1,103,060 shares of our common stock outstanding under this plan.

The following table illustrates information about the securities issued from these plans:

Plan Category	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 remaining available for future issuance under the equity compensation plan (excluding securities reflected in column (a)
	(a)	(b)	(c)

Shareholder Approved(1)	1,856,293	$1.09	1,298,825

Non-Shareholder
Approved	N/A	N/A	N/A

(1) Includes the CyberDefender Corporation 2005 Equity Incentive Plan (also known as the CyberDefender Corporation 2005 Stock Option Plan) and the CyberDefender Corporation 2006 Equity Incentive Plan.

Item 6. Selected Financial Data

The registrant is a smaller reporting company and is not required to provide this information.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those statements included elsewhere in this report. In addition to the historical financial information, the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” at Item 1A of this report.

Overview

We are a provider of security software and services to the consumer and small business market. We are located in Los Angeles, California. Our mission is to bring to market advanced solutions to protect computer users against identity theft, Internet viruses, spyware and related security threats and provide support services to assist customers with their technology needs.

We have developed a Collaborative Internet Security Network, which we refer to as earlyNETWORK, which is based on certain technology principles commonly found in a peer-to-peer network infrastructure. A peer-to-peer network does not have the notion of clients or servers, but only equal peer nodes that simultaneously function as both “clients” and “servers” to the other nodes on the network. This means that when a threat is detected from a computer that is part of the earlyNETWORK™, the threat is relayed to our Early Alert Center. The Early Alert Center tests, grades and ranks the threat, automatically generates definition and signature files based on the threat, and relays this information to the Alert Server, in some cases after a human verification step. The Alert Server will relay the information it receives from the Early Alert Center to other machines in the earlyNETWORK™, and each machine that receives the information will, in turn, relay it to other machines that are part of the earlyNETWORK™. This protocol allows us to rapidly distribute alerts and updates regarding potentially damaging viruses, e-mails and other threats to members of the earlyNETWORK™, without regard for the cost of the bandwidth involved. Because cost is not a factor, updates can be continuous, making our approach significantly faster than the client/server protocols used by traditional Internet security companies that provide manual broadcast-updated threat management systems. Computer users join the earlyNETWORK™ simply by downloading and installing our software.

Historically, our revenues were derived from subscriptions to our single software product, 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. On November 20, 2006 we stopped licensing this product to new subscribers (although we continue to support and upgrade it for existing users). We now offer several products and services including our core product, CyberDefender Early Detection Center V2.0. EDC is a complete Internet security suite that protects home computer users against spam, spyware, viruses and scams. The annual license fee varies depending on the marketing and distribution channels that we use.

On September 27, 2007, we announced the launch of CyberDefenderULTIMATE and CyberDefenderCOMPLETE. These are bundled products that include EDC as well as support services. CyberDefenderULTIMATE provides year round support for any software or hardware connected to a subscriber’s computer while CyberDefenderCOMPLETE provides a one time live technical support call. These products also include 2 gigabytes of online backup. We also offer a free Internet security toolbar called MyIdentityDefender (“MyID”). MyID is free to use and generates revenue through search advertising. 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 varies depending on the marketing or distribution channels we use. Additionally, we offer stand alone technical support services available as a one-time call or as an annual subscription.

CyberDefender Early Detection Center V2.0 is typically marketed to consumers via a free download of a trial version of the software. Using the trial version, users scan their computer for threats for free and then have the option to upgrade to a fully featured version of the software to remove the threats from their PCs, for a fee.

In the past, we marketed solely online. The offer, to scan a computer for spyware and then pay for removal of the spyware found, was broadcast in e-mails, banners and search ads. In 2009, we migrated to off-line marketing channels as we believe these channels are more effective in driving new business. Specifically, we are selling our products through direct response marketing by partnering with other businesses, such as Guthy-Renker LLC, a leader in the direct response industry and Allianex, a leader in retail distribution. Additionally, we have been expanding our product offering through the licensing of the For Dummies® brand.

The development of our newer products and services combined with the use of off-line marketing channels has resulted in a significant growth in sales, which increased 285% for the year ended December 31, 2009 as compared to the year ended December 31, 2008. Accompanying this growth was an expected increase in our related operating expenses as more fully described below in Result of Operations. However, operating expenses as a percentage of sales decreased from the year ended December 31, 2009 as compared to the year ended December 31, 2008. As a result, we achieved operating profitability in the fourth quarter of 2009. For the full year, our expenses still exceeded our revenues. We engaged in five offerings of our debt and/or equity securities during the 2009 fiscal year to expand our business. On March 15, 2010, we executed a non-binding term sheet with GRM, for a strategic investment of $5 million. This investment will be used to continue to grow our business.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

Revenue recognition. The Company sells products and services and packages that include both.

The Company recognizes revenue from the sale of software licenses under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 985, “Software.”

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.

As part of the sales price of its software licenses, 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 is in substance a subscription and the entire fee is deferred and is recognized ratably over the term of the arrangement.

Revenue is recognized immediately for the sale of products that do not require product updates and services that are performed when purchased. Additionally, the Company recognizes the portion of the sale of bundled products and one of its services at the time of purchase when all of the elements necessary for revenue recognition have occurred.

The Company also uses third parties to sell its software and therefore evaluates the criteria of FASB ASC Topic 605, “Revenue Recognition,” 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.

During 2009, the Company also offered two products which were 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. 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.

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 after a customer is automatically charged for a renewal license and subsequently, within 30 days of renewal, decides not to continue using the license or the credit card processed for renewal is no longer valid. The third party processor of renewal sales is usually notified within 30 days by a customer that the customer no longer wishes to license our product. The third party processor reduces the amounts due to us as a result of any chargebacks during the preceding 30 day period. As a result, a majority of chargebacks occur within 30 days of the rebilling event and are recorded prior to closing the previous month’s accounting records. As stated in our revenue recognition policy, revenue is deferred and recognized ratably over the term of the arrangement.

Advertising Costs. The Company expenses most advertising costs as they are incurred. Beginning in the fourth quarter of 2009, per ASC Topic 340-20, Capitalized Advertising Costs, the Company began capitalizing its direct-response advertising costs and amortizing them over their expected period of future benefits, generally twelve months.

Software Development Costs. The Company accounts for software development costs in accordance with FASB ASC Topic 985, “Software.” 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.

Stock Based Compensation and Fair Value of our Shares. The Company applies FASB ASC Topic 718, “Compensation – Stock Compensation,” 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. For non-employee stock based compensation, the Company recognizes an expense in accordance with FASB ASC Topic 505, “Equity,” 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 FASB ASC Topic 505, “Equity.” 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. An asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified for accounting purposes as an offset to equity on the grantor’s balance sheet once the equity instrument is granted. 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.

Contractual Obligations

We are committed under the following contractual obligations:

	Payments Due By Period
	Total		Less than 1 year		1 to 3 Years		3 to 5 Years		Over 5 Years
Long-term debt obligations	$	2,214,000	$	—	$	2,214,000	$	—	$	—
Capital lease obligations	$	22,391	$	9,447	$	12,944	$	—	$	—
Operating lease obligations	$	4,449,789	$	24,503	$	772,475	$	925,315	$	2,727,496

Off-Balance Sheet Arrangements

We do not have off-balance sheet arrangements. As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, often established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Indemnities

During the normal course of business, we have agreed to certain indemnifications. In the future, we may be required to make payments in relation to these commitments. These indemnities include agreements with our officers and directors which may require us to indemnify these individuals for liabilities arising by reason of the fact that they were or are officers or directors. The duration of these indemnities varies and, in certain cases, is indefinite. There is no limit on the maximum potential future payments we could be obligated to make pursuant to these indemnities. We hedge some of the risk associated with these potential obligations by carrying general liability insurance. Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities in our financial statements.

Trends, Events and Uncertainties

As described above in the discussion of revenue recognition, we receive payment upon the sale of our products and defer the revenue over the life of the license agreement, which is generally one year.

The following table summarizes our GAAP revenue and deferred revenue for each quarter of the two most recently completed fiscal years.

Quarter Ended	Net Revenue		Deferred Revenue
31-Mar-08	$	475,046	$	1,019,071
30-Jun-08		742,862	$	1,673,889
30-Sep-08		1,202,715	$	3,220,738
31-Dec-08		2,467,136	$	4,552,953
Fiscal Year 2008 Totals	$	4,887,759

31-Mar-09	$	3,191,630	$	6,687,198
30-Jun-09		3,686,644	$	8,139,384
30-Sep-09		4,427,404	$	9,656,352
31-Dec-09		7,536,215	$	10,779,146
Fiscal Year 2009 Totals	$	18,841,893

The following table summarizes our gross sales by category for each quarter of the two most recently completed fiscal years.

Quarter Ended	Software				Services				Ancillary				Renewals				Total
31-Mar-08	$	147,423	27	%	$	68,597	12	%	$	20,496	4	%		311,470	57	%	$	547,986
30-Jun-08		680,606	44	%		300,939	20	%		106,033	7	%		445,790	29	%		1,533,368
30-Sep-08		1,652,904	53	%		853,629	27	%		261,208	8	%		358,434	12	%		3,126,175
31-Dec-08		2,107,307	54	%		1,493,234	38	%		335,520	8	%		-	0	%		3,936,061
Fiscal Year 2008 Totals	$	4,588,240	50	%	$	2,716,399	30	%	$	723,257	8	%	$	1,115,694	12	%	$	9,143,590

31-Mar-09	$	2,475,095	40	%	$	2,645,857	43	%	$	606,051	10	%	$	463,948	7	%	$	6,190,951
30-Jun-09		2,501,266	40	%		2,678,978	43	%		584,144	9	%		466,747	8	%		6,231,135
30-Sep-09		2,666,274	40	%		2,915,731	43	%		461,120	7	%		699,068	10	%		6,742,193
31-Dec-09		4,401,569	45	%		3,705,830	38	%		982,460	10	%		717,949	7	%		9,807,808
Fiscal Year 2009 Totals	$	12,044,204	42	%	$	11,946,396	41	%	$	2,633,775	9	%	$	2,347,712	8	%	$	28,972,087

The tables above indicate an upward trend in gross sales, GAAP revenue and deferred revenue resulting from our focus on promoting our new products and services and the addition of our new marketing channels, as discussed below. We cannot guarantee that this upward trend will continue, even with increased spending on advertising.

Other trends, events and uncertainties that may impact our liquidity are included in the discussion below.

RESULTS OF OPERATIONS

Fiscal Year Ended December 31, 2009 Compared to the Fiscal Year Ended December 31, 2008

Revenue

					Change in
	2009		2008		$		%
Revenue	$	18,841,893	$	4,887,759	$	13,954,134		285	%

This increase in net revenue was primarily attributable to the increase in new product sales and services that have resulted from our expanded product offerings as well as an increase in direct advertising expenditures associated with customer acquisition and an increase in renewals as a result of our larger customer base.

Cost of Sales

					Change in
	2009		2008		$		%
Cost of Sales	$	4,182,462	$	767,115	$	3,415,347		445	%

This increase in cost of sales was primarily attributable to the increase in sales of our technical support service products which were primarily serviced by a third party, an increase in sales of the CD-ROMs that backup our EDC software and sales of third party products that require a per sale royalty.

Operating Expenses

Advertising

					Change in
	2009		2008		$		%
Advertising	$	13,081,509	$	7,106,455	$	5,975,054		84	%

Advertising costs are comprised primarily of media and channel fees, including online and offline advertising and related functional resources. Media and channel fees fluctuate by channel. This increase was primarily attributable to the launch of our new products, expanding our direct marketing efforts to include traditional media, such as radio and television, and our decision to use advertising as a customer acquisition strategy. Advertising purchased from four vendors accounted for 68% and 92% of the Company’s total advertising expense for the years ended December 31, 2009 and 2008, respectively.

Product Development

					Change in
	2009		2008		$		%
Product Development	$	1,851,931	$	530,010	$	1,321,921		249	%

Product development expenses are primarily comprised of research and development costs associated with the continued development of our products. This increase is primarily attributable to the increase in the number of products offered and the ongoing support and improvement of these products.

Selling, General and Administrative

					Change in
	2009		2008		$		%
S,G & A	$	6,566,661	$	3,727,253	$	2,839,408		76	%

Selling, general and administrative expenses are primarily comprised of salaries and wages, third party credit card processing fees, legal and professional fees, rent and other normal operating expenses.

This increase was primarily attributable to two factors. The first is an increase in third party credit card processing fees due to the increase in sales. The second is an increase in salaries and wages due to the increase in staffing required as a result of the increase in sales. Additionally, there was an overall increase in all areas due to the increased sales activities in the current period. S,G & A has decreased as a percentage of net sales to 35% for the year ended December 31, 2009 from 76% for the year ended December 31, 2008.

Investor Relations and Other Related Consulting

					Change in
	2009		2008		$		%
Investor relations and other related consulting	$	3,203,788	$	1,265,616	$	1,938,172		153	%

This increase was primarily attributable to the value of warrants issued to various consultants for investor relation services and creative services during the period as more fully described in the notes to the financial statements.

Loss From Operations

					Change in
	2009		2008		$		%
Loss from operations	$	10,081,575	$	8,548,098	$	1,533,477		18	%

This increase in Loss from operations was primarily attributable to the significant increases in advertising, selling, general and administrative costs and the value of warrants granted for investor relations and consulting services, as more fully described above, offset by the increase in net revenue.

Other Income/(Expense)

Change in fair value of derivative liabilities

					Change in
	2009		2008		$		%
Change in fair value of derivative liabilities	$	109,058	$	-0-	$	109,058		100	%

As more fully described in the notes to the financial statements, on January 1, 2009 we adopted the provisions of FASB ASC Topic 815, “Derivatives and Hedging,” that apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative. As such, we were required to reclassify certain amounts from the equity section of the balance sheet to the liabilities section. In addition, the value of these instruments must be reassessed by us as of each balance sheet date. In August 2009, the Company obtained waivers from the warrant and note holders that forever waive, as of and after April 1, 2009, any and all conversion or exercise price adjustments that would otherwise occur, or would have otherwise occurred on or after April 1, 2009, as a result of certain anti-dilution provisions included in the warrants and notes. As a result of obtaining the waivers, the warrants and notes are now afforded equity treatment. The change in fair value of these instruments for the year ended December 31, 2009 resulted in a gain of $109,058.

Interest expense, net

					Change in
	2009		2008		$		%
Interest expense, net	$	3,729,814	$	2,486,334	$	1,243,480		50	%

The increased interest expense was primarily attributable to the issuance of additional warrants as part of a warrant tender offer that we completed on August 17, 2009, the amortization of debt discounts and deferred financing costs and interest on the 10% Convertible Promissory Notes and the vesting of the GRM warrants offset by the decrease in the interest and amortization expense related to our 10% Secured Debentures and our 7.41% Original Issue Discount Notes.

Liquidity and Capital Resources

In November 2006 we changed our operating strategy by deciding to introduce a suite of security products instead of just a single product. This change in our business resulted in a significant decrease in our revenues from 2006 to 2007 since we stopped selling our CyberDefender AntiSpyware 2006 product while we developed and rolled-out our new products. Since late 2007, we have launched several new products and services and subsequently our revenues have been increasing on a quarterly basis since January 2008, with the Company reporting positive operating income for the quarter ended December 31, 2009.

To help with our cash flow, we occasionally sell our debt or equity securities. We currently have outstanding $2,214,000 in principal amount of our 8% convertible debt securities. According to the terms of these debentures, the principal amount and all accrued interest is due on April 1, 2011.

At December 31, 2009, we had cash totaling $3,357,510. In the fiscal year ended December 31, 2009, we generated positive cash flows of $2.6 million. In addition, on March 15, 2010, we executed a non-binding term sheet with GRM, for a strategic investment of $5 million into the Company. The investment is to be in the form of a 9% convertible promissory note due 24 months from issuance. The note will not be convertible during the first 180 days after its issuance. If the note is not repaid within the first 180 days, then it would become convertible into common stock at $3.50 per share. CyberDefender would have the right to prepay the note without penalty during the first 180 days.

Cash provided/(used) during the fiscal year ended December 31, 2009 included:

Operating Activities

Net cash used in operating activities during the fiscal year ended December 31, 2009 was primarily the result of our net loss of $13.7 million. Net loss for the fiscal year ended December 31, 2009 was adjusted for non-cash items such as amortization of debt discount of $1.2 million, compensation expense for vested stock options of $0.3 million, amortization of deferred financing fees of $0.4 million, shares and warrants issued for penalties and interest of $1.4 million, shares and warrants issued for services of $3.2 million and warrants issued in connection with our warrant tender offer of $0.5 million. Other changes in working capital accounts include an increase in restricted cash of $1.6 million, an increase in accounts receivable of $0.3 million, an increase in prepaid and other assets of $0.2 million, an increase in deferred charges of $5.2 million, an increase in accounts payable and accrued expenses of $1.7 million and an increase of $6.2 million in deferred revenue resulting from higher new customer and renewal sales.

Our primary source of operating cash flow is the collection of license fee revenues from our customers and the timing of payments to our vendors and service providers. In 2009 and 2008, we did not make any significant changes to our payment terms for our customers, which are generally credit card based.

The increase in cash related to accounts payable and accrued expenses was $1.7 million. Our operating cash flows, including changes in accounts payable and accrued liabilities, are impacted by the timing of payments to our vendors for accounts payable. We typically pay our vendors and service providers in accordance with invoice terms and conditions. The timing of cash payments in future periods will be impacted by the nature of accounts payable arrangements. In the fiscal years ended December 31, 2009 and 2008, we did not make any significant changes to the timing of payments to our vendors.

Our working capital deficit at December 31, 2009, defined as current assets minus current liabilities, was $3.9 million as compared to a working capital deficit of $7.8 million at December 31, 2008. The increase in working capital of approximately $3.9 million from December 31, 2008 to December 31, 2009 was primarily attributable to an increase in cash of $2.6 million, an increase in restricted cash of $1.6 million, an increase in deferred charges of $5.2 million, a decrease in the current portion of notes payable of $2.4 million offset by an increase in accounts payable and accrued expenses of $1.7 million and an increase in deferred revenue of $6.2 million, resulting from increased sales.

Investing Activities

Net cash used in investing activities during the fiscal year ended December 31, 2009 was $0.2 million, which was used for property and equipment purchases. We expect to continue to purchase property and equipment in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors, including but not limited to any increase in the number of our employees and changes in computer hardware and software used in our business. Net cash used in investing activities during the fiscal year ended December 31, 2008 was $0 and also related to the purchase of property and equipment.

Financing Activities

Cash provided by financing activities during the fiscal year ended December 31, 2009 was primarily the result of the sale of common stock of $3.6 million, issuances of notes payable, net of commissions, totaling $2.7 million and the exercise of common stock warrants and options totaling $2.5 million. Cash used in financing activities was for payments on capital lease obligations. Cash provided by financing activities during the fiscal year ended December 31, 2008 was primarily the result of issuances of notes payable, net of commissions, totaling $1.0 million and the sale of stock net of offering costs totaling $1.0 million. Cash used in financing activities was primarily used for payment of notes payable totaling $0.3 million and payments on capital lease obligations.

Other than as discussed above, we know of no trends, events or uncertainties that are reasonably likely to impact our future liquidity.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The registrant is a smaller reporting company and is not required to provide this information.

Item 8. Financial Statements and Supplementary Data

The financial statements and supplementary data required to be included in this Item 8 are set forth at page F-1 of this report.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2009. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2009, our disclosure controls and procedures were not effective at the reasonable assurance level due to a significant deficiency described below.

In light of the significant deficiency described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

A significant deficiency is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5), that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following significant deficiency which has caused management to conclude that, as of December 31, 2009, our disclosure controls and procedures were not effective at the reasonable assurance level:

1. Internal control policies and procedures are not documented in a formalized manner. Written documentation of disclosure controls and procedures is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have formalized documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a significant deficiency.

To address this significant deficiency, management performed additional analysis and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Remediation of Significant Deficiency

We have attempted to remediate the deficiency in our disclosure controls and procedures identified above by hiring a full-time CFO, with SEC reporting experience, in January 2009 and two additional accounting personnel during 2009 to allow us to refine and document our internal controls and procedures. During the next fiscal year we also intend to implement the remediation initiatives discussed below, in the section titled “Management’s Remediation Initiatives”, which we believe will significantly strengthen our controls and procedures.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

·	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the issuer; and

·	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

As of the end of our most recent fiscal year, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, as of December 31, 2009, such internal control over financial reporting was not effective. This was due to a deficiency that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weakness.

The matter involving internal control over financial reporting that our management considered to be a material weakness under the standards of the Public Company Accounting Oversight Board was the lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. The aforementioned material weakness was identified by our Chief Financial Officer in connection with the review of our financial statements as of December 31, 2009.

Management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only the management's report in this annual report.

Management's Remediation Initiatives

In an effort to remediate the identified material weakness and significant deficiency and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:

We will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. First, we will create a senior position to focus on financial reporting and standardizing and documenting our accounting procedures with the goal of increasing the effectiveness of the internal controls in preventing and detecting misstatements of accounting information. Second, we plan to appoint outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us. We anticipate the costs of implementing these remediation initiatives will be approximately $100,000 to $125,000 a year in increased salaries and $50,000 to $100,000 a year in increased legal and accounting expenses.

Management believes that the appointment of outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.

We anticipate that these initiatives will be at least partially, if not fully, implemented by December 31, 2010. Additionally, we plan to test our updated controls and remediate our deficiencies by December 31, 2010.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the fourth quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Not applicable

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference to our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2009.

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions and Director Independence

Item 14. Principal Accounting Fees and Services

PART IV

Item 15. Exhibits, Financial Statement Schedules

3.1		Articles of incorporation of the registrant, as amended (1)

3.2		Bylaws of the registrant, as amended (1)

10.1		2005 Stock Incentive Plan (1)

10.2		Amended and Restated 2006 Equity Incentive Plan (1)

10.3		Securities purchase agreement between registrant and each purchaser identified on the signature pages thereof dated as of September 12, 2006 (1)

10.4		Employment agreement between the registrant and Gary Guseinov dated August 31, 2006 (1)**

10.5		Employment agreement between the registrant and Igor Barash dated September 1, 2003 (1)**

10.6		Employment offer between the registrant and Igor Barash dated November 23, 2005*

10.7		Employment agreement between the registrant and Igor Barash dated July 1, 2008*

10. 8		Agreement for Internet Advertising Agent Services date May 16, 2008 between the registrant and WebMetro (2)

10. 9		Consulting Agreement with Frontier Capital Partners LLC dated July 15, 2008 (3)

10.10		Form of Indemnification Agreement entered into between the registrant and Gary Guseinov, Bing Liu, Igor Barash, John LaValle and Michael Barrett (1)**

10.11		Form of Securities Purchase Agreement for the sale of Units (August 2008) (4)

10.12		Form of Warrant to Purchase Common Stock (August 2008) (4)

10.13		Common Stock Purchase Warrant issued to Newview Finance L.L.C. dated November 10, 2008 (5)

10.14		Settlement Agreement between the registrant and Patrick Hinojosa (6)

10.15		Form of 7.41% Senior Secured Note (7)

10.16		Form of Registration Rights Agreement executed in conjunction with the sale of 7.41% Senior Secured Notes (7)

10.17		Form of Amended and Restated Security Agreement executed in conjunction with the sale of 7.41% Senior Secured Notes (7)

10.18		Form of Securities Purchase Agreement executed in conjunction with the sale of 7.41% Senior Secured Notes (7)

10.19		Form of Common Stock Purchase Warrant issued in conjunction with the sale of 7.41% Senior Secured Notes (7)

10.20		Lease Agreement dated October 19, 2007 between the registrant and 617 7th Street Associates, LLC (8)

10.21		Form of Securities Purchase Agreement (November 25, 2008/December 5, 2008) (9)

10.22		Form of 10% Convertible Promissory Note (November 25, 2008/December 5, 2008) (9)

10.23		Form of Common Stock Purchase Warrant (November 25, 2008/December 5, 2008) (9)

10.24		Form of Registration Rights Agreement (November 25, 2008/December 5, 2008) (9)

10.25		Form of Subordination Agreement (November 25, 2008/December 5, 2008) (9)

10.26		Consent and Waiver Agreement dated November 21, 2008 between the registrant and the holders of the 10% Secured Convertible Debentures dated September 12, 2006 (November 25, 2008/December 5, 2008) (9)

10.27		Amended and Restated Consent and Waiver dated August 19, 2008 between the registrant and the holders of the 10% Secured Convertible Debentures dated September 12, 2006 (10)

10.28		Consent and Waiver dated September 22, 2008 between the registrant and the holders of the 10% Secured Convertible Debentures dated September 12, 2006 (10)

10.29		Warrant to Purchase Common Stock issued to Guthy-Renker Match LLC (7)

10.30		Employment Agreement between the registrant and Kevin Harris (7) **

10.31		Amendment to Lease Agreement dated January 30, 2009 between the registrant and 617 7th Street Associates, LLC (7)

10.32		Media and Marketing Services Agreement with GR Match, LLC (7)

10.33		Securities Purchase Agreement dated June 3, 2009 between the registrant and GR Match, LLC(9)

10.34		First Amendment to Media and Marketing Services Agreement dated June 4, 2009 between the registrant and GR Match, LLC(9)

10.35		Indemnification Agreement dated July 21, 2009 between the registrant and Bennet Van de Bunt(10)

10.36		First Amendment dated October 26, 2009 to Securities Purchase Agreement between the registrant and GR Match, LLC(11)

10.37		Second Amendment dated October 26, 2009 to Media and Marketing Services Agreement between the registrant and GR Match, LLC(11)

10.38		Indemnification Agreement dated January 1, 2010 between the registrant and Luc Vanhal(12)

10.39		Consulting Agreement dated April 1, 2009 between the registrant and SCP Holdings LLC(13)

10.40		Consent and Waiver Agreement dated April 23, 2009(13)

10.41		Securities Purchase Agreement dated June 10, 2009 between the registrant and Shimski LP(13)

10.42		Amended and Restated Warrant to Purchase Common Stock issued to GR Match LLC on May 6, 2009(13)

10.43		Warrant to Purchase Common Stock issued to GR Match LLC on May 6, 2009(13)

10.44		Warrant to Purchase Common Stock issued to GR Match LLC on May 6, 2009(13)

10.45		Amendment to Lease Agreement dated September 30, 2009 between the registrant and 617 7th Street Associates, LLC *

23.1		Consent of KMJ Corbin & Company LLP*

31.1		Certification Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*

31.2		Certification Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*

32		Certification Pursuant to Section 1350 of Title 18 of the United States Code*

*	Filed herewith.

**	Denotes an agreement with management.

(1)	Incorporated by reference from the registrant’s Registration Statement on Form SB-2, file no. 333-138430, filed with the Securities and Exchange Commission on November 3, 2006.

(2)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 5, 2008.

(3)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 22, 2008.

(4)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3, 2008.

(5)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 2008.

(6)

Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2008. This document is the subject of a confidential treatment request therefore portions of it have been redacted. A full copy of the document has been filed separately with the Securities and Exchange Commission.

(7)	Incorporated by reference from the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2008.

(8)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2007.

(9)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 5, 2008.

(10)	Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2008.

(11)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2009.

(12)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 20, 2010.

(13)	Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2009.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CYBERDEFENDER CORPORATION

Date: March 31, 2010	By:	/s/ Gary Guseinov
		Gary Guseinov
		Chief Executive Officer

	By:	/s/ Kevin Harris
		Kevin Harris
		Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on this 31st day of March 2010.

SIGNATURE, TITLE

/s/ Gary Guseinov

Gary Guseinov

President, Chief Executive Officer, and Director

/s/ Kevin Harris

Kevin Harris

Chief Financial Officer

/s/ Igor Barash

Igor Barash

Director

	Page
Report of Independent Registered Public Accounting Firm		F-2

Balance Sheets – December 31, 2009 and 2008		F-3

Statements of Operations - For the Years Ended December 31, 2009 and 2008		F-4

Statements of Stockholders’ Deficit - For the Years Ended December 31, 2009 and 2008		F-5

Statements of Cash Flows - For the Years Ended December 31, 2009 and 2008		F-6

Notes to Financial Statements		F-8

	December 31,			December 31,
	2009			2008
ASSETS
CURRENT ASSETS:
Cash	$	3,357,510		$	779,071
Restricted cash		1,565,841			15,000
Accounts receivable		489,464			204,635
Deferred financing costs, current		191,566			324,200
Prepaid expenses		302,291			674,478
Deferred charges, current		5,629,288			811,542

Total Current Assets		11,535,960			2,808,926

PROPERTY AND EQUIPMENT, net		242,927			94,883
DEFERRED FINANCING COSTS, net of current portion		47,892			-
DEFERRED CHARGES, net of current portion		609,904			239,983
OTHER ASSETS		67,605			26,196

Total Assets	$	12,504,288		$	3,169,988

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	4,893,186		$	3,798,645
Accrued expenses		862,023			384,974
Deferred revenue, current		9,662,030			4,025,026
Convertible notes payable, net of discount		-			2,421,529
Capital lease obligations, current		9,410			27,291

Total Current Liabilities		15,426,649			10,657,465

DEFERRED RENT		65,938			-
DEFERRED REVENUE, less current portion		1,117,116			527,927
CONVERTIBLE NOTES PAYABLE, net of discount		1,593,000			-
CAPITAL LEASE OBLIGATIONS, less current portion		9,708			16,776

Total Liabilities		18,212,411			11,202,168

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ DEFICIT:
Common stock, no par value; 50,000,000 shares authorized; 25,673,967 and 17,350,798 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively		16,595,314			6,381,921
Additional paid-in capital		16,488,488			11,398,623
Accumulated deficit		(38,791,925	)		(25,812,724	)

Total Stockholders’ Deficit		(5,708,123	)		(8,032,180	)

Total Liabilities and Stockholders’ Deficit	$	12,504,288		$	3,169,988

	2009			2008
REVENUES:
Net sales	$	18,841,893		$	4,887,759

COST OF SALES		4,182,462			767,115

GROSS PROFIT		14,659,431			4,120,644

OPERATING EXPENSES:
Advertising		13,081,509			7,106,455
Product development		1,851,931			530,010
Selling, general and administrative		6,566,661			3,727,253
Investor relations and other related consulting		3,203,788			1,265,616
Depreciation and amortization		37,117			39,408
Total Operating Expenses		24,741,006			12,668,742

LOSS FROM OPERATIONS		(10,081,575	)		(8,548,098	)

OTHER INCOME/(EXPENSE):
Change in fair value of derivative liabilities		109,058			-
Loss on registration rights agreement		-			(216,540	)
Interest expense, net		(3,729,814	)		(2,486,334	)
Total Other Expenses, net		(3,620,756	)		(2,702,874	)

LOSS BEFORE INCOME TAX EXPENSE		(13,702,331	)		(11,250,972	)

INCOME TAX EXPENSE		800			800

NET LOSS	$	(13,703,131	)	$	(11,251,772	)

Basic and fully diluted net loss per share	$	(0.63	)	$	(0.72	)

Weighted Average Shares Outstanding:
Basic and fully diluted		21,890,656			15,562,790

					Additional
	Common Stock				Paid-in			Accumulated
	Shares		Amount		Capital			Deficit			Total
Balance at December 31, 2007		13,994,597	$	4,788,349	$	7,105,428		$	(14,560,952	)	$	(2,667,175	)
Sale of shares with warrants attached, net of cash issuance costs of $112,757		1,155,500		139,504		903,239			—			1,042,743
Issuance of shares and warrants for services		300,000		393,673		1,873,110			—			2,266,783
Issuance of shares for penalties and interest		271,091		253,081		—			—			253,081
Value of warrants issued in association with debt		—		—		83,590			—			83,590
Conversion of OID notes and accrued interest		744,749		125,096		619,653			—			744,749
Conversion of convertible notes and accrued interest		796,876		681,683		115,193			—			796,876
Value of warrants and beneficial conversion feature of convertible notes payable		—		—		445,467			—			445,467
Cashless warrant exercise		37,985		—		—			—			—
Exercise of stock options		50,000		535		—			—			535
Compensation expense on vested options		—		—		252,943			—			252,943
Net loss		—		—		—			(11,251,772	)		(11,251,772	)
Balance at December 31, 2008		17,350,798		6,381,921		11,398,623			(25,812,724	)		(8,032,180	)

Sale of shares		1,975,360		3,606,880		—			—			3,606,880
Value of warrants and beneficial conversion feature of convertible notes payable		—		—		1,074,367			—			1,074,367
Issuance of shares and warrants for services		94,628		104,091		1,726,087			—			1,830,178
Issuance of shares and warrants for penalties and interest		34,922		32,552		1,358,090			—			1,390,642
Conversion of convertible notes and accrued interest		3,651,973		3,942,754		—			—			3,942,754
Exercise of stock warrants		2,265,607		2,247,138		—			—			2,247,138
Exercise of stock options		300,679		279,978		—			—			279,978
Compensation expense on vested options		—		—		308,776			—			308,776
Issuance of warrants in connection with warrant tender offer		—		—		548,728			—			548,728
Reclassification of derivatives to liabilities		—		—		(7,065,940	)		723,930			(6,342,010	)
Reclassification of derivatives to equity		—		—		7,139,757			—			7,139,757
Net loss		—		—		—			(13,703,131	)		(13,703,131	)
Balance at December 31, 2009		25,673,967	$	16,595,314	$	16,488,488		$	(38,791,925	)	$	(5,708,123	)

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(13,703,131	)	$	(11,251,772	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on registration rights agreement		-			216,540
Amortization of debt discount		1,169,026			1,322,379
Depreciation and amortization		37,117			39,408
Compensation expense from vested stock options		308,776			252,943
Amortization of deferred financing costs		423,589			702,061
Shares and warrants issued for penalties and interest		1,390,642			253,081
Shares and warrants issued for services		3,203,788			2,266,783
Warrants issued in connection with warrant tender offer		548,728			-
Change in fair value of derivative liabilities		(109,058	)		-
Changes in operating assets and liabilities:
Restricted cash		(1,550,841	)		(15,000	)
Accounts receivable		(284,829	)		(185,582	)
Prepaid and other assets		(198,710	)		(652,593	)
Deferred charges		(5,187,667	)		(1,010,965	)
Other assets		(41,409	)		(99	)
Accounts payable and accrued expenses		1,741,619			3,059,002
Deferred revenue		6,226,193			3,923,511
Cash Flows Used In Operating Activities		(6,026,167	)		(1,080,303	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(185,161	)		(2,286	)
Cash Flows Used In Investing Activities		(185,161	)		(2,286	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and convertible notes payable, net of commissions		2,680,720			954,300
Principal payments on notes payable		-			(349,000	)
Principal payments on capital lease obligations		(24,949	)		(23,913	)
Proceeds from exercise of stock options		279,978			535
Proceeds from exercise of stock warrants		2,247,138			-
Proceeds from sale of stock, net of cash issuance costs		3,606,880			1,042,743
Cash Flows Provided by Financing Activities		8,789,767			1,624,665

NET INCREASE IN CASH		2,578,439			542,076

CASH, beginning of year		779,071			236,995

CASH, end of year	$	3,357,510		$	779,071

	2009		2008
Supplemental disclosures of cash flow information:
Income taxes paid	$	800	$	39
Cash paid for interest	$	102,338	$	36,203

Supplemental schedule of non-cash financing activities:
Property and equipment acquired through capital lease obligation	$	-	$	2,362
Discount on notes payable	$	923,801	$	83,590
Warrants issued in connection with sale of stock	$	-	$	903,239
Conversion of notes payable and accrued interest to common stock and warrants	$	3,942,754	$	1,541,625
Warrants issued in connection with debt conversion	$	-	$	445,467
Convertible notes payable issued as payment for accrued interest and penalties	$	-	$	440,784
Warrants issued for placement fees with convertible debt	$	150,566	$	-
Cumulative effect of accounting change to additional paid-in capital for derivative liabilities	$	7,065,940	$	-
Cumulative effect of accounting change to retained earnings for derivative liabilities	$	723,930	$	-
Reclassification of derivatives to equity	$	7,139,757	$	-
Value of warrants and embedded conversion features recorded to derivative liabilities	$	906,805	$	-

	•		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.

	Year Ended
	December 31, 2009							December 31, 2008
				Weighted							Weighted
	Number			Average		Aggregate		Number			Average		Aggregate
	of			Exercise		Intrinsic		of			Exercise		Intrinsic
	Warrants			Price		Value		Warrants			Prices		Value
Outstanding and exercisable, beginning of year		11,029,890		$	1.14				5,741,306		$	1.05

Issued		4,421,916		$	1.29				5,386,705		$	1.24
Exercised		(2,425,149	)	$	1.12				(98,121	)		1.01
Outstanding, end of year		13,026,657		$	1.20	$	45,517,994		11,029,890		$	1.14	$	1,379,311

Exercisable, end of year		12,836,657		$	1.19	$	45,000,494		9,949,890		$	1.13	$	1,357,711

Exercise Price	Number of Warrant Shares	Weighted Average Remaining Contractual Life (Years)
$ 1.00	2,778,090	1.85
$ 1.01	700,306	5.91
$ 1.20	324,875	3.00
$ 1.25	8,948,396	3.44
$ 1.80	2,500	4.31
$ 1.83	125,000	4.38
$ 2.05	77,490	4.73
$ 2.18	55,000	2.72
$ 2.25	15,000	4.64

	13,026,657

	2009	2008
Annual dividend yield	0.0%	0.0%
Average expected life (years)	2.07-5.10	3.00-5.00
Risk-free interest rate	1.46-3.72%	3.81-4.52%
Expected volatility	85-103%	99-148%

	December 31, 2009			December 31, 2008
2006 Debentures	$	-		$	2,442,754
2008 Convertible Notes		-			845,000
2009 8% Convertible Notes		2,214,000			-
Unamortized discount		(621,000	)		(866,225	)
Convertible notes payable, net	$	1,593,000		$	2,421,529

2010	$	9,447
2011		6,753
2012		6,191
Total minimum lease payments		22,391

Less amount representing interest		(3,273	)

Present value of minimum capitalized payments		19,118
Less current portion		(9,410	)
Long-term capital lease obligations	$	9,708

Years Ending December 31,
2010	$	24,503
2011		328,755
2012		443,721
2013		455,820
2014		469,495
Thereafter		2,727,496
Total	$	4,449,790