CYBERDEFENDER CORP - FORM S-1/A

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EX-23.1 - CYBERDEFENDER CORP	v220653_ex23-1.htm

As filed with the Securities and Exchange Commission on May 5, 2011

Registration Statement No. 333-161790

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 4

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED

CyberDefender Corporation

(Exact name of registrant as specified in its charter)

Delaware	7372	65-1205833
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

617 West 7th Street, Suite 1000

Los Angeles, California 90017

(213) 689-8631

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive offices)

Kevin Harris

Chief Financial Officer

CyberDefender Corporation

617 West 7th Street, Suite 1000

Los Angeles, California 90017

(213) 689-8631

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

Copy to:

Kevin Friedmann, Esq.

Richardson & Patel LLP

750 Third Avenue, 9th Floor

New York, New York 10017

(212) 561-5559

Approximate date of commencement of sales: From time to time after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

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 ¨	Accelerated filer ¨

Non-accelerated filer ¨	Smaller Reporting Company x

The Registrant previously paid a registration fee of $1,193.98 in connection with the filing of this registration statement with the Securities and Exchange Commission on September 8, 2009.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.

The information in this Prospectus is not complete and may be changed. The securities may not be sold until the Registration Statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, dated May 5, 2011

Prospectus

6,580,232 Shares of Common Stock

This Prospectus covers the resale by the selling stockholders named on page 48 of up to 6,580,232 shares of the common stock of CyberDefender Corporation (“Registrant,” the “Company,” “we,” “us” or “our” in this Prospectus), which includes:

4,321,221 shares of common stock underlying common stock purchase warrants issued to two consultants for services provided to the Company;

1,142,860 shares of common stock sold pursuant to a Securities Purchase Agreement dated June 3, 2009;

113,400 shares of common stock underlying common stock purchase warrants issued pursuant to various Securities Purchase Agreements dated from November 13, 2008 to January 28, 2009;

647,499 shares of common stock underlying amended common stock purchase warrants issued pursuant to a warrant tender offer that terminated on August 17, 2009; and

355,252 shares of common stock issued pursuant to the cash exercise of amended common stock purchase warrants issued pursuant to a warrant tender offer that terminated on August 17, 2009.

This offering is not being underwritten. Our common stock is listed on the NASDAQ Global Market under the symbol “CYDE.” On May 2, 2011, the closing price per share of our common stock was $1.95.

We will not receive any of the proceeds of the sales of these shares. However, we may receive up to $6,227,060 to the extent the warrants are exercised for cash. If some or all of the warrants are exercised for cash, the money we receive will be used for general corporate purposes, including working capital requirements. We will pay all expenses incurred in connection with the offering described in this Prospectus, with the exception of the brokerage expenses, fees, discounts, and commissions which will be paid by the selling stockholders. Our common stock and warrants are described more fully in the section below in this Prospectus entitled “Description of Securities.”

AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PLEASE READ CAREFULLY THE “RISK FACTORS” BEGINNING BELOW AT PAGE 3.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

You should rely only on the information contained in this Prospectus to make your investment decision. We have not authorized anyone to provide you with different information. This Prospectus may be used only where it is legal to sell these securities. You should not assume that the information in this Prospectus is accurate as of any date other than the date on the front page of this Prospectus.

The following table of contents has been designed to help you find important information contained in this Prospectus. We encourage you to read the entire Prospectus carefully.

The date of this Prospectus is _______, 2011

Table of Contents

Prospectus Summary	1
Risk Factors	3
Special Note Regarding Forward-Looking Statements	12
Use of Proceeds	12
Dividends	12
Capitalization	13
Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	23
Information with Respect to the Registrant	24
Directors, Executive Officers, Promoters and Control Persons	32
Executive Compensation	35
Certain Relationships and Related Transactions	44
Selling Stockholders	47
Plan of Distribution	49
Security Ownership of Certain Beneficial Owners and Management	51
Description of Securities	52
Market for Common Equity and Related Stockholder Matters	56
Legal Matters and Interests of Named Experts	57
Experts	57
Where You Can Find More Information	57
Disclosure of Commission Position on Indemnification for Securities Act Liabilities	57
Financial Information	F-1

Prospectus Summary

This summary highlights material information contained elsewhere in this Prospectus. You should read the entire Prospectus carefully, including the section titled “Risk Factors” and our financial statements and the related notes.

The Company

The Company provides remote technical support services as well as Internet security software and utilities. Our LiveTech services and security software are designed for complimentary use and provide a complete online security solution for our customers. The Company’s LiveTech service is a remote, live technical support service that provides customers with 24/7 access to a technician from our extensive United States and international call centers by means of subscription services. We also develop and market anti-malware software, identity protection services, online backup services and personal computer (“PC”) optimization services. We market our products and services directly to consumers through multiple channels including television, radio, the Internet and print.

The volume of online threats has continued to rise over the last several years due in part to the PC 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, viruses and spyware and to provide remote technical resolution services to those who use our products.

During 2010 we took the following actions, among others, to enhance our business:

Expanded and extended our strategic relationship with GR Match, LLC (“GRM”), a subsidiary of Guthy-Renker, LLC, one of the world's largest direct response marketing companies. We signed a license agreement with GRM pursuant to which GRM will sell and distribute our products internationally as well as by means of retail locations and television shopping channels domestically. We also extended the term of our Media Marketing and Services Agreement (described below) with GRM until December 31, 2013.

Strengthened our comprehensive call center platform to support and expand LiveTech by opening our 210 seat Los Angeles-based call center and improving the call center infrastructure by adding a cloud-based CRM system and upgrading our IVR system.

Implemented phase one of our new eCommerce platform.

Listed our common stock on the NASDAQ Global Market exchange.

Appointed four independent directors to our Board of Directors (the "Board"), and formed independent Audit, Compensation and Corporate Governance and Nominating committees.

Hired additional management personnel in call center operations, eCommerce and product development.

Risks Related to Our Business

Our business is subject to a number of risks. You should understand these risks before making an investment decision. The risks are discussed more fully in the section of this Prospectus below entitled “Risk Factors.”

The Offering

We are registering 6,580,232 shares of our common stock for resale by the selling stockholders identified in the section of this Prospectus entitled “Selling Stockholders.” The shares consist of:

4,321,221 shares of common stock underlying common stock purchase warrants issued to two consultants for services provided to the Company;

1,142,860 shares of common stock sold pursuant to a Securities Purchase Agreement dated June 3, 2009;

113,400 shares of common stock underlying common stock purchase warrants issued pursuant to various Securities Purchase Agreements dated from November 13, 2008 to January 28, 2009;

647,499 shares of common stock underlying amended common stock purchase warrants issued pursuant to a warrant tender offer that terminated on August 17, 2009; and

355,252 shares of common stock issued pursuant to the cash exercise of amended common stock purchase warrants issued pursuant to a warrant tender offer that terminated on August 17, 2009.

Shares Outstanding After This Offering

After this offering, assuming the issuance of all shares of common stock underlying the warrants described above, we would have 33,204,053 shares of common stock outstanding. This amount does not include the shares of common stock that we are committed to issue, which are described in the section of this Prospectus above entitled “Prospectus Summary – Information Regarding Our Capitalization.”

Information About Our Securities

Information regarding our common stock and outstanding warrants is included in the section of this Prospectus below entitled “Description of Securities.”

Corporate Information

We maintain our principal offices at 617 West 7th Street, Suite 1000, Los Angeles, California 90017. Our telephone number at our principal offices is (213) 689-8631. Our Web address is www.cyberdefendercorp.com. Information included on our website is not part of this Prospectus.

Risk Factors

You should carefully consider the risks described below before making an investment decision. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this prospectus, including our financial statements and related notes.

Risks Related to Our Business

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

We were incorporated in the State of California as Network Dynamics in August 2003, and we have limited historical financial data and a limited operating history. As a result, it is difficult to evaluate our performance and to forecast our future operating results. Our prospects should be considered in view of the risks and uncertainties that we face as an early stage company, including whether we will be able to:

Increase revenues from sales of our products and support services;

Successfully protect our ARGUS Network from security attacks;

Successfully protect our customers’ personal computers and networks from Internet threats;

Respond effectively to competitive pressures;

Protect our intellectual property rights;

Continue to develop and upgrade our technology; and

Renew our customers’ subscriptions for current and future products and services.

We incurred net losses for our last five 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, a net loss of $19,841,756 for the fiscal year ended December 31, 2009, and a net loss of $39,609,020 for the fiscal year ended December 31, 2010. 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.

We may need additional capital in the future to meet our obligations and financing may not be available.

We currently anticipate that our available capital resources, including our operating cash flows, will be sufficient to meet our expected working capital and capital expenditure requirements through December 31, 2011. However, our capital resources may not be sufficient to fund the repayment of the obligations to GRM in the amount of $11.2 million due on March 31, 2012, which is described in detail below in the section entitled “Certain Relationships and Related Transactions.” We may need to obtain additional financing prior to March 31, 2012 to satisfy the obligation. There can be no assurance that we will be able to secure additional financing on terms favorable to us, or at all. In the event we are unable to obtain additional financing, we will attempt to renegotiate the terms of the GRM obligation; however, there can be no assurance that this would occur. If we are unable to obtain additional funding or renegotiate the GRM obligation, we may be required to curtail our operations significantly, which would have a material adverse impact on our business and financial condition. In addition, in the event of the Company’s default under the GRM obligation, GRM has the right, subject to approval by the Board, to require us to retain a consultant or hire an executive who would, during the duration of the event of default, be senior to the Company’s Chief Executive Officer and Chief Financial Officer and who would oversee the management and operations of the Company, subject to the direction of the Board. A default in the repayment of the GRM obligation could, therefore, have a material adverse impact on our business and financial condition.

Our operating results may fluctuate significantly from quarter to quarter and make it difficult to forecast our operating results accurately.

We expect that our revenue, gross margins and operating results, which we disclose from time to time on a Generally Accepted Accounting Principles (“GAAP”) and non-GAAP basis, may fluctuate materially from quarter to quarter and from year to year. As a result, our operating results for prior periods may not be indicative of our future performance. In addition, the fluctuations make it difficult for us to forecast operating results. We try to adjust expenses based in part on our expectations regarding future revenue, but in the short term expenses are relatively fixed. This makes it difficult for us to adjust our expenses in time to compensate for any unexpected revenue shortfall in a given period that might result from a decrease in demand for our products and services.

Our financial results also have been in the past, and may continue to be in the future, materially affected by non-cash and other accounting charges, including: deferral of revenue and expenses; amortization of intangible assets; stock-based compensation expense; and valuation of warrants.

Fluctuations in our quarterly financial results may make it more difficult for us to raise capital in the future or pursue acquisitions that involve issuances of our stock. If our quarterly financial results or our predictions of future financial results fail to meet the expectations of securities analysts and investors, our stock price could be negatively affected.

Fluctuations in demand for our products and services are driven by many factors, and a decrease in demand for our products and services could adversely affect our business and financial condition.

Fluctuations in demand for our products and services are due to many factors, including: general economic conditions; competition; product obsolescence or unpopularity with customers and potential customers; unfavorable perceptions of our business reputation; technological changes; shifts in buying patterns; financial difficulties and budget constraints of our current and potential customers; levels of broadband usage; and awareness of security threats to information technology systems. If demand for our products and services declines for any of the reasons stated above, our business and financial condition could be adversely affected.

Adverse conditions in the national and global economies and financial markets may adversely affect our business and financial condition.

National and global economies and financial markets recently experienced a prolonged downturn stemming from many factors, including adverse credit conditions impacted by the sub-prime mortgage crisis, slower or receding economic activity, concerns about inflation and deflation, fluctuating energy costs, high unemployment, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns and other factors. The U.S. and many other countries also have experienced slowed or receding economic growth and disruptions in the financial markets. The length of time required to recover from these economic and financial market conditions is unknown. During challenging economic times, periods of high unemployment and in tight credit markets, many customers may delay or reduce technology purchases. This could result: in reductions in sales of our products and services; longer sales cycles; slower adoption of new technologies; lower renewal rates; and increased price competition. In addition, difficulties in collections of accounts receivable could increase and, accordingly, our reserves for doubtful accounts and write-offs of accounts receivable could be increased. These results may persist even if certain economic conditions improve. Any of these events likely would adversely affect our business and financial condition.

Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 material weakness. 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 financial condition.

Included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 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, 2010 because of a material weakness under the standards of the Public Accounting Oversight Board. The material weakness was that our controls over financial reporting were not sufficient to ensure that our financial statements are prepared in accordance with U.S. GAAP. In an effort to remediate the identified material weakness and enhance our internal controls, we have initiated the following measures: we will ensure that personnel responsible for the Company's internal control over financial reporting and disclosure controls and procedures participate in ongoing continuing profession education; and we will use external resources when deemed necessary to assist in ensuring the Company's internal control over financial reporting and disclosure controls and procedures are effective. We also improved our existing accounting policies and procedures by, among other things, recruiting and hiring additional employees to assist with accounting functions, formally documenting all accounting policies and procedures and paying for the costs of continuing education for our employees involved with accounting functions. These improvements have resulted in increased salaries and increased legal and accounting expenses

Our failure to achieve and maintain an effective internal control environment could result in the loss of investors’ confidence in our financial reporting, our financial statements being unreliable, and a material decline in our stock price. Our failure to maintain effective internal control over our financial reporting and disclosure controls and procedures could result in investigations, enforcement actions, and monetary and other sanctions by regulatory authorities, which could adversely affect our business and financial condition.

Our websites and our products and services may be subject to disruptions and security breaches. If a disruption or security breach occurred, our reputation could be damaged and our business and financial condition could be adversely affected.

Although we believe we have sufficient controls in place to prevent intentional disruptions, we could be the target of attacks specifically designed to impede the performance of our websites and our products and services and to harm our reputation. Computer “hackers” may attempt to penetrate our network or our websites and misappropriate proprietary information or cause interruptions of our services. Because the techniques used by hackers change frequently and may not be recognized until they are used to attack a target, we may be unable to anticipate these techniques. The theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of an attack could adversely affect our competitive position, reputation, brand and future sales of our products and services. In addition, our customers could assert claims against us related to resulting losses of their personal and confidential information. As a result, our business could be subject to significant disruption, we could suffer monetary and other losses and reputational harm which could adversely affect our business and financial condition.

In addition, we update and modify our accounting and other systems from time to time, and the updates and modifications may be disruptive to our business. They also may cause us to incur higher costs than we anticipate.

We and our customers also face a number of potential business interruption risks that are beyond our control, including natural disasters, acts of terrorism, and other unexpected events. Our corporate headquarters in Los Angeles, California is located very near to a major earthquake fault. The potential impact of a major earthquake on our facilities, infrastructure and overall operations is not known, but likely would be severe. Although we implemented business interruption and disaster recovery programs, an earthquake could seriously disrupt our business. We are largely uninsured for losses and business disruptions caused by an earthquake and other natural disasters.

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

Since January 1, 2010, our business has continued to grow rapidly. Our sales increased 142% for the year ended December 31, 2010 in contrast to the year ended December 31, 2009. The number of full-time employees and consultants we employ grew from 69 full-time employees and 50 independent contractors as of December 31, 2009 to 379 full-time employees and 307 independent contractors as of December 31, 2010. The growth of our business has placed a strain on our management and resources and has required, and may continue to require, the implementation of new operating systems and the expansion of our facilities. Our failure to manage our growth and expansion could adversely affect our business and financial condition. Failure to implement new systems effectively or within a reasonable period of time also could adversely affect our business and financial condition.

We have made substantial investments in personnel and facilities in anticipation that our growth will continue. If the projections about our growth are not accurate, our business and financial condition could be adversely affected.

We believe that the growth we have experienced during the past two years will continue for the immediate future. As a result, we have made substantial investments in personnel, systems and facilities. If our growth does not continue, our operating expenses may exceed our revenue. Although we may be able to eliminate or reduce some expenses, some fixed costs such as rent could not be reduced easily, or at all. As a result, our business and financial condition 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 (which is described below in the section entitled “Certain Relationships and Related Transactions”), GRM may terminate the Media and Marketing Service Agreement for any reason by giving us 30 days written notice. In addition, GRM may terminate the Media and Marketing Service Agreement if we breach the Media and Marketing Service Agreement or default in the performance of any obligation under the Media and Marketing Service Agreement, unless the breach or default is cured within 15 business days. GRM is entitled to terminate the Media and Marketing Service 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. We earn significant revenues from the Media and Marketing Service Agreement. If GRM decided to terminate the Media and Marketing Service Agreement, our operating results could be adversely affected.

We advertise and market our products and services through search engines like Google and Yahoo!, e-mail and display advertising, affiliate marketing and direct response television and radio commercials. If our advertising and marketing efforts are not effective, our sales could decline and our business and financial condition would be adversely affected.

We market our products and related services via direct response television and radio commercials and over the Internet, primarily through space purchased from Internet-based marketers and search engines. During 2010, we spent approximately 82% of our advertising budget on direct response television and radio commercials and approximately 18% on Internet advertising. It is possible that our advertising will not produce the results we expect or that our advertising costs will increase significantly.

It also is possible that the number of persons watching and listening to programs that carry our commercials could decline or that direct response advertising could fall into disfavor among consumers. The occurrence of any of these events could have an adverse effect on our business and financial condition.

We face intense competition from other providers of Internet security software and services. This competition could adversely affect our business and financial condition.

We operate in intensely competitive markets that experience rapid technological developments, changes in industry standards, changes in customer requirements, and frequent new product introductions and improvements. If we are unable to anticipate or react to these competitive challenges or if existing or new competitors gain market share in any of our markets, our competitive position could weaken and we could experience a decrease in demand for our products and services. To compete successfully, we must devote substantial resources to our research and development efforts to develop new products and services and to improve our existing products and services. If we are not able to devote the required resources to research and development, and there is no assurance that we will be able to do so, our competitive position could be adversely affected.

Our competitors include WebRoot Software, Kaspersky Labs, iYogi and Support.com. Our larger competitors, including TrendMicro, McAfee, Symantec and Computer Associates, have far greater brand name recognition and far greater financial, technical, sales, marketing and other resources than we do and, consequently, have the ability to influence potential customers to purchase their products rather than ours. Our existing and future competitors could introduce superior products and services at lower prices than our products and services. Some competitors also could gain market share by acquiring or forming strategic alliances with other competitors. Because new electronic commerce distribution methods have removed many of the barriers historically faced by start-up and early stage companies in the software industry, we may face additional sources of competition in the future which could adversely affect our business and financial condition.

If we are unable to develop and maintain new and enhanced security and identity protection products and services to meet emerging industry standards, our business and financial condition could be adversely affected.

Our future success depends upon our ability to improve our current products and services and to develop new products and services that keep pace with the rapid technological developments, continually-evolving industry trends and standards, and ongoing changes in customer requirements in our markets. Failure to keep pace with any changes that are important to our customers could cause us to lose customers and could have a negative impact on our business and financial condition.

Our ability to adapt to changes can be hampered by product development delays. As we have in the past, we may experience delays in product development. Complex products like ours may contain undetected errors or other problems, especially when first released, which could adversely impact market acceptance. We also may experience delays or unforeseen costs associated with integrating products we acquire or license with products we develop because we may not be sufficiently familiar with products that we did not develop. We may choose not to deliver a partially-developed product, thereby increasing our development costs without a corresponding benefit. These delays could adversely affect our business and financial condition.

Although we test our products prior to release, they nevertheless may contain errors, failures, bugs and other problems which could adversely affect our business and financial condition.

Because we offer very complex products, undetected errors, failures, bugs and other problems may occur, especially when new products are introduced or when new versions are released. In the past, we have discovered errors, failures, and bugs in certain of our product offerings after their introduction. In addition, our customers’ computing environments often are characterized by non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. Errors, failures, bugs or other problems in our products could result in negative publicity, damage to our brand, product returns, loss of or delay in market acceptance of our products, loss of competitive position, or claims by customers or others, and could adversely affect our business and financial condition.

Our products may falsely detect viruses or computer threats that do not actually exist. These “false alarms,” although not unusual in the security industry, likely would impair customers’ and potential customers’ perceived reliability of our products and therefore could negatively affect customers’ opinions of our products and services.

Our anti-spam and anti-spyware may falsely identify emails, programs or web sites as unwanted “spam,” “potentially unwanted programs” or “unsafe.” They also may fail to properly identify unwanted emails, programs or unsafe web sites, particularly because spam emails, spyware or malware are often designed to circumvent anti-spam or spyware products and incorrectly to incorrectly identify legitimate web sites as unsafe. Persons whose emails or programs are incorrectly blocked by our products, or whose web sites are incorrectly identified as unsafe, may file legal actions against us. In addition, false identification of emails or programs as unwanted spam or potentially unwanted programs may discourage potential customers from using or continuing to use our products and could adversely affect our business and financial condition.

If we fail to upgrade or modify our information technology system effectively, we may not be able to report our financial results accurately or prevent fraud.

We may experience difficulties in transitioning to new or upgraded information technology systems and maintaining existing systems, including the loss of data and decreases in productivity as personnel become familiar with new, upgraded or modified systems. Our management information systems will require modification and refinement as we grow and as our business requirements change, which could prolong the difficulties we experience with systems transitions, and we may not always employ the most effective systems for our purposes. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management information systems and respond to changes in our business requirements, our business could be harmed and we may not be able to satisfy timely our Securities and Exchange Commission reporting requirements, which could adversely affect our business and financial condition.

Increased customer demands on our technical support services may adversely affect our relationships with our customers and adversely affect our business and financial condition.

A large portion of our revenue is derived from technical support services. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. We also may be unable to modify the manner in which our support services are provided to compete with support services offered by our competitors.

We have outsourced a portion of our worldwide consumer support functions to third-party service providers, some of which are located outside the U.S. If these service providers experience financial difficulties, service disruptions, or do not maintain sufficiently skilled workers and resources to satisfy our requirements and our customers’ expectations, the level of support services provided to our customers could decline materially, which could materially harm our relationships with customers.

Our ability to 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, on affordable terms, for potential claims 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, which would adversely affect our business and financial condition.

Loss of any of our key management personnel, particularly our Chief Executive Officer, could negatively impact our business and financial condition.

Our future success depends upon our ability to recruit and retain our key management, technical, sales, marketing, finance, and other critical personnel. Most of our officers and other key personnel are at-will employees, and there can be no assurance that we will be able to retain them. Competition for persons with the specific skills that we require is significant, and we believe that we must offer competitive compensation, including cash and equity-based compensation. The volatility in our stock price may from time to time adversely affect our ability to recruit or retain employees. In addition, we may be unable to obtain required stockholder approvals for future increases in the number of shares available for issuance under our equity compensation plans. Accounting rules require us to treat the issuance of employee stock options and other forms of equity-based compensation as compensation expense. As a result, we may decide to issue fewer equity-based incentives and may be impaired in our efforts to attract and retain necessary personnel. If we are unable to hire and retain qualified employees, our business and financial condition could be adversely affected.

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 Operating Officer, and Kevin Harris, our Chief Financial Officer. We believe that Mr. Guseinov would be particularly difficult to replace.

If we lose key executives and management personnel, we may be forced to expend significant time and expense in the pursuit of replacements. In addition, there is no assurance that we would be able to find satisfactory replacements on terms that are not unduly expensive or burdensome to the Company, or at all. 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 regulation of Internet communications, e-commerce and advertising will remain minimal. At this time, complying with applicable laws and regulations is not unduly burdensome. However, it is possible that, in the future, laws and regulations may be enacted to address matters such as user privacy, spyware, pricing, intellectual property ownership and infringement, taxation, and quality of products and services. Additional 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 laws and regulations or the addition of new laws and regulations could affect the costs of communicating on the Internet and adversely affect the demand for our products or otherwise harm our business and financial condition.

A portion of our business is the development and distribution of software. If we do not protect our proprietary technology and prevent third parties from using it without authorization, our business could be harmed materially.

Most of our software and underlying technology is proprietary. We attempt to protect our proprietary rights through the use of confidentiality agreements and procedures and through copyright, patent, trademark, and trade secret laws. However, the steps we have taken to protect our proprietary technology may not deter its misuse, theft or misappropriation. Competitors may independently develop technologies or products that are substantially equivalent or superior to our products or that improperly incorporate our proprietary technology into their products. Competitors may hire our former employees who may misappropriate our proprietary technology. Our license agreements are not signed by our customers and therefore may be unenforceable under the laws of some jurisdictions. Furthermore, the laws of some foreign countries do not offer the same level of protection of our proprietary rights as the laws of the U.S., and we may be subject to unauthorized use of our products in those countries. The unauthorized copying or use of our products or proprietary information could result in reduced sales of our products. In addition, any legal action to protect proprietary information that we may bring or be engaged in, alone or through our alliances with the Business Software Alliance or the Software & Information Industry Association, could be costly, may distract management from day-to-day operations, and may lead to additional claims against us, which could adversely affect our business and financial condition. Changing legal interpretations of liability for unauthorized use of our software or more indifference by corporate, government or institutional users to refraining from intellectual property piracy or other infringements of intellectual property could also 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.

The security technology industry increasingly has been subject to patent and other intellectual property rights litigation, particularly from so-called “special purpose entities” that seek to profit by acquiring intellectual property rights and then asserting claims against others. We expect this trend to continue and, in the future, we may be required to defend against these kinds of claims. The litigation process is subject to inherent uncertainties, and we may not prevail in litigation regardless of the merits of our position. In addition to the expense and distraction associated with litigation, adverse determinations could cause us to lose our proprietary rights, prevent us from manufacturing or selling our products, require us to obtain licenses to patents or other intellectual property rights that our products are alleged to infringe (licenses may not be available on reasonable commercial terms or at all), and subject us to substantial liabilities.

If we acquire technology from third parties to include in our products, our exposure to infringement actions may increase because we must rely upon the third parties to verify the origin and ownership of the technology. Similarly, we face exposure to infringement actions if we hire software engineers who were previously employed by competitors and those employees inadvertently or deliberately incorporate proprietary technology of our competitors into our products despite efforts by our competitors and us to prevent such infringement.

We believe that, as the number of products in the software industry increases and the functionality of these products further overlap, 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; divert management’s attention from our business; require us to stop selling, delay providing, or redesign our products; and require us to pay damages or purchase licenses, which could adversely affect our business and financial condition.

Pending or future litigation could have a material adverse impact on our results of operation, financial condition and liquidity.

In addition to potential intellectual property litigation, in the future we may be subject to other litigation including purported class actions, purported stockholder derivative actions, and actions brought by current or former employees. Where we can make a reasonable estimate of the liability relating to pending litigation and determine that an adverse liability resulting from such litigation is probable, we will record a related liability. As additional information becomes available, we will assess the potential liability and revise estimates as appropriate. However, because of the inherent uncertainties relating to litigation, the amount of our estimates could be wrong. The expense of defending future litigation may be costly and divert management’s attention from the day-to-day operations of our business, which could adversely affect our business and financial condition. In addition, an unfavorable outcome in future litigation could result in our liability to pay damages or subject us to other constraints that could adversely affect our business and financial condition.

Risks Related to Ownership of Our Securities

Our stock generally is thinly traded and it may not be possible to sell shares of our common stock in a timely manner.

Our common stock began trading on the NASDAQ Global Market on June 9, 2010, and generally is thinly traded. We believe that the generally low trading volume is 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 trading volume. We believe that, even if we were to come to their attention, most analysts, brokers and institutional investors probably would not purchase or recommend the purchase of our stock until we become a larger company with a substantial operating history. As a result, although our common stock is publicly traded, there may be periods of a number of days or more when trading activity in our shares is minimal or nonexistent and it may not be possible to sell shares of our common stock in a timely manner.

In addition, future sales of substantial amounts of our common stock, or the perception that substantial sales could occur, could put downward selling pressure on our stock price and therefore could adversely affect the stock price. This downward pressure may make it impossible for an investor to sell stock in a timely manner or at a reasonable price, if at all.

Our stock price has been volatile in the past and is likely to be volatile in the future, and you could lose the value of your investment.

The market price of our common stock has experienced significant volatility in the past and is likely to continue to be volatile in the future. As a result, you could lose the value of your investment. The market price of our common stock may be affected by a number of factors, including:

Announcements by us of operating results or revenue or earnings forecasts that fail to meet or be consistent with earlier forecasts or the expectations of our investors;

Announcements by our competitors that fail to meet or be consistent with their earlier forecasts or the expectations of their investors and securities analysts;

Rumors, public announcements, or media information regarding our competitors’ operations, management, organization, or financial condition; or

Announcements by us of changes in our forecasts of revenue or earnings.

Our executive officers and directors own or control approximately 26% of our issued and outstanding common stock, which may limit the ability of our non-management stockholders, whether acting alone or together, to influence our management. In addition, this concentration of ownership could discourage or prevent a potential takeover that might otherwise result in our stockholders receiving a premium over the market price for our common stock.

Approximately 26% of the issued and outstanding shares of our common stock is owned and controlled by our executive officers and directors. Mr. Guseinov, our Chief Executive Officer, owns 22% of our issued and outstanding common stock. The concentrated control may adversely affect the price of our common stock, and the insiders may be able to control matters requiring approval by our stockholders, including the election of directors and approval of acquisitions, mergers and other business transactions. Non-management stockholders may have little or no influence on management and the conduct of the Company’s business. The concentrated control also may make it difficult for our stockholders to receive a premium for their shares of our common stock in the event of a merger or other change in control of the Company. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.

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 finance our operations and develop our business and we do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our Board 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 to which we may be a party at the time. In addition, our ability to pay dividends on our common stock may be limited by Delaware law. Accordingly, investors must rely on sales of their common stock after price appreciation – which appreciation may never occur – as the only way to realize a return on their investments. Investors seeking cash dividends should not purchase our common stock.

Limitations on our directors’ liability and our indemnification of our directors may discourage stockholders from filing legal actions against our directors.

Our certificate of incorporation provides, in substance, that our directors are not personally liable to the Company or our stockholders for monetary damages for breach of fiduciary duty as a director, except for: (i) any breach of the director’s duty of loyalty to the Company or its stockholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) improper payment of dividends or unlawful stock purchases or redemptions; and (iv) any transaction from which the director derives an improper personal benefit. These provisions may discourage stockholders from filing legal actions against our directors for breaches of fiduciary duty and may reduce the likelihood of derivative actions being filed by stockholders on behalf of the Company against our directors. In addition, our certificate of incorporation and our bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Delaware law, and we have entered into indemnification agreements with our directors and senior officers.

Our charter documents may impede or discourage a takeover, which could protect management but which may not be in the best interests of our stockholders.

Under our certificate of incorporation, our Board has the authority to issue up to 10 million shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock and could discourage a change of control of the Company or changes in management, even if such action would provide a premium to our stockholders or otherwise be in their best interests.

Special Note Regarding Forward-Looking Statements

This Prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” contains forward-looking statements. Forward-looking statements 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 words are intended to identify forward-looking statements. Certain risks 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 and services;

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

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

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

Forward-looking statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do not intend to update any of the forward-looking statements after the date of this Prospectus or to conform these statements to actual results. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission (“SEC”).

Use of Proceeds

We will not receive any of the proceeds of the sales of these shares. However, we may receive up to $6,227,060 to the extent the warrants are exercised for cash. If some or all of the warrants are exercised for cash, the money we received will be used for general corporate purposes, including working capital requirements. We will pay all expenses incurred in connection with the offering described in this Prospectus, with the exception of the brokerage expenses, fees, discounts, and commissions which will be paid by the selling stockholders. Our common stock and warrants are described more fully in the section below in this Prospectus entitled “Description of Securities.”

Dividends

We have not paid or declared cash dividends on our common stock in the past two years. We currently intend to retain all available funds and all future earnings to finance the development and expansion of our business. We do not expect to pay any dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board and will depend upon various factors, including our results of operations, financial condition, capital requirements, debt levels, and statutory and contractual restrictions.

Capitalization

As of May 2, 2011, we had 28,121,933 shares of common stock issued and outstanding. We are also committed to issue the following:

2,575,389 shares of common stock underlying a 9% Convertible Promissory Note, as amended, issued to GR Match, LLC on March 31,2010;

3,090,984 shares of common stock underlying a 9% Convertible Promissory Note, as amended, issued to GR Match, LLC on February 25, 2011;

14,602,375 shares of common stock upon the exercise of warrants having an exercise price of $1.25 per share;

221,750 shares of common stock upon the exercise of warrants having an exercise price of $1.20 per share;

700,306 shares of common stock upon the exercise of warrants having an exercise price of $1.01 per share;

2,032,661 shares of common stock upon the exercise of warrants having an exercise price of $1.00 per share;

2,500 shares of common stock upon the exercise of warrants having an exercise price of $1.80 per share;

125,000 shares of common stock upon the exercise of warrants having an exercise price of $1.83 per share;

77,490 shares of common stock upon the exercise of warrants having an exercise price of $2.05 per share

55,000 shares of common stock upon the exercise of warrants having an exercise price of $2.18 per share;

434,000 shares of common stock upon the exercise of 217,000 outstanding unit purchase options having an exercise price of $1.00 per unit, with each unit consisting of one share of common stock and a warrant to purchase one share of common stock for $1.00 per share;

2,348,309 shares of common stock included in our Amended and Restated 2006 Equity Incentive Plan, from which options for the purchase of 2,163,997 shares of common stock have been granted; and

693,609 shares of common stock included in our 2005 Equity Incentive Plan (sometimes referred to as our 2005 Stock Option Plan), from which an option for the purchase of 630,733 shares of common stock has been granted.

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 Prospectus. 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 Prospectus.

Overview

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

We have developed a collaborative Internet security network, which we refer to as CyberDefender Argus Network, which is based on certain technology principles commonly found in a peer-to-peer network infrastructure. A peer-to-peer network does not have clients or servers, but instead has 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 CyberDefender Argus Network™, 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 CyberDefender Argus Network™, and each machine that receives the information will, in turn, relay it to other machines that are part of the CyberDefender Argus Network™. This protocol allows us to rapidly distribute alerts and updates regarding potentially damaging viruses, e-mails and other threats to members of the CyberDefender Argus Network™, 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 CyberDefender Argus Network™ simply by downloading and installing our software.

In 2010, our revenue mix shifted considerably, and in addition to being a security software company, we are gaining traction as a leader in remote technical support services led by our LiveTech business. LiveTech accounted for roughly 67% of our gross sales in the fourth quarter and 60% of our gross sales for the full year. This continued strong performance supports our belief in the sizeable market that exists for remote PC repair and technical support services, and our ability to capture share in this nascent and emerging market. As consumer awareness and the need for such services continues to grow, we expect considerable growth from LiveTech in 2011 and beyond. With this in mind, we made a number of investments in our infrastructure in 2010 to establish the foundation needed to support our anticipated growth. The most significant investment we made to more effectively address this market was in our recently opened Los Angeles call center, which employs advanced SAAS CRM/IVR platforms designed to manage high sales volume and improve overall customer experience through more efficient call routing, improved interactive voice response and a variety of other key features. Although the new call center and enhanced technology platform only launched in December of 2010, we have already realized benefits from this implementation including increased sales conversions, which we expect will improve further as we continue to refine the systems and improve the level of training provided to our call center agents.

In the past, we marketed solely online via e-mails, banners and search ads. In 2009, we began using off-line marketing channels because we believe these channels are more effective in driving new business. Specifically, we are selling our products through direct response television and radio marketing by partnering with GRM.

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 142% for the year ended December 31, 2010 as compared to the year ended December 31, 2009. Accompanying this growth was an expected increase in our related operating expenses as more fully described below in Results of Operations. We engaged in five offerings of our debt and/or equity securities during the 2009 fiscal year to expand our business. During the 2010 fiscal year we obtained financing from GRM via a $5.3 million convertible note as well as a $5 million revolving credit facility, which was converted to a convertible note in February 2011. The funds received were used to expand 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. We sell off-the-shelf software products and technical support services. We recognize revenue in accordance with GAAP from the sale of software licenses under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 985, “Software.” Specifically, we recognize revenue from products when all of the following conditions for revenue recognition are met:

Persuasive evidence of an arrangement exists,

The product or service has been delivered,

The fee is fixed or determinable, and

Collection of the resulting receivable is reasonably assured.

As part of the sales price of some of our software licenses, we provide renewable product support and content updates, which are separate components of product licenses and sales. Term licenses allow customers to use our products and receive product support coverage and content updates for a specified period, which is generally twelve months. We invoice for product support, content updates and term licenses at the beginning of the term. This revenue contains multiple elements where “vendor specific objective evidence” (“VSOE”) may not exist for one or more of the elements. Certain of our software licenses are, in substance, subscriptions and therefore the sale is deferred and recognized ratably over the term of the arrangement. Revenue is recognized immediately for the sale of software products that are utility products and that do not require product updates.

Revenue is recognized immediately for the sale of our one-time technical support service as it is performed when purchased. We recognize a portion of the sale of one of our annual services at the time of purchase when all of the elements necessary for revenue recognition have occurred (i.e,. the initial technical support call has occurred) and the remaining revenue is deferred over the annual term. Revenue is deferred and recognized on a straight line basis over the term of the service agreements for the technical support services that are provided by third parties.

We also use third parties to sell our software and therefore use 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, has latitude in establishing prices and selecting suppliers, establishes product specifications, and has the risk of loss. Accordingly, our revenue is recorded on a gross basis.

We still support, although we do not update, MyIdentityDefender Toolbar and CyberDefender FREE 2.0, which were free to subscribers. 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 advertisements displayed or the performance of the advertisements based on the amount of times the advertisements are clicked by the user. 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.

Our policy with respect to refunds is to offer refunds within the first 30 days after the date of purchase except for LiveTech, for which refunds are offered within the first 10 days of purchase. The Company may voluntarily issue refunds to customers after 30 days of purchase, however the majority are issued within 30 days of the original sale and are charged against the associated sale or deferred revenues (as applicable).

Advertising Costs. We expense advertising costs as they are incurred. As described in detail in Note 5 of our financial statements for the year ended December 31, 2010, we issued warrants for media and marketing services. The non-cash value of those warrants is included in media and marketing services on the accompanying statements of operations. For the years ended December 31, 2010 and 2009, the Company recorded non-cash expense of $18.6 million and $5.9 million, respectively.

Software Development Costs. We account 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.

We account 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
Debt obligations	$	11,241,917	$	—	$	11,241,917	$	—	$	—
Capital lease obligations	$	349,221	$	163,819	$	185,402	$	—	$	—
Operating lease obligations	$	8,620,884	$	724,051	$	1,799,622	$	1,899,149	$	4,198,062

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,” which often are 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 them 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 services and defer the revenue over the life of the license or service agreement, which range from one to three years.

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-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

31-Mar-10	$	9,477,330	$	11,619,760
30-Jun-10		9,712,586	$	12,081,434
30-Sep-10		12,746,103	$	14,163,271
31-Dec-10		13,632,526	$	15,458,653
Fiscal Year 2010 Totals	$	45,568,545

The following table summarizes our gross sales by category for each quarter of the two most recently completed fiscal years. Gross sales are a non-GAAP measure that we use in assessing our operating performance. We define gross sales as total sales before refunds and bad debt before deferring revenue for GAAP purposes. We use this non-GAAP financial measure because we believe it provides a better indication of our operating performance and the profitability of our marketing initiatives. We include this non-GAAP financial measure in our earnings announcements in order to provide transparency to our investors and to enable investors to better understand our operating performance. However, we do not recommend using gross sales alone to assess our financial performance or to formulate investment decisions.

Quarter Ended	Software				Services				Ancillary				Renewals				Total
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

31-Mar-10	$	4,092,152	35	%	$	5,802,486	49	%	$	856,297	7	%	$	1,062,473	9	%	$	11,813,408
30-Jun-10		3,504,147	28	%		6,967,067	56	%		568,525	5	%		1,389,064	11	%		12,428,803
30-Sep-10		4,155,264	22	%		11,706,203	63	%		501,721	3	%		2,196,572	12	%		18,559,760
31-Dec-10		3,944,197	21	%		12,780,949	67	%		493,886	3	%		1,890,599	10	%		19,109,631
Fiscal Year 2010 Totals	$	15,695,760	25	%	$	37,256,705	60	%	$	2,420,429	4	%	$	6,538,708	11	%	$	61,911,602

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.

The following table summarizes our new gross sales by category, separated into one year licenses or service agreements versus multi-year licenses or service agreements.

	2010				2009
1 Year - Software sales	$	14,507,106	26	%	$	11,071,195	42	%
Multi-year - Software sales		1,188,744	2	%		973,009	4	%
1 Year - Services sales		11,838,876	21	%		8,114,893	30	%
Multi-year - Services sales		25,417,829	46	%		3,831,503	14	%
Ancillary Sales		2,420,429	4	%		2,633,775	10	%
Total	$	55,372,895			$	26,624,375

The table above indicates an upward trend in the sale of our multi-year LiveTech services. Management believes this to be a result of increased demand for the value received for these multi-year LiveTech services and the overall growing demand for remote computer repair services.

The following is a reconciliation of gross sales to net revenue for the years ended December 31, 2009 and 2010:

	2010			2009
Gross Sales		61,911,602			28,972,087
Less: Refunds		(7,678,617	)		(3,904,001	)
Less: Bad debt/cancels		(3,984,934	)		-
Less: Change in deferred revenue		(4,679,507	)		(6,226,193	)
Net revenue		45,568,545			18,841,893

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

RESULTS OF OPERATIONS

Fiscal Year Ended December 31, 2010 Compared to the Fiscal Year Ended December 31, 2009

Net Sales

					Change in
	2010		2009		$		%

Net Sales	$	45,568,545	$	18,841,893	$	26,726,652		142	%

The increase in net revenue was driven by several factors: increased direct-response advertising efforts through our partnership with GRM, increasing demand for our software products and remote LiveTech services, an increase in renewal revenues and continued improvements related to infrastructure optimization including SaaS-based CRM, IVR and eCommerce platforms. See the discussion of advertising expenses below.

Revenue from product sales increased $5.1 million, or 51%, to $15.3 million for the year ended December 31, 2010 from $10.2 million for the year ended December 31, 2009. Revenue from services increased $18.5 million, or 324%, to $24.2 million for the year ended December 31, 2010 from $5.7 million for the year ended December 31, 2009. Revenue from renewals increased $3.6 million, or 226%, to $5.2 million for the year ended December 31, 2010 from $1.6 million for the year ended December 31, 2009.

Cost of Sales

					Change in
	2010		2009		$		%

Cost of Sales	$	19,981,021	$	4,182,462	$	15,798,559		378	%

The increase in cost of sales was primarily attributable to the expansion of our call center operations to support the increase in sales of our remote LiveTech services and the transition to CyberDefender managed call centers. During 2010, we transitioned to using only CyberDefender managed call centers, internal as well as through third-parties. Prior to the transition the Company contracted with an outsourced call center on a revenue share basis that allowed us to defer the cost for GAAP accounting. Cost of sales includes compensation related expenses of our internal sales and technical support staff, as well as the cost of outsourced call centers. Compensation-related expenses for our internal technical support staff totaled $8.8 million for the year ended December 31, 2010 as compared to $0.1 for the year ended December 31, 2009. Expenses related to outsourced call centers totaled $9.7 million for the year ended December 31, 2010 as compared $3.4 for the year ended December 31, 2009.

Operating Expenses

Media and marketing services

					Change in
	2010		2009		$		%

Media and marketing services	$	22,966,079	$	15,302,394	$	7,663,685		50	%

Media and marketing services costs include offline and online advertising and related functional resources. This increase was primarily attributable to the Company’s decision to increase its advertising spend to increase sales.

Media and marketing services – related party

					Change in
	2010		2009		$		%

Media and marketing services – related party	$	19,262,845	$	6,006,273	$	13,256,572		221	%

Media and marketing services – related party expense is comprised primarily of non-cash expense related to the Media Services Warrant and other warrants issued to GRM. This increase was primarily attributable to the non-cash expense related to the Media Services Warrant and other warrants issued to GRM. Non-cash expenses were $18.6 million and $5.9 million for the years ended December 31, 2010 and 2009, respectively.

Product Development

					Change in
	2010		2009		$		%

Product Development	$	3,945,714	$	1,851,931	$	2,093,783		113	%

Product development expenses are comprised of research and development costs associated with the development of new products as well as the ongoing support and improvement of current products. This increase is primarily attributable to increased salaries and compensation paid to contractors.

General and Administrative

					Change in
	2010		2009		$		%

G & A	$	16,811,996	$	9,040,806	$	7,771,190		86	%

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.

The increase in G & A was attributable to an increase in salaries and wages and related compensation expenses, including benefits and payroll taxes, of $3.3 million to $5.9 million in 2010 from $2.6 million in 2009, resulting from the increase in staffing across all departments required as a result of the increase in sales and scaling of infrastructure. There was also an increase in merchant processing fees of $1.4 million to $2.5 million in 2010 from $1.1 million in 2009, due to increased sales and the Company’s use of services provided by Vindicia, a leading provider of on-demand billing solutions for online merchants. Call center related infrastructure and customer service costs increased by $1.7 million to $2.2 million in 2010 from $0.5 million in 2009. Professional fees increased by $1.0 million to $1.7 million in 2010 from $0.7 million in 2009 due to listing the Company’s common stock on the NASDAQ Global Market and the engagement of a new accounting firm. Stock based compensation increased by $0.7 million to $1.0 million in 2010 from $0.3 million in 2009. Additionally, there was also an overall increase in expenses in all G & A categories due to the increased staffing and sales activities in the current period.

Loss from Operations

					Change in
	2010		2009		$		%

Loss from operations	$	37,635,170	$	17,579,090	$	20,056,080		114	%

The increase in operating loss was primarily attributable to the non-cash expense related to the Media Services Warrant and other warrants issued to GRM. The Company recorded non-cash expense of $18.6 million to media and marketing services for the year ended December 31, 2010 as compared to $5.9 million for the year ended December 31, 2009.

Other Income/(Expense)

Change in Fair Value of Derivative Liabilities

					Change in
	2010		2009		$			%

Change in fair value of derivative liabilities	$	-0-	$	109,058	$	(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. During 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 price protection 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
	2010		2009		$			%

Interest expense, net (including related party)	$	1,973,850	$	2,371,724	$	(397,874	)		(22	)%

The decreased interest expense was attributable to the decrease in the interest and amortization expense related to our 2006 Debentures and our 2008 8% Convertible Notes, which both converted in 2009, and the issuance of additional warrants as part of a warrant tender offer that we completed on August 17, 2009 offset by interest and amortization of our 2009 8% Convertible Notes and the Senior Promissory Note (as defined below in the section entitled "Certain Relationships and Related Transactions").

Net Loss

					Change in
	2010		2009		$		%

Net Loss	$	39,609,020	$	19,841,756	$	19,767,264		100	%

The increase in operating loss was primarily attributable to the non-cash expense related to the Media Services Warrant and other warrants issued to GRM. The Company recorded non-cash expense of $18.6 million to media and marketing services for year ended December 31, 2010 as compared to $5.9 million for the year ended December 31, 2009.

Liquidity and Capital Resources

As described in the section above titled “Trends, Events and Uncertainties,” our revenues have been increasing on a quarterly basis for the last two years.

To help with our cash flow, we occasionally sell our debt or equity securities. We currently have outstanding $5.5 million in principal amount of a 9% secured convertible promissory note. According to the terms of this note, the principal amount is due on March 31, 2012 and interest is due quarterly in arrears. At December 31, 2010, we also had a revolving credit facility with a balance of $5.0 million outstanding. This facility was renegotiated in February, 2011 and the balance was converted to a 9% secured convertible promissory note due March 31, 2012. GRM is the holder of both promissory notes.

At December 31, 2010, we had cash totaling $2.6 million and restricted cash of $3.1 million, of which $2.8 million was held as a reserve by our merchant processor. In March 2011, the Company negotiated a cap on the reserve of $2 million and the release of $1.2 million of the reserve. In the fiscal year ended December 31, 2010, we used cash of $0.7 million as described below. In the fiscal year ended December 31, 2009, we generated positive cash flows of $2.6 million primarily through financing activities as described below. We currently anticipate that our available capital resources, including our operating cash flows, will be sufficient to meet our expected working capital and capital expenditure requirements through December 31, 2011. However, our capital resources may not be sufficient to fund the repayment of the obligation to GRM due on March 31, 2012. We may need to obtain additional financing prior to March 31, 2012 to satisfy the obligation. There can be no assurance that we will be able to secure additional financing on terms favorable to us, or at all. In the event we are unable to obtain additional financing, we will attempt to renegotiate the terms of the GRM obligation; however, there can be no assurance that this would occur. If we are unable to obtain additional funding or renegotiate the GRM obligation, we may be required to curtail our operations significantly, which would have a material adverse impact on our business and financial condition. In addition, in the event of the Company’s default under the GRM obligation, GRM has the right to require us to retain a consultant or hire an executive who would be senior to the Company’s Chief Executive Officer and Chief Financial Officer and who would oversee the management and operations of the Company, subject to the direction of the Company’s Board, until the event of default is cured. If we continue to maintain substantial levels of debt, our ability to take advantage of opportunities, such as acquiring equipment or operations that could complement our business, and our financial condition could be adversely affected.

Cash provided/(used) during the fiscal years ended December 31, 2010 and 2009 included:

Operating Activities

Net cash used in operating activities of $4.8 million during the fiscal year ended December 31, 2010 was primarily the result of our net loss of $39.6 million. Net loss was adjusted for non-cash items such as amortization of debt discount of $1.1 million, compensation expense for vested stock options of $1.0 million, amortization of deferred financing fees of $0.2 million, warrants issued for media and marketing services of $18.6 million and shares and warrants issued for services, interest and penalties of $0.6 million. Other changes in working capital accounts include an increase in restricted cash of $1.5 million, an increase in accounts receivable of $1.9 million, a decrease in deferred charges of $2.4 million, an increase in accounts payable and accrued expenses of $4.9 million, an increase in accounts payable and accrued expenses – related party of $4.6 million and an increase of $4.7 million in deferred revenue resulting from higher new customer and renewal sales.

Net cash used in operating activities of $6.0 million during the fiscal year ended December 31, 2009 was primarily the result of our net loss of $19.8 million. Net loss 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, warrants issued for media and marketing services of $5.3 million, shares and warrants issued for services of $3.0 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 $2.9 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 2010 we began offering payment plans to our customers for the purchase of multi-year technical support service plans. We expect this change to increase gross sales but to also impact operating cash flow because sales receipts will be spread over two months instead of being received at the time of sale.

The increase in cash related to accounts payable and accrued expenses and accounts payable and accrued expenses – related party was $9.5 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.

Our working capital deficit at December 31, 2010, defined as current assets minus current liabilities, was $11.4 million as compared to a working capital deficit of $6.2 million at December 31, 2009. The decrease in working capital of $5.2 million from December 31, 2009 to December 31, 2010 was primarily attributable to a decrease in deferred charges of $2.2 million, an increase in accounts payable and accrued expenses of $2.9 million and an increase in the current portion of deferred revenue of $1.7 million, resulting from increased sales offset by an increase in restricted cash of $1.5 million and an increase in accounts receivable of $1.9 million.

Investing Activities

Net cash used in investing activities during the fiscal years ended December 31, 2010 and 2009 was $1.3 million and $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.

Financing Activities

Cash provided by financing activities during the fiscal year ended December 31, 2010 was primarily the result of the issuance of a note payable, net of commissions, totaling $4.9 million and the exercise of common stock warrants and options totaling $0.6 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, 2009 was primarily the result of the sale of common stock for proceeds 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.

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

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On October 8, 2010, the Company dismissed KMJ Corbin & Company LLP (“KMJ”) as its independent registered public accounting firm.

On October 11, 2010, the Company engaged Grant Thornton LLP (“Grant Thornton”) as its new independent registered public accounting firm.

For the fiscal years ended December 31, 2008, and December 31, 2009, KMJ’s reports on the Company’s financial statements did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles; however, the report issued on the Company’s financial statements for the year ended December 31, 2008 stated that there was substantial doubt about the Company’s ability to continue as a going concern. The report issued on the Company’s financial statements for the year ended December 31, 2009, did not include any qualification about the Company’s ability to continue as a going concern.

The decision to dismiss KMJ was approved by the Company’s Audit Committee.

During the fiscal years ended December 31, 2008 and December 31, 2009 and through October 8, 2010, there were no disagreements with KMJ on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which would have caused KMJ to make reference to the subject matter of the disagreement in its reports.

During the fiscal years ended December 31, 2008 and December 31, 2009 and through October 8, 2010, the Company did not experience any of the events set forth in paragraphs (A) through (D) of Item 304(a)(1)(v) of Regulation S-K.

On October 11, 2010, the Company’s Audit Committee engaged Grant Thornton as the Company’s new independent registered public accounting firm and as principal accountant to audit the Company’s financial statements. During the fiscal years ended December 31, 2008 and December 31, 2009 and through October 8, 2010, the Company did not consult Grant Thornton regarding any of the matters set forth in paragraphs (i) and (ii) of Item 304(a)(2) of Regulation S-K.

Information With Respect to the Registrant

Our Business

Our business is focused on two areas: LiveTech, which is remote personal computer (“PC”) diagnostic and repair services; and security and optimization software.

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

Five specific services and products comprise SSS:

Remote PC Repair: These services are designed to repair personal computers (“PCs”) by means of remote access from a live technician. These services incorporate manual malware removal, system restore and PC optimization by means of our LiveTech services.

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 and spyware.

Identity Protection Services: These services provide credit monitoring and identity protection insurance or guarantees.

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

PC Optimization Software: These products 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 malicious programs are introduced to computers in a number of ways, including, but not limited to:

Poor browser security – 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;

Explosive growth in spyware causing theft of confidential information, loss of employee productivity, consumption of large amounts of bandwidth, damage to desktops and a large increases in requests for assistance from “help desks”; 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 these factors, the SSS market has developed and continues to expand in order to respond to the ever-evolving threats presented by malicious programs.

Our Competitive Advantages

Traditional 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 access to live support. Our LiveTech service eliminates the reliance on the end-user to properly utilize software security. We believe this provides the Company with a significant competitive advantage as well as an additional recurring revenue stream opportunity that compliments its security software.

Although many products exist today to address security issues, most 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” in a timely manner, 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. In addition, new patches may take hours to install and decrease 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 third 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 because they rely on intensive data centers and networks to deliver updates, thereby using a significant amount of bandwidth, which is expensive to obtain. In addition, 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 because threats are not perpetrated on a schedule; therefore a PC which was updated on Monday may effectively be infected on Tuesday. “Freeware” or free antivirus and antispyware software downloads offer minimal updates and leave 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. We believe 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.

Our 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 must 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 users from getting the needed updates; and

A threat may block a user’s 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 CyberDefender Argus Network (formerly known as the earlyNETWORK), our proprietary collaborative Internet security network, to detect, analyze and quarantine new security threats. We believe the CyberDefender Argus Network provides a unique approach to updating personal computer security. We have developed the Argus Network based on certain technology principles commonly found in a peer-to-peer network infrastructure. A peer-to-peer network does not have clients or servers, but instead relies upon 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 Argus Network is not a conventional peer-to-peer network because our Alert Server is a required checkpoint for all client activities, thus assuring the integrity of the network. The Argus Network is a controlled publishing network that leverages the power of distributed bandwidth to defend automatically against a wide spectrum of software attacks and provide users with proprietary automated processes that rapidly identify and quarantine both known and emerging threats. Each user has a controlled role in relaying the threat updates to as many as 20 other users, thus allowing continuous release of threat updates. As additional users are added, the efficiency of our collaborative security network increases. With more users, threats are detected faster and remedial updates occur faster because users of our software are connected to other users rather than an update server. The Argus Network is designed to reduce the lag time between the identification of a new security threat by our Early Alert Center and notification to PCs that are part of the Argus Network. Users of our software who cannot connect with other users always will be able rely on the Alert Server which is the central source for threat analysis and notification.

The Argus Network works as follows. Our customers become a part of the Argus Network by downloading and installing one of our Internet security products (CyberDefender Early Detection Center V3.0 or, when it was offered, CyberDefender FREE V2.0), described below. Unusual behavior is detected by a PC that is part the Argus Network. The potential threat, which may be anything from spam to a virus, is put on standby, and is reported to the 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 our AppHunter for analysis.

AppHunter is an automated system that manages the threat analysis process. AppHunter first tests the undefined threat on an isolated computer that is automatically cleaned 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 and are considered to be viruses. AppHunter also performs a confidential set of proprietary verifications to ensure that the threat itself is not an attempt to deceive or hack the network.

Because there are a number 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 over the Argus Network. 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 in an ever-widening circle. This distributed notification process frees up the Alert Server to deal with incoming alerts from customers 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 less expensive than traditional Internet security companies that provide manual, broadcast-updated threat management systems. Most traditional Internet security companies use a single point of threat capture, a cumbersome threat analysis system and an intermittent scheduled update system, and create a “coverage gap” that can delay alerts on important new infectious attacks for 12 hours or more. In contrast, our proprietary technology quickly distributes threat updates to all computers that are part of the Argus Network. 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, which was one to two days before other security software vendors announced their discoveries of the 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 by means of the Argus Network is minimal, Alert Server can send out updates as fast as threats are confirmed, which we believe results in superior security coverage. In general, it takes about an hour from the time the first user has picked up the new threat to the updating of the network. The network responds quickly to new threats because it enlists all the PCs in the Argus Network 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 PC.

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:

LiveTech

LiveTech provides unlimited live premium tech-on-call service 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 sales agents.

LiveTech One Time Resolution

This service provides a one-time fix by means of our LiveTech service for any technology problem.

CyberDefenderULTIMATE (no longer sold but still serviced)

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 was sold in annual or multi-year subscriptions.

Proprietary Technology Overview

The following is a description of our proprietary technologies:

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

TPN is a sophisticated threat analysis platform which utilizes CyberDefender’s proprietary threat analysis engine and updating technology. U.S. Patent No. 7,836,506 B2 was issued on November 16, 2010.

Secure Peer to Peer Network V1.2/V2.0 (“SPN”)

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

CyberHunter V1.0

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

CyberDefender Early Detection Center V3.0

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

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

This is a proprietary anti-phishing and web access protection technology designed for the Windows Internet Explorer browser.

Products

Our core software product is a suite of Internet security products called Early Detection Center V3.0 (“EDC”). In addition to EDC, we also market the following products described below. We distribute our software via the Internet and on computer disk. The following is a description of our products.

EDC V3.0

EDC V3.0 is a Windows PC Internet security suite designed to protect consumers against spyware, viruses, phishing attacks and spam. CyberDefender Early Detection Center utilizes the CyberDefender Argus Network 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 EDC V2.0. This version was offered free to consumers and is supported by imbedded banner advertising. Users can upgrade to the non-advertisement supported version (EDC V2.0). Users no longer receive unlimited updates, however we still support this version of the software for the advertising revenue it generates.

CyberDefender Registry Cleaner V1.0 (“RC”)

RC V1.0 is Windows PC optimization software designed to improve performance and increase PC speed. RCl V1.0 fixes common Windows registry errors. Users receive unlimited updates during the subscription term.

CyberDefender FamilyPak

The FamilyPak offers the same technology as EDC V3.0. FamilyPak is designed for families with multiple PCs or small businesses running multiple PCs.

MyIdentityDefender V1.0 (No longer distributed)

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

CyberDefender Identity Protection Service (“IDS”)

IDS is an identity protection service offering users basic identity 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 IDS includes credit monitoring. This is a monthly subscription product.

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 CyberDefender Argus Network and includes unlimited threat definition updates during the subscription term.

CyberDefender Online Backup

This is a comprehensive online backup solution which allows for secure cloud storage of common PC files. Cloud storage ranges from 10 Gigabytes to over 1 Terabyte. Web access to stored files also is available.

Growth Strategy

Our strategy is to continue to grow our business by increasing our customer base, continuing to offer new products and services, continuing to scale our current marketing channels, adding new marketing channels, forming new strategic alliances and expanding internationally.

In 2010, we increased our marketing efforts under the brands DoubleMySpeed, MyCleanPC, and MaxMySpeed by means of direct-response commercials on television and radio through our strategic partnership with GRM. We intend to continue to scale these efforts going forward to increase our customer base. The Company signed a license agreement with GRM to increase its efforts via retail outlets and television shopping networks and to expand internationally.

Because a majority of our products and services are offered on a subscription basis, it is also important for the growth of our business that customers renew their subscriptions year after year. The Company continually works to improve its retention marketing. 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.

The Company intends to launch new products in 2011, aimed at increasing sales and improving customer retention and renewals. These products will be sold on a stand-alone basis and also combined with existing products and services.

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.

Revenue Model

Our revenue model consists mainly of the sale of software and technical support services on a license or subscription basis. The terms of the licenses or subscriptions are one, two and three years. We also sell identity protection services and online backup on monthly subscriptions. The licenses on the software products auto-renew at the end of the license term for a new term of one year. The identity protection services and online backup auto-renew on a monthly basis. We also actively engage in retention efforts for technical support subscription customers.

Retail Sales

On April 1, 2010, we entered into a License Agreement (the “License Agreement”) with GRM whereby we granted to GRM an exclusive royalty-bearing license to market, sell and distribute, in the United States through retail channels of distribution (such as retail stores, online retail storefronts, kiosks, counters and other similar retail channels) and television shopping channels (such as QVC and Home Shopping Network), and in certain foreign countries through retail channels and television shopping channels. We anticipate delivering our products via this retail channel in late 2011.

Customers

Our primary customers are consumers and small businesses using personal computers that run the Windows operating systems and, therefore, we are not dependent on any single customer or on a few major customers. Although our products are available for downloading from our websites, which makes them available to anyone in the world, we do not have a significant customer base outside of the United States. Additionally, we currently only offer technical support to US based customers. The number of our customers fluctuates due to the fact that, although we gain new customers on a daily basis, existing customers may cancel or not renew their subscriptions.

Marketing and Sales

We sell our products directly to computer users through online marketing, direct-response marketing (television, radio and print advertisements) and retailers. Our marketing campaigns are designed to drive new customers to our e-commerce web sites where they purchase our products and services. In addition, our sales staff and outsourced sales team are trained to pursue cross-selling and up-selling opportunities.

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, support.com 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 an application with the U.S. Patent and Trademark Office (“PTO”) bearing the application title “Threat Protection Network” and serial number U.S. 11/234,531. On September 22, 2005, we also 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 filed a provisional application with the PTO bearing the application title "System and Method for Operating an Anti-Malware Network on a Cloud Computing Platform”, serial number U.S. 61/221,477. That application was allowed to expire given that other applications claim priority.

On June 29, 2010, we filed an application with the PTO bearing the application title “System and Method for Operating an Anti-Malware Network on a Cloud Computing Platform”, serial number U.S. 12/826,583. On June 29, 2010, we also filed an application with the U.S. Receiving Office under the PCT bearing the application title “System and Method for Operating an Anti-Malware Network on a Cloud Computing Platform”, bearing serial number PCT/US2010/040492.

On August 9, 2010, we filed an application with the PTO bearing the application title “System and Method for Visually Exposing the Malicious or non-Malicious Character of Software Application”, serial number U.S. 61/372,016.

On September 24, 2010, in connection with application serial number U.S. 11/234,531 (described above), we filed a continuation application with the PTO.

On November 16, 2010, the PTO issued to us Patent Number U.S. 7,836,506 B2, entitled “Threat Protection Network.” The patent was issued in response to our application serial number U.S. 11/234/531 (described above).

CyberDefender, MyCleanPC and DoubleMySpeed are registered trademarks.

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 the protection of our intellectual property, including unauthorized use and copying of our software solutions, which are described above in the section entitled “Risk Factors”. Litigation may be necessary to enforce our intellectual property rights and to protect our patent, trademarks and trade secrets.

Employees

At March 31, 2011, we employed 326 full time employees and approximately 391 independent contractors. Our employees work in the following functions: corporate, finance and accounting, product development, engineering, information technology, marketing, customer service, support services, and sales.

Government Regulation and Probability of Affecting Business

The development and sale of our products generally is not subject to government regulation. However, laws and regulations that apply to Internet communications, commerce and advertising are becoming more prevalent. These laws and regulations could affect the costs of communicating and transacting business on the Internet and adversely affect the demand for our products or otherwise harm our business and financial condition. The United States Congress has enacted legislation regarding children’s privacy, copyrights, sending of unsolicited commercial email and spyware. Other laws and regulations, including laws and regulations that could impose taxes upon electronic commerce transactions, could be enacted in the future. This legislation could lessen 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 electronic commerce may prompt calls for more stringent consumer protection laws and regulations, including laws and regulations relating to identity theft and privacy matters, which may impose additional regulatory requirements on companies engaged in electronic commerce.

At this time, the current laws and regulations governing electronic commerce have not imposed significant burdens on our business; however, in the future our business and financial condition could be materially and adversely affected by the enactment of laws or regulations relating to electronic commerce, including Internet-based advertising.

Description of Property

Our corporate office is located at 617 West 7th Street, Suite 1000, Los Angeles, California 90017. 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. On August 17, 2010, we signed a third amendment to our lease whereby we added an additional 15,876 square feet to our leased premises. We commenced occupancy of the additional space on January 1, 2011. The monthly rent for the initial six month period is abated. The base rent starting in month 7 is $35,060 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 31,752 square feet of office space, or approximately 16.5% of the building.

Legal Proceedings

We are not currently a party to any legal proceedings. Occasionally, we are subject to claims and we are named as a party in legal proceedings arising out of the normal course of our business. These claims and proceedings may relate to contractual rights, employment matters, and other matters relating to our business.

We believe that, as the number of products in the software industry increases and the functionality of these products further overlap, 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. In addition to potential intellectual property litigation, in the future we may be subject to other litigation including purported class actions, purported stockholder derivative actions, and actions brought by current or former employees.

Directors, Executive Officers, Promoters and Control Persons

The following table identifies our Named Executive Officers and members of our Board. Our Named Executive Officers are our Chief Executive Officer and our two most highly compensated officers other than our Chief Executive Officer – our Chief Financial Officer and our Chief Operating Officer.

Name	Age	Position Held
Gary Guseinov	41	Chief Executive Officer and Chairman of the Board
Kevin Harris	42	Chief Financial Officer, Secretary and Director
Igor Barash	40	Chief Operating Officer
Howard A. Bain III	65	Director
Thomas Connerty	48	Director
Thomas W. Patterson	51	Director
Ricardo A. Salas	47	Director

There are no family relationships among any of our directors or Named Executive Officers. Our directors serve until the next annual meeting of stockholders and until their successors are elected by our stockholders, or until the earlier of their death, retirement, resignation or removal. Our Named Executive Officers are appointed by the Board and serve at the Board’s discretion. There is no arrangement or understanding between or among any of our directors or Named Executive Officers and any other person pursuant to which any director or Named Executive Officer was or is to be selected as a director or officer. However, pursuant to the Media and Marketing Services Agreement. GRM has the right to designate one member of our Board. At this time, GRM has not designated a member of the Board.

To our knowledge, there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current Board.

None of our directors or Named Executive Officers has, during the past ten years,

had any bankruptcy petition filed by or against the business or property of such person or any business of which such person was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time,

been convicted in a criminal proceeding and none of our directors or executive officers is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses),

been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities,

been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;

been the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or State securities or commodities law or regulation; or any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Our stock is quoted on the NASDAQ Global Market, which requires that our Board of Directors be composed of a majority of independent directors. Using the definition of “independent” set forth in NASDAQ Rule 5605(a)(2), we have determined that four of our directors, Messrs. Bain, Patterson, Connerty and Salas, qualify as independent directors

Business Experience

Gary Guseinov is one of our co-founders and has served as our Chief Executive Officer and Chairman of the Board since our inception in August of 2003. Mr. Guseinov has over 12 years of start-up business experience in the e-commerce sector in addition to direct marketing expertise. In 1994, Mr. Guseinov rapidly grew Digital Media Concepts, a web development/ecommerce firm, by establishing business relationships with AT&T, Pacific Bell and British Petroleum. In 1998, Digital Media Concepts merged with Synergy Ventures Inc., a marketing firm focusing on performance based Internet advertising. By 1999, Mr. Guseinov developed the first Automated Media Planning System (“SynergyMPS”) and an email marketing platform capable of delivering over 1 billion email messages per month. While at Synergy, Mr. Guseinov was responsible for acquiring such clients as Lucent Technologies, Wells Fargo Bank, Citibank, Chase, New Century Financial, JD Powers and Associates, Sears, GoToMyPC/Citrix and many other Fortune 1000 clients. Under Mr. Guseinov’s management, Synergy was able to generate over $2 billion in revenues for its clients. Mr. Guseinov earned his B.A. from the California State University at Northridge, School of Social and Behavioral Sciences. As a co-founder, Mr. Guseinov is intimately acquainted with the development of our business and has shaped the direction of the Company. On that basis, we concluded that he should serve as a director.

Kevin Harris joined us as a financial consultant in October 2008 and became our Chief Financial Officer in January 2009 and a director in March 2009. Mr. Harris is a Certified Public Accountant in the State of California with over fifteen years of financial, accounting and management experience. From April 2004 to December 31, 2008, Mr. Harris served as the Chief Operating Officer of Statmon Technologies Corp., a publicly traded company, where he was also a financial advisor from 2002-2004. From February 2001 to March 2004, Mr. Harris served as the Senior Vice President of Finance for RKO Pictures, LLC. Prior to RKO, he was the Vice President – Finance and Controller for Pop.com, LLC, an Internet content joint venture among DreamWorks SKG, Imagine Entertainment and Vulcan Ventures. From 1998 to 2000, Mr. Harris was the Director – Corporate Financial Planning at Metro-Goldwyn-Mayer Studios, Inc. From 1995 to 1998, Mr. Harris was the Head of Production Finance and Assistant Controller at PolyGram Television where he oversaw all aspects of production finance, accounting and financial planning. From 1993 to 1995, Mr. Harris was a Senior Auditor at KPMG Peat Marwick. Mr. Harris graduated with honors from the California State University at San Bernardino, earning his Bachelor of Science in Business Administration. Mr. Harris serves as a board member and treasurer of Lollipop Theater Network, a 501c(3) non-profit organization. We believe that Mr. Harris’ education and his experience, both as a CPA and as a financial manager in public companies, provides our Board with accounting and finance expertise and concluded that he should serve as a director.

Igor Barash is one of our co-founders and served as our Chief Information Officer from 2003 to 2008. Mr. Barash was our Chief Product Officer from 2008 to 2010. In 2010, Mr. Barash was again appointed Chief Information Officer and held that position until 2011, when he was appointed Chief Operating Officer. Mr. Barash has over 10 years of senior level management experience with tier one Internet service providers. In 1997, Mr. Barash became one of the first employees of Hostpro, a Los Angeles based ISP. With his extensive knowledge of the Internet based systems, servers, administration and development, Hostpro grew to become one of the largest hosting service providers in the world. After Hostpro’s purchase by Micron PC, Mr. Barash took a key role in Micron’s Internet services business, including developing value added features on enterprise level service models and participating as Micron’s representative to Microsoft. Later, Mr. Barash became the technical due diligence leader during Micron’s procurement of other ISPs, and Mr. Barash delivered assessments of all companies in contention to be purchased and incorporated under the Micron umbrella. In 1999, Mr. Barash was given the task of restructuring and incorporating WorldWide Hosting in Boca Raton, an acquisition he led. Mr. Barash earned his B.S. from the California State University at Northridge, School of Computer Science. Like Mr. Guseinov, Mr. Barash is a co-founder of the Company and has an in-depth knowledge of the Company’s business.

Howard A. Bain III has served as chief financial officer or senior financial executive of five public, high technology companies during more than three decades in Silicon Valley. He also held senior financial and accounting management positions with Fairchild Camera & Instrument Corporation and was a consultant with Arthur Andersen LLP, where he was a certified public accountant. Mr. Bain was Chief Financial Officer of Symantec Corporation from 1991 to 1999 (which – like CyberDefender – also is in the business of providing Internet security software, utilities and remote technical support services); Informix Corporation from 1999 to 2000, of Vicinity Corporation in 2000, and Portal Software from 2001 to 2004. From 2004 until the present, Mr. Bain has served on the boards of directors of a number of public and private companies. Mr. Bain currently serves on the boards of Nanometrics, Inc., Learning Tree International, and Force 10 Networks. He holds a B.S. in Business from California Polytechnic University. We believe that Mr. Bain’s financial and accounting expertise and experience as chief financial officer of publicly traded technology companies and concluded that he should serve as a director.

Thomas Connerty formerly held the position of executive vice president of program development and chief marketing officer of NutriSystem, Inc. Mr. Connerty joined NutriSystem in November 2004 and was instrumental in successfully creating and implementing an innovative direct marketing program, which contributed to NutriSystem's rapid growth. In three years, NutriSystem's annual revenues increased from $38 million to over $775 million. During his tenure, which terminated in 2008, NutriSystem was named by Forbes, Business Week and Fortune as one of the fastest growing companies in America. Prior to his positions at NutriSystem, Mr. Connerty was with the Nautilus Group from 2000 through 2004, where he was Vice President of Direct Marketing and instrumental in building the Bowflex division into a leader in the home fitness market, growing revenues from $160 million to over $500 million in four years. Prior to Nautilus, he served as the Vice President of Broadcast for the Home Shopping Network, where he managed advertising, programming and operations for two of the company's shopping channels that generated more than $1 billion in annual sales. We use direct marketing to sell our software products and our technical support services, and we concluded that, based upon Mr. Connerty’s extensive direct marketing and advertising experience, he should serve as a director.

Thomas W. Patterson is a security industry veteran, having worked as IBM's chief strategist for eCommerce from 1996 to 1997, as a partner with KPMG from 1999 to 2002, and as an international security partner at Deloitte & Touche LLP from 2002 to 2004. He is also a successful technology entrepreneur, first heading security at MCC, America's largest technology R&D consortium which created the first secure web browsers, from 1993 to 1995, and then founding an Internet company, Command Information, Inc, in 2005 that grew to over $50 million in revenue in under two years (now controlled by the Carlyle Group). Mr. Patterson was with Command Information until 2008. During 2009 – 2010, Mr. Patterson was Chief Security Officer of MagTek, Inc. and, in 2010 and continuing to the present, joined Dell Computer as Executive Director, Global Security Services. Mr. Patterson is the author of Mapping Security, the corporate security sourcebook for today's global economy (Addison-Wesley). Mr. Patterson has served as a Chief Security Officer in the financial sector assisting clients in the growth and security of their organizations. Previously, Mr. Patterson served as a board member of two public companies (US Search and Globalink), is a frequent speaker and media expert on security events, and has advised the United States Congress, the Federal Bureau of Investigation, and other branches of the federal government in the area of critical infrastructure protection. Mr. Patterson received his B.S. from the University of Maryland. Our business is providing Internet security software, utilities and remote technical support services, and we concluded that, based upon Mr. Patterson’s past experience and his expertise in the areas of Internet and technology security, he should serve as a director.

Ricardo A. Salas has served in various senior executive capacities and as a director for Liquidmetal Technologies, a publicly owned reporting company, including the role of President and Chief Executive Officer between December 2005 and October 2006. Mr. Salas currently is Executive Vice President of Liquidmetal Technologies. From January 2000 through June 2005, Mr. Salas served as Chief Executive Officer of iLIANT Corporation, an information technology and outsourcing service firm in the health care industry, and he continues to serve as director of MED3000 Group, inc. following its acquisition of iLIANT Corporation in May of 2006. Since 2006, Mr. Salas also has served as a director of VillageEDOCS and MSI Healthcare, Inc., which are private companies. Mr. Salas was a founder of Medical Manager Corporation and served as a Vice President between June 1999 and January 2000. In April 1994, he founded National Medical Systems, Inc. and served as its Vice President through its merger into Medical Manager Corporation at the time of its initial public offering in February 1997. From 1987 through 2004, he was Vice President of J. Holdsworth Capital Ltd., a private investment firm. Mr. Salas received his B.A. in Economics in 1986 from Harvard University in Cambridge, Massachusetts. We concluded that, based upon Mr. Salas’ prior experience with information technology and outsourcing companies, he should serve as a director.

Executive Compensation

Compensation Discussion and Analysis

Our executive compensation program consists of the following components:

Base salary;

Incentive bonuses;

Awards of restricted stock or stock options from our 2006 Equity Incentive Plan;

Severance and change in control protection;

Expense reimbursement for auto lease payments, auto insurance and other expenses; and

Participation in the Company’s 401(k) plan.

The Compensation Committee of the Board is conducting a review of our non-employee directors’ compensation and our Named Executive Officers’ compensation programs. The members of the Compensation Committee are Mr. Salas (the Chairman) and Messrs. Connerty and Patterson, all of whom are independent and none of whom have been an officer or employee of the Company. See the discussion titled “Certain Relationships and Related Transactions” for information relating to transactions between these directors and the Company. Pending the completion of the review, the Compensation Committee has determined to continue the current compensation programs, The Committee also has determined not to change our Named Executive Officers’ compensation under the current program, but to: (i) limit compensation payments to base salary, incentive awards previously granted, and participation in the Company’s 401(k) plan; and (ii) suspend the granting of any further incentive bonuses and equity grants. We believe that, pending the completion of the review, our current compensation program is sufficient to accomplish the objectives of providing meaningful incentives to motivate our executive officers to achieve profitable growth and to increase stockholder value.

The base salary component of the current program provides a basic, least variable form of compensation to our executives for their services.

We believe that the incentive bonuses motivate executives and reward them according either to the Company’s performance or the executive’s individual performance. Incentive bonuses are discretionary, there is no single method of computing bonuses, and the Board may use any criteria to determine the amount of a bonus. On May 18, 2010, the Board, which then was comprised of Messrs. Guseinov, Harris, Barash and Van de Bundt, authorized the accrual of bonuses to our Named Executive Officers based on the Company’s 197% year over year increase in GAAP revenue and 90% year over year growth in gross sales.

Awards of restricted stock or stock options, we believe, align the interests of our executives with those of our stockholders by providing an inducement to our executives to maintain a long-term perspective with respect to the development of the Company’s business. The awards, because they are longer term, also are an incentive for executives to remain with the Company.

We offer participation in the Company’s 401(k) plan and severance payments for purposes of retention and remaining competitive. The change in control protection, we believe, enables our executives to concentrate on our stockholders’ interests and to evaluate more objectively potential business combinations involving the Company.

Summary of Compensation

The following table reflects all compensation awarded to, earned by or paid to our Named Executive Officers during the fiscal years ended December 31, 2010 and 2009.

Summary Compensation Table

Name and principal position	Year	Salary ($)			Bonus ($)		Stock Awards ($)		Option Awards ($)(4)		Non-Equity Incentive Plan Compen-sation ($)		Nonquali-fied Deferred Compen-sation Earnings ($)		All Other Compen-sation ($)(5)		Total ($)
Gary Guseinov, Chief Executive Officer	2010	$	281,250	(1)	$	130,469		0		0		0		0	$	23,585	$	435,304
	2009	$	225,000	(1)	$	137,500		0		0		0		0	$	14,344	$	376,844

Kevin Harris, Chief Financial Officer	2010	$	237,500	(2)	$	96,250		0	$	637,347		0		0	$	19,893	$	990,990
	2009	$	190,000	(2)	$	72,500		0	$	373,617		0		0	$	11,000	$	647,117

Igor Barash, Chief Operating Officer	2010	$	218,750	(3)	$	72,219		0	$	57,514		0		0	$	19,455	$	369,938
	2009	$	158,958	(3)	$	25,000		0	$	92,691		0		0	$	5,115	$	281,764

(1) As of January 1, 2010, Mr. Guseinov’s base salary has been set, pursuant to his Amended and Restated Employment Agreement (the “Employment Agreement”) entered into as of April 26, 2010, at $281,250 per year. The Employment Agreement is described below in the section entitled “Employment Agreements, Termination of Employment and Change-in-Control Agreements.” As of October 1, 2006, Mr. Guseinov’s base salary was set, pursuant to his employment agreement, at $225,000 per year. Of the $130,469 accrued as a 2010 bonus, $60,156 was paid during 2010 and the balance of $70,313 was accrued at December 31, 2010. Of the $137,500 accrued as a 2009 bonus, $75,611 was paid during 2009 and the balance of $61,889 was paid during 2010.

(2) As of January 1, 2010, Mr. Harris’ base salary has been set, pursuant to his Amended and Restated Employment Agreement entered into as of April 26, 2010 (the “Amended and Restated Employment Agreement”), at $237,500 per year. The Employment Agreement is described below in the section entitled “Employment Agreements, Termination of Employment and Change-in-Control Agreements.” Mr. Harris’ base salary was set, pursuant to his employment agreement, at $190,000 per year for 2009. Of the $96,250 accrued as a 2010 bonus, $48,750 was paid during 2010 and the balance of $47,500 was accrued at December 31, 2010. Of the $72,500 accrued as a 2009 bonus, $50,000 was paid during 2009 and the balance of $22,500 was paid during 2010.

(3) As of January 1, 2010, Mr. Barash’s base salary has been set, pursuant to his Amended and Restated Employment Agreement entered into as of April 26, 2010 (the “Amended and Restated Employment Agreement”), at $218,750 per year. The Employment Agreement is described below in the section entitled “Employment Agreements, Termination of Employment and Change-in-Control Agreements.” Mr. Barash’s base salary was set, pursuant to his employment agreement, at $140,000 per year at July 1, 2008. Mr. Barash’s base salary was increased to $175,000 per year at June 16, 2009. Of the $74,219 accrued as a 2010 bonus, $41,406 was paid during 2010 and the balance of $32,813 was accrued at December 31, 2010.

(4) For the assumptions used in calculating the value of this grant, please see Note 5 of our financial statements for the fiscal year ended December 31, 2010.

(5) Other compensation includes auto allowance, auto insurance, life insurance and company contributions to 401(k).

The compensation set forth in the table above is pursuant to the terms and conditions of the employment agreements we have with our Named Executive Officers, which are described below. There were no plan-based awards during fiscal year 2010.

Equity Compensation

In 2010, we granted options to purchase our common stock to Messrs. Harris and Barash. The Board granted the options to Messrs. Harris and Barash because it believed that share ownership is an effective method to deliver superior stockholder returns by increasing the alignment between the interests of our executive officers and our stockholders.

The following table sets forth certain information concerning outstanding equity awards for our Named Executive Officers. No options were exercised by our Named Executive Officers during the last two fiscal years.

Outstanding Equity Awards at Fiscal Year-End

Option Awards								Stock Awards
	Number of securities underlying unexercised options							Number of shares or units of stock		Market value of shares or units of stock		Equity incentive plan awards: number of unearned shares, units or other		Equity incentive plan awards: Market or payout value of unearned shares, units or
Name	Exercisable		Unexercisable		Option exercise price		Option expiration date	that have not vested		that have not vested		rights that have not vested		other rights that have not vested
Igor Barash		12,500		-0-	$	1.00	12/11/2016		-0-		-0-		-0-		-0-
Igor Barash		47,000		-0-	$	1.00	11/23/2015		-0-		-0-		-0-		-0-
Igor Barash		90,625		59,375	$	1.00	7/1/2018		-0-		-0-		-0-		-0-
Igor Barash		15,278		34,722	$	4.00	1/1/2020		-0-		-0-		-0-		-0-
Kevin Harris		20,000		-0-	$	1.00	10/1/2018		-0-		-0-		-0-		-0-
Kevin Harris		200,000		-0-	$	1.00	1/13/2019		-0-		-0-		-0-		-0-
Kevin Harris		25,000		-0-	$	1.00	3/31/2019		-0-		-0-		-0-		-0-
Kevin Harris		25,000		-0-	$	1.00	6/30/2019		-0-		-0-		-0-		-0-
Kevin Harris		25,000		-0-	$	1.00	9/30/2019		-0-		-0-		-0-		-0-
Kevin Harris		25,000		-0-	$	1.00	12/31/2019		-0-		-0-		-0-		-0-
Kevin Harris		91,667		208,333	$	4.00	1/1/2020		-0-		-0-		-0-		-0-
Kevin Harris		25,000		-0-	$	1.00	3/31/2020		-0-		-0-		-0-		-0-
Kevin Harris		75,000		-0-	$	1.00	4/26/2020		-0-		-0-		-0-		-0-

Employment Agreements, Termination of Employment and Change-in-Control Arrangements with Named Executive Officers

The following discussion provides only brief summaries of the agreements to which references are made. The discussion is qualified by the full texts of the agreements.

We entered into an amended and restated key executive employment agreement with Gary Guseinov as of April 26, 2010. The term of the agreement is three years commencing as of January 1, 2010; however if the agreement is not terminated during that period, then it will be renewed for successive periods of one year until terminated pursuant to its terms. Mr. Guseinov receives an annual base salary of $281,250. In addition, we reimburse Mr. Guseinov for the following business related expenses, in an aggregate amount to be established by the Board for such expenses: mobile telephone, residence Internet connection, car allowance, car insurance and other miscellaneous business related expenses. Pursuant to the agreement, Mr. Guseinov is entitled to participate in all incentive bonus (subject to a limit of not more than 50% of his annual base salary for any twelve month period), retirement, profit-sharing, life, medical, disability and other benefit programs which the Company from time to time may make available to other executive officers of the Company. We provide Mr. Guseinov, his spouse and his children, if any, with basic health and dental insurance benefits on the terms and conditions that such benefits are provided to other executive officers of the Company and their families. Mr. Guseinov also is entitled to four weeks of paid vacation each year and paid sick leave in accordance with policies regarding employee sick leave that the Company from time to time may implement. Pursuant to the terms of the agreement, we have agreed to provide a term life insurance policy or policies (at least at the ten year level) with coverage in the face amount of at least $3,000,000, provided that the costs attributable to the insurance coverage do not exceed an annual limit to be determined by our Board. Mr. Guseinov has the right to designate the beneficiary of $1,000,000 of the policy or policies, and the Company is the beneficiary of the remainder of the policy or policies. We do not currently, and we have not in the past, provided this life insurance benefit to Mr. Guseinov. The Company also is required to obtain directors’ and officers’ liability insurance of no less than $5,000,000 in aggregate coverage.

Pursuant to the agreement, we are entitled to terminate Mr. Guseinov’s employment upon a change of control, upon Mr. Guseinov’s disability or for cause. Mr. Guseinov may terminate his employment upon 30 days written notice to us or in the event of a constructive termination. Constructive termination is defined as: (i) a change (without Mr. Guseinov’s consent) in his position, authority, duties, responsibilities (including reporting responsibilities) or status with the Company that is inconsistent in any material and adverse respect with his position, authority, duties, responsibilities or status with the Company as provided in the agreement; (ii) an adverse change in his title; (iii) any reduction in his annual base salary to which he does not agree, unless the reduction is concurrent with and part of a Company-wide reduction in salary for all employees; (iv) any breach by the Company of a material obligation of the Company under the agreement; (v) any requirement by the Company to relocate Mr. Guseinov to an office outside of Los Angeles County, California or outside a thirty mile radius from his residence as of the effective date of the agreement; (vi) any purported termination by the Company of his employment other than as permitted by the agreement, except in the case of his disability; or (vii) Mr. Guseinov’s failure to be elected or reelected to the Board during the term of the agreement.

If the Company terminates Mr. Guseinov’s employment for cause, he is entitled to accrued salary, earned and pro rata bonus compensation, vested stock options and vested benefits under the Company’s benefit plans applicable to him. He is not entitled to certain post termination benefits, as that term is defined in the agreement. The Company will extend health and dental insurance benefits, at Mr. Guseinov’s election and sole cost, to the extent permitted by the Company’s policies and benefit plans, for six months after the termination date, except as otherwise required by law. If the Company terminates Mr. Guseinov’s employment without cause (including the Company’s failure to renew the agreement for a second three-year term or as the result of a change of control), or if the agreement is terminated as the result of constructive termination, Mr. Guseinov is entitled to accrued but unpaid salary, earned and pro rata bonus compensation, full vesting of all unvested stock and stock options, vested benefits under the Company’s benefit plans applicable to him, and to the following post termination benefits: (i) continuing payment of Mr. Guseinov’s base salary in effect at the time of termination for the greater of nine months following the date of termination or the balance of the then applicable Term; and (ii) continuing coverage of Mr. Guseinov, his spouse and children, if any, at the Company’s expense, under any health and dental insurance plans that covered him immediately prior to termination, for a period of six months following the date of termination. The Company will extend health and dental insurance benefits, at Mr. Guseinov’s election and sole cost, to the extent permitted by the Company’s policies and benefit plans, for six months after the termination date, except as otherwise required by law. If Mr. Guseinov terminates his employment voluntarily, he is entitled to accrued but unpaid salary, earned and pro rata bonus compensation, vested stock options, and any benefits required by law. If Mr. Guseinov’s employment is terminated due to his death, his estate is entitled to accrued but unpaid salary, earned and pro rata bonus compensation, vested stock options, and vested benefits under the Company’s benefit plans applicable to him. His estate is not entitled to the post termination benefits. Pursuant to the agreement, Mr. Guseinov assigned and agreed to assign in the future, to the Company or to our nominees, all relevant intellectual property as that term is defined in the agreement.

We entered into an amended and restated key executive employment agreement with Kevin Harris as of April 26, 2010. The term of the agreement is three years commencing as of January 1, 2010; however if the agreement is not terminated during that period, then it will be renewed for successive periods of one year until terminated pursuant to its terms. Mr. Harris receives an annual base salary of $237,500. In addition, we reimburse Mr. Harris for the following business related expenses, in an aggregate amount to be established by the Board for such expenses: mobile telephone, residence Internet connection, car allowance, car insurance and other miscellaneous business related expenses. Pursuant to the agreement, Mr. Harris is entitled to participate in all incentive bonus (subject to a limit of not more than 40% of his annual base salary for any twelve month period), retirement, profit-sharing, life, medical, disability and other benefit programs which the Company from time to time may make available to other executive officers of the Company. We provide Mr. Harris, his spouse and his children, if any, with basic health and dental insurance benefits on the terms and conditions that such benefits are provided to other executive officers of the Company and their families. Mr. Harris also is entitled to four weeks of paid vacation each year and paid sick leave in accordance with policies regarding employee sick leave that the Company from time to time may implement. Pursuant to the terms of the agreement, we have agreed to provide a term life insurance policy or policies (at least at the ten year level) with coverage in the face amount of at least $1,000,000, provided that the costs attributable to the insurance coverage do not exceed an annual limit to be determined by our Board. Mr. Harris is the beneficiary of 100% of the policy or policies. We do not currently, and we have not in the past, provided this life insurance benefit to Mr. Harris. The Company also is required to obtain directors’ and officers’ liability insurance of no less than $5,000,000 in aggregate coverage.

Pursuant to the agreement, Mr. Harris retains the entire option grant for 400,000 shares of our common stock provided to him pursuant to the original employment agreement (which includes bonus options for fiscal years 2009 and 2010 as required under the original agreement) (collectively, the “Original Option Grant”), of which: (i) 325,000 options shares became fully vested pursuant to the agreement; (ii) 75,000 option shares became vested in three, equal quarterly increments, with the first quarterly increment of 25,000 options shares having vested on June 30, 2010, the second quarterly increment having vested on September 30, 2010, and the third quarterly increment having vested on December 31, 2010. In addition to the Original Option Grant, Mr. Harris was granted an option to purchase 300,000 shares of our common stock at an exercise price equal to the closing price of the stock on the OTC Bulletin Board reported by Bloomberg LP on April 26, 2010, which will vest in equal monthly increments over the three-year term of the agreement.

Pursuant to the agreement, we are entitled to terminate Mr. Harris’ employment upon a change of control, upon Mr. Harris’ disability or for cause. Mr. Harris may terminate his employment upon 30 days written notice to us or in the event of a constructive termination. Constructive termination is defined as: (i) a change (without Mr. Harris’ consent) in his position, authority, duties, responsibilities (including reporting responsibilities) or status with the Company that is inconsistent in any material and adverse respect with his position, authority, duties, responsibilities or status with the Company as provided in the agreement; (ii) an adverse change in his title; (iii) any reduction in his annual base salary to which he does not agree, unless the reduction is concurrent with and part of a Company-wide reduction in salary for all employees; (iv) any breach by the Company of a material obligation of the Company under the agreement; (v) any requirement by the Company to relocate Mr. Harris to an office outside of Los Angeles County, California or outside a thirty mile radius from his residence as of the effective date of the agreement; (vi) any purported termination by the Company of his employment other than as permitted by the agreement, except in the case of his disability; or (vii) Mr. Harris’ failure to be elected or reelected to the Board during the term of the agreement. If the Company terminates Mr. Harris’ employment for cause, he is entitled to accrued salary, earned and pro rata bonus compensation, vested stock options and vested benefits under the Company’s benefit plans applicable to him. He is not entitled to certain post termination benefits, as that term is defined in the agreement. The Company will extend health and dental insurance benefits, at Mr. Harris’ election and sole cost, to the extent permitted by the Company’s policies and benefit plans, for six months after the termination date, except as otherwise required by law.

If the Company terminates Mr. Harris’ employment without cause (including the Company’s failure to renew the agreement for a second three-year term or as the result of a change of control), or if the agreement is terminated as the result of constructive termination, Mr. Harris is entitled to accrued but unpaid salary, earned and pro rata bonus compensation, full vesting of all unvested stock and stock options, vested benefits under the Company’s benefit plans applicable to him, and to the following post termination benefits: (i) continuing payment of Mr. Harris’ base salary in effect at the time of termination for the greater of nine months following the date of termination or the balance of the then applicable Term; and (ii) continuing coverage of Mr. Harris, his spouse and children, if any, at the Company’s expense, under any health and dental insurance plans that covered him immediately prior to termination, for a period of six months following the date of termination. The Company will extend health and dental insurance benefits, at Mr. Harris’ election and sole cost, to the extent permitted by the Company’s policies and benefit plans, for six months after the termination date, except as otherwise required by law. If Mr. Harris terminates his employment voluntarily, he is entitled to accrued but unpaid salary, earned and pro rata bonus compensation, vested stock options, and any benefits required by law. If Mr. Harris’ employment is terminated due to his death, his estate is entitled to accrued but unpaid salary, earned and pro rata bonus compensation, vested stock options, and vested benefits under the Company’s benefit plans applicable to him. His estate is not entitled to the post termination benefits. If Mr. Harris terminates his employment as the result of a constructive termination, he is entitled to accrued but unpaid salary, earned and pro rata bonus compensation, full vesting of any unvested stock and stock options, vested benefits under the Company’s benefit plans applicable to him, and the post termination benefits. Pursuant to the agreement, Mr. Harris assigned and agreed to assign in the future, to the Company or to our nominees, all relevant intellectual property as that term is defined in the agreement.

Mr. Harris may terminate his employment upon giving us 30 days written notice of his termination. We may terminate Mr. Harris’ employment for cause, in the event that a disability renders him unable to provide services to us and as a result of a change of control. Mr. Harris’ employment may also be terminated as a result of a constructive termination. If his employment is terminated as a result of any of the above, Mr. Harris will receive his monthly base salary for the lesser of six months or the remaining term of the employment agreement and we will continue to pay the premiums for his health and dental insurance for a period of six months. In addition, if Mr. Harris’ employment is terminated as a result of a constructive termination that occurs on or after July 1, 2009 or as a result of a change in control, all stock option grants and conditional grants (such as the grant made in conjunction with the performance goals) will vest. In the event of termination for any reason, Mr. Harris will also be entitled to receive his accrued but unpaid salary, earned bonus compensation, vested stock options and vested benefits, such as accrued vacation pay.

We entered into an amended and restated key executive employment agreement with Igor Barash as of April 26, 2010. The term of the agreement is three years commencing as of January 1, 2010; however if the agreement is not terminated during that period, then it will be renewed for successive periods of one year until terminated pursuant to its terms. Mr. Barash receives an annual base salary of $218,750. In addition, we reimburse Mr. Barash for the following business related expenses, in an aggregate amount to be established by the Board for such expenses: mobile telephone, residence Internet connection, car allowance, car insurance and other miscellaneous business related expenses. Pursuant to the agreement, Mr. Barash is entitled to participate in all incentive bonus (subject to a limit of not more than 30% of his annual base salary for any twelve month period), retirement, profit-sharing, life, medical, disability and other benefit programs which the Company from time to time may make available to other executive officers of the Company. We provide Mr. Barash, his spouse and his children, if any, with basic health and dental insurance benefits on the terms and conditions that such benefits are provided to other executive officers of the Company and their families. Mr. Barash also is entitled to four weeks of paid vacation each year and paid sick leave in accordance with policies regarding employee sick leave that the Company from time to time may implement. Pursuant to the terms of the agreement, we have agreed to provide a term life insurance policy or policies (at least at the ten year level) with coverage in the face amount of at least $500,000, provided that the costs attributable to the insurance coverage do not exceed an annual limit to be determined by our Board. Mr. Barash is the beneficiary of 100% of the policy or policies. We do not currently, and we have not in the past, provided this life insurance benefit to Mr. Barash. The Company also is required to obtain directors’ and officers’ liability insurance of no less than $5,000,000 in aggregate coverage.

Pursuant to the agreement, Mr. Barash’s performance is evaluated quarterly, commencing on July 1. 2010, and, in order to qualify for an incentive bonus, there must have been, at a minimum, a 15% increase in “visitor to order” ratios from the prior quarter across all product channels.

Pursuant to the agreement, the unvested portion of the option grant to Mr. Barash for 150,000 shares pursuant to the original employment agreement (the “Initial Option Grant”) continues to vest in equal monthly increments through July 1, 2012, with the final monthly increment vesting on that date. In addition to the Initial Option Grant, Mr. Barash was granted an option to purchase 50,000 shares of the our common stock at an exercise price equal to the closing price of the stock on the OTC Bulletin Board reported by Bloomberg LP on April 26, 2010, which will vest in equal monthly increments over the three-year term of the agreement. Pursuant to the agreement, we are entitled to terminate Mr. Barash’s employment upon a change of control, upon Mr. Barash’s disability or for cause. Mr. Barash may terminate his employment upon 30 days written notice to us or in the event of a constructive termination. Constructive termination is defined as: (i) a change (without Mr. Barash’s consent) in his position, authority, duties, responsibilities (including reporting responsibilities) or status with the Company that is inconsistent in any material and adverse respect with his position, authority, duties, responsibilities or status with the Company as provided in the agreement; (ii) an adverse change in his title; (iii) any reduction in his annual base salary to which he does not agree, unless the reduction is concurrent with and part of a Company-wide reduction in salary for all employees; (iv) any breach by the Company of a material obligation of the Company under the agreement; (v) any requirement by the Company to relocate Mr. Barash to an office outside of Los Angeles County, California or outside a thirty mile radius from his residence as of the effective date of the agreement; or (vi) any purported termination by the Company of his employment other than as permitted by the agreement, except in the case of his disability.

If the Company terminates Mr. Barash’s employment for cause, he is entitled to accrued salary, earned and pro rata bonus compensation, vested stock options and vested benefits under the Company’s benefit plans applicable to him. He is not entitled to certain post termination benefits, as that term is defined in the agreement. The Company will extend health and dental insurance benefits, at Mr. Barash’s election and sole cost, to the extent permitted by the Company’s policies and benefit plans, for six months after the termination date, except as otherwise required by law. If the Company terminates Mr. Barash’s employment without cause (including as the result of a change of control), or if the agreement is terminated as the result of constructive termination), Mr. Barash is entitled to accrued but unpaid salary, earned and pro rata bonus compensation, full vesting of all unvested stock and stock options, vested benefits under the Company’s benefit plans applicable to him, and to the following post termination benefits: (i) continuing payment of Mr. Barash’s base salary in effect at the time of termination for the greater of six months following the date of termination or the balance of the then applicable Term; and (ii) continuing coverage of Mr. Barash, his spouse and children, if any, at the Company’s expense, under any health and dental insurance plans that covered Executive immediately prior to termination, for a period of six months following the date of termination. The Company will extend health and dental insurance benefits, at Mr. Barash’s election and sole cost, to the extent permitted by the Company’s policies and benefit plans, for six months after the termination date, except as otherwise required by law. If Mr. Barash terminates his employment voluntarily, he is entitled to accrued but unpaid salary, earned and pro rata bonus compensation, vested stock options, and any benefits required by law. If Mr. Barash’s employment is terminated due to his death, his estate is entitled to accrued but unpaid salary, earned and pro rata bonus compensation, vested stock options, and vested benefits under the Company’s benefit plans applicable to him. His estate is not entitled to the post termination benefits. Pursuant to the agreement, Mr. Barash assigned and agreed to assign in the future, to the Company or to our nominees, all relevant intellectual property as that term is defined in the agreement.

The table below reflects the amount of compensation to each of our current Named Executive Officers in the event we terminate such officer’s employment for other than “cause” or the officer resigns for “good reason”. Regardless of the manner in which an executive’s employment terminates, the executive is entitled to receive amounts already earned during his term of employment, such as base salary earned through the date of termination and accrued vacation pay. The amounts shown assume that each termination was effective as of December 31, 2010, and thus includes amounts earned through the end of 2010. The value of stock-related compensation assumes that the value of our common stock is $3.06, which was the closing trading price on the last trading day of 2010. The value of continuing coverage under our welfare and fringe benefits plans reflects our actual cost for those benefits as of December 31, 2010. All of these amounts are estimates of the amounts that would be paid out to the executives upon their termination. The actual amounts can only be determined at the time the executives’ employment actually terminates.

	Resignation for Good Reason or Termination Other than for Cause
Gary Guseinov
Base salary and cash bonus	$	632,813
Equity		-
Healthcare and other insurance benefits		3,793
Kevin Harris
Base salary and cash bonus		522,500
Equity		865,200
Healthcare and other insurance benefits		1,697
Igor Barash
Base salary and cash bonus		470,313
Equity		431,570
Healthcare and other insurance benefits		3,793

Compensation payable to the members of our Board of Directors

The Board has approved certain compensation terms for all directors of the Company who are not officers or employees of the Company, including the independent directors and the director who may be designated from time to time by GR Match, LLC pursuant to the Media and Marketing Services Agreement, dated as of March 24, 2009, as amended (which is described below in the section entitled “Transactions with Related Persons”). The compensation terms for directors who are not also officers or employees of the Company is as follows:

An annual retainer of $20,000 per year;

Additional retainer of $25,000 per year for the Chairman of the Board /Lead Independent Director (if any);

Additional retainer of $15,000 per year for service as Chairman of the Audit Committee;

Additional retainer of $2,500 per year for service on the Audit Committee (not applicable to the Chairman of the Audit Committee, who is covered by item 3 above), the Compensation Committee or the Nominating and Corporate Governance Committee;

An annual option grant to purchase 10,000 shares of common stock under the Company’s 2006 Equity Incentive Plan at an exercise price equal to the closing price of the Company’s common stock on the initial date of grant and, as applicable, upon each anniversary thereof (or the next trading day if an anniversary falls on a day that is not a trading day);

On the date that an individual first becomes an independent director, an initial grant of 20,000 shares of restricted stock, which restriction lapses ratably over one year commencing on the date of grant;

$1,000 to attend a Board meeting in person, and $500 to participate in a Board meeting by phone; and

Reasonable travel and lodging expenses for any activities related to the performance of their duties on the Board.

Non-employee directors may elect to receive their cash compensation in restricted stock valued at the closing price of the Company’s common stock on the date such compensation is due (or the next trading day if such due date is not a trading day). All option grants received by non-employee directors for services as a Board member are made subject to forfeiture in the event of termination of service on the Board or as a Committee member, as applicable to such grant. All cash compensation is paid quarterly, in arrears, and the first payment was prorated and paid on July 1, 2010.

We do not have arrangements with our non-employee directors providing for payments upon resignation, retirement or termination, or upon a change in control of the Company.

Fiscal Year 2010 Director Compensation

The following table provides information for fiscal year 2010 compensation paid to all of our non-employee directors:

Name	Fees Earned or Paid in Cash ($)(1)		Stock Awards ($)(2)			Option Awards ($)(3)			Total ($)
Howard Bain III		26,396		80,000	(5)		17,454	(7)		123,850

Thomas Connerty		19,924		80,000	(5)		17,454	(7)		117,378

Thomas Patterson		16,431		80,000	(5)		17,454	(7)		113,885

Ricardo Salas		18,431		80,000	(5)		17,454	(7)		115,885

Bennet Van de Bunt(4)		6,944		33,257	(6)		7,308	(8)		47,509

(1)

Non-employee directors earn an annual retainer fee of $20,000 plus an additional annual fee of $2,500 for membership on each committee. The chair of the Audit Committee earns an additional annual fee of $15,000. Non-employee directors also receive $1,000 to attend a Board meeting in person, and $500 to participate in a Board meeting by phone.

(2)

Amounts shown in this column reflect the aggregate full grant date fair value calculated in accordance with FASB Accounting Standards Codification Topic 718 for awards granted during the fiscal year.

(3)

The fair value of an option award is determined using the Black-Scholes option pricing model under ASC 718. This column reflects the grant date fair values which have been determined based on assumptions described in Note 5 to our financial statements for the year ended December 31, 2010.

(4)

Mr. Van de Bunt resigned effective October 25, 2010. Accordingly, he received prorated compensation under the director compensation policies described above.

(5)

On May 26, 2010, Messrs. Bain, Connerty, Patterson and Salas were each granted 20,000 shares of restricted stock which restriction lapses ratably over a one year period. The restricted stock had a per share fair value of $4.00 and a full grant date fair value of $80,000. As of December 31, 2010, the restriction had lapsed on 11,945 shares.

(6)

On May 26, 2010, Mr. Van de Bunt was granted 20,000 shares of restricted stock which restriction lapses ratably over a one year period. The restricted stock had a per share fair value of $4.00 and a full grant date fair value of $80,000. As of December 31, 2010, the restriction had lapsed on 8,314 shares. The balance of the shares was forfeited due to Mr. Van de Bunt’s resignation.

(7)

On May 26, 2010, Messrs. Bain, Connerty, Patterson and Salas were each granted options to purchases 10,000 shares of common stock, which vest ratably over a one year period. As of December 31, 2010, the right to purchase 5,833 shares had vested for each individual.

(8)

On May 26, 2010, Mr. Van de Bunt was granted an option to purchases 10,000 shares of common stock, which vests ratably over a one year period. As of December 31, 2010, the right to purchase 3,333 shares had vested. The balance of the option was forfeited due to Mr. Van de Bunt’s resignation.

Certain Relationships and Related Transactions

As noted above, using the definition of “independent” set forth in NASDAQ Rule 5605(a)(2), we have determined that four of our directors, Messrs. Bain, Patterson, Connerty and Salas, qualify as independent directors.

Current SEC regulations define the related person transactions that require disclosure to include any transaction, arrangement or relationship in which the amount involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year end for the last two completed fiscal years in which CyberDefender was or is to be a participant and in which a related person had or will have a direct or indirect material interest in such transaction, arrangement or relationship. A related person is: (i) an executive officer, director or director nominee of the Company, (ii) a beneficial owner of more than five percent of our common stock, (iii) an immediate family member of an executive officer, director or director nominee or beneficial owner of more than five percent of our common stock, or (iv) any entity that is owned or controlled by any of the foregoing persons or in which any of the foregoing persons has a substantial ownership interest or control.

For the period from January 1, 2009 through April 4, 2011 (the “Reporting Period”), described below are certain transactions or series of transactions between us and certain related persons, other than compensation arrangements that are otherwise required to be described under “Executive Compensation.”

The Company has entered into, and will enter into in the future, indemnification agreements with the individuals who serve as its officers and directors. Pursuant to these agreements, the Company will indemnify officers and directors who are made parties to, or threatened to be made parties to, any proceeding by reason of the fact that they are or were officers or directors of the Company, or are or were serving at the request of the Company as a director, officer, employee, or agent of another entity. The agreements require the Company to indemnify its officers and directors against all expenses, judgments, fines and penalties actually and reasonably incurred by them in connection with the defense or settlement of any such proceeding, subject to the terms and conditions of the agreements.

On October 30, 2008, the Company executed a letter of intent with GRM, the beneficial owner of more than 5% of our common stock, to create, market and distribute direct response advertisements to sell the Company’s products. GRM was responsible for creating, financing, producing, testing and evaluating a radio commercial to market the Company’s products in exchange for $50,000 and a fully vested, non-forfeitable warrant to purchase 1,000,000 shares of common stock at an exercise price of $1.25 per share.

On March 24, 2009, the Company entered into a Media and Marketing Services Agreement with GRM (the "Media and Marketing Services Agreement"). Pursuant to the Media and Marketing Service Agreement, GRM provides direct response media campaigns, including radio and television direct response commercials, to promote the Company’s products and services and purchases media time on the Company’s behalf. During the term of the Media and Marketing Service Agreement, which is to continue until December 31, 2013, subject to certain rights of termination, GRM will be the exclusive provider of all direct-response television and radio media purchasing and direct response production services.

As compensation for GRM’s services under the Media and Marketing Service Agreement, the Company agreed to amend the warrant described above so that the terms were consistent with the warrants described below. In conjunction with the execution of the Media and Marketing Services Agreement and for creating, financing, producing, testing and evaluating a television commercial to market the Company’s products, the Company issued to GRM a second five-year warrant for the purchase of 1,000,000 shares of the Company’s common stock at an exercise price of $1.25 per share. This warrant may be exercised only for cash. Finally, the Company agreed to issue to GRM a five-year warrant (“Media Services Warrant”) for the purchase of 8,000,000 shares of the Company’s common stock at an exercise price of $1.25 per share. The Media Services Warrant may be exercised only with cash and is subject to vesting as follows: for each $2 of media placement costs advanced by GRM on the Company’s behalf, the right to purchase one share of the Company’s common stock will vest. The Media Services Warrant is fully vested.

On June 4, 2009 we and GRM entered into the First Amendment to Media and Marketing Agreement which extended the term from August 31, 2010 to June 1, 2011.

On October 26, 2009, we and GRM entered into the Second Amendment to Media and Marketing Services Agreement, whereby we also agreed to accelerate the vesting of the GRM warrants if we sold securities for less than $1.25 per share.

On June 4, 2009, pursuant to a Securities Purchase Agreement dated June 3, 2009 (the “Securities Purchase Agreement”), we closed the sale and issuance to GRM of 1,142,860 shares of common stock for an aggregate purchase price of $2,000,005. On November 2, 2009 we and GRM entered into the First Amendment to the Securities Purchase Agreement, effective as of October 26, 2009 (the “First Amendment”). Pursuant to the terms of the First Amendment, we and GRM agreed to use good faith efforts to enter into a license agreement pursuant to which we would grant to GRM an exclusive, worldwide license to exploit, advertise, market and sell our products under the “DoubleMySpeed” brand name. On March 31, 2010, pursuant to the terms of a Loan and Securities Purchase Agreement (the "Loan and Securities Purchase Agreement"), we sold and issued to GRM in a private placement a 9% Secured Convertible Promissory Note in the aggregate principal amount of $5,300,000, due March 31, 2012 (the “Senior Promissory Note”). We received net proceeds of $5,000,000 after payment of an issuance fee of $300,000 to GRM. GRM may elect to cause the accrued unpaid interest for any applicable quarter to be added to the then outstanding principal amount of the Senior Promissory Note in lieu of a cash payment of interest. GRM chose to have the interest payments due July 1, 2010, January 1, 2011 and April 1, 2011 added to the aggregate principal amount of the Senior Promissory Note, therefore, during the Reporting Period, the largest amount of principal outstanding under the Senior Promissory Note was $5,665,860 and no principal payments had been made. The Company paid $121,933 in interest under the Senior Promissory Note during the Reporting Period.

On April 1, 2010, we and GRM entered into the License Agreement pursuant to which we granted to GRM an exclusive royalty-bearing license to market, sell and distribute our antivirus and Internet security products and services in the United States, through retail channels of distribution and television shopping channels, and in certain foreign countries, through retail channels, television shopping channels, direct response television and radio, and certain Internet websites.

Pursuant to the terms of the Media and Marketing Agreement, GRM is permitted to appoint one member to our board of directors. On July 21, 2009, GRM appointed Bennet Van de Bunt to our Board. On January 1, 2010, Mr. Van de Bunt resigned from our Board, and GRM appointed Mr. Luc Vanhal to the Board. Mr. Vanhal resigned this position as of February 28, 2010, and on March 22, 2010, GRM reappointed Mr. Van De Bunt as a director. Effective as of October 25, 2010, in conjunction with the appointment of the Board of Directors observer described below, Mr. Van de Bundt resigned from his position as a director.

On October 22, 2010, we and GRM entered into a Third Amendment to the Media and Marketing Services Agreement (“the Third Amendment”), effective as of October 15, 2010. The Third Amendment, among other things: (i) amended the security interest granted to GRM pursuant to the Media and Marketing Services Agreement; (ii) provided for the payment by the Company to GRM of a monthly management fee in connection with GRM’s media buying services; (iii) provided for the Company’s payment of GRM’s costs incurred in connection with television and direct response commercials; and (iv) provided for the appointment by GRM, in certain circumstances, of one Board of Directors observer. GRM appointed Chase Brogan as observer effective as of October 25, 2010. The Company has entered into an Indemnification Agreement with Mr. Brogan and has added the observer as an insured under the Company directors’ and officers’ liability policy. The Company paid GRM $191,129 in creative management fees for the year ended December 31, 2010. In addition, GRM invoiced the Company $422,573 and $91,867 for the years ended December 31, 2010 and 2009 for their overhead expense reimbursement on media costs incurred by GRM pursuant to the Media and Marketing Services Agreement.

On October 22, 2010, we and GRM also entered into a First Amendment to the License Agreement (“the First Amendment”), effective as of October 15, 2010. Pursuant to the First Amendment, the Company and GRM agreed to amend: (i) the amounts of royalties payable to the Company in connection with the sales of certain of the Company’s products in certain international locations; and (ii) provisions relating to the marketing of certain products in certain international locations. Effective as of December 3, 2010, we and GRM entered into a Revolving Credit Loan Agreement pursuant to which GRM has made available to the Company a secured revolving credit facility in the principal amount not to exceed $5,000,000 which the Company has used solely for the payment of amounts owing to GRM pursuant to the Media and Marketing Agreement. The revolving credit facility was later amended (see the discussion below) and the principal amount was increased to $5,700,734. GRM chose to have the interest payment due on April 1, 2011 added to the aggregate principal amount, therefore, during the Reporting Period, the largest amount of principal outstanding was $5,750,656 and no principal or interest payments had been made.

Effective as of December 3, 2010, we and GRM entered into a Revolving Credit Loan Agreement (the "Revolving Credit Loan Agreement") pursuant to which GRM has made available to the Company a secured revolving credit facility in the principal amount not to exceed $5,000,000 (the "Revolving Credit Facility") which the Company has used solely for the Company's payments of amounts owing to GRM pursuant to the Media and Marketing Agreement. The Revolving Credit Facility was subject to the terms and conditions set forth in: (i) the Revolving Credit Loan Agreement; (ii) a Revolving Credit Note, dated December 3, 2010, payable by the Company to the order of GRM in the principal amount of $5,000,000 (the "Revolving Credit Note"); and (iii) a Security Agreement executed by the Company in favor of GRM, effective as of December 3, 2010 (the "Security Agreement" and, together with the Revolving Credit Loan Agreement and the Revolving Credit Note, collectively, the "Revolving Credit Facility Documents"). During the Reporting Period, the largest amount of principal outstanding under the Credit Facility was $5,750,656 and no principal or interest payments had been made.

In connection with the Credit Facility, and effective as of December 3, 2010, we and GRM also entered into a First Amendment to the Senior Promissory Note (described above), and a First Amendment to the Loan and Securities Purchase Agreement (described above).

In connection with the Loan Modification Agreement, effective as of February 25, 2011, the Company and GRM entered into a second amendment to the Senior Promissory Note (the “Second Amendment”). Pursuant to the Second Amendment, Section 1 of the Senior Promissory Note was amended and restated to provide that the Original Conversion Price (as that term is defined in the Senior Promissory Note) shall be $2.20. In connection with the Loan Modification Agreement, effective as of February 25, 2011, the Company and GRM entered into a limited waiver of the provisions of Section 4.13 of the Loan and Securities Purchase Agreement (the “Waiver”). Pursuant to the Waiver, GRM agreed to a one-time waiver of its right to participate in a Qualified Common Stock Offering (as that term is defined in the Waiver) that closes on or before June 30, 2011.

In connection with the Loan Modification Agreement, effective as of February 25, 2011, the Company and GRM entered into a Fifth Amendment to the Media and Marketing Services Agreement (the “Fifth Amendment”) which amends and restates Section 2.2 of the Media and Marketing Services Agreement to provide that the Company shall reimburse GRM for certain Media Costs (as that term is defined in the Media and Marketing Services Agreement) no later than 30 days following the Company’s receipt of the applicable GRM invoice.

Selling Stockholders

The following table sets forth the names of the selling stockholders who may sell their shares under this prospectus from time to time. No selling stockholder has, or within the past three years has had, any position, office or other material relationship with us or any of our predecessors or affiliates other than as a result of the ownership of our securities, except for Richardson & Patel LLP, our legal counsel, and Ricardo Salas, a member of our Board of Directors.

The following table also provides certain information with respect to the selling stockholders’ ownership of our securities as of May 2, 2011, the total number of securities they may sell under this Prospectus from time to time, and the number of securities they will own thereafter assuming no other acquisitions or dispositions of our securities. The selling stockholders can offer all, some or none of their securities, thus we have no way of determining the number they will hold after this offering. Therefore, we have prepared the table below on the assumption that the selling stockholders will sell all shares covered by this Prospectus.

Some of the selling stockholders may distribute their shares, from time to time, to their limited and/or general partners or managers, who may sell shares pursuant to this Prospectus. Each selling stockholder may also transfer shares owned by him or her by gift, and upon any such transfer the donee would have the same right of sale as the selling stockholder.

The shares described in the following table consist of shares of common stock underlying common stock purchase warrants that were issued in various private placements or issued to consultants. A discussion of the material terms of this offering is included in the section of this Prospectus titled “Prospectus Summary” at page 1. To the best of our knowledge, none of the selling stockholders are or were affiliated with registered broker-dealers. See our discussion titled “Plan of Distribution” for further information regarding the selling stockholders’ method of distribution of these shares.

	Number of Shares Owned Before Offering			Number of Shares Being Offered			Number of Shares Owned After Offering (1)		Percentage Owned After Offering(1)
Nancy R. McBride		154,550			52,250	(2)		102,300			*
IRA FBO Terrence Rettig, Pershing LLC as custodian (12)		172,990			60,000	(3)		112,990			*
James N. Angelos & Sophia Angelos		124,000			30,800	(4)		93,200			*
IRA FBO Ruth H. Reinhard, Pershing LLC as Custodian (12)		316,687			5,083	(4)		311,604			*
IRA FBO Patrick Shannon, Pershing LLC as custodian (12)		21,500			8,000	(3)		13,500			*
Michael B. Schachter		32,137			22,137	(5)		10,000			*
Ricardo A. Salas		157,662			109,654	(4)		48,008			*
Lisa Schachter		29,600			7,700	(3)		21,900			*
IRA FBO Barbara K. Balfour, Pershing LLC as Custodian (12)		57,925			2,875	(4)		55,050			*
Sophia Gazonas		42,718			10,000	(3)		32,718			*
Sandra Dinapoli		73,050			10,000	(3)		63,050			*
Anthony A. Stingo and Anita M. Stingo		60,303			10,000	(3)		50,303			*
V. Jean Stack		171,500			14,300	(2)		157,200			*
Newview Finance LLC		1,660,000			1,660,000	(6)		-			*
Phil Westreich		135,000			135,000	(7)		-			*
Michael Ling		230,000			230,000	(8)		-			*
David Kagle		25,000			25,000	(9)		-			*
GR Match, LLC		16,840,733	(11)		3,529,081	(10)		13,311,652		28.6	%
Walter W. Buckley III		38,099			16,699	(2)		21,400			*
Commercial Construction Management (13)		121,574			5,000	(2)		116,574			*
Willam J. Santora		219,683			10,000	(2)		209,683			*
SEP FBO Heidi Ann Mucci, Pershing LLC as Custodian (12)		52,875			1,875	(4)		51,000			*
William F. Holsten III		26,222			13,071	(4)		13,151			*
Leo Carlin		44,400			15,000	(2)		29,400			*
Michael F. Valente		86,807			55,207	(4)		31,600			*
Robert Goggin		505,359			201,522	(4)		303,837			*
Ruth H Reinhard		159,561			23,862	(4)		135,699			*
James D. Watson		169,487			24,505	(2)		144,982			*
Robert Odell		221,791			96,177	(4)		125,614			*
Pamela L Watson Defined Benefit Pension Plan (12)		228,652			7,500	(2)		221,152			*
Tony Fareed		45,625			14,437	(2)		31,188			*
Seneco Associates, Inc. PS Plan U/A 07/01/2003 (14)		38,875			12,375	(4)		26,500			*
Brian E. Boyle		326,000			80,561	(2)		245,439			*
Garrett Goggin		181,888			80,561	(4)		101,327			*

TOTAL		22,772,253			6,580,232			16,192,021		34.8	%

(1)	Assumes that all shares will be resold by the selling stockholders after this offering.

(2)	Shares of common stock issued upon the exercise of an amended common stock purchase warrant(s) pursuant to our warrant tender offer that terminated on August 17, 2009.

(3)	Shares of common stock issuable upon the exercise of a common stock purchase warrant issued in conjunction with the sale of our 10% Convertible Promissory Note issued beginning on November 25, 2008.

(4)	Shares of common stock issuable upon the exercise of an amended common stock purchase warrant(s) pursuant to our warrant tender offer that terminated on August 17, 2009.

(5)

Includes 14,437 shares of common stock issuable upon the exercise of an amended common stock purchase warrant pursuant to our warrant tender offer that terminated on August 17, 2009 and 7,700 shares of common stock issuable upon the exercise of a common stock purchase warrant issued in conjunction with the sale of our 10% Convertible Promissory Note issued beginning on November 25, 2008.

(6)

Shares of common stock issuable upon the exercise of a common stock purchase warrant issued to Newview Finance LLC on November 11, 2008 for management consulting services, business advisory services, shareholder information services and public relations services. Newview LLC has appointed Brian Jacobelli, one of its members, as the person with dispositive and voting power over the securities.

(7)	Includes 65,000 shares of common stock issued upon the exercise of a common stock purchase warrant assigned from Newview Finance LLC on March 10, 2010.and 70,000 shares of common stock issuable upon the exercise of a common stock purchase warrant assigned from Newview Finance LLC on March 10, 2010.

(8)	Includes 50,000 shares of common stock issued upon the exercise of a common stock purchase warrant assigned from Newview Finance LLC on June 25, 2010.and 180,000 shares of common stock issuable upon the exercise of a common stock purchase warrant assigned from Newview Finance LLC on June 18, 2009.

(9)	Shares of common stock issuable upon the exercise of a common stock purchase warrant assigned from Newview Finance LLC on June 18, 2009.

(10)

Includes 1,142,860 shares of common stock issued pursuant to a Securities Purchase Agreement dated June 4, 2009, and 2,386,221 shares of common stock issuable upon the exercise of common stock purchase warrants issued to GR-Match LLC pursuant to the Media and Marketing Services Agreement, date March 24, 2009.

(11)

Includes 1,142,860 shares of common stock issued pursuant to a Securities Purchase Agreement dated June 4, 2009, 10,000,000 shares of common stock issuable upon the exercise of common stock purchase warrants issued to GR-Match LLC pursuant to the Media and Marketing Services Agreement, date March 24, 2009, 31,500 shares of common stock issuable upon the exercise of common stock purchase warrants purchased in a private transaction, and 5,666,373 shares of common stock issuable upon the conversion of convertible notes.

(12)	Voting and investment power over these securities is held by the beneficiary.

(13)	Brian Sutcliffe, as president, holds dispositive and voting power over the securities.

(14)	Frank Seneco, as trustee, holds dispositive and voting power over the securities.

Plan of Distribution

Each selling stockholder and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the NASDAQ Stock Market or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A selling stockholder may use any one or more of the following methods when selling shares:

•

ordinary brokerage transactions and transactions in which the broker dealer solicits purchasers;

•

block trades in which the broker dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

•

purchases by a broker dealer as principal and resale by the broker dealer for its account;

•

an exchange distribution in accordance with the rules of the applicable exchange;

•

privately negotiated transactions;

•

settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;

•

broker dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

•

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

•

a combination of any such methods of sale; or

•

any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended, if available, rather than under this Prospectus.

Broker-dealers engaged by the selling stockholders may arrange for other broker dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with NASDR Rule 2440, and in the case of a principal transaction a markup or markdown in compliance with NASDR IM-2440.

In connection with the sale of the common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities that require the delivery to such broker-dealer or other financial institution of shares offered by this Prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended, in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act of 1933, as amended. We know of no existing arrangements between the selling stockholders and any other security holder, broker, dealer, underwriter or agent relating to the sale or distribution of our common stock.

We are required to pay certain fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify some of the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act of 1933, as amended.

If selling stockholders are deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended, they will be subject to the prospectus delivery requirements of the Securities Act of 1933, as amended, including Rule 172 thereunder. In addition, any securities covered by this Prospectus that qualify for sale pursuant to Rule 144 under the Securities Act of 1933, as amended, may be sold under Rule 144 rather than under this Prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling stockholders.

We have signed registration rights agreements with various investors. These agreements require us to keep the registration statement, of which this prospectus is a part, effective for periods ranging from the earlier of (i) the date on which the shares may be resold by the selling stockholders without registration and without regard to any volume limitations by reason of Rule 144 under the Securities Act of 1933, as amended, or any other rule of similar effect (ii) all of the shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act of 1933, as amended, or any other rule of similar effect or (iii) two years from the effective date. We intend to keep the registration statement effective for the longest period required by the registration rights agreements we have signed. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

Under applicable rules and regulations under the Securities Exchange Act of 1934, as amended, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the selling stockholders or any other person. We will make copies of this Prospectus available to the selling stockholders who are required to deliver a copy of this Prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act of 1933, as amended).

Security Ownership of Certain Beneficial

Owners and Management

The following table sets forth certain information regarding beneficial ownership of our securities as of May 2, 2011 by (i) each person who is known by us to own beneficially more than 5% of the outstanding shares of each class of our voting securities, (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group. Unless otherwise stated, the address of our directors and executive officers is c/o CyberDefender Corporation, 617 West 7th Street, Suite 1000, Los Angeles, California 90017.

We have determined beneficial ownership in accordance with the rules of the SEC. Under these rules, beneficial ownership generally includes voting or investment power over securities. The number of shares shown as beneficially owned in the tables below are calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as amended. Under Rule 13d-3(d)(1), shares not outstanding that are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but are not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. Except as otherwise indicated, we believe that the beneficial owners listed below, based on the information furnished by these owners, have sole investment and voting power with respect to the securities indicated as beneficially owned by them, subject to applicable community property laws. As of May 2, 2011, there were 28,121,933 shares of common stock issued and outstanding.

Name and Address of Beneficial Owners(1)	Number of Shares of Common Stock Beneficially Owned			Percentage of Common Stock
Executive Officers and Directors:
Gary Guseinov, Chief Executive Officer and Chairman of the Board		5,993,575			21.3	%
Igor Barash, Chief Operating Officer		829,041	(2)		2.9	%
Kevin Harris, Chief Financial Officer, Secretary and Director		599,749	(3)		2.1	%
Howard Bain III, Director		35,000	(4)		*
Thomas Connerty, Director		30,000	(4)		*
Thomas Patterson, Director		30,000	(4)		*
Ricardo Salas, Director		472,416	(4)		1.7	%
5% Stockholders:
GR Match, LLC		16,840,733	(5)		38.6	%
ITU Ventures		1,819,382	(6)		6.4	%
All executive officers and directors as a group		7,989,781			27.5	%

*Less than 1%

(1)The address for each of our officers and directors is 617 West 7th Street, Suite 1000, Los Angeles, California 90017.

(2) Includes 192,486 shares subject to options that will be exercisable as of June 3, 2011.

(3) Includes 576,249 shares subject to options that will be exercisable as of June 3, 2011.

(4) Includes 10,000 shares subject to options that will be exercisable as of June 3, 2011.

(5) This number represents 1,142,860 shares of Common Stock, 10,031,500 shares of Common Stock issuable upon the exercise of Common Stock purchase warrants and 5,666,373 shares of Common Stock issuable upon the conversion of outstanding convertible notes. The address of GR Match, LLC is c/o Guthy-Renker LLC, 3340 Ocean Park Boulevard, Suite 3000, Santa Monica, CA 90405. Mr. Van de Bunt is a beneficial owner of these securities, inasmuch as he is the Manager of GR Match, LLC and the beneficiary of a trust that owns a 4.86% interest in Guthy-Renker Partners, Inc., which owns a 94% interest in Guthy-Renker Holdings, LLC, which is the sole owner of Guthy-Renker LLC, which owns an 80% interest in GR Match, LLC. Mr. Van de Bunt disclaims ownership of these securities.

(6) This number represents 1,252,475 shares of Common Stock and 566,907 shares of Common Stock issuable upon the exercise of a Common Stock purchase warrant. The address of ITU Ventures is 1900 Avenue of the Stars, Suite 2701, Los Angeles, California 90067.

Description of Securities

General

The following discussion of our securities is qualified in its entirety by our certificate of incorporation, our bylaws and by the full text of the agreements pursuant to which the securities were issued. We urge you to review these documents, copies of which have been filed with the SEC, as well as the applicable statutes of the State of Delaware for a more complete description of the rights and liabilities of holders of our securities.

Common Stock

We are authorized to issue two classes of stock – common and preferred. The total number of shares of common stock that we may issue is 100,000,000, with $0.001 par value per share. The total number of shares of preferred stock that we may issue is 10,000,000, with $0.001 par value per share.

As of May 2, 2011, we had 28,121,933 shares of common stock issued and outstanding that were held of record by 143 stockholders.

The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. The holders of common stock are entitled to receive ratably any dividends that may be declared from time to time by the Board out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities. The common stock has no preemptive or conversion rights or other subscription rights. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock offered in this offering will be fully paid and not liable for further call or assessment.

The holders of common stock do not have cumulative voting rights.

Except for directors, who are elected by receiving the highest number of affirmative votes of the shares entitled to be voted for them, or as otherwise required by Delaware law, all stockholder action is taken by the vote of a majority of the issued and outstanding shares of common stock present at a meeting of stockholders at which a quorum consisting of a majority of the issued and outstanding shares of common stock is present in person or proxy.

Convertible Promissory Notes

As described above in the section entitled “Certain Relationships and Related Transactions,” on March 31, 2010, the Company issued the Senior Promissory Note due March 31, 2012. The Company received net proceeds of $5.0 million after payment of an issuance fee of $300,000 to GRM. The Senior Promissory Note will accrue simple interest at the rate of 9% per annum, payable on the first day of each calendar quarter in cash; provided, however, that GRM may elect to cause the accrued unpaid interest for any applicable quarter to be added to the then outstanding principal amount of the Senior Promissory Note in lieu of a cash payment of interest by delivering written notice of such election to the Company no later than 15 days prior to the applicable interest payment date. GRM chose to have the interest payments due July 1, 2010, January 1, 2011 and April 1, 2011 added to the aggregate principal amount of the Senior Promissory Note. The current balance of the Senior Promissory Note is $5,665,860.

The outstanding principal amount of the Senior Promissory Note and accrued unpaid interest due thereon may be converted, at GRM’s election, into the Company’s common stock at a conversion price of $2.20 per share, as amended, (the “Conversion Price”), subject to adjustment only in the event of stock splits, dividends, combinations, reclassifications and the like. If at any time after 180 days from the later of March 31, 2010 or such date when a registration statement filed with the SEC covering the resale of the shares issuable upon conversion of the Senior Promissory Note becomes effective, the volume weighted average price of the Company’s common stock for each of any 30 consecutive trading days, which period shall have commenced after the effective date of such registration statement, exceeds 250% of the then applicable Conversion Price, and the daily trading volume for the common stock is at least 100,000 shares (subject to adjustment for stock splits, combinations, recapitalizations, dividends and the like) during such 30 trading day period, then the Company may force GRM to convert all or part of the then outstanding principal amount of the Senior Promissory Note. GRM has piggyback and demand registration rights with respect to the shares issuable upon conversion of the Senior Promissory Note.

Effective as of February 25, 2011, the Company and GRM entered into a Loan Modification Agreement (the “Loan Modification Agreement”) pursuant to which the Company and GRM agreed to convert the existing indebtedness evidenced by the $5 million credit facility to indebtedness that is convertible into shares of the Company’s common stock. Pursuant to the Loan Modification Agreement, the Company and GRM agreed: (i) to amend and restate the Credit Facility on the terms and conditions of an Amended and Restated Nine Percent (9%) Secured Convertible Promissory Note made as of February 25, 2011, and due March 31, 2012 (the “Amended and Restated Note”); (ii) that the entire outstanding indebtedness under the credit facility will be repaid in accordance with the terms and conditions of the Amended and Restated Note; and (iii) that the Revolving Credit Loan Agreement documenting the credit facility is replaced and superseded in its entirety by the Loan Modification Agreement.

The principal amount of the Amended and Restated Note was $5,700,734. Simple interest on the aggregate unconverted and outstanding principal amount of the Amended and Restated Note at the rate of 9% per annum is payable by the Company to GRM on the first day of each calendar quarter during the term of the Amended and Restated Note. GRM may elect to cause the accrued but unpaid interest for any applicable quarter to be added to the then outstanding principal amount of the Note in lieu of a cash payment of interest. At any time, and until it is paid in full, the Amended and Restated Note may be converted by GRM to shares of the Company’s common stock, in whole or in part and from time to time. The Conversion Price is the lower of $2.20 or a price which is equal to the lowest Volume Weighted Average Price (as that term is defined in the Amended and Restated Note) for any five consecutive Trading Day (as that term is defined in the Amended and Restated Note) period ending on or prior to March 31, 2011, and subject to adjustment as set forth in the Amended and Restated Note. The Conversion Price was adjusted to $1.86 as of March 31, 2011. GRM chose to have the interest payment April 1, 2011 added to the aggregate principal amount of the Amended and Restated Note. The current balance of the Amended and Restated Note is $5,749,231.

The Amended and Restated Note: (i) provides for a reduction in the Conversion Price in the event of a “Dilutive Issuance” (as that term is defined in the Amended and Restated Note) during the period from February 25, 2011 through June 30, 2011, but in no event reduced to an amount less than $1.75; and (ii) permits the Company, in order to cause the stockholder approval requirements of the NASDAQ Marketplace Rules (as that term is defined in the Amended and Restated Note) not to apply to a Dilutive Issuance, to limit the amount of the reduction to the Conversion Price upon a Dilutive Issuance and pay GRM an amount calculated in accordance with the provisions of the Amended and Restated Note.

Warrants

We have outstanding warrants to purchase 1,729,780 shares of our common stock that were issued in conjunction with the offering of our 10% Secured Convertible Debentures. The warrant exercise price is $1.00 per share. These warrants are immediately exercisable. If there was no effective registration statement registering the underlying shares on September 12, 2007, these warrants contain cashless exercise provisions that allow the holder to exercise the warrant for a lesser number of shares of common stock in lieu of paying cash. The number of shares that would be issued in this case would be based upon the market price of the common stock at the time of the net exercise, or if there is no market price, the price per share as determined by our Board. Pursuant to our warrant tender offer, warrants that cover 712,130 shares of common stock were amended to delete the cashless exercise provision. A registration statement covering a portion of the shares underlying these warrants was declared effective on July 19, 2007. On November 21, 2008, the holders of these warrants agreed to waive the requirement that we maintain a registration statement registering the resale of the shares of common stock underlying the warrants, provided that such underlying shares carry piggyback registration rights.

We have outstanding warrants to purchase 700,306 shares of our common stock at an exercise price of $1.01 per share. These warrants are immediately exercisable and contain cashless exercise provisions that allow the holder to exercise the warrant for a lesser number of shares of common stock in lieu of paying cash. The number of shares that would be issued in this case would be based upon the market price of the common stock at the time of the net exercise, or if there is no market price, the price per share as determined by our Board.

We have outstanding warrants (the “OID Warrants”) to purchase 221,750 shares of our common stock at an exercise price of $1.20 per share that were issued in conjunction with the sale of our 7.41% Senior Secured Notes. The OID Warrants are immediately exercisable and include cashless exercise provisions that allow the holder to exercise the warrant for a lesser number of shares of common stock in lieu of paying cash. The number of shares that would be issued if a cashless exercise were chosen would be based upon the market price of the common stock at the time of the exercise, or if there is no market price, at a price per share to be determined by our Board. Pursuant to our warrant tender offer, warrants that cover 84,875 shares of common stock were amended to delete the cashless exercise provision from these warrants.

We have outstanding warrants to purchase 109,059 shares of our common stock at an exercise price of $1.00 per share. These warrants were issued to the holders of our 10% Secured Convertible Debentures in exchange for the Consent and Waiver agreement signed in March 2007, pursuant to which the holders of these debentures waived certain defaults related to the Registration Rights Agreement we entered into and allowed us to sell the 7.41% Senior Secured Notes. The warrants are immediately exercisable and include cashless exercise provisions that allow the holder to exercise the warrant for a lesser number of shares of common stock in lieu of paying cash. The number of shares that would be issued if a cashless exercise were chosen would be based upon the market price of the common stock at the time of the exercise, or if there is no market price, at a price per share to be determined by our Board. Pursuant to our warrant tender offer, warrants that cover 19,760 shares of common stock were amended to delete the cashless exercise provision from these warrants.

We have outstanding warrants to purchase 193,822 shares of our common stock at an exercise price of $1.00 per share, 72,000 shares of our common stock at an exercise price of $1.25 per share and 77,490 shares of our common stock at an exercise price of $2.05 per share. These warrants were issued to 1st Worldwide Financial Partners, LLC and its affiliates as partial compensation for placement agent services that they rendered to us.

We have outstanding warrants to purchase 362,500 shares of our common stock at an exercise price of $1.25 per share. These warrants were issued to Oceana Partners, LLC or its designees as compensation for services that they rendered to us.

We have outstanding warrants to purchase 1,177,262 shares of our common stock that were issued in conjunction with an offering of units consisting of shares of our common stock and warrants to purchase our common stock. The warrants have a five year term and an exercise price of $1.25.

We have outstanding warrants to purchase 148,000 shares of our common stock. The warrants were issued in conjunction with an offering of our subordinated 10% Convertible Promissory Notes that we consummated in multiple closings between November 13, 2008 and January 28, 2009. The warrants have a term of 5 years and an exercise price of $1.25 per share. The warrants are redeemable by the Company, after the expiration of a redemption notice period, at a price of $0.01 per share in the event (i) the average volume weighted average price of our common stock for 10 consecutive trading days equals or exceeds 2.5 times the then current exercise price, (ii) the average daily trading volume of our common stock during such 10-trading day period is at least 50,000 shares and (iii) there is an effective registration statement covering the resale of the shares issuable upon exercise of the warrants.

We have outstanding warrants to purchase 1,935,000 shares of our common stock at an exercise price of $1.25 per share. These warrants were issued to Newview Finance LLC as compensation for investor relations services.

We have outstanding warrants to purchase 10,000,000 shares of our common stock at an exercise price of $1.25 per share. These warrants were issued to GR Match LLC pursuant to the Media and Marketing Services Agreement dated March 24, 2009.

We have outstanding warrants to purchase 5,000 shares of our common stock at an exercise price of $1.25 per share and 2,500 shares of our common stock at an exercise price of $1.80 per share. These warrants were issued to a consultant as compensation for accounting services.

We have outstanding warrants to purchase 21,613 shares of our common stock at an exercise price of $1.25 per share and 125,000 shares of our common stock at an exercise price of $1.83 per share. These warrants were issued to two marketing consultants as compensation for marketing services that they rendered to us.

We have outstanding warrants to purchase 850,000 shares of our common stock at an exercise price of $1.25 per share. These warrants were issued to SCP Holdings LLC as compensation for services.

We have outstanding warrants to purchase 55,000 shares of our common stock at an exercise price of $2.18 per share. These warrants were issued as compensation for services.

The exercise price and the number of shares issuable upon exercise of all the foregoing warrants will be adjusted upon the occurrence of certain events, including reclassifications, reorganizations or combinations of our common stock. At all times that the warrants are outstanding, we will authorize and reserve at least that number of shares of common stock equal to the number of shares of common stock issuable upon exercise of all outstanding warrants.

Unit Purchase Options

We have outstanding Unit Purchase Options, exercisable at $1.00 per unit, for the purchase of a total of 217,000 shares of our common stock along with warrants for the purchase of 217,000 shares of our common stock at $1.00 per share. These Unit Purchase Options have a term of five years and were granted to Oceana Partners, LLC and its designee in exchange for financial, strategic and management consulting services.

Stock Options

We have 2,348,309 shares of common stock included in our Amended and Restated 2006 Equity Incentive Plan, of which options for the purchase of 2,163,997 shares of common stock have been granted.

We have 693,609 shares of common stock included in our 2005 Equity Incentive Plan (sometimes referred to as our 2005 Stock Option Plan), of which options for the purchase of 630,733 shares of common stock has been granted.

Registration Rights

In conjunction with the warrant we issued to Newview Finance LLC we agreed to file a registration statement registering the resale of the common stock underlying the warrant.

In conjunction with warrants and convertible promissory notes we issued to GRM, we granted demand and “piggyback” registration rights to GRM. Upon written demand by GRM, we are required to prepare and file with the SEC, as soon as practicable but in no event later than 45 days, a registration statement in order to register the resale of all the common stock underlying the warrants and convertible promissory notes, to use our best efforts to cause such registration statement to become effective as soon as practicable after the filing date thereof, and to keep the registration statement effective for at least 24 months following the effective date.

In conjunction with the Consent and Waiver Agreement we entered into on November 21, 2008, we granted “piggyback” registration rights to the holders of our 10% Secured Convertible Debentures. The piggyback registration rights cover 1,729,780 shares of common stock underlying the warrants we issued in the offering of our 10% Secured Convertible Debentures.

In conjunction with Securities Purchase Agreements we entered into on June 4, 2009 and June 10, 2009 we granted demand and “piggyback” registration rights to the purchasers. Upon written demand by the purchasers, we are required to prepare and file with the Securities and Exchange Commission, as soon as practicable but in no event later than 45 days, a registration statement in order to register the resale of all the common stock purchased, to use our best efforts to cause such registration statement to become effective as soon as practicable after the filing date thereof, and to keep the registration statement effective for at least 24 months following the effective date. The registration rights cover a total of 1,775,360 shares of common stock.

Market for Common Equity and Related Stockholder Matters

During the period from August 2, 2007, until June 9, 2010, our common stock was quoted on the OTC Bulletin Board under the symbol “CYDE.” On June 9, 2010, our common stock began trading on the NASDAQ Global Market under the symbol “CYDE.” As of May 2, 2011 we had 28,121,933 shares of common stock issued and outstanding and we have approximately 143 record holders of our common stock, not including an indeterminate number of stockholders whose shares are held by brokers in street name.

The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported by the NASDAQ and the high and low bid information per share of our common stock as reported by the OTC Bulletin Board. The OTC Bulletin Board 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, 2010	First Quarter	$	4.87	$	3.80
	Second Quarter	$	4.90	$	3.16
	Third Quarter	$	4.18	$	3.04
	Fourth Quarter	$	4.45	$	1.81

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

After this offering, assuming the issuance of all shares of common stock underlying the warrants described in this Prospectus under the section titled “Prospectus Summary - The Offering,” we would have 33,204,053 shares of common stock outstanding. This amount does not include a total of 5,666,373 shares of common stock that are underlying our convertible promissory notes, 12,926,774 shares of common stock that would be issued upon the exercise of warrants and 3,041,918 shares of common stock reserved for issuance under our Amended and Restated 2006 Equity Incentive Plan and our 2005 Equity Incentive Plan (sometimes referred to as our 2005 Stock Option Plan). See the discussion in the section of this Prospectus titled, “Prospectus Summary – Shares Outstanding after this Offering.”

We have outstanding 11,314,594 shares of restricted common stock, of which 3,825,827 shares may be sold pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended (the “Securities Act”).

Legal Matters and Interests of Counsel

The validity of the share of our common stock in this offering and certain other, related legal matters will be passed upon by Richardson & Patel LLP (“Richardson & Patel”). Richardson & Patel and its partners have accepted our common stock in exchange for services rendered to us in the past and, although the law firm and its partners are under no obligation to do so, they may continue to accept our common stock for services rendered by them. As of the date of this prospectus, Richardson & Patel and its partners collectively own 208,524 shares of our common stock and warrants to purchase 2,890 shares of our common stock

Experts

Grant Thornton LLP (“Grant Thornton”), our independent registered public accounting firm, audited our financial statements at December 31, 2010 and December 31, 2009, as set forth in their report. We have included our financial statements in this Prospectus and elsewhere in the Registration Statement in reliance on the report of Grant Thornton LLP, given on their authority as experts in accounting and auditing.

Where You Can Find More Information

We have filed with the SEC a Registration Statement on Form S-1 under the Securities Act with respect to the common stock being offered in this offering. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules filed as part of the Registration Statement. For further information with respect to us and our common stock, we refer you to the Registration Statement and the exhibits and schedules filed as a part of the Registration Statement. Statements contained in this Prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the Registration Statement, we refer you to the copy of the contract or document that has been filed. Each statement in this Prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The reports and other information we file with the SEC can be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Copies of these materials can be obtained at prescribed rates from the Public Reference Section of the SEC at the principal offices of the SEC, 100 F Street, N.E., Washington D.C. 20549. You may obtain information regarding the operation of the public reference room by calling 1 (800) SEC-0330. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Disclosure of Commission Position of Indemnification for Securities Act Liabilities

Delaware law generally permits indemnification of expenses, including attorneys’ fees, judgments, fines and amounts actually and reasonably incurred by an officer, director employee or agent (a “covered person”) in the defense or settlement of a direct or third-party action, and it permits indemnification of expenses actually and reasonably incurred by a covered person in an action by or in the right of the corporation, in either case upon a determination that the covered person has met the applicable standard of conduct. For a person who is an officer or director at the time the determination is made, the determination must be made by (1) a majority vote of disinterested directors (even though less than a quorum), (2) a committee comprised of and established by a majority vote of such disinterested directors (even if less than a quorum), (3) independent legal counsel in a written opinion if there are no such directors or (4) the stockholders that the person seeking indemnification has satisfied the applicable standard of conduct. Without requisite court approval, however, no indemnification may be made in the defense of any derivative action in which the person is found to be liable in the performance of his or her duty to the corporation.

Expenses incurred by an officer or director in defending an action may be paid in advance under Delaware law, if such director or officer undertakes to repay such amounts if it is ultimately determined that he or she is not entitled to indemnification. Such expenses may be paid in advance of former officers and directors and employees and agents of a Delaware corporation upon such terms and conditions as the corporation deems appropriate. In addition, the laws of both states authorize a corporation’s purchase of indemnity insurance for the benefit of its officers, directors, employees and agents whether or not the corporation would have the power to indemnify against the liability covered by the policy.

The Company’s Delaware Certificate of Incorporation eliminates the liability of directors to the corporation or its stockholders for monetary damages for breach of fiduciary duty as directors to the fullest extent permitted by Delaware law, as that law exists currently and as it may be amended in the future. Under Delaware law, a director’s monetary liability may not be eliminated or limited by a corporation for: (1) breaches of the director’s duty of loyalty to the corporation or its stockholders; (2) acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law; (3) the unlawful payment of dividends or unlawful stock repurchases or redemptions under Section 174 of the DGCL or (4) transactions in which the director received an improper personal benefit. Under Delaware law, a provision in the charter documents that limits a director’s liability for the violation of, or otherwise relieves the corporation or its directors from complying with federal or state securities laws is prohibited. Such provisions also may not attempt to limit the availability of non-monetary remedies such as injunctive relief or rescission for a violation of federal or state securities laws.

Delaware law and the Company’s Certificate of Incorporation and Bylaws may permit indemnification for liabilities under the Securities Act of 1933, as amended (“Securities Act”) or the Securities Exchange Act of 1934, as amended (“Exchange Act”). Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

PART II

Item 13. Other Expenses of Issuance and Distribution

The following is an itemized statement of all expenses, all of which we will pay, in connection with the registration of the common stock offered hereby:

	Amount
SEC registration fee	$	1,194
Printing fees	*$	-
Legal fees	*$	20,000
Accounting fees and expenses	*$	20,000
Miscellaneous	*$	-
Total	*$	41,194

*Estimates

Item 14. Indemnification of Officers and Directors

As permitted by Delaware law and the Company’s Certificate of Incorporation and Bylaws, the Company has entered into an Indemnification Agreements with each of its senior executive officers and its directors, and will do so with future senior executives and directors.

Pursuant to the terms of the Indemnification Agreement, the Company must indemnify the executive or director (the “Indemnitee”) if the Indemnitee is a party to or threatened to be made a party to any proceeding by reason of the fact that the Indemnitee is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee, or agent of another entity, against all expenses, judgments, fines and penalties actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such proceeding. The indemnification must be provided only if the Indemnitee acted in good faith and in a manner which he reasonably believed to be in the best interests of the Company, or, in the case of a criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. If the proceeding is brought by or in the right of the Company, the Company need not provide indemnification for expenses if the Indemnittee is judged to be liable to the Company, unless the court in which the proceeding is brought determines that, despite the adjudication of liability, but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for expenses as the court deems proper.

No indemnification may be provided in connection with any proceeding charging improper personal benefit to the Indemnitee, whether or not involving action in his official capacity, in which he is judged liable on the basis that personal benefit was improperly received by him. The Company must advance all reasonable expenses to the Indemnitee in connection with a proceeding within 5 days after receipt of a notice from the Indemnitee requesting the advance. The notice must include reasonable evidence of the expenses and must be preceded or accompanied by an undertaking by or on behalf of the Indemnitee to repay any expenses advanced if it is determined that the Indemnitee is not entitled to be indemnified against the expenses. Notwithstanding the Indemnification Agreement, the Company must indemnify the Indemnitee to the full extent permitted by law, whether or not such indemnification is specifically authorized by the other provisions of the Indemnification Agreement, the Company’s Certificate of Incorporation, the Bylaws, or by statute. In the event of any changes, after the date of the Indemnification Agreement, in any applicable law, statute, or rule that expand the right of a Delaware corporation to indemnify a member of its Board or any officer, any such changes shall be within the purview of the Indemnitee’s rights, and the Company’s obligations. In the event of any changes in any applicable law, statute, or rule that narrow the right of a Delaware corporation to indemnify a member of its Board or any officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to the Indemnification Agreement, will have no effect on it.

The indemnification provided by the Indemnification Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation, the Bylaws, any agreement, any vote of stockholders or disinterested directors, the laws of the State of Delaware, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of the Company or of any entity which the Indemnitee serves at the request of the Company, the Indemnitee will be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies.

The term of the Indemnification Agreement will continue until the later of: (a) 10 years after the date that the Indemnitee ceases to serve as a director, or (b) the final termination of all pending proceedings in respect of which the Indemnitee is granted rights of indemnification or advancement of expenses under the Indemnification Agreement.

The Indemnitee is not entitled to indemnification or advancement of expenses under the Indemnification Agreement with respect to any proceeding brought or made by him against the Company.

Item 15. Recent Sales of Unregistered Securities

During the past three years, we have issued and sold the following unregistered securities.

During the three months ended March 31, 2011, sixteen investors exercised warrants to purchase 689,231 shares of common stock exercisable at prices ranging from $0.75 to $1.25 per share. We relied on section 4(2) of the Securities Act of 1933 to issue the common stock inasmuch as the securities were issued to accredited investors without any form of general solicitation or general advertising.

Effective as of February 25, 2011, we entered into a Loan Modification Agreement (the “Loan Modification Agreement”) with GRM pursuant to which we agreed to convert the existing indebtedness evidenced by the Credit Facility to indebtedness that is convertible into shares of our common stock. Pursuant to the Loan Modification Agreement, we agreed: (i) to amend and restate the Revolving Credit Note on the terms and conditions of an Amended and Restated Nine Percent (9%) Secured Convertible Promissory Note made as of February 25, 2011, and due March 31, 2012 (the “Amended and Restated Note”); (ii) that the entire outstanding indebtedness under the Credit Facility will be repaid in accordance with the terms and conditions of the Amended and Restated Note; and (iii) that the Revolving Credit Loan Agreement is replaced and superseded in its entirety by the Loan Modification Agreement.

The principal amount of the Amended and Restated Note is $5,700,733.94. Simple interest on the aggregate unconverted and outstanding principal amount of the Amended and Restated Note at the rate of 9% per annum is payable on the first day of each calendar quarter during the term of the Amended and Restated Note. At any time, and until it is paid in full, the Amended and Restated Note may be converted by GRM to shares of our common stock, in whole or in part and from time to time. The Conversion Price is the lower of $2.20 or a price which is equal to the lowest Volume Weighted Average Price (as that term is defined in the Amended and Restated Note) for any five consecutive Trading Day (as that term is defined in the Amended and Restated Note) period ending on or prior to March 31, 2011, and subject to adjustment as set forth in the Amended and Restated Note. The Conversion Price was adjusted to $1.86 on March 31, 2011.

During the three months ended September 30, 2010, one investor exercised a warrant to purchase 2,400 shares of common stock exercisable at $1.00 per share. We relied on section 4(2) of the Securities Act of 1933 to issue the common stock inasmuch as the securities were issued to an accredited investor without any form of general solicitation or general advertising.

During the three months ended June 30, 2010, two investors exercised warrants to purchase 30,000 shares of common stock exercisable at prices ranging from $1.25 to $2.25 per share. We relied on section 4(2) of the Securities Act of 1933 to issue the common stock inasmuch as the securities were issued to accredited investors without any form of general solicitation or general advertising.

On March 31, 2010, pursuant to the terms of the Securities Purchase Agreement, we sold and issued in a private placement to GRM the Senior Promissory Note in the aggregate principal amount of $5,300,000 (the “Note”), due March 31, 2012. We received net proceeds of $5,000,000 after payment of an issuance fee of $300,000 to GRM. The Senior Promissory Note will accrue simple interest at the rate of 9% per annum, payable on the first day of each calendar quarter in cash; provided, however, that GRM may elect to cause the accrued unpaid interest for any applicable quarter to be added to the then outstanding principal amount of the Senior Promissory Note in lieu of a cash payment of interest by delivering written notice of such election to the Company no later than 15 days prior to the applicable interest payment date. The Conversion Price is $2.20, as amended.

During the three months ended March 31, 2010, four investors exercised warrants to purchase 126,750 shares of common stock exercisable at prices ranging from $1.00 to $1.25 per share. We relied on section 4(2) of the Securities Act of 1933 to issue the common stock inasmuch as the securities were issued to accredited investors without any form of general solicitation or general advertising.

On November 5, 2009, we completed the private sale of $2,214,000 in aggregate principal amount of our 8% Secured Convertible Promissory Notes (the “Notes”) to 38 accredited investors pursuant to Rule 506 of Regulation D under the Securities Act. The Notes are convertible, at the election of the holders, into our common stock at a conversion price of $2.05 per share. The Notes are due and payable on April 1, 2011.

On September 30 2009, all of the holders of the Company’s 2009 Convertible Notes converted $300,000 of principal into 171,429 shares of common stock at $1.75 per share. We relied on section 3(9) of the Securities Act of 1933 to issue the securities inasmuch as we exchanged the securities with our existing security holders exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

On September 30 2009, all of the holders of the Company’s 2008 Convertible Notes converted $1,200,000 of principal into 960,000 shares of common stock at $1.25 per share. We relied on section 3(9) of the Securities Act of 1933 to issue the securities inasmuch as we exchanged the securities with our existing security holders exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

On August 1, 2009, the Company entered into an agreement with a consultant for business development services related to the signing of the Wiley contract. The consultant was granted a warrant to purchase 55,000 shares of the Company’s common stock for a period of three years at an exercise price of $2.18. The warrant vests in increments, 15,000 shares at the signing of the Wiley contract, 15,000 shares at the Wiley launch and 25,000 shares at the earlier of the first anniversary date of the agreement or when sales of the Wiley branded products exceed 100,000 units. The Company relied on Section 4(2) of the Securities Act of 1933 to issue the warrant inasmuch as the warrant was issued to an accredited investor without any form of general solicitation or general advertising.

On July 30, 2009, one investor exercised warrants to purchase 15,000 shares of common stock exercisable at $1.25 per share. We relied on section 4(2) of the Securities Act of 1933 to issue the common stock inasmuch as the securities were issued to an accredited investor without any form of general solicitation or general advertising.

From July through September 2009, certain holders of the Company’s 2006 Debentures converted $396,671 of principal into 396,671 shares of common stock at $1.00 per share. In addition, certain holders of the Company’s 10% convertible debentures converted $137,588 of principal into 161,873 shares of common stock at $0.85 per share. We relied on section 3(9) of the Securities Act of 1933 to issue the securities inasmuch as we exchanged the securities with our existing security holders exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

During July 2009, we entered into Securities Purchase Agreements with twenty-eight accredited investors pursuant to which it sold 200,000 shares of its common stock at $2.50 per share. There were no underwriting discounts or other commissions paid in conjunction with these transactions. The issuance of the shares was exempt from registration under Section 4(2) of the Securities Act, and Rule 506 of Regulation D promulgated thereunder, inasmuch as the shares were issued to accredited investors without any form of general solicitation or general advertising.

On July 1, 2009, a certain holder of 10% Secured Convertible Debentures, converted $25,000 of principal into 25,000 shares of common stock. We relied on section 3(a)(9) of the Securities Act to issue the securities inasmuch as we exchanged the securities with our existing security holder exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

On July 1, 2009, one investor exercised warrants to purchase 62,500 shares of common stock exercisable at $1.00 per share. The warrant was exercised pursuant to the cashless provision contained in the warrant and as such, the registrant issued 43,446 warrant shares to the investor. We relied on Section 3(a)(9) of the Securities Act to issue the securities inasmuch as we exchanged the securities with our existing security holder exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

On June 4, 2009 and June 10, 2009, we entered into Securities Purchase Agreements with two accredited investors pursuant to which it sold an aggregate of 1,775,360 shares of its common stock at $1.75 per share. There were no underwriting discounts or other commissions paid in conjunction with these transactions. The issuance of the shares was exempt from registration under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, because the shares were issued to accredited investors without any form of general solicitation or general advertising.

In June 2009, five investors exercised warrants to purchase 116,232 shares of common stock exercisable at $1.00 to $1.01 per share. The warrants were exercised pursuant to the cashless provision contained in the warrants. We issued 82,378 shares of common stock to the investors. We relied on Section 3(a)(9) of the Securities Act to issue the securities because we exchanged the securities with our existing security holders exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

During May and June 2009, a holder of 10% Convertible Debentures, converted $68,855 of principal into 81,006 shares of common stock at $0.85 per share. We relied on Section 3(a)(9) of the Securities Act to issue the securities because we exchanged the securities with our existing security holders exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

On May 15, 2009, we entered into a three month agreement with Spetcu International LLC for marketing related services. As part of the agreement, the consultant was granted a warrant to purchase 15,000 shares of the registrant’s common stock for a period of five years at an exercise price of $1.83. The right to purchase vested 5,000 shares per month over the term of the agreement. The agreement also provided for a bonus of up to 50,000 additional warrant shares at an exercise price of $1.83 for achieving certain goals. On June 15, 2009, the agreement was terminated, including the right to purchase 10,000 shares of common stock that had not vested, and the registrant entered into a second two month agreement with the consultant. As part of the second agreement, the consultant was granted a warrant to purchase 10,000 shares of the registrant’s common stock for a period of five years at an exercise price of $1.83. The right to purchase vests 5,000 shares per month over the term of the agreement. Additionally, the consultant was granted a warrant to purchase 5,000 shares of the registrant’s common stock for a period of five years at an exercise price of $1.83 for deferring the payment of 50% of the compensation owed for services rendered during May 2009 until July 30, 2009 and a warrant to purchase 5,000 shares of the registrant’s common stock for a period of five years at an exercise price of $1.83 as part of the bonus per the second agreement. The second agreement also provided for a bonus of up to 45,000 additional warrant shares at an exercise price of $1.83 for achieving certain goals. These goals were achieved and the 45,000 additional shares were granted on August 15, 2009. We relied on Section 4(2) of the Securities Act of 1933 to issue the securities because the securities were offered and sold without any form of general solicitation or general advertising and the offeree made representations that he was an accredited investor.

Between May 1, 2009 and May 7, 2009, we consummated the sale of $300,000 in aggregate principal amount of its subordinated 10% Convertible Promissory Notes (the “Notes”), convertible into common stock at a conversion price of $1.75 per share (the “Conversion Price”) to accredited investors. All outstanding principal and interest of the Notes is due five months from the date of issuance. Out of the total gross proceeds of the offering, we paid our placement agent $72,000 in commissions, equal to 6% of the gross proceeds of the offering, and issued to its placement agent a warrant to purchase 57,600 shares of common stock, equal to 6% of the number of shares of common stock into which the Notes initially may be converted, at an exercise price of $1.25 per share. The offering was exempt from registration under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder because the securities were issued to accredited investors only without any form of general solicitation or general advertising.

In May 2009, one investor exercised warrants to purchase 172,928 shares of common stock exercisable at $1.00 per share. The warrant was exercised pursuant to the cashless provision contained in the warrant and as such, the registrant issued 88,150 warrant shares to the investor. We relied on Section 3(a)(9) of the Securities Act to issue the securities because we exchanged the securities with our existing security holder exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

Pursuant to our tender offer to the holders of warrants issued with “cashless exercise” provisions and/or “down-round” provisions (collectively the “Released Provisions”) that closed on August 17, 2009, we offered to increase by 10% the number of shares of common stock covered by their warrants in exchange for extinguishing the Released Provisions from their warrants. In order for the warrant holders to take advantage of the offer, they were required to exercise a portion of their warrant(s) and purchase for cash no less than 30% of the shares of common stock covered by their warrant(s), after giving effect to the increase. We received $2,008,180 in proceeds, net of offering costs of $72,836, and issued 1,838,952 shares of common stock to warrant holders that participated in the tender offer. Additionally, we have issued warrants to purchase 269,681 shares of our common stock for the 10% increase in warrants offered to warrant holders. We relied on Section 4(2) of the Securities Act to issue the securities because the securities were offered and sold without any form of general solicitation or general advertising and the offerees were accredited investors.

On April 24, 2009, we entered into an agreement with Michael Barrett for consulting services relating to financial management and reporting. As part of the agreement, Mr. Barrett was granted a warrant to purchase 2,500 shares of common stock at an exercise price of $1.80 per share. We relied on Section 4(2) of the Securities Act to issue the securities because Mr. Barrett occupied an insider status relative to us that afforded him effective access to the information registration would otherwise provide.

On April 5, 2009, we entered into a three month agreement with a consultant for marketing related services. As part of the agreement, the consultant was granted a warrant to purchase 15,000 shares of the registrant’s common stock for a period of five years at an exercise price of $1.25. The right to purchase the common stock was to vest at the rate of 5,000 shares of common stock per month over the term of the agreement. On May 15, 2009, the original agreement was terminated, as was the unvested amount of the warrant of 5,000 shares, and the registrant entered into a second three month agreement with the consultant. As part of the agreement, the consultant was granted a warrant to purchase 15,000 shares of our common stock for a period of five years at an exercise price of $1.25. The right to purchase the common stock was to vest at the rate of 5,000 shares of common stock per month over the term of the second agreement. The second agreement also provided for a bonus of up to 50,000 additional warrant shares at an exercise price of $1.83 for achieving certain goals. On June 15, 2009, the second agreement was terminated, as was the unvested amount of the warrant of 10,000 shares, and the registrant entered into a third two month agreement with the consultant. As part of the third agreement, the consultant was granted a warrant to purchase 10,000 shares of our common stock for a period of five years at an exercise price of $1.25. The right to purchase 5,000 shares of common stock per month vests over the term of the agreement. Additionally, the consultant was granted a warrant to purchase 5,000 shares of our common stock for a period of five years at an exercise price of $1.83 for deferring the payment of 50% of the compensation due to be paid for services rendered during May 2009 until July 30, 2009 and a warrant to purchase 5,000 shares of our common stock for a period of five years at an exercise price of $1.83 as part of the bonus per the second agreement. The third agreement also provided for a bonus of up to 45,000 additional warrant shares at an exercise price of $1.83 for achieving certain goals. These goals were achieved and the 45,000 additional shares were granted on August 15, 2009. The registrant relied on Section 4(2) of the Securities Act to issue the securities because the securities were offered and sold without any form of general solicitation or general advertising and the offeree made representations that he was an accredited investor.

In April 2009, one investor exercised warrants to purchase 36,294 shares of common stock exercisable at $1.01 per share. The warrant was exercised pursuant to the cashless provision contained in the warrant and as such, the registrant issued 16,732 warrant shares to the investor. We relied on Section 4(2) of the Securities Act to issue the common stock because the securities were offered and sold without any form of general solicitation or general advertising and the offeree made representations that he was an accredited investor.

On April 1, 2009, we entered into an agreement with SCP Holding, LLC for management consulting and business advisory services on an as needed basis. The consultant was granted a warrant to purchase 850,000 shares of the registrant’s common stock for a period of five years at an exercise price of $1.25. The warrant vests as follows: the right to purchase 300,000 shares of common stock vested on the date of the agreement and the right to purchase 50,000 shares of common stock vested on the 1st day of each month following the date of the agreement, commencing May 1st, 2009 and ending March 1, 2010. We relied on Section 4(2) of the Securities Act to issue the common stock because the securities were offered and sold without any form of general solicitation or general advertising and the offeree made representations that he was an accredited investor.

In April 2009, certain holders of our 10% Secured Convertible Debentures converted $99,697 of principal into 99,697 shares of common stock at $1.00 per share. We relied on Section 3(a)(9) of the Securities Act to issue the securities because we exchanged the securities with our existing security holders exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

In April 2009, we issued 15,779 shares of common stock to certain holders of the 10% Secured Convertible Debentures for payment of interest and registration rights penalties. The agreed upon value of the common stock was $0.85 per share. We relied on Section 4(2) of the Securities Act to issue the securities because the securities were offered and sold without any form of general solicitation or general advertising and the offeree made representations that he was an accredited investor.

On March 24, 2009, we entered into the Media and Marketing Services Agreement with GRM. Pursuant to the Media and Marketing Services Agreement, GRM will provide direct response media campaigns, including radio and television direct response commercials, to promote our products and services and will purchase media time on our behalf. In connection with that agreement, we agreed to amend and restate a 5-year warrant previously issued in October 2008 to GRM for the purchase of 1,000,000 shares of common stock at an exercise price of $1.25 per share, so that the terms were consistent with the warrants GRM received in conjunction with the Media and Marketing Services Agreement. In conjunction with the execution of the Media and Marketing Services Agreement and for creating, financing, producing, testing and evaluating a television commercial to market our products, and in addition to the amended and restated 5-year warrant for the purchase of 1,000,000 shares of common stock at a price of $1.25 per share, we issued to GRM a second 5 year warrant for the purchase of 1,000,000 shares of our common stock at a price of $1.25 per share. This warrant may be exercised only for cash. Finally, we issued to GRM a 5 year warrant for the purchase of 8,000,000 shares of our common stock at an exercise price of $1.25 per share. This warrant may be exercised only for cash. This warrant was issued to compensate GRM for providing media placement costs on 45 days terms with us and will be subject to vesting as follows: for each $2 of media placement costs advanced by GRM on our behalf, under the Media and Marketing Services Agreement the right to purchase one share of the registrant’s common stock will vest. If GRM terminates the agreement due to a breach by us in our performance or as a result of our discontinuance, dissolution, liquidation, winding up or insolvency, or if we terminate the agreement for any reason, other than as a result of a breach by GRM or our discontinuance, dissolution, liquidation, winding up or insolvency, then any unexpired and unvested rights of GRM to purchase shares of our common stock pursuant to the third warrant will immediately vest. If we breach our payment obligations under the agreement and fail to cure the breach within 15 days after receiving notice from GRM, then the number of warrant shares which would otherwise vest during the month of the delinquent payment automatically will double. We relied on Section 4(2) of the Securities to issue the warrants because the securities were offered and sold without any form of general solicitation or general advertising and the offeree made representations that it was an accredited investor.

In March 2009, certain holders of our 10% Secured Convertible Debentures converted $854,163 of principal into 854,163 shares of common stock at $1.00 per share. We relied on Section 3(a)(9) of the Securities Act to issue the securities because we exchanged the securities with our existing security holders exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

In February 2009, certain holders of our 10% Secured Convertible Debentures converted $601,439 of principal into 601,439 shares of common stock at $1.00 per share. In addition, those same holders converted $207,473 of principal amount and accrued interest of certain other debentures received in 2008 into 244,086 shares of common stock at $0.85 per share. We relied on Section 3(a)(9) of the Securities Act to issue the securities because we exchanged the securities with our existing security holders exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

In February 2009, we issued 94,628 shares of restricted common stock valued at $1.10 per share to a vendor in payment for past services rendered. We relied on Section 4(2) of the Securities Act to issue the securities because the securities were offered and sold without any form of general solicitation or general advertising and the offeree made representations that it was an accredited investor.

On January 17, 2009, we entered into a two month consulting agreement with Michael Barrett for consulting services relating to financial management and reporting. As part of the agreement, Mr. Barrett was granted a warrant to purchase 2,500 shares of common stock with a term of five years at an exercise price of $1.25 per share, per month for the term of the agreement. We relied on Section 4(2) of the Securities Act to issue the securities because Mr. Barrett occupied an insider status relative to us that afforded him effective access to the information registration would otherwise provide.

In January 2009, certain holders of our10% Secured Convertible Debentures converted $50,000 of principal into 50,000 shares of common stock at $1.00 per share. We relied on Section 3(a)(9) of the Securities Act to issue the securities because we exchanged the securities with our existing security holders exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

Between November 13, 2008 and January 28, 2009, the registrant consummated the sale of $1,200,000 in aggregate principal amount of its subordinated 10% Convertible Promissory Notes (the “Notes”), convertible into common stock at a conversion price of $1.25 per share (the “Conversion Price”), along with five-year warrants (the “Warrants”) to purchase an aggregate of 960,000 shares of common stock at an exercise price of $1.25 per share (the “Exercise Price”), to accredited investors. All outstanding principal and interest of the Notes is due eleven months from the date of issuance. Out of the total gross proceeds of the offering, the registrant paid its placement agent $72,000 in commissions, equal to 6% of the gross proceeds of the offering, and issued to its placement agent a warrant to purchase 57,600 shares of common stock, equal to 6% of the number of shares of common stock into which the Notes initially may be converted, at an exercise price of $1.25 per share. The offering was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, inasmuch as the securities were issued to accredited investors only without any form of general solicitation or general advertising.

On November 11, 2008, the registrant entered into a consulting agreement with Newview Finance LLC (“Newview”), pursuant to which Newview will provide the registrant with management consulting services, business advisory services, shareholder information services and public relations services. In consideration of these services, the registrant issued to Newview a 3-year Common Stock Purchase Warrant to purchase up to 2,250,000 shares of the registrant’s common stock, exercisable for cash only at an exercise price of $1.25 per share (the “Newview Warrant”). The Newview Warrant will vest as follows: (i) 900,000 of the Newview Warrant shares vested on November 11, 2008, and (ii) the right to purchase the remaining 1,350,000 of the Newview Warrant shares vested in equal increments of 270,000 shares on a monthly basis during the period from December 1, 2008 to April 1, 2009. The offering of the Newview Warrant and its underlying shares was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, inasmuch as the securities were issued to an accredited investor only without any form of general solicitation or general advertising.

In September 2008, the registrant issued $91,290 of additional 10% convertible debentures to holders of the registrant’s 10% Secured Convertible Debentures for payment of accrued interest and liquidated damages pursuant to the Consent and Waivers discussed below. The offering of the securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, inasmuch as the securities were issued to an accredited investor only without any form of general solicitation or general advertising.

On September 22, 2008 the registrant entered into a Consent and Waiver agreement (the “September 2008 Consent and Waiver”) with the holders of at least 75% in aggregate principal amount of its then outstanding 10% Secured Convertible Debentures. The September 2008 Consent and Waiver allowed the registrant to pay the interest accrued on the registrant’s 10% Secured Convertible Debentures for the months of April 1, July 1 and October 1, 2008 as well as accrued late fees, with the registrant’s securities. Each holder of 10% Secured Convertible Debentures could accept either shares of the registrant’s common stock having an agreed upon value of $0.85 or a 10% Convertible Debenture in payment of these obligations. The 10% Convertible Debentures accrue interest at the rate of 10% per annum, have a maturity date of September 12, 2009, and may be converted to common stock at the rate of $0.85 per share. The offering was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, inasmuch as the securities were issued to accredited investors only without any form of general solicitation or general advertising.

On August 6, 2008 certain holders of our 7.41% Notes converted their notes plus accrued interest and penalties into 509,648 shares of our common stock and 382,230 warrants. The conversion was executed under a most favored nation provision in the securities purchase agreement and the noteholders converted on the same term as the offering described above. We relied on section 3(a)(9) of the Securities Act of 1933 to issue the securities inasmuch as the notes were exchanged by us with our existing security holders exclusively, and no commission or other remuneration was paid or given directly or indirectly for soliciting the exchange.

In August 2008, certain holders of our 10% Secured Convertible Debentures converted $300,000 in principal amount and $15,468 of accrued interest, along with accrued liquidated damages and penalty interest into 315,468 shares of common stock at $1.00 per share and 86,601 warrants to purchase shares of our common stock at $1.25 per share. We relied on section 3(a)(9) of the Securities Act of 1933 for the conversion of the principal and interest, inasmuch as the exchange was made by our existing security holders exclusively, and no commission or other remuneration was paid or given directly or indirectly for soliciting the exchange. We relied on section 4(2) of the Securities Act of 1933 to issue the securities for the liquidated damages and penalty interest inasmuch as the securities were offered and sold without any form of general solicitation or general advertising and the offerees made representations that they were accredited investors.

On July 15, 2008, we entered into a consulting agreement with Frontier Capital Partners L.L.C. (“Frontier”) pursuant to which Frontier agreed to provide investor relations and other business advisory services. The agreement term was 3 months, but the agreement could be terminated by either party upon 5 days written notice. The agreement also includes provisions allowing immediate termination in the event of dissolution, bankruptcy or insolvency and for cause. We agreed to issue to Frontier 125,000 shares of our restricted common stock as compensation for these services. 75,000 of these shares were issued immediately (upon execution of the agreement) and are deemed to be a non-refundable retainer. The remaining 50,000 shares were issued 46 days after execution of the agreement. We relied on section 4(2) of the Securities Act of 1933 to issue the securities inasmuch as the securities were offered and sold without any form of general solicitation or general advertising.

On June 23, 2008 certain holders of our OID Notes converted their notes plus accrued interest into 235,104 shares of our common stock and 176,327 warrants. The conversion was executed under a most favored nation provision in the securities purchase agreement and the noteholders converted on the same terms as the offering described above. We relied on section 3(a)(9) of the Securities Act of 1933 to issue the securities inasmuch as the notes were exchanged by us with our existing security holders exclusively, and no commission or other remuneration was paid or given directly or indirectly for soliciting the exchange.

On March 2 2008, the registrant issued a promissory note to a shareholder in the amount of $160,000. The registrant issued warrants to purchase 40,000 shares of common stock for consideration for the loan. The warrants may be exercised at a price of $1.20 per share for a period of 5 years. This note was repaid in July 2008. The offering was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, inasmuch as the securities were issued to an accredited investor without any form of general solicitation or general advertising.

On February 13, 2008 the registrant entered into a Consent and Waiver agreement (the “February 2008 Consent and Waiver”), which was amended and restated on August 19, 2008, with the holders of at least 75% in aggregate principal amount of its then outstanding 10% Secured Convertible Debentures. Pursuant to the February 2008 Consent and Waiver, as amended and restated, the investors waived the requirement that the registrant file a second registration statement (as required by the Registration Rights Agreement dated September 12, 2006) and waived all liquidated damages that accrued after December 19, 2007 as a result of that breach. The February 2008 Consent and Waiver, as amended and restated, allowed the registrant to pay $194,603 in accrued liquidated damages, as well as the interest accrued on the 10% Secured Convertible Debentures which was to be paid on January 1, 2008, with the registrant’s securities. Each holder of 10% Secured Convertible Debentures could choose to accept either shares of the registrant’s common stock having an agreed upon value of $0.85 or a 10% Convertible Debenture as payment. The 10% Convertible Debentures accrue interest at the rate of 10% per annum, have a maturity date of September 12, 2009, and may be converted to common stock at the rate of $0.85 per share. The offering was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, inasmuch as the securities were issued to accredited investors only without any form of general solicitation or general advertising.

On February 14, 2008, the registrant entered into a consulting agreement with Kulman IR. Pursuant to this agreement, Kulman was to provide investor relations services to the registrant for a period of 12 months in exchange for a monthly fee of $3,500, the issuance of 100,000 shares of restricted common stock valued at $100,000, the payment of pre-approved expenses incurred by Kulman in discharging its obligations under the agreement and cross-indemnities. The shares of common stock were subject to the following vesting provisions: 50,000 shares vested upon execution of the agreement, 25,000 shares vested on August 7, 2008 and the remaining 25,000 shares vested on October 7, 2008. The agreement was terminated on August 8, 2008, and Kulman IR and its designee returned 25,000 shares to the registrant for cancellation. The registrant relied on section 4(2) of the Securities Act of 1933 to issue the securities inasmuch as the securities were offered and sold without any form of general solicitation or general advertising and the offeree made representations that it was an accredited investor.

On February 12, 2008, the registrant entered into a consulting agreement with New Castle Consulting. Pursuant to this agreement, New Castle Consulting provided investor relations services to the registrant for a period of 6 months in exchange for an immediate payment of $4,500, a monthly fee of $4,500 the payment of which began in March 2008 and the issuance of 100,000 shares of restricted common stock valued at $100,000. The registrant relied on section 4(2) of the Securities Act of 1933 to issue the securities inasmuch as the securities were offered and sold without any form of general solicitation or general advertising and the offeree made representations that it was an accredited investor.

In January and February 2008, the registrant issued 261,091 shares of common stock to holders of its 10% Secured Convertible Debentures as partial payment for liquidated damages in the amount of $119,615 and interest in the amount of $123,466 accrued on these securities as of December 31, 2007. The registrant relied on section 4(2) of the Securities Act of 1933 to issue the securities inasmuch as the securities were offered and sold without any form of general solicitation or general advertising and the offerees made representations that they were accredited investors.

Item 16. Exhibits and Financial Schedules

Exhibits

2.1	Agreement and Plan of Merger dated May 25, 2010 between CyberDefender Corporation, a Delaware corporation, and CyberDefender Corporation, a California Corporation (1)
2.2	State of California Certificate of Ownership (1)
3.1	Certificate of incorporation of the registrant (1)
3.2	Bylaws of the registrant (1)
5.1	Opinion of Richardson & Patel LLP ***
10.1	2005 Stock Incentive Plan (2)
10.2	Amended and Restated 2006 Equity Incentive Plan (2)
10.3	Securities purchase agreement between registrant and each purchaser identified on the signature pages thereof dated as of September 12, 2006 (2)
10.4	Employment agreement between the registrant and Gary Guseinov dated August 31, 2006 (2)**
10.5	Employment agreement between the registrant and Igor Barash dated July 1, 2008(3)**
10.6	Form of Indemnification Agreement entered into between the registrant and Gary Guseinov, Bing Liu and Igor Barash (2)**
10.7	Form of Securities Purchase Agreement for the sale of Units (August 2008) (4)
10. 8	Form of Warrant to Purchase Common Stock (August 2008) (4)
10. 9	Common Stock Purchase Warrant issued to Newview Finance L.L.C. dated November 10, 2008 (5)
10.10	Lease Agreement dated October 19, 2007 between the registrant and 617 7th Street Associates, LLC (6)
10.11	Form of Securities Purchase Agreement (November 25, 2008/December 5, 2008) (7)
10.12	Form of 10% Convertible Promissory Note (November 25, 2008/December 5, 2008) (7)
10.13	Form of Common Stock Purchase Warrant (November 25, 2008/December 5, 2008) (7)
10.14	Form of Registration Rights Agreement (November 25, 2008/December 5, 2008) (7)
10.15	Form of Subordination Agreement (November 25, 2008/December 5, 2008) (7)
10.16	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) (7)
10.17	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 (8)
10.18	Consent and Waiver dated September 22, 2008 between the registrant and the holders of the 10% Secured Convertible Debentures dated September 12, 2006 (8)
10.19	Warrant to Purchase Common Stock issued to Guthy-Renker Match LLC (9)
10.20	Employment Agreement between the registrant and Kevin Harris (9) **
10.21	Amendment to Lease Agreement dated January 30, 2009 between the registrant and 617 7th Street Associates, LLC (9)
10.22	Media and Marketing Services Agreement with GR Match, LLC (9)
10.23	Securities Purchase Agreement dated June 3, 2009 between the registrant and GR Match, LLC(7)
10.24	First Amendment to Media and Marketing Services Agreement dated June 4, 2009 between the registrant and GR Match, LLC(7)
10.25	Indemnification Agreement dated July 21, 2009 between the registrant and Bennet Van De Bunt(8)
10.26	First Amendment dated October 26, 2009 to Securities Purchase Agreement between the registrant and GR Match, LLC(10)
10.27	Second Amendment dated October 26, 2009 to Media and Marketing Services Agreement between the registrant and GR Match, LLC(10)
10.28	Indemnification Agreement dated January 1, 2010 between the registrant and Luc Vanhal(11)
10.29	Consulting Agreement dated April 1, 2009 between the registrant and SCP Holdings LLC(12)
10.30	Consent and Waiver Agreement dated April 23, 2009(12)
10.31	Securities Purchase Agreement dated June 10, 2009 between the registrant and Shimski LP(12)
10.32	Amended and Restated Warrant to Purchase Common Stock issued to GR Match LLC on May 6, 2009(12)

10.33	Warrant to Purchase Common Stock issued to GR Match LLC on May 6, 2009(12)
10.34	Warrant to Purchase Common Stock issued to GR Match LLC on May 6, 2009(12)
10.35	Amendment to Lease Agreement dated September 30, 2009 between the registrant and 617 7th Street Associates, LLC (3)
10.36	Loan and Securities Purchase Agreement dated March 31, 2010 between the registrant and GR Match, LLC (13)
10.37	9% Secured Convertible Promissory Note dated March 31, 2010 in favor of GR Match, LLC (13)
10.38	Security Agreement dated March 31, 2010 between the registrant and GR Match, LLC (13)
10.39	License Agreement dated April 1, 2010 between the registrant and GR Match, LLC (14)
10.40	Amended and Restated Key Executive Employment Agreement dated April 26, 2010 between the registrant and Gary Guseinov (15)
10.41	Amended and Restated Key Executive Employment Agreement dated April 26, 2010 between the registrant and Kevin Harris (15)
10.42	Amended and Restated Key Executive Employment Agreement dated April 26, 2010 between the registrant and Igor Barash (15)
10.43	Form of Indemnification Agreement entered into by the registrant and its officers and directors (16)
10.44	Third Amendment dated August 9, 2010 to Lease between the registrant and 617 7th Street Associates, LLC (17)
10.45	Third Amendment dated October 22, 2010 to Media and Marketing Services Agreement between the registrant and GR Match, LLC*
10.46	First Amendment dated October 22, 2010 to License Agreement between the registrant and GR Match, LLC*
10.47	Revolving Credit Loan Agreement dated December 7, 2010 between the registrant and GR Match, LLC (18)
10.48	Revolving Credit Note dated December 3, 2010 between the registrant and GR Match, LLC (18)
10.49	Security Agreement dated December 7, 2010 between the registrant and GR Match, LLC (18)
10.50	First Amendment dated December 7, 2010 to 9% Secured Convertible Promissory Note between the registrant and GR Match, LLC (18)
10.51	First Amendment dated December 7, 2010 to Loan and Securities Purchase Agreement between the registrant and GR Match, LLC (18)
10.52	Fourth Amendment dated December 7, 2010 to Media and Marketing Services Agreement between the registrant and GR Match, LLC (18)
10.53	Loan Modification Agreement dated February 25, 2011 between the registrant and GR Match, LLC (19)
10.54	Amended and Restated 9% Convertible Promissory Note dated February 25, 2011 between the registrant and GR Match, LLC (19)
10.55	Second Amendment dated February 25, 2011 to 9% Secured Convertible Promissory Note between the registrant and GR Match, LLC (19)
10.56	Waiver dated February 25, 2011 between the registrant and GR Match, LLC (19)
10.57	Fifth Amendment dated February 25, 2011 to Media and Marketing Services Agreement between the registrant and GR Match, LLC (19)
10.58	Third Amendment dated April 4, 2011 to 9% Secured Convertible Promissory Note between the registrant and GR Match, LLC (20)
10.59	First Amendement dated April 4, 2011 to Amended and Restated 9% Convertible Promissory Note between the registrant and GR Match, LLC (20)
23.1	Consent of Grant Thornton LLP *
23.2	Consent of Richardson & Patel LLP (See Exhibit 5.1)

* Filed herewith.

** Denotes an agreement with management.

*** Previously filed.

(1)	Incorporated by reference from the Registration Statement on Form S-3, File No. 333-167910, filed with the Securities and Exchange Commission on June 30, 2010.

(2)	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.

(3)	Incorporated by reference from the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010.

(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 Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2007.

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

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

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

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

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

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

(13)	Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 17, 2010.

(14)	Incorporated by reference from Amendment No. 1 to Registration Statement on Form S-3, File No. 333-167910, filed with the Securities and Exchange Commission on July 30, 2010.

(15)	Incorporated by reference from the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on May 27, 2010.

(16)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 2, 2010.

(17)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 11, 2010.

(18)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 13, 2010.

(19)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 1, 2011.

(20)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2011

Item 17. Undertakings

The undersigned registrant hereby undertakes:

To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:

To include any prospectus required by section 10(a)(3) of the Securities Act;

To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing,, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective Registration Statement; and

To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement.

That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of offering.

If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

SIGNATURES

In accordance with the requirements of the Securities Act, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Los Angeles, State of California on May 5, 2011.

CYBERDEFENDER CORPORATION

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 Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

Name	Title	Date

/s/ Gary Guseinov	Chief Executive Officer and Chairman of	May 5, 2011
Gary Guseinov	the Board (Principal Executive Officer)

/s/ Kevin Harris	Chief Financial Officer and Director	May 5, 2011
Kevin Harris	(Principal Financial and Accounting Officer)

/s/ Igor Barash	Chief Operating Officer	May 5, 2011
Igor Barash

/s/ Howard A. Bain III	Director	May 5, 2011
Howard A. Bain III

/s/ Thomas W. Patterson	Director	May 5, 2011
Thomas W. Patterson

/s/ Thomas Connerty	Director	May 5, 2011
Thomas Connerty

/s/ Ricardo A. Salas	Director	May 5, 2011
Ricardo A. Salas

CYBERDEFENDER CORPORATION

Table of Contents

	Page
Report of Independent Registered Public Accounting Firm	F-2

Balance Sheets – December 31, 2010 and 2009	F-3

Statements of Operations - For the Years Ended December 31, 2010 and 2009	F-4

Statements of Stockholders’ Deficit - For the Years Ended December 31, 2010 and 2009	F-5

Statements of Cash Flows - For the Years Ended December 31, 2010 and 2009	F-6

Notes to Financial Statements	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

CyberDefender Corporation

We have audited the accompanying balance sheets of CyberDefender Corporation (the “Company”) as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CyberDefender Corporation as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Los Angeles, California

April 1, 2011

F-2

CYBERDEFENDER CORPORATION

BALANCE SHEETS

	December 31,			December 31,
	2010			2009
ASSETS
CURRENT ASSETS:
Cash	$	2,649,061		$	3,357,510
Restricted cash		3,079,394			1,565,841
Accounts receivable		2,385,920			489,464
Deferred financing costs, current		103,484			191,566
Prepaid expenses		195,258			302,291
Deferred charges, current		1,147,764			3,316,535

Total Current Assets		9,560,881			9,223,207

PROPERTY AND EQUIPMENT, net		1,742,675			242,927
DEFERRED FINANCING COSTS, net of current portion		6,377			47,892
DEFERRED CHARGES, net of current portion		402,772			609,904
OTHER ASSETS		269,314			67,605

Total Assets	$	11,982,019		$	10,191,535

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	6,275,896		$	3,420,215
Accounts payable and accrued expenses – related party		1,447,257			1,861,957
Accrued expenses		1,788,435			473,037
Deferred revenue, current		11,342,211			9,662,030
Capital lease obligations, current		137,435			9,410

Total Current Liabilities		20,991,234			15,426,649

DEFERRED RENT		466,920			65,938
DEFERRED REVENUE, less current portion		4,116,442			1,117,116
CONVERTIBLE NOTES PAYABLE – RELATED PARTY, net of discount		9,825,056			-
CONVERTIBLE NOTES PAYABLE, net of discount		-			1,593,000
CAPITAL LEASE OBLIGATIONS, less current portion		168,572			9,708

Total Liabilities		35,568,224			18,212,411

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ DEFICIT:
Preferred stock, par value $0.001; 10,000,000 shares authorized; no shares issued and outstanding at December 31, 2010 and December 31, 2009, respectively		-			-
Common stock, par value $0.001; 100,000,000 shares authorized; 27,327,702 and 25,673,967 shares issued and outstanding at December 31, 2010 and December 31, 2009, respectively		27,328			25,674
Additional paid-in capital		60,926,037			36,884,000
Accumulated deficit		(84,539,570	)		(44,930,550	)

Total Stockholders’ Deficit		(23,586,205	)		(8,020,876	)

Total Liabilities and Stockholders’ Deficit	$	11,982,019		$	10,191,535

See accompanying notes to financial statements

F-3

CYBERDEFENDER CORPORATION

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,

	2010			2009
REVENUES:
Net sales	$	45,568,545		$	18,841,893

COST OF SALES		19,981,021			4,182,462

GROSS PROFIT		25,587,524			14,659,431

OPERATING EXPENSES:
Media and marketing services		22,966,079			15,302,394
Media and marketing services – related party		19,262,845			6,006,273
Product development		3,945,714			1,851,931
General and administrative		16,811,996			9,040,806
Depreciation and amortization		236,060			37,117
Total Operating Expenses		63,222,694			32,238,521

LOSS FROM OPERATIONS		(37,635,170	)		(17,579,090	)

OTHER INCOME/(EXPENSE):
Change in fair value of derivative liabilities		-			109,058
Interest expense – related party		(999,692	)		-
Interest expense, net		(974,158	)		(2,371,724	)
Total Other Expenses, net		(1,973,850	)		(2,262,666	)

NET LOSS	$	(39,609,020	)	$	(19,841,756	)
Basic and fully diluted net loss per share	$	(1.49	)	$	(0.91	)
Weighted Average Shares Outstanding:
Basic and fully diluted		26,607,962			21,890,656

See accompanying notes to financial statements

F-4

CYBERDEFENDER CORPORATION

STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

					Additional
	Common Stock				Paid-in			Accumulated
	Shares		Amount		Capital			Deficit			Total
Balance at December 31, 2008		17,350,798		17,351		17,763,193			(25,812,724	)		(8,032,180	)
Sale of shares		1,975,360		1,975		3,604,905			—			3,606,880
Value of warrants and beneficial conversion feature of convertible notes payable		—		—		1,074,367			—			1,074,367
Issuance of warrants for media and marketing services – related party		—		—		5,343,509			—			5,343,509
Issuance of shares and warrants for services		94,628		95		1,670,536			—			1,670,631
Issuance of shares and warrants for penalties and interest		34,922		35		32,517			—			32,552
Conversion of convertible notes and accrued interest		3,651,973		3,652		3,939,102			—			3,942,754
Exercise of stock warrants		2,265,607		2,265		2,244,873			—			2,247,138
Exercise of stock options		300,679		301		279,677			—			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		—		—		—			(19,841,756	)		(19,841,756	)
Balance at December 31, 2009		25,673,967	$	25,674	$	36,884,000		$	(44,930,550	)	$	(8,020,876	)
Issuance of warrants for media and marketing services – related party		—		—		18,649,143			—			18,649,143
Issuance of warrants for services		—		—		592,765			—			592,765
Exercise of stock warrants		452,201		452		499,185			—			499,637
Exercise of stock options		73,200		73		62,319			—			62,392
Conversion of convertible notes and accrued interest		1,128,334		1,129		2,312,010			—			2,313,139
Value of beneficial conversion feature of convertible note payable		—		—		908,571			—			908,571
Compensation expense on vested options		—		—		1,018,044			—			1,018,044
Net loss		—		—					(39,609,020	)		(39,609,020	)
Balance at December 31, 2010		27,327,702	$	27,328	$	60,926,037		$	(84,539,570	)	$	(23,586,205	)

See accompanying notes to financial statements

F-5

CYBERDEFENDER CORPORATION

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,

	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(39,609,020	)	$	(19,841,756	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount		621,000			1,169,026
Amortization of debt discount – related party		453,214			-
Depreciation and amortization		236,060			37,117
Compensation expense from vested stock options		1,018,044			308,776
Amortization of deferred financing costs		180,615			423,589
Warrants issued for media and marketing services – related party		18,649,143			5,914,406
Shares and warrants issued for services, penalties and interest		592,765			2,505,897
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		(1,513,553	)		(1,550,841	)
Accounts receivable		(1,896,456	)		(284,829	)
Prepaid and other assets		107,033			(198,710	)
Deferred charges		2,375,903			(2,874,914	)
Other assets		(201,709	)		(41,409	)
Accounts payable and accrued expenses		4,912,383			(120,338	)
Accounts payable and accrued expenses – related party		4,624,530			1,861,957
Deferred revenue		4,679,507			6,226,193
Cash Flows Used In Operating Activities		(4,770,541	)		(6,026,167	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(1,320,976	)		(185,161	)
Cash Flows Used In Investing Activities		(1,320,976	)		(185,161	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable, net of expenses		-			2,680,720
Proceeds from convertible note payable – related party, net of expenses		4,948,982			-
Principal payments on capital lease obligations		(127,943	)		(24,949	)
Proceeds from exercise of stock options		62,392			279,978
Proceeds from exercise of stock warrants, net of commissions		499,637			2,247,138
Proceeds from sale of stock, net of issuance costs		-			3,606,880
Cash Flows Provided by Financing Activities		5,383,068			8,789,767

NET INCREASE/(DECREASE) IN CASH		(708,449	)		2,578,439

CASH, beginning of year		3,357,510			779,071

CASH, end of year	$	2,649,061		$	3,357,510

See accompanying notes to financial statements

F-6

CYBERDEFENDER CORPORATION

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,

	2010		2009
Supplemental disclosures of cash flow information:
Income taxes paid	$	800	$	800
Cash paid for interest	$	243,434	$	102,338

Supplemental schedule of non-cash financing activities:
Property and equipment acquired through capital lease obligation	$	414,832	$	-
Discount on notes payable – related party	$	908,571		-
Discount on notes payable	$	-	$	923,801
Conversion of notes payable and accrued interest to common stock and warrants	$	2,313,139	$	3,942,754
Conversion of accounts payable to long-term note – related party	$	5,039,230	$	-
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

See accompanying notes to financial statements

F-7

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

The Company, based in Los Angeles, California, develops and markets remote LiveTech support services, anitmalware software, identity protection services, online backup services and pc optimization software to the consumer and small business market. The Company markets its products directly to consumers through multiple channels including television, radio, the Internet and print. The Company’s goal is to be a leading provider of advanced solutions to protect consumers and small businesses against threats such as Internet viruses, spyware and identity theft, and to provide remote technical resolution services.

Our software products include CyberDefender Early Detection Center, a comprehensive antispyware and antivirus suite, and CyberDefender Registry Cleaner, a PC optimization suite. Both products are compatible with Windows XP, Vista and 7.

CyberDefender also provides LiveTech services 7 days a week and 365 days a year. Our technicians are available to address PC problems that cannot be resolved with simple do-it-yourself software. Our technicians connect to customers’ computers using a popular remote access software and provide our customers with quick and reliable computer repair. Repair and optimization services include (but are not limited to) malware removal, speed optimization, software updates, file backup, privacy optimization and hardware troubleshooting.

The Company developed a collaborative Internet security network, which it refers to as CyberDefender Argus Network (formerly known as the CyberDefender Argus Network), based on certain technology principles commonly found in a peer-to-peer network infrastructure. A peer-to-peer network is not based upon traditional clients and servers, but rather upon 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 CyberDefender Argus Network, 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 CyberDefender Argus Network, and each machine that receives the information will, in turn, relay it to other machines that are part of the CyberDefender Argus Network. This protocol allows us to distribute rapidly alerts and updates regarding potentially damaging viruses and other threats to members of the CyberDefender Argus Network, 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 CyberDefender Argus Network simply by downloading and installing our security software.

During May 2010, the Company entered into an Agreement and Plan of Merger with a wholly owned Delaware subsidiary, pursuant to which the Company merged with and into the Delaware subsidiary, with the Delaware subsidiary being the surviving corporation, on the basis of one share of common stock of the Delaware subsidiary to be exchanged for each outstanding share of common stock of the Company, all as more particularly set forth in the Agreement and Plan of Merger. The main purpose of the merger was to change the Company’s state of incorporation from California to Delaware. Additionally, at the time of the merger the Company increased the number of authorized shares of common stock to 100 million, changed the common stock from no par value to $0.001 par value and authorized 10 million shares of preferred stock. As a result the Company retroactively restated its December 31, 2009 common stock balance as if the change in par value was effective for all periods presented.

Liquidity

The Company has experienced operating losses since inception. Management has implemented plans to continue to build its revenue base, expand sales and marketing and improve operations, however, through December 31, 2010, the Company continued to operate at negative cash flow. For the years ended December 31, 2010 and 2009, the Company has incurred a net loss of $39.6 million and $19.8 million with negative cash flows from operations of $4.7 million and $6.0 million, respectively. As of December 31, 2010 and 2009, the Company had an accumulated deficit in retained earnings of $84.5 million and $44.9 million, respectively. To date, the Company's operations have been primarily financed through debt and equity proceeds from private placement offerings. If the Company is unable to meet its financial projections for fiscal year 2011, cash generated from operations may not be sufficient to fund operations. The Company would then need to obtain additional financing to provide working capital for fiscal 2011 and to repay the obligations to GRM due on March 31, 2012. If the Company was unable to meet their financial projections or obtain additional funding, we expect we would be able to renegotiate the terms of the GRM debt, however, there can be no assurance that this would occur. Failure to obtain additional funding or an amendment to the GRM debt may require us to significantly curtail our operations which could have a material adverse impact on our results of operations and financial position.

Reclassification

To conform to the current year's presentation, as a result of management's continuing analysis of its financial reporting, the Company consolidated its 2009 investor relations and other related consulting expense and income tax expense with general and administrative expense on the statement of operations. These reclassifications had no effect on the previously reported net loss for 2009.

F-8

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of Estimates

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management are, among others, collectibility of accounts receivable, recoverability of prepaid expenses, deferred charges and property and equipment, value of shares and options/warrants granted, valuation of deferred tax assets and recognition of revenue. Actual results could differ from those estimates and assumptions.

Accounts Receivable

During 2010, the Company began offering a payment plan to its customers for the purchase of multi-year technical support service plans. The payment plan allows customers to pay in three installments over sixty days. The Company does not believe an allowance for doubtful accounts is necessary due to the short duration of payment terms on amounts recorded as revenue.

Property and Equipment

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

Equipment under Capital Lease

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

Internal Use Software

Certain costs related to computer software developed or obtained for internal use are capitalized. The Company capitalizes only those direct costs incurred during the application development and implementation stages for developing, purchasing or otherwise acquiring software solely to meet the Company’s internal needs. Capitalized costs will be amortized on a straight-line basis over the estimated useful lives of the underlying software, which generally are three years. During 2010, the Company capitalized $0.6 million of costs which are included in property and equipment on the accompanying balance sheet.

Revenue Recognition

The Company sells off-the-shelf software products and technical support services.

The Company recognizes revenue in accordance with GAAP 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:

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 some 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. Certain of the Company’s software licenses are in substance a subscription and therefore the sale is deferred and recognized ratably over the term of the arrangement. Revenue is recognized immediately for the sale of software products that are utility products and that do not require product updates.

Revenue is recognized immediately for the sale of our one-time technical support service as it is performed when purchased. The Company recognizes a portion of the sale of one of its annual services at the time of purchase when all of the elements necessary for revenue recognition have occurred (i.e,. the initial technical support call has occurred) and the remaining revenue is deferred over the annual term. Revenue is deferred and recognized on a straight line basis over the term of the service agreements for the technical support services that are provided by third parties.

F-9

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company also uses third parties to sell its software and therefore evaluates the criteria of 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.

The Company still supports MyIdentityDefender Toolbar and CyberDefender FREE 2.0, which were free to subscribers. 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.

Deferred Charges

The Company uses a third party to provide technical support services associated with the CyberDefenderULTIMATE product, which is no longer being sold but is still supported. The costs associated with this service are deferred and amortized against the recognition of the related sales revenue. Included in short-term and long-term deferred revenue as of December 31, 2010 is $1,557,000 and $307,000, respectively, related to the CyberDefenderULTIMATE product.

Advertising Costs

The Company expenses advertising costs as they are incurred. As described in detail in Note 5 below, the Company issued warrants for media and marketing services. The non-cash value of those warrants is included in media and marketing services on the accompanying statements of operations. For the years ended December 31, 2010 and 2009, the Company has not recorded a reserve for refunds as such amounts are not expected to be material.

Reserves for Refunds

The Company’s policy with respect to refunds is to offer refunds within the first 30 days after the date of purchase. The Company may voluntarily issue refunds to customers after 30 days of purchase, however the majority are issued within 30 days of the original sale and are charged against the associated sale or deferred revenues (as applicable). Refunds were $7.3 million and $3.0 million for the years ended December 31, 2010 and 2009, respectively. As of December 31, 2010 and 2009, the Company has not recorded a reserve for refunds as such amounts are not expected to be material.

Concentrations of Risk

As of December 31, 2010, all of our cash was maintained at a major financial institution in the United States. At times, deposits held with the financial institution may exceed the amount of insurance provided on such deposits by the Federal Deposit Insurance Corporation (“FDIC”) which provides deposit coverage with limits up to $250,000 per owner through December 31, 2013. As of December 31, 2010, the Company had a balance of approximately $2,278,000 in excess of the FDIC limit.

Income Taxes

The Company has adopted the liability method of accounting for income taxes pursuant to FASB ASC Topic 740, “Income Taxes.” Deferred income taxes are recorded to reflect tax consequences on future years for the differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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

FASB ASC Topic 740 prescribes recognition thresholds that must be met before a tax position is recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. An entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold.

The Company does not have any unrecognized tax benefits as of December 31, 2010 and 2009 that, if recognized, would affect the Company’s effective income tax rate.

F-10

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company’s policy is to recognize interest and penalties related to income tax issues as components of income tax expense. The Company did not recognize or have any accrual for interest and penalties relating to income taxes as of December 31, 2010.

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.

Derivative Instruments

Effective January 1, 2009, the Company adopted the provisions of FASB ASC Topic 815, “Derivatives and Hedging,” that applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result, as of January 1, 2009, 7,134,036 of the Company’s issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. In addition, amounts related to the embedded conversion feature of convertible notes issued previous to January 1, 2009 and treated as equity pursuant to the derivative treatment exemption were also no longer afforded equity treatment. As such, effective January 1, 2009, the Company reclassified the fair value of these common stock purchase warrants and the fair value of the embedded conversion features, which both have exercise price reset features, from equity to liability status as if these warrants and embedded conversion features were treated as a derivative liability since the earliest date of issue in September 2006. On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, $7,065,940 to beginning additional paid-in capital, $723,930 to opening retained earnings and $6,342,010 to a long-term derivative liability to recognize the fair value of such warrants and embedded conversion features on such date.

During the year ended December 31, 2009, the Company issued 1,192,000 common stock purchase warrants that contained features that required the Company to record their fair value as a derivative liability. In addition, the value related to the embedded conversion feature of convertible notes issued during the year ended December 31, 2009 was also recorded as a derivative liability. The fair value of these common stock purchase warrants and the embedded conversion feature on their respective value date for the year ended December 31, 2009 was $906,805. We recognized income of $109,058 from the change in fair value of the outstanding warrants and embedded conversion feature for the year ended December 31, 2009.

The Company obtained waivers from the warrant and note holders, pursuant to which the warrant and note holders forever waived, 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 the price reset provisions included in the warrants and notes. As a result of obtaining the waivers, the warrants and notes are now afforded equity treatment resulting in the elimination of the derivative liabilities of $7,139,757 and a corresponding increase in additional paid-in capital.

Fair Value Measurements

FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

•

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

•

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

•

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

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company has no assets or liabilities that are measured at fair value on either a recurring or non-recurring basis.

All of our financial instruments are recorded at fair value. For certain of the Company’s financial instruments, including cash, restricted cash, accounts receivable, accounts payable, other accrued liabilities and notes payable, the carrying amounts approximate fair value due to their short maturities.

F-11

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loss Per Share

In accordance with FASB ASC Topic 260, “Earnings Per Share,” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of December 31, 2010 and 2009, there were 23,214,566 and 16,139,945 shares of potentially dilutive securities outstanding, respectively. As the Company reported a net loss, none of the potentially dilutive securities were included in the calculation of diluted earnings per share since their effect would be anti-dilutive for that reporting period.

Stock Based Compensation

The Company applies 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.

Segment Disclosures

The Company operates in one segment and its chief operating decision maker is its chief executive officer.

Subsequent events

The Company has evaluated subsequent events through the filing date of this Form 10-K, and determined that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes thereto other than as discussed in the accompanying notes (see Note 10).

Recently Issued Accounting Pronouncements

The Company has adopted all accounting pronouncements effective before December 31, 2010 which are applicable to the Company.

In January 2010, the FASB issued an update to its accounting guidance regarding fair value measurement and disclosure. The guidance affects the disclosures made about recurring and non-recurring fair value measurements. This guidance is effective for annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. The Company is currently evaluating the impact that this guidance will have on its financial statements.

In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, Securities and Exchange Commission (SEC) filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The adoption of this amendment has had no material impact on the Company's financial position, results of operations or cash flows.

F-12

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 2 – RESTRICTED CASH

Under a credit card processing agreement with a financial institution, the Company is required to maintain a security reserve deposit as collateral. The amount of the deposit is at the discretion of the financial institution and as of December 31, 2010 and 2009 was $10,000 and $15,000, respectively. Under a separate credit card processing agreement with a different financial institution, the Company is also required to maintain a security reserve deposit as collateral. The amount of the deposit is currently based on 10% of the six-month rolling sales volume and was approximately $2.8 million and $1.3 million as of December 31, 2010 and 2009, respectively. The security reserve deposit is funded by the institution withholding a portion of daily cash receipts from Visa and MasterCard transactions.

On September 30, 2009, the Company entered into a second amendment to its lease as more fully described in Note 9 below. As part of the amendment the Company is required to issue a $250,000 letter of credit as a security deposit. The letter of credit is collateralized by cash held in an account at the Company’s bank. The account is interest bearing and the Company receives the interest that is earned.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	December 31,			December 31,
	2010			2009
Furniture and fixtures	$	390,615		$	121,370
Leasehold improvements		261,734			169,661
Office equipment		860,758			97,227
Software		589,921			17,333
		2,103,028			405,591
Less accumulated depreciation and amortization		(360,353	)		(162,664	)
Property and equipment, net	$	1,742,675		$	242,927

NOTE 4 - INCOME TAXES

The Company is subject to taxation in the United States and the State of California. The Company is subject to examination for tax years 2005 forward by the United States and the tax years 2004 forward by California. The Company may be, due to unused net operating losses, subject to examination for earlier years.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized.

Components of the net deferred tax asset as of December 31, 2010 and 2009 are approximately as follows:

	December 31,
	2010			2009
Deferred tax assets
Net operating loss carryforwards	$	17,083,000		$	9,595,000
Stock compensation expense		835,000			453,000
Accrued liabilities		180,000			48,000
Contingent liabilities		11,000			11,000
Accounts payable		8,000			19,000
AMT credit carryforwards		6,000			6,000
Warrants issued for services		10,265,000			3,154,000
Deferred revenue		1,548,000			420,000
Total gross deferred tax assets		29,936,000			13,706,000
Deferred tax liabilities
Depreciation/amortization		(38,000	)		(23,000	)
Total gross deferred tax liabilities		(38,000	)		(23,000	)
Net deferred tax asset		29,898,000			13,683,000
Less valuation allowance		(29,898,000	)		(13,683,000	)
Net deferred tax assets	$	-		$	-

F-13

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 4 - INCOME TAXES (continued)

The Company’s effective income tax rate differs from the statutory federal income tax rate as follows for the years ended December 31, 2010 and 2009:

	December 31,
	2010			2009
Federal tax benefit rate		-34.0	%		-34.0	%
State tax benefit rate (net of federal benefit)		-4.0	%		-4.0	%
Loan discount accretion		1.0	%		2.9	%
Other		-4.9	%		1.5	%
Valuation allowance		41.9	%		33.6	%
Effective income tax rate		-			-

The change in the valuation allowance for the years ended December 31, 2010 and 2009 was approximately $16,215,000 and $6,992,000, respectively

At December 31, 2010, the Company had federal and state net operating loss carryforwards of approximately $45,432,000 and $44,688,000 available, respectively, to reduce future taxable income and which will expire at various dates beginning in 2015 through 2025.

Pursuant to Internal Revenue Code Sections 382 and 383, the use of the Company’s net operating loss and credit carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within a three-year period. The annual limitation may result in the expiration of net operating losses and credits before utilization.

The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company's formation due to the complexity and cost associated with such a study, and the fact that there may be additional such ownership changes in the future. If the Company has experienced an ownership change at any time since its formation, utilization of the NOL carryforwards would be subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL carryforwards before utilization. Further, until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Due to the existence of the valuation allowance, future changes in the Company's unrecognized tax benefits will not impact its effective tax rate. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.

NOTE 5 – STOCKHOLDERS’ DEFICIT

Common Stock

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

On June 4, 2009, the Company closed the sale and issuance of 1,142,860 shares of common stock to a subsidiary of Guthy-Renker, GR Match, LLC (“GRM”) for an aggregate purchase price of $2,000,005, of which $400,000 (the “Commercial Funds”) must be used for the creation and production by GRM of television commercials advertising the Company’s products and services, and the balance of which the Company will use for general working capital. At December 31, 2010 and 2009, the balance of the Commercial Funds of $3,035 and $161,153 was recorded in prepaid expenses on the accompanying balance sheets. Pursuant to the terms of the Securities Purchase Agreement documenting the transaction, GRM has demand and piggyback registration rights with respect to the shares. Also, in the event the Company sells or issues shares of its common stock or common stock equivalents at a price per share below $1.75 during the ninety days following the closing of the transaction, except for certain exempt issuances, GRM will receive additional shares of common stock in order to effectively re-price the shares at such lower price. No additional shares were issued below $1.75 during the ninety-day period.

F-14

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 5 – STOCKHOLDERS’ DEFICIT (continued)

On June 10, 2009, the Company closed the sale and issuance of 632,500 shares of common stock to Shimski L.P. for an aggregate purchase price of $1,106,875. Pursuant to the terms of the Securities Purchase Agreement, Shimski L.P. has demand and piggyback registration rights with respect to the shares. Also, in the event the Company sells or issues shares of its common stock or common stock equivalents at a price per share below $1.75 during the ninety days following the closing of the transaction, except for certain exempt issuances, Shimski L.P. will receive additional shares of common stock in order to effectively re-price the shares at such lower price. No additional shares were issued below $1.75 during the ninety-day period.

On July 21, 2009, the Company closed the sale and issuance of 200,000 shares of common stock to twenty-eight accredited investors for an aggregate purchase price of $500,000, the proceeds of which the Company will use for general working capital. There were no issuance costs related to this sale.

On August 17, 2009, the Company issued 1,838,952 shares of common stock for warrants that were exercised in connection with a tender offer as more fully described in “stock warrants” below.

During 2009, nine investors exercised warrants to purchase 393,989 shares of common stock exercisable at $1.00 to $1.01 per share. The warrants were exercised pursuant to the cashless provision contained in the warrants and as such, the Company issued 234,447 shares to the investor.

During 2009, eight investors exercised warrants to purchase 192,208 shares of common stock exercisable at $1.00 to $1.25 per share. The Company received proceeds of $238,958.

During 2010, twelve investors exercised warrants to purchase 428,512 shares of common stock exercisable at prices ranging from $1.00 to $2.25 per share.

During 2010, one investor exercised a warrant to purchase 37,500 shares of common stock exercisable at $1.00 to $1.01 per share. The warrant was exercised pursuant to the cashless provision contained in the warrant and as such, the Company issued 23,689 shares to the investor.

See “stock options” below for additional shares issued related to the exercise of stock options.

See Note 6 for a discussion of additional shares of common stock issued related to the conversion of convertible notes payable.

Stock warrants

On November 11, 2008, the Company entered into a consulting agreement with Newview Consulting L.L.C. (“Newview”) Pursuant to this agreement, Newview agreed to provide investor relations services in exchange for a warrant to purchase 2,250,000 shares of common stock at a price of $1.25 per share. 900,000 warrants vested immediately and 270,000 warrants were to vest on the 1st of each month beginning December 1, 2008 and ending April 1, 2009. At January 1, 2009, the Company amended the vesting schedule in the Newview warrant to vest the remaining 1,080,000 warrants on the first of each month from January 1, 2009 to June 1, 2009 at the rate of 180,000 warrants per month. During the years ended December 31, 2010 and 2009, 0 and 1,080,000 warrants vested, respectively. The warrants were valued at $1,932,289, using the Black Scholes pricing model, and $0 and $1,010,673 was expensed to general and administrative expense for the years ended December 31, 2010 and 2009, respectively.

On January 17, 2009, the Company entered into a two-month consulting agreement with a consultant for services relating to financial management and reporting. As part of the agreement, the consultant was granted a warrant to purchase 2,500 shares of common stock with a term of five years at an exercise price of $1.25 per share, for each month of the term of the agreement. The fair value of these warrants was $3,753, using a Black Scholes pricing model, and was expensed to general and administrative expense for the year ended December 31, 2009. On April 24, 2009, the Company entered into a second agreement with the consultant. As part of the agreement, the consultant was granted a warrant to purchase 2,500 shares of common stock at an exercise price of $1.80 per share. The fair value of the warrant, which was computed as $3,453, was expensed to general and administrative expense for the year ended December 31, 2009.

On October 30, 2008, the Company executed a letter of intent with GRM to create, market and distribute direct response advertisements to sell the Company’s products. GRM was responsible for creating, financing, producing, testing and evaluating a radio commercial to market the Company’s products in exchange for $50,000 and a fully vested, non-forfeitable warrant to purchase 1,000,000 shares of common stock at a price of $1.25 per share with an estimated fair value of $951,495 using the Black-Scholes pricing model. The fair value of the warrant was recorded to prepaid expenses at the time of issuance and was expensed over the five-month term of service. The Company expensed $0 and $570,897 to media and marketing services expense for the years ended December 31, 2010 and 2009, respectively. The warrant included an anti-dilutive provision that reduced the exercise price of the warrant if the Company at any time while this warrant is outstanding sells and issues any common stock at a price per share less than the then exercise price. During August 2009, the Company received a waiver whereby GRM permanently waived, as of and after April 1, 2009, any and all exercise price adjustments that would otherwise occur, or would have occurred on or after April 1, 2009, as a result of this provision.

F-15

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 5 – STOCKHOLDERS’ DEFICIT (continued)

On March 24, 2009, the Company entered into a Media and Marketing Services Agreement with GRM. Pursuant to the agreement, GRM will provide direct response media campaigns, including radio and television direct response commercials, to promote the Company’s products and services and will purchase media time on the Company’s behalf. During the term of the agreement, which is to continue until December 31, 2013, as amended, subject to certain rights of termination, GRM will be the exclusive provider of all direct-response television and radio media purchasing and direct response production services.

As compensation for GRM’s services, the Company agreed to amend the warrant described above so that the terms were consistent with the warrants described below. None of the amended terms resulted in an accounting change to the warrant. In conjunction with the execution of the Media and Marketing Services Agreement and for creating, financing, producing, testing and evaluating a television commercial to market the Company’s products, the Company issued to GRM a second five-year warrant for the purchase of 1,000,000 shares of the Company’s common stock at a price of $1.25 per share valued at $712,303 using the Black-Scholes pricing model. The fair value of the warrant was recorded to prepaid expenses at the time of issuance and was expensed over the five-month expected term of service to media and marketing services expense during the year ended December 31, 2009. This warrant may be exercised only for cash. Finally, the Company agreed to issue to GRM a five-year warrant (“Media Services Warrant”) for the purchase of 8,000,000 shares of the Company’s common stock at an exercise price of $1.25 per share. The Media Services Warrant may be exercised only with cash and is subject to vesting as follows: for each $2 of media placement costs advanced by GRM on the Company’s behalf, the right to purchase one share of the Company’s common stock will vest. During the years ended December 31, 2010 and 2009, the right to purchase 6,162,668 and 1,837,332 of the 8,000,000 Media Services Warrant shares vested and were valued at $18.6 million and $4.6 million using the Black-Scholes pricing model. The fair value of these vested shares has been expensed to media and marketing services expense. The remaining 6,162,668 unvested shares at December 31, 2009 from the Media Services Warrant were not guaranteed to vest as they were contingent on GRM advancing media placement costs, therefore, those unvested warrants were not included or accounted for as outstanding dilutive securities at December 31, 2009. These warrants included an anti-dilutive provision that reduced the exercise price of the warrants if the Company at any time while the warrants are outstanding sells and issues any common stock at a price per share less than the then exercise price. During August 2009, the Company received a waiver whereby GRM permanently waived, as of and after April 1, 2009, any and all exercise price adjustments that would otherwise occur, or would have occurred on or after April 1, 2009, as a result of this provision.

On April 1, 2009, the Company entered into an agreement with a consultant for management consulting and business advisory services on an as needed basis. The consultant was granted a warrant to purchase 850,000 shares of the Company’s common stock for a period of five years at an exercise price of $1.25. These warrants vest as follows: 300,000 immediately and 50,000 per month on the 1st day of each month commencing May 1, 2009 and ending March 1, 2010. During the years ended December 31, 2010 and 2009, the right to purchase 150,000 and 700,000 of the warrant shares vested and were valued at $523,610 and $1,162,294 using the Black-Scholes pricing model. The fair value of these vested shares has been expensed to general and administrative expense.

On April 5, 2009, the Company entered into an agreement with a consultant for marketing related services. The agreement had a term of three months. The agreement provided compensation of $13,000 for month one, $14,000 for month two and $15,000 for month three. In addition, the consultant was granted a warrant to purchase 15,000 shares of the Company’s common stock for a period of five years at an exercise price of $1.25. This warrant was to vest 5,000 shares per month over the term of the agreement. On May 15, 2009, the original agreement was terminated, along with the right to purchase 8,387 shares of common stock that would have vested over the remaining term of the agreement, and the Company entered into a second agreement with the consultant. The second agreement had a term of three months and provided for compensation of $17,500 for month one, of which 50% was deferred for 30 days, and $8,750 per month thereafter. In addition, the consultant was granted a warrant to purchase 15,000 shares of the Company’s common stock for a period of five years at an exercise price of $1.25. The warrant was to vest 5,000 shares per month over the term of the second agreement. The second agreement also provided for a bonus of up to 50,000 additional warrant shares at an exercise price of $1.83 for achieving certain goals. On June 15, 2009, the second agreement was terminated, along with the right to purchase 10,000 shares of common stock that would have vested in July and August 2009, and the Company entered into a third agreement with the consultant. The third agreement had a term of two months. The third agreement provided compensation of $12,500 per month. In addition, the consultant was granted a warrant to purchase 10,000 shares of the Company’s common stock for a period of five years at an exercise price of $1.25. This warrant vests 5,000 shares per month over the term of the agreement. Additionally, the consultant was granted a warrant to purchase 5,000 shares of the Company’s common stock for a period of five years at an exercise price of $1.83 for deferring 50% of the compensation due for May 2009 until July 30, 2009 and a warrant to purchase 5,000 shares of the Company’s common stock for a period of five years at an exercise price of $1.83 as part of the bonus that was earned under the second agreement. The third agreement also provided for a bonus of up to 45,000 additional warrant shares at an exercise price of $1.83 for achieving certain goals. These goals were achieved and the Company issued the bonus warrant to the consultant on August 15, 2009. The fair value of the 76,613 warrant shares that were granted and vested totaled $127,803 and was expensed to general and administrative expense during the year ended December 31, 2009.

F-16

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 5 – STOCKHOLDERS’ DEFICIT (Continued)

In May 2009, the Company began an offering to the holders of its warrants issued with “cashless exercise” provisions and/or “down-round” provisions (collectively the “Released Provisions”). Pursuant to the offering, the warrant holders were given the opportunity to increase by 10% the number of shares of common stock covered by their warrants in exchange for extinguishing the Released Provisions from their warrants. In order for the warrant holders to take advantage of the offer, they were required to exercise a portion of their warrant(s) and purchase for cash no less than 30% of the shares of common stock covered by their warrant(s), after giving effect to the increase. On June 29, 2009, the Company filed a Schedule TO with the SEC covering this offering. Per the Schedule TO, the offering was to expire on July 28, 2009. The Schedule TO was subsequently amended and the offering was extended until August 17, 2009. The Company received $2,008,180 in proceeds, net of offering costs of $72,835, and issued 1,838,952 shares of common stock to warrant holders that participated in this offer. Additionally, the Company issued warrants to purchase 269,681 shares of the Company’s common stock which represented the 10% increase in the shares of common stock covered by the warrants. The additional warrants were valued at $548,728, using the Black Scholes pricing model, and were expensed to interest expense during the year ended December 31, 2009.

On May 15, 2009, the Company entered into an agreement with a consultant for marketing related services. The agreement had a term of three months and provided compensation of $17,500 for month one, of which 50% will be deferred for 30 days, and $8,750 per month thereafter. In addition, the consultant was granted a warrant to purchase 15,000 shares of the Company’s common stock for a period of five years at an exercise price of $1.83. The warrant was to vest 5,000 shares per month over the term of the agreement. The agreement also provided for a bonus of up to 50,000 additional warrant shares at an exercise price of $1.83 for achieving certain goals. On June 15, 2009, the agreement was terminated, along with the right to purchase 10,000 shares of common stock that would have vested in June and July 2009, and the Company entered into a second agreement with the consultant. The second agreement had a term of two months and provided for compensation of $12,500 per month. In addition, the consultant was granted a warrant to purchase 10,000 shares of the Company’s common stock for a period of five years at an exercise price of $1.83. This warrant vests 5,000 shares per month over the term of the agreement. Additionally, the consultant was granted a warrant to purchase 5,000 shares of the Company’s common stock for a period of five years at an exercise price of $1.83 for deferring 50% of the compensation due for May 2009 until July 30, 2009 and a warrant to purchase 5,000 shares of the Company’s common stock for a period of five years at an exercise price of $1.83 as part of the bonus that was earned under the first agreement. The second agreement also provided for a bonus of up to 45,000 additional warrant shares at an exercise price of $1.83 for achieving certain goals. These goals were achieved and the Company issued the bonus warrant to the consultant on August 15, 2009. The fair value of the 70,000 warrant shares that were granted and vested of $115,684 was expensed to general and administrative expense during the year ended December 31, 2009.

On August 1, 2009, the Company entered into an agreement with a consultant for business development services related to the signing of the Wiley licensing contract. The consultant was granted a warrant to purchase 55,000 shares of the Company’s common stock for a period of three years at an exercise price of $2.18. The warrant was to vest 15,000 shares at the signing of the Wiley contract, 15,000 shares at the Wiley launch and 25,000 shares at the earlier of the first anniversary date of the agreement or when sales of the Wiley branded products exceed 100,000 units. During the years ended December 31, 2010 and 2009, the right to purchase 40,000 and 15,000 of the warrant shares vested and were valued at $69,155 and $25,933 using the Black-Scholes pricing model. The fair value of these vested shares has been expensed to general and administrative expense.

On May 1, 2009, the Company entered into an agreement with a consultant to provide investor relations services. The agreement was amended in August 2009 to include the issuance of a warrant to purchase 5,000 shares of the Company’s common stock for a period of three years at an exercise price of $2.25 for each month the contract remained in effect. The contract was terminated after three months. The fair value of the 15,000 warrant shares that were granted and vested of $23,751 was expensed to general and administrative expense during the year ended December 31, 2009.

See Note 6 for additional warrants issued related to the convertible notes payable.

F-17

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 5 – STOCKHOLDERS’ DEFICIT (Continued)

The following represents a summary of the warrants outstanding at December 31, 2010 and 2009 and changes during the years then ended:

	Year Ended
	December 31, 2010							December 31, 2009
				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		13,026,657		$	1.20				11,029,890		$	1.14

Issued		6,162,668		$	1.25				4,421,916		$	1.29
Exercised		(466,012	)	$	1.19				(2,425,149	)	$	1.12
Outstanding, end of year		18,723,313		$	1.22	$	25,341,692		13,026,657		$	1.20	$	45,517,994

Exercisable, end of year		18,723,313		$	1.22	$	25,341,692		12,836,657		$	1.19	$	45,000,494

The following table summarizes information about warrants outstanding at December 31, 2010:

			Weighted
			Average
	Number of		Remaining
	Warrant		Contractual
Exercise Price	Shares		Life (Years)
$ 1.00		2,625,503		0.86
$ 1.01		700,306		4.91
$ 1.20		236,750		2.09
$ 1.25		14,900,764		2.82
$ 1.80		2,500		3.31
$ 1.83		125,000		3.38
$ 2.05		77,490		3.73
$ 2.18		55,000		1.72
		18,723,313		2.62

The weighted average grant date fair value of warrants granted during the years ended December 31, 2010 and 2009 was $3.09 and $0.91 per share, respectively.

F-18

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 5 – STOCKHOLDERS’ DEFICIT (Continued)

The Company’s common stock purchase warrants do not trade in an active securities market, therefore, we estimate the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions for the years ended December 31, 2010 and 2009:

	2010			2009
Annual dividend yield		0.0	%		0.0	%
Average expected life (years)		3.54-4.29			2.07-5.10
Risk-free interest rate		1.34-2.52	%		1.46-3.72	%
Expected volatility		38-88	%		85-103	%

Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for the prior year. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on 5-year to 10-year U.S. Treasury securities.

Stock options

In January 2005, the Company adopted the CyberDefender Corporation 2005 Stock Option Plan (sometimes called the CyberDefender Corporation 2005 Equity Incentive Plan and referred to herein as the “2005 Plan”), which provides for the granting of Incentive Stock Options or Nonstatutory Stock Options, the issuance of stock appreciation rights, stock purchase rights and awards of stock. Under the terms of the 2005 Plan, the exercise price of options granted may be equal to, greater than or less than the fair market value on the date of grant, the options have a maximum term of ten years and generally vest over a period of service or attainment of specified performance objectives. The maximum aggregate amount of options that may be granted from the 2005 Plan is 931,734 shares, of which awards for the purchase of 670,733 shares have been granted and are outstanding, awards for the purchase of 198,125 shares have been exercised and awards for the purchase of 62,876 shares are available for grant at December 31, 2010.

On October 30, 2006, the Company adopted the Amended and Restated 2006 Equity Incentive Plan (“2006 Plan”) that provides for the granting of Incentive Stock Options or Nonstatutory Stock Options, the issuance of stock appreciation rights, stock purchase rights and awards of stock. Under the terms of the 2006 Plan, the exercise price of options granted may be equal to, greater than or less than the fair market value on the date of grant, the options may have a maximum term of ten years and generally vest over a period of service or attainment of specified performance objectives. The maximum aggregate amount of stock based awards that may be granted from the 2006 Plan is 2,875,000 shares, of which awards for the purchase of 2,055,163 shares have been granted and are outstanding, awards for the purchase of 326,691 shares have been exercised, awards of stocks totaling 286,666 shares have been awarded and awards for the purchase of 206,480 shares are available for grant at December 31, 2010.

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

On April 1, 2009, the Company entered into a three-month consulting agreement with Unionway International, LLC, an entity controlled by Mr. Bing Liu, for consulting services. As part of the agreement, Mr. Liu was granted a 10-year option to purchase 15,000 shares of common stock at an exercise price of $1.25 per share vesting over the term of the agreement.

During 2009, the Company granted to employees options to purchase a total of 417,126 shares of common stock under the 2006 Plan and the 2005 Plan at a prices ranging from of $1.00 to $4.60 per share.

During the year ended December 31, 2010, the Company granted to employees options to purchase a total of 1,036,626 shares of common stock under the 2006 Plan and the 2005 Plan at prices ranging from $1.00 to $4.70 per share.

F-19

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 5 – STOCKHOLDERS’ DEFICIT (Continued)

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

	Year Ended
	December 31, 2010									December 31, 2009
						Weighted									Weighted
	Weighted					Average							Weighted		Average
	Number			Average		Remaining		Aggregate		Number			Average		Remaining		Aggregate
	Of			Exercise		Contractual		Intrinsic		of			Exercise		Contractual		Intrinsic
	Options			Price		Term		Value		Options			Prices		Term		Value

Outstanding, beginning of year		1,856,293		$	1.09						1,444,084		$	0.83

Granted		1,086,126		$	3.67						957,126		$	1.44

Exercised		(73,200	)	$	0.85						(300,679	)	$	0.93

Cancelled/forfeited		(143,323	)	$	2.27						(244,238	)	$	1.10

Outstanding, end of year		2,725,896		$	2.06		7.62	$	3,595,952		1,856,293		$	1.09		7.57	$	6,699,108

Vested and expected to vest in the future		2,486,255		$	1.85		7.45	$	3,661,831		1,677,043		$	1.01		7.40	$	6,183,077

Exercisable, end of year		1,699,325		$	1.20		6.72	$	3,298,981		1,160,210		$	0.81		6.71	$	4,510,095

The weighted-average grant date fair value of options granted during the years ended December 31, 2010 and 2009 was $2.46 and $1.29 per share, respectively.

As of December 31, 2010 and 2009, 1,026,571 and 696,083 of the options granted are not vested with total unrecognized compensation cost of $1,627,243 and $735,771, respectively. At December 31, 2010 and 2009, the remaining value of non-vested options granted is expected to be recognized over the weighted average vesting period of 2.68 and 2.53 years, respectively.

The Company recorded compensation expense associated with the issuance and vesting of stock options of $1,018,044 and $308,776 in general and administrative expense for the years ended December 31, 2010 and 2009, respectively.

During the years ended December 31, 2010 and 2009, 73,200 and 300,679 of employee stock options were exercised for total proceeds to the Company of $62,391 and $279,978, respectively. The aggregate intrinsic value of the exercised options was $242,100 and $689,630 for the years ended December 31, 2010 and 2009, respectively.

The Company’s common stock options do not trade in an active securities market, therefore, we estimate the fair value of these warrants using the Black-Scholes option pricing model using the following average assumptions for the years ended December 31, 2010 and 2009:

	2010			2009
Annual dividend yield		0.0	%		0.0	%
Average expected life (years)		5.78			5.46
Risk-free interest rate		2.56	%		2.25	%
Expected volatility		61.68	%		69.89	%

F-20

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 5 – STOCKHOLDERS’ DEFICIT (Continued)

Expected volatility is based primarily on historical volatility. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of these options. The Company currently has no reason to believe future volatility over the expected remaining life of these options is likely to differ materially from historical volatility. The expected life is based on the remaining term of the options. The risk-free interest rate is based on 5-year to 10-year U.S. Treasury securities.

NOTE 6 –NOTES PAYABLE

Convertible Notes

On September 12, 2006, the Company entered into a Securities Purchase Agreement with 13 accredited investors pursuant to which it sold 10% secured convertible debentures (the “2006 Debentures”) in the aggregate principal amount of $3,243,378 and common stock purchase warrants to purchase an aggregate of 3,243,378 shares of the Company’s common stock at $1.00 per share. The 2006 Debentures were convertible at $1.00 (the “Base Conversion Price”) into shares of common stock. The 2006 Debentures matured on September 12, 2009 and bore interest at the rate of 10% per year, payable quarterly. If, during the time that the 2006 Debentures were outstanding, the Company sold or granted any option to purchase (other than options issued pursuant to a plan approved by our board of directors), or sold or granted any right to reprice its securities, or otherwise disposed of or issued any common stock or common stock equivalents entitling any person to acquire shares of the Company’s common stock at a price per share that was lower than the conversion price of the debentures or that was higher than the Base Conversion Price but lower than the daily volume weighted average price of the common stock, then the conversion price of the 2006 Debentures would be reduced. During August 2009, the Company received a waiver whereby the holders of the 2006 Debentures permanently waived, as of and after April 1, 2009, any and all conversion or exercise price adjustments that would otherwise occur, or would have occurred on or after April 1, 2009, as a result of this provision.

Under the terms of the Registration Rights Agreement executed in conjunction with the offering, the Company is obligated to register for resale at least 130% of the shares of its common stock issuable upon the conversion of the 2006 Debentures and the exercise of the common stock purchase warrants. However, the agreement also prohibits the Company from registering shares of common stock on a registration statement that total more than one-half of the issued and outstanding shares of common stock, reduced by 10,000 shares.

If a registration statement was not filed within 30 days of the sale of the 2006 Debentures, or was not effective 120 days from the date of the sale of the 2006 Debentures, which was January 10, 2007, or if the Company did not respond to an SEC request for information during the registration period within 10 days of notice, the Company was required to pay to each holder of its 2006 Debentures an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.5% of the aggregate subscription amount paid by each holder. The Company, (1) was not liable for liquidated damages with respect to any warrants or warrant shares, (2) was not liable for liquidated damages in excess of 1.5% of the aggregate subscription amount of the holders in any 30-day period, and (3) the maximum aggregate liquidated damages payable to a holder was 18% of the aggregate subscription amount paid by such holder up to a maximum aggregate liquidated damages of 18% of the total amount of the 2006 Debentures, or $583,808. If the Company failed to pay any partial liquidated damages in full within seven days after the date payable, the Company would pay interest at a rate of 18% per annum to the holder, accruing daily from the date such partial liquidated damages were due until such amounts, plus all such interest, were paid in full. The partial liquidated damages applied on a daily pro-rata basis for any portion of a month.

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

The Company believed, at the time the 2006 Debentures were issued, that it was probable that it would be in violation of certain filing provisions within the Registration Rights Agreement and recorded $111,897 as a discount to the 2006 Debentures. On March 23, 2007 the Company entered into a Consent and Waiver agreement as more fully described below that determined the actual liquidated damages to be $169,917 calculated through March 23, 2007 and covering the period through April 30, 2007.

The Consent and Waiver allowed the Company to pay the liquidated damages in one of two ways to be chosen by each holder. For payment of the 2006 Debenture holder’s pro rata portion of the liquidated damages, the 2006 Debenture holder could choose to increase the principal amount of his 2006 Debenture by his pro-rata share of the liquidated damages amount or accept shares of the Company’s common stock valued at $0.85 per share for this purpose. The Consent and Waiver allowed the Company to issue these shares without triggering the anti-dilution rights included in the original offering documents. At December 31, 2010 and 2009, $3,658 of these damages remained in accrued expenses.

F-21

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 6 –NOTES PAYABLE (Continued)

The Company did not meet the April 30, 2007 date for its registration statement to be declared effective by the SEC. The registration statement became effective on July 19, 2007. As a result, the Company incurred additional liquidated damages for the period May 1 through July 19, 2007 of $132,726. On September 21, 2007 the Company received from the holders of the 2006 Debentures a second Consent and Waiver. The holders of the 2006 Debentures agreed to accept shares of the Company’s common stock at $0.85 per share instead of cash as payment for the interest due on July 1, 2007 and October 1, 2007 and for damages incurred under the Registration Rights Agreement. The Company issued 931 shares in April 2009 as partial payment for these liquidated damages valued at $791. At December 31, 2010 and 2009, $25,422 of these damages remained in accrued expenses.

The Company did not meet the August 18, 2007 date to file a second registration statement. As a result, the Company incurred additional liquidated damages for the period August 18 through December 19, 2007 of $194,603. The Company received from the holders of the 2006 Debentures a third Consent and Waiver, dated February 13, 2008 and amended on August 19, 2008. The third Consent and Waiver waived the requirement included in the 2006 Debentures and the Registration Rights Agreement that the Company file a second registration statement, waived the liquidated damages that accrued from and after December 19, 2007 and waived the payment of any interest that would have accrued on the liquidated damages. The holders of the 2006 Debentures agreed to accept either additional debentures or shares of the Company’s common stock at $0.85 per share instead of cash as payment for the interest due on January 1, 2008 and as payment of the liquidated damages accrued prior to December 19, 2007 under the Registration Rights Agreement. In September 2008, the Company issued $64,422 in additional unsecured convertible 10% debentures (“2006 Unsecured Debentures”) as payment of liquidated damages, which included $4,422 of penalty interest, and $26,868 in 2006 Unsecured Debentures as payment for quarterly interest due on January 1, 2008, which included $1,868 of penalty interest. The 2006 Unsecured Debentures had a term of 18 months and are convertible at $0.85 per share. During October and December 2008, the Company issued $349,494 in 2006 Unsecured Debentures as payment of liquidated damages, quarterly interest, and penalty interest. The Company issued 5,567 shares in April 2009 as final payment for $4,732 in liquidated damages.

According to the terms of the 2006 Debentures, the Company was to make interest payments quarterly on January 1, April 1, July 1 and October 1 until September 2009, when the principal amount and all accrued but unpaid interest was due. The Company failed to make the interest payments that were due on January 1, April 1, and July 1 2009, totaling $126,614. The Company issued 9,281 shares in April 2009 as partial payment for $7,886 in interest. In May 2009, the Company paid $56,575 for quarterly interest, which included $3,810 of penalty interest. In September 2009, the Company paid $47,614 for quarterly interest. At December 31, 2010 and 2009, $69,982 remained in accrued interest on the 2006 Debentures.

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

The Company has accounted for the 2006 Debentures according to FASB ASC Topic 470, “Debt.” The value of the 2006 Debentures was allocated between the 2006 Debentures, the registration rights arrangement and the warrants, including the discount, which amounted to $63,689, $111,897 and $3,067,792, respectively. The discount of $3,179,689 related to the registration rights arrangement and the warrants, including the discount, is being amortized over the term of the 2006 Debentures. The Company amortized $0 and $477,282 to interest expense for the years ended December 31, 2010 and 2009, respectively.

In addition, as part of the transaction, the Company paid $217,000, issued 1,000,515 shares of common stock in November 2006 valued at $1,000,515 and issued 217,000 unit purchase options with each unit consisting of 1 share of common stock and a warrant to purchase 1 share of common stock for $1.00 per share in November 2006. The unit purchase options were valued at $374,531 using the Black-Scholes option pricing model. These costs, totaling $1,592,046, are being amortized over the term of the 2006 Debentures. The Company recorded amortization of $0 and $238,605 to interest expense related to the 2006 Debentures during the years ended December 31, 2010 and 2009, respectively.

During 2009, certain holders of the 2006 Debentures converted $2,001,970 of principal into 2,001,970 shares of common stock at $1.00 per share.

During 2009, certain holders of the 2006 Unsecured Debentures converted $440,784 of principal into 518,574 shares of common stock at $0.85 per share.

As of December 31, 2009, all of the holders of the 2006 Debentures and 2006 Unsecured Debentures have converted the outstanding principal amount to shares of common stock and all of the related note discount and debt issuance costs have been amortized to interest expense.

F-22

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 6 –NOTES PAYABLE (Continued)

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

Per the Consent and Waiver discussed above, in November and December 2008, the Company entered into a Securities Purchase Agreement, that also included registration rights, with certain accredited investors to which it sold 2008 Convertible Notes in the aggregate principal amount of $845,000, which may be converted at the price of $1.25 per share (subject to adjustment as discussed below) into an aggregate of 676,000 shares of common stock. In conjunction with the sale of the 2008 Convertible Notes, the Company issued common stock purchase warrants to purchase an aggregate of 338,000 shares of common stock at $1.25 per share and paid its placement agent a total of $50,700 in commissions and issued to its placement agent a five-year warrant to purchase an additional 50,700 shares of the Company’s common stock, at an exercise price of $1.25 per share, valued at $47,498 using the Black-Scholes option pricing model. In January 2009, the Company completed the sale and issuance of the Company’s 2008 Convertible Notes. Accordingly, the Company received additional gross proceeds of $355,000, which may be converted at the price of $1.25 per share (subject to adjustment as discussed below) into an aggregate of 284,000 shares of common stock. In conjunction with the sale of the 2008 Convertible Notes, the Company issued common stock purchase warrants to purchase an aggregate of 142,000 shares of common stock at $1.25 per share and paid its placement agent a total of $21,300 in commissions and issued to its placement agent a five-year warrant to purchase an additional 21,300 shares of the Company’s common stock, at an exercise price of $1.25 per share, valued at $18,197 using the Black-Scholes option pricing model.

If, during the time that the 2008 Convertible Notes were outstanding, the Company sold or granted any option to purchase (other than options issued to its employees, officers, directors or consultants), or sold or granted any right to re-price its securities, or otherwise dispose of or issue any common stock or common stock equivalents entitling any person to acquire shares of our common stock at a price per share that was lower than the conversion price of these notes, then the conversion price of the 2008 Convertible Notes would be reduced according to the following weighted average formula: the conversion price will be multiplied by a fraction the denominator of which will be the number of shares of common stock outstanding on the date of the issuance plus the number of additional shares of common stock offered for purchase and the numerator of which will be the number of shares of common stock outstanding on the date of such issuance plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at the conversion price. A reduction in the conversion price resulting from the foregoing would allow holders of the Company’s 2008 Convertible Notes to receive more than 960,000 shares of its common stock upon conversion of the outstanding principal amount. In that case, an investment in the Company’s common stock would be diluted to a greater extent than it would be if no adjustment to the conversion price were required to be made. During August 2009, the Company received a waiver from the holders of the 2008 Convertible Notes pursuant to which they forever waived, 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 this provision.

The warrants are redeemable at a price of $0.01 per share in the event (i) the average VWAP of the Company’s common stock for 10 consecutive trading days equals or exceeds 2.5 times the then current exercise price, (ii) the average daily trading volume of the common stock during such 10-trading day period is at least 50,000 shares and (iii) there is an effective registration statement covering the resale of the shares issuable upon exercise of the warrants.

The total value of the 2008 Convertible Notes was allocated between the 2008 Convertible Notes and the warrants, including the discount, which amounted to $595,646 and $604,354, respectively. The discount of $604,354 ($158,886 was recorded in 2009) related to the warrants is being amortized over the term of the 2008 Convertible Notes. The Company amortized $0 and $547,829 to interest expense related to the 2008 Convertible Notes for the years ended December 31, 2010 and 2009, respectively. At December 31, 2010 and 2009, $0 and $109,001 of accrued interest on these notes was recorded in accrued expenses, respectively.

In addition, as part of the transaction, the Company paid to the placement agent $72,000 and issued common stock purchase warrants to purchase an aggregate of 72,000 shares of common stock at $1.25 per share. The warrants were valued at $65,695 using the Black-Scholes option pricing model. These costs, totaling $137,695 ($39,497 was recorded in 2009), are being amortized over the term of the 2008 Convertible Notes. The Company recorded amortization of $0 and $125,092 to interest expense during the years ended December 31, 2010 and 2009, respectively.

On September 30, 2009, all of the holders of the 2008 Convertible Notes converted $1,200,000 of principal into 960,000 shares of common stock at $1.25 per share and all of the related note discount and debt issuance costs have been amortized to interest expense.

F-23

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 6 –NOTES PAYABLE (Continued)

During May 2009, the Company entered into a ninth Consent and Waiver agreement whereby the holders of the 2006 Debentures agreed to allow the Company to sell up to $300,000 in aggregate principal amount of the Company’s 10% Convertible Promissory Notes (“2009 10% Convertible Notes”), due five months from the date of issuance and convertible into shares of Common Stock at a conversion price of $1.75 per share. Subsequent to the execution of the Consent and Waiver, in May 2009, the Company entered into a Securities Purchase Agreement with certain accredited investors to which it sold 2009 10% Convertible Notes in the aggregate principal amount of $300,000, which could be converted into an aggregate of 171,429 shares of common stock. In conjunction with the sale of the 2009 10% Convertible Notes, the Company paid its placement agent a total of $12,000 in commissions. The Company recorded amortization of $12,000 to interest expense during the year ended December 31, 2009.

The total value of the 2009 10% Convertible Notes was allocated between the 2009 10% Convertible Notes and the discount, which amounted to $19,715. The discount is being amortized over the term of the 2009 10% Convertible Notes. The Company amortized $19,715 to interest expense related to the 2009 10% Convertible Notes for the year ended December 31, 2009. At December 31, 2010 and 2009, $0 and $12,500 of accrued interest on these notes was recorded in accrued expenses, respectively.

On September 30 2009, all of the holders of the 2009 10% Convertible Notes converted $300,000 of principal into 171,429 shares of common stock at $1.75 per share and all of the related note discount and debt issuance costs have been amortized to interest expense.

On November 4, 2009, the Company closed the sale and issuance of $2.2 million in aggregate principal amount of its 8% Secured Convertible Promissory Notes (the “2009 8% Convertible Notes”), convertible into common stock of the Company at a conversion price of $2.05 per share. The Company has the right, up to and including the trading day immediately prior to the payment due date, to force the holders to convert all or part of the then outstanding principal amount of the 2009 8% Convertible Notes, plus accrued but unpaid interest, into shares of the Company’s common stock if the 10-day volume weighted average price (sometimes referred to as “VWAP”) exceeds 250% of the conversion price. All outstanding principal and interest of the 2009 8% Convertible Notes is due April 1, 2011. Out of the total gross proceeds of the offering, the Company paid its placement agent $154,980 in commissions, equal to 7% of the gross proceeds of the offering, and issued to its placement agent a three year warrant to purchase 77,490 shares of common stock, equal to 3.5% of the number of shares of common stock into which the Notes initially may be converted, at an exercise price of $2.05 per share. The warrants were valued at $132,369 using the Black-Scholes option pricing model. These costs, totaling $287,349, are being amortized over the term of the 2009 8% Convertible Notes. The Company recorded amortization of $239,457 and $47,892 to interest expense during the years ended December 31, 2010 and 2009, respectively. In conjunction with the sale of the 2009 8% Convertible Notes, the Company executed a Security Agreement pursuant to which it granted to the note holders a first lien security interest, subject only to certain Permitted Liens which are defined in the Security Agreement, in certain collateral to secure payment of the 2009 8% Convertible Notes.

The total value of the 2009 8% Convertible Notes was allocated between the 2009 8% Convertible Notes and the discount, which amounted to $745,200. The discount is being amortized over the term of the 2009 8% Convertible Notes. The Company amortized $621,000 and $124,200 to interest expense related to the 2009 8% Convertible Notes for the years ended December 31, 2010 and 2009, respectively. At December 31, 2010, and 2009, $0 and $32,719 of accrued interest on these notes was recorded in accrued expenses, respectively.

On March 31, 2010, the Company issued in a private placement to GRM a 9% Secured Convertible Promissory Note in the aggregate principal amount of $5.3 million (the “GR Note”), due March 31, 2012. The Company received net proceeds of $5.0 million after payment of an issuance fee of $300,000 to GRM. The Company has recorded the $300,000 as a discount to the GR Note as if the amount were an original issue discount. The GR Note will accrue simple interest at the rate of 9% per annum, payable on the first day of each calendar quarter in cash; provided, however, that GRM may elect to cause the accrued unpaid interest for any applicable quarter to be added to the then outstanding principal amount of the GR Note in lieu of a cash payment of interest by delivering written notice of such election to the Company no later than 15 days prior to the applicable interest payment date. GRM chose to have the interest payments due July 1, 2010 and January 1, 2011 added to the aggregate principal amount of the GR Note. For the year ended December 31, 2010 the Company recorded interest expense of $363,116 under the GR Note.

The outstanding principal amount of the GR Note and accrued unpaid interest due thereon may be converted, at GRM’s election, into the Company’s common stock at a conversion price of $3.50 per share (the “Conversion Price”), subject to adjustment only in the event of stock splits, dividends, combinations, reclassifications and the like. If at any time after 180 days from the later of March 31, 2010 or such date when a registration statement filed with the SEC covering the resale of the shares issuable upon conversion of the GR Note becomes effective, the volume weighted average price of the Company’s common stock for each of any 30 consecutive trading days, which period shall have commenced after the effective date of such registration statement, exceeds 250% of the then applicable Conversion Price, and the daily trading volume for the common stock is at least 100,000 shares (subject to adjustment for stock splits, combinations, recapitalizations, dividends and the like) during such 30 trading day period, then the Company may force GRM to convert all or part of the then outstanding principal amount of the GR Note. GRM has piggyback and demand registration rights with respect to the shares issuable upon conversion of the GR Note. The GR Note was amended subsequent to December 31, 2010, see Note 10 below.

F-24

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 6 –NOTES PAYABLE (Continued)

The Company granted GRM a first lien priority security interest in all of the Company’s assets securing the Company’s obligations under the GR Note, subject to certain permitted indebtedness and liens permitted in connection with the same.

The Company agreed that on or before 90 days following March 31, 2010, the Company shall: (i) cause each holder (each, a “Senior Debt Holder”) of the Company’s outstanding 2009 8% Convertible Notes, dated on or about November 5, 2009, in the aggregate principal amount of $2.2 million, to (A) be entirely converted, along with accrued unpaid interest thereon, into shares of the Company’s common stock in accordance with the terms thereof; or (B) expressly subordinate any lien which the Senior Debt Holder holds in the Company's assets to the GR Note and the security interest granted to GRM pursuant to a written subordination agreement with GRM acceptable to GRM in its sole discretion; or (C) prepay the entire outstanding principal balance of each 2009 8% Convertible Note, and any accrued unpaid interest thereon and cause each of the 2009 8% Convertible Notes to be cancelled. As described above all outstanding principal of the 2009 8% Convertible Notes along with all accrued interest was converted to shares of the Company’s common stock.

The total value of the GR Note was allocated between the GR Note and the discount, which amounted to $1.2 million including the $300,000 issuance fee. The discount will be amortized over the term of GR Note. The Company amortized $453,214 to interest expense related to the GR Note for the year ended December 31, 2010.

As part of the transaction, the Company incurred deferred financing costs of approximately $51,000. These costs are being amortized over the term of the GR Note. The Company recorded amortization of $19,132 to interest expense during the year ended December 31, 2010.

Effective as of December 3, 2010, the Company and GRM entered into a Revolving Credit Loan Agreement (the “Loan Agreement”) pursuant to which GRM has made available to the Company a secured revolving credit facility in the principal amount not to exceed $5,000,000 (the “Credit Facility”). Pursuant to the terms and conditions of the Loan Agreement, GRM will advance funds to the Company, and the Company will use the funds solely for the Company’s payments of amounts owing to GRM pursuant to the Media Services Agreement. All outstanding principal and accrued but unpaid interest under the Credit Facility is due and payable in full on the earlier of either March 31, 2011 or the closing of the Company’s sale and issuance of any debt or equity securities of the Company in an aggregate amount exceeding $10,000,000. Interest will accrue on the outstanding principal amount advanced under the Credit Facility at an annual rate of 10%, and will be calculated on a per diem basis and added to the principal amount advanced. Upon an event of default, the interest rate will increase to 15% per annum, and GRM may elect to: (1) terminate the Credit Facility; (2) declare immediately due and payable in cash the entire outstanding principal balance, together with any repayment fees, all accrued but unpaid interest, and any and all other amounts due and owing; and (3) exercise any and all rights and remedies available to GRM pursuant to the Loan Agreement or under applicable law. Additionally, GRM also has the right, but not the obligation, and at the Company’s sole cost and expense, to require the Company to retain a consultant or hire a Company executive who would be senior to the Company’s Chief Executive Officer and Chief Financial Officer.

Simultaneously with all repayments of outstanding amounts advanced under the Credit Facility, including repayment of the Credit Facility on the due date, the Company will pay GRM a repayment fee in an amount equal to 10% of the total amount being repaid. Late payments, if any, will incur a fee in an amount equal to 10% of the amount due. This fee is being amortized over the four month term of the Credit Facility. The Company recorded $125,000 to interest expense during the year ended December 31, 2010.

Pursuant to a security agreement, the Company granted to GRM a second lien priority security interest in all of the Company’s assets subject only to liens existing on the original issue date in favor of GRM under the GR Note. Subject to certain limited exceptions, any future debt financing by the Company must be approved by GRM and in all cases must be subordinate to the Credit Facility with respect to both terms of payment and priority.

The Company recorded interest expense of $39,230 for the year ended December 31, 2010, which was added to the principal amount of the Credit Facility. The Credit Facility was amended subsequent to December 31, 2010 and the maturity date of the Credit Facility was amended to March 31, 2012. As a result, borrowings under the Credit Facility have been classified as long-term as of December 31, 2010. See Note 10 below.

Convertible notes payable consist of the following:

	December 31, 2010			December 31, 2009
2009 8% Convertible Notes	$	-		$	2,214,000
GR Note		5,541,183			-
Credit Facility		5,039,230			-
Unamortized discount		(755,357	)		(621,000	)
Convertible notes payable, net	$	9,825,056		$	1,593,000

F-25

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 7 - CAPITAL LEASE OBLIGATIONS

The Company leases certain furniture and other equipment under capital leases through October 2013 at implicit rates ranging from 6.7% to 19.4%. The following is a schedule by fiscal years of the future minimum lease payments under these capital leases together with the present value of the net minimum lease payments at December 31, 2010:

2011	$	163,819
2012		140,818
2013		44,584
Total minimum lease payments		349,221

Less amount representing interest		(43,215	)

Present value of minimum capitalized payments		306,006
Less current portion		(137,435	)
Long-term capital lease obligations	$	168,572

Property and equipment included $520,756 and $105,924 and accumulated depreciation included $139,150 and $75,064 acquired through capital leases as of December 31, 2010 and 2009, respectively. Depreciation expense of $64,086 and $18,013 is included in the total depreciation expense for the years ended December 31, 2010 and 2009, respectively. Interest expense under these leases were $19,752 and $3,979 for the years ended December 31, 2010 and 2009, respectively.

NOTE 8 - RELATED PARTY TRANSACTIONS

Unionway International, LLC, an entity controlled by Bing Liu, a former officer and director, provided software development services to the Company. During the years ended December 31, 2010 and 2009, the Company paid Unionway International, LLC $0 and $49,500, respectively. Mr. Liu is on the Company’s advisory board as of the date of this filing.

The Company purchased promotional items with the Company’s name and logo on them from VK Productions, an entity controlled by Mr. Guseinov’s spouse. During the years ended December 31, 2010 and 2009, the Company paid VK Productions $31,676 and $10,950, respectively.

On March 24, 2009, the Company entered into a Media and Marketing Services Agreement with GRM as more fully described in Note 5 above. Pursuant to the agreement, GRM will provide direct response media campaigns, including radio and television direct response commercials, to promote the Company’s products and services and will purchase media time on the Company’s behalf. As compensation for the services the Company issued warrants to GRM. See Note 5 for a detailed description of all warrants issued to GRM and the vesting of those warrants. The Media and Marketing Services Agreement was amended on October 15, 2010 to add a monthly creative management fee of $75,000 as all of the warrants issued to GRM had vested. The Company paid GRM $191,129 in creative management fees for the year ended December 31, 2010.

In addition, GRM invoiced the Company $422,573 and $91,867 for the years ended December 31, 2010 and 2009 for their overhead expense reimbursement on media costs incurred by GRM pursuant to the Media Agreement.

On June 23, 2009, the Company appointed a representative of GRM to the Company’s board of directors pursuant to the Media and Marketing Services Agreement. On October 22, 2010, the Company and GRM entered into a Third Amendment to the Media and Marketing Services Agreement (“the Third Amendment”), effective as of October 15, 2010. Pursuant to the Third Amendment, GRM has the right to appoint one observer to the board of directors at any time when there is no GRM director on the board of directors. Effective October 25, 2010, the GRM representative to the Company’s board of directors resigned and GRM appointed an observer.

On April 1, 2010, the Company and GRM entered into a License Agreement (the “License Agreement”) whereby the Company granted to GRM an exclusive royalty-bearing license to market, sell and distribute, in the United States through retail channels of distribution (such as retail stores, online retail storefronts, kiosks, counters and other similar retail channels) and television shopping channels (such as QVC and Home Shopping Network), and in certain foreign countries through retail channels, television shopping channels, direct response television and radio, and Internet websites associated with such marketing channels (other than www.cyberdefender.com), the Company’s line of antivirus and Internet security products or services (the “License”).

In consideration of the license granted to GRM in the License Agreement, GRM will pay royalties to the Company on a product-by-product basis for each annual subscription and each annual renewal by end users of the products covered by the License Agreement. Upon the achievement of certain milestones or conditions in the License Agreement, GRM will make annual advances of royalties to the Company in the amount of $250,000 per year. If GRM fails to pay an annual advance when due, and if certain other conditions are met, the License shall become non-exclusive. The Company did not record any revenue under the License Agreement in 2010.

F-26

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 8 - RELATED PARTY TRANSACTIONS

The License Agreement provides that GRM and the Company will share costs associated with localizing products and related material to comport to the language, laws and/or customs of foreign countries, subject to certain caps on GRM’s expenses with respect to such localization efforts.

Under the License Agreement, the Company will provide customer service and all product and technical support services to end users of the products in the United States and will retain all revenue from such services. Additionally, with respect to each foreign country in which GRM markets the products, the Company will have the right to provide customer service and all product and technical support services to end users of the products in such foreign country.

The License Agreement also provides that, after certain conditions are met, the Company has the right to buy back and terminate the License (and the related rights of GRM) as it relates to the territory of United States (the “Domestic Buy-Out Right”) and/or to the collective territories outside of the United States (the “International Buy-Out Right”). The price to be paid by the Company in connection with the Domestic Buy-Out Right or International Buy-Out Right, as applicable, will be based on a combination of factors, including (i) the annualized gross revenue earned by GRM in connection with the sale and distribution of products in the applicable territory being “bought out” by the Company (the “Annualized Gross Revenue”), (ii) the enterprise value of the Company, (iii) the gross revenue of the Company for the 12 months preceding its exercise of such buy-out right and/or (iv) the fair market value of GRM’s rights under the License Agreement (with respect to the territory being “bought out” by the Company). In no case, however, will the buy-out price be less than (a) 1.5 times the Annualized Gross Revenue, if the applicable buy-out right is exercised within one year of such right becoming exercisable, or (b) 3.0 times the Annualized Gross Revenue, if the applicable buy-out right is exercised at any time after the one-year anniversary of such right becoming exercisable. The buy-out price will be payable in cash or in shares of the Company’s common stock, or any combination thereof, at GRM’s discretion.

The License Agreement may be terminated by mutual consent of the parties. The License Agreement may also be terminated by either party upon a default of the other party under the License Agreement that remains uncured for 30 days following notice of such default. Additionally, GRM may terminate the License Agreement at any time for convenience, provided that GRM may not market any antivirus or Internet security products or services that compete with the Company’s products or services in the distribution channels covered by the License Agreement for one year following such a termination for convenience. On October 22, 2010, the Company and GRM entered into a First Amendment to the License Agreement (“the First Amendment”), effective as of October 15, 2010. Pursuant to the First Amendment, the royalties payable in Schedule D to the License Agreement were amended and GRM was provided the one time right to cause the eighteen months cutoff date (to which reference is made in the definition of the International Roll-Out Date) to be delayed for a period of up to 12 months in the event that GRM elects to delay its marketing of the products in the International Territory for legitimate business reasons, including, without limitation, delays in the development of the required processes, systems or other aspects of GRM’s business.

See Note 6 for a detailed description of the GR Note and Revolving Credit Facility. See Note 10 for subsequent events related to GRM.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Royalty Agreement

On July 24, 2009, the Company entered into a licensing agreement with Wiley Publishing, Inc., owner of the For Dummies® trademark, for use of the For Dummies® trademark in connection with the manufacture, development, operation, sale, distribution and promotion of the Company’s products. The term of the agreement is five years with an option for the Company to renew for an additional five years provided that the Company has paid to Wiley a minimum royalty of $2,000,000 during the initial term of the agreement. The Company paid a $100,000 non-refundable royalty advance that is recorded in prepaid expenses on the accompanying balance sheet as of December 31, 2010 and 2009.

Operating Leases

The Company's primary offices are in Los Angeles, California. The Company entered into a lease on October 19, 2007 which commenced on March 24, 2008 for approximately 4,742 rentable square feet of office space with a term of sixty-two months. On October 9, 2009, the Company entered into a second amendment of its lease with its current landlord to relocate and to occupy approximately 16,000 square feet in the building to accommodate growth. The lease calls for a base monthly rent of $35,060 with annual increases of 3% plus common area expenses with a term of ten years. The Company’s rent on its original space was abated beginning July 1, 2009 and the abatement continues on the new space for a period of fourteen (14) months from the date the Company began to occupy the new space, which was February 1, 2010, as long as the Company abides by all the terms and conditions of the lease and if no event of default occurs. Rent expense (including any rent abatements or escalation charges) is recognized on a straight-line basis from the date the Company takes possession of the property to the end of the lease term. In the event the Company fails to abide by all the terms and conditions of the lease or an event of default occurs the Company shall reimburse the landlord for the abated rent along with interest. On August 9, 2010, the Company entered into a third amendment to the lease for the Company’s premises. Pursuant to the third amendment, the Company will occupy an additional 16,000 square feet in the building to accommodate growth. The third amendment requires a base monthly rent upon occupancy of $35,060 for the additional space, making the total base monthly rent $70,120, with annual increases of 3%. The Company began to occupy the additional space on December 1, 2010. The third amendment provides for six months of rent abatement on the additional space as long as the Company occupies the space for the full lease term. In the event the Company fails to abide by all the terms and conditions of the lease or an event of default occurs the Company shall reimburse the landlord for the abated rent along with interest. Aside from the monthly rent, the Company is required to pay its share of common operating expenses.

F-27

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)

The Company also leases equipment under operating leases that expire at various dates through 2013.

As of December 31, 2010, the Company's future minimum lease payments required under the operating leases with initial or remaining terms in excess of one year are as follows:

Years Ending December 31,
2011	$	724,051
2012		889,973
2013		909,649
2014		935,542
2015		963,608
Thereafter		4,198,061
Total	$	8,620,884

Total rent expense for the years ended December 31, 2010 and 2009 was $403,976 and $155,288, respectively, which is included in general and administrative expense.

Employment Agreements

On April 26, 2010 the Company entered into an Amended and Restated Key Executive Employment Agreement with each of Gary Guseinov, the Company’s Chief Executive Officer, Kevin Harris, the Company’s Chief Financial Officer, and Igor Barash, the Company’s Chief Information Officer.

Amended and Restated Key Executive Employment Agreement with Gary Guseinov (the “Guseinov Agreement”)

The Guseinov Agreement has a term of three years commencing as of January 1, 2010 and will renew for successive one-year periods if not terminated sooner in accordance with its terms. The Company will pay Mr. Guseinov an annual base salary of $281,250 plus certain reimbursable expenses. The Company will review Mr. Guseinov’s base salary every six months and the Board may in its discretion increase Mr. Guseinov’s base salary at such intervals without amendment or modification of the Guseinov Agreement. Mr. Guseinov will be entitled to participate in any incentive bonus compensation plan as the Board may adopt from time to time; provided that Mr. Guseinov may not receive more than 50% of his base salary for any twelve-month period. The Company will provide, at its cost, at least $3,000,000 in key man life insurance on Mr. Guseinov’s life during the term of the Guseinov Agreement and Mr. Guseinov will have the right to designate the beneficiary of $1,000,000 of the policy or policies, and the Company will be the beneficiary of $2,000,000 of the policy or policies. If the Company terminates Mr. Guseinov’s employment without cause during the term of the Guseinov Agreement, or takes actions that constitute constructive termination, then Mr. Guseinov will be entitled to accrued but unpaid salary, earned and pro rata bonus compensation, full vesting of all unvested stock and stock options, vested benefits under the Company’s employee benefit plans, continuing payment of Mr. Guseinov’s base salary in effect at the time of termination for the greater of nine months following the date of termination or the balance of the then applicable term and continuing coverage of Mr. Guseinov, his spouse and children, if any, at the Company’s expense, under any health and dental insurance plans that covered Mr. Guseinov immediately prior to his termination, for a period of six months following the date of termination.

Amended and Restated Key Executive Employment Agreement with Kevin Harris (the “Harris Agreement”)

The Harris Agreement has a term of three years commencing as of January 1, 2010 and will renew for successive one-year periods if not terminated sooner in accordance with its terms. The Company will pay Mr. Harris an annual base salary of $237,500 plus certain reimbursable expenses. The Company will review Mr. Harris’s base salary every six months and the Board may in its discretion increase Mr. Harris’s base salary at such intervals without amendment or modification of the Harris Agreement. Mr. Harris shall retain his existing stock options for 400,000 shares exercisable for $1.00 per share granted pursuant to the terms of his original Key Executive Employment Agreement with the Company (which includes bonus options for 2009 and 2010), of which 325,000 option shares are deemed fully vested and the remaining 75,000 option shares will vest in three equal installments on June 30, 2010, September 30, 2010 and December 31, 2010. Mr. Harris will receive an additional option to purchase 300,000 shares of common stock at an exercise price of $4.04 per share. Mr. Harris will be entitled to participate in any incentive bonus compensation plan as the Board may adopt from time to time; provided that Mr. Harris may not receive more than 40% of his base salary for any twelve-month period. The Company will provide, at its cost, at least $1,000,000 in term life insurance on Mr. Harris’s life during the term of the Harris Agreement and Mr. Harris will be the beneficiary of 100% of such policy or policies. If the Company terminates Mr. Harris’s employment without cause during the term of the Harris Agreement, or takes actions that constitute constructive termination, then Mr. Harris will be entitled to accrued but unpaid salary, earned and pro rata bonus compensation, full vesting of all unvested stock and stock options, vested benefits under the Company’s employee benefit plans, continuing payment of Mr. Harris’s base salary in effect at the time of termination for the greater of nine months following the date of termination or the balance of the then applicable term and continuing coverage of Mr. Harris, his spouse and children, if any, at the Company’s expense, under any health and dental insurance plans that covered Mr. Harris immediately prior to his termination, for a period of six months following the date of termination.

F-28

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

Amended and Restated Key Executive Employment Agreement with Igor Barash (the “Barash Agreement”)

The Barash Agreement has a term of three years commencing as of January 1, 2010 and will renew for successive one-year periods if not terminated sooner in accordance with its terms. The Company will pay Mr. Barash an annual base salary of $218,750 plus certain reimbursable expenses. The Company will review Mr. Barash’s base salary every six months and the Board may in its discretion increase Mr. Barash’s base salary at such intervals without amendment or modification of the Barash Agreement. The unvested portion of Mr. Barash’s existing stock option for 150,000 shares exercisable for $1.00 per share, granted on or about July 1, 2008, will immediately vest and Mr. Barash will receive an additional option to purchase 50,000 shares of common stock at an exercise price of $4.04 per share. Mr. Barash will be entitled to participate in any incentive bonus compensation plan as the Board may adopt from time to time; provided that Mr. Barash may not receive more than 30% of his base salary for any twelve-month period. The Company will provide, at its cost, at least $500,000 in term life insurance on Mr. Barash’s life during the term of the Barash Agreement and Mr. Barash will be the beneficiary of 100% of such policy or policies. If the Company terminates Mr. Barash’s employment without cause during the term of the Barash Agreement, or takes actions that constitute constructive termination, then Mr. Barash will be entitled to accrued but unpaid salary, earned and pro rata bonus compensation, full vesting of all unvested stock and stock options, vested benefits under the Company’s employee benefit plans, continuing payment of Mr. Barash’s base salary in effect at the time of termination for the greater of six months following the date of termination or the balance of the then applicable term and continuing coverage of Mr. Barash, his spouse and children, if any, at the Company’s expense, under any health and dental insurance plans that covered Mr. Barash immediately prior to his termination, for a period of six months following the date of termination.

Litigation

In the ordinary course of business, the Company faces various claims brought by third parties including class action suits and the Company may, from time to time, make claims or take legal actions to assert its rights, including intellectual property rights as well as claims relating to employment and the safety or efficacy of its products. Any of these claims could subject the Company to costly litigation and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, the Company’s insurance carriers may deny coverage or the Company’s policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on the Company’s operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage the Company’s reputation and business. Management believes the outcome of currently pending claims and lawsuits will not likely have a material effect on the Company’s operations or financial position.

Guarantees and Indemnities

During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company hedges some of the risk associated with these potential obligations by carrying insurance. Historically, the Company has not been obligated to make significant payments for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying condensed balance sheets.

The Company has entered into, and will likely enter into in the future, indemnification agreements with the individuals who serve as its officers and directors. Pursuant to these agreements, the Company will indemnify officers and directors who are made parties to, or threatened to be made parties to, any proceeding by reason of the fact that they are or were officers or directors of the Company, or are or were serving at the request of the Company as a director, officer, employee, or agent of another entity. The agreements require the Company to indemnify its officers and directors against all expenses, judgments, fines and penalties actually and reasonably incurred by them in connection with the defense or settlement of any such proceeding, subject to the terms and conditions of the agreements.

F-29

CYBERDEFENDER CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

NOTE 10 – SUBSEQUENT EVENTS

Effective as of February 25, 2011, the Company and GRM entered into a Loan Modification Agreement (the “Loan Modification Agreement”) pursuant to which the Company and GRM agreed to convert the existing indebtedness evidenced by the Credit Facility to indebtedness that is convertible into shares of the Company’s common stock. Pursuant to the Loan Modification Agreement, the Company and GRM agreed: (i) to amend and restate the Credit Facility on the terms and conditions of an Amended and Restated Nine Percent (9%) Secured Convertible Promissory Note made as of February 25, 2011, and due March 31, 2012 (the “Amended and Restated Note”); (ii) that the entire outstanding indebtedness under the Credit Facility will be repaid in accordance with the terms and conditions of the Amended and Restated Note; and (iii) that the Credit Agreement is replaced and superseded in its entirety by the Loan Modification Agreement.

The principal amount of the Amended and Restated Note is $5,700,734. Simple interest on the aggregate unconverted and outstanding principal amount of the Amended and Restated Note at the rate of 9% per annum is payable by the Company to GRM on the first day of each calendar quarter during the term of the Amended and Restated Note. At any time, and until it is paid in full, the Amended and Restated Note may be converted by GRM to shares of the Company’s common stock, in whole or in part and from time to time. The Conversion Price is the lower of $2.20 or a price which is equal to the lowest Volume Weighted Average Price (as that term is defined in the Amended and Restated Note) for any five consecutive Trading Day (as that term is defined in the Amended and Restated Note) period ending on or prior to March 31, 2011, and subject to adjustment as set forth in the Amended and Restated Note. Based on the Company’s stock price through the date of this report, the Conversion Price of the Amended and Restated Note will decrease. As a result, the Company will record a discount on the Amended and Restated Note due to this beneficial conversion feature. The Company expects that discount to be approximately $1.0 million that will be recognized in interest expense – related party during the period April 1, 2011 to the debt maturity date.

Pursuant to the Security Agreement, the Company granted to GRM a second lien priority security interest in all of the Company’s assets subject only to liens existing on the original issue date in favor of GRM under: (i) the 9% Secured Convertible Promissory Note, dated March 31, 2010, in the original amount of $5,300,000, issued by the Company in favor of GRM (the “Senior Promissory Note”); (ii) the Loan and Securities Purchase Agreement, dated as of March 31, 2010, by and between the Company and GRM (the “Loan and Securities Purchase Agreement”); and (iii) the Security Agreement, dated as of March 31, 2010, executed by the Company in favor of GRM (collectively, the “Senior Loan Documents”). The Amended and Restated Note provides that the Security Agreement and the liens created under the Security Agreement remain in full force and effect and secure the Company’s obligations under the Amended and Restated Note, and that the Company’s indebtedness and obligations to GRM under the Amended and Restated Note are subordinated to the Company’s indebtedness to GRM under the Senior Loan Documents.

Upon an Event of Default (as that term is defined in the Amended and Restated Note), the interest rate on the outstanding principal balance and all other amounts due and owing under the Amended and Restated Note will increase to 15% per annum and the full principal amount, together with all accrued but unpaid interest, is due and payable in cash.

The Loan Modification Agreement provides that, upon an Event of Default (as that term is defined in the Loan Modification Agreement) GRM also has the right, but not the obligation, in GRM’s sole discretion and at the Company’s sole cost and expense, but subject to approval by a majority of the independent directors of the Company’s Board of Directors, which approval will not be withheld unreasonably, to require the Company to retain a consultant or hire a Company executive who would be senior to the Company’s Chief Executive Officer and Chief Financial Officer (the “Senior Business Advisor”). The Senior Business Advisor would oversee the management and operations of the Company, subject to the direction of the Company’s Board of Directors (the “Board”). The Senior Business Advisor would report directly to the Board, and the Company’s existing senior management would report to the Senior Business Advisor during the tenure of the Senior Business Advisor, which would be only for the duration of the Event of Default.

In connection with the matters described above, effective as of February 25, 2011, the Company and GRM entered into a second amendment to the Senior Promissory Note (the “Second Amendment”). Pursuant to the Second Amendment, Section 1 of the Senior Promissory Note was amended and restated to provide that the Original Conversion Price (as that term is defined in the Senior Promissory Note) shall be $2.20.

In connection with the matters described above, effective as of February 25, 2011, the Company and GRM entered into a limited waiver of the provisions of Section 4.13 of the Loan and Securities Purchase Agreement (the “Waiver”). Pursuant to the Waiver, GRM agreed to a one-time waiver of its right to participate in a Qualified Common Stock Offering (as that term is defined in the Waiver) that closes on or before June 30, 2011.

In connection with the matters described above, effective as of February 25, 2011, the Company and GRM entered into a Fifth Amendment to the Media Services Agreement (the “Fifth Amendment”) which amends and restates Section 2.2 of the Media Services Agreement to provide that the Company shall reimburse GRM for certain Media Costs (as that term is defined in the Media Services Agreement) no later than 30 days following the Company’s receipt of the applicable GRM invoice.

During January 2011, certain holders of warrants to purchase shares of the Company’s common stock exercised their warrants for cash. The holders exercised warrants for the purchase of 98,875 shares of common stock at exercise prices from $1.00 to $1.25. The Company received net proceeds of $109,784, net of fees of $5,778.

During March 2011, the Company offered certain holders of warrants to purchase shares of the Company’s common stock a discount on their exercise price if they exercised their warrants for cash. The holders exercised warrants for the purchase of 553,356 shares of common stock at exercise prices from $0.75 to $0.94. The original exercise prices ranged from $1.00 to $1.25. The Company received net proceeds of $436,072, net of fees $22,951.

F-30

CYBERDEFENDER CORP - FORM S-1/A - May 5, 2011

Attached files

CYBERDEFENDER CORP Reports