**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**










**FORM
      10-KSB/A**


**(Amendment
      No. 1)**




(Mark
      One)




**þ** **** ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the
      fiscal year ended December 31, 2007





OR





 ̈ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934





Commission
      file number: 000-50561




**CITY
      LOAN, INC.**


**(f/k/a
      Enigma Software Group, Inc.)**


(Name
      of
      Small Business Issuer in Its Charter)




**Delaware**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            
            **20-2675930**
              (I.R.S.
                Employer
              Identification
                No.)3431
                Cherry Avenue
              Long
                Beach, CA
            
            90807(Address
                of principal executive offices)
            
            (Zip
                Code)




(800)
      398-6657


(Issuer's
      Telephone Number)




Securities
      registered under Section 12(b) of the Exchange Act: None




Securities
      registered under Section 12(g) of the Exchange Act:




Title
                of Each Class
              Common
                Stock, $.001 Par Value




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.  ̈





Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes þ No  ̈





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of the registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. þ





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


Yes  ̈ No þ




State
      issuer’s revenues for its most recent fiscal year. $3,413,967




State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked prices of such common equity, as of a
      specified date within the past 60 days. $95,811 as of March 26,
      2008.




**APPLICABLE
      ONLY TO CORPORATE REGISTRANTS**




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date. 6,387,372 shares
      of
      Common Stock, $0.001 par value, outstanding as of March 26, 2008.




Transitional
      Small Business Disclosure Format (Check One): Yes  ̈ No þ









**ENIGMA
      SOFTWARE GROUP, INC.**




**TABLE
      OF CONTENTS TO ANNUAL REPORT**


**ON
      FORM 10-KSB**


**YEAR
      ENDED DECEMBER 31, 2007**




**PART
                  I****Item 1.**
              **Description
                  of Business**
              
              **3****Item 2.**
              **Description
                  of Property**
              
              **5****Item 3.**
              **Legal
                  Proceedings**
              
              **5****Item 4.**
              **Submission
                  of Matters to a Vote of Security Holders**
              
              **5**




**PART
                  II****Item 5.**
              **Market
                  for Common Equity, Related Stockholder Matters and Small Business
                  Issuer
                  Purchases of Equity Securities**
              
              **6****Item 6.**
              **Management’s
                  Discussion and Analysis or Plan of Operation**
              
              **7****Item 7.**
              **Financial
                  Statements**
              
              **23****Item 8.**
              **Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosure**
              
              **23****Item 8A.**
              **Controls
                  and Procedures**
              
              **23****Item 8B.**
              **Other
                  Information**
              
              **24**




**PART
                  III****Item 9.**
              **Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16 (a) of the Exchange Act**
              
              **25****Item 10.**
              **Executive
                  Compensation**
              
              **27****Item
                11.**
              **Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters**
              
              **30****Item 12.**
              **Certain
                  Relationships and Related Transactions, and Director
                  Independence**
              
              **31****Item 13.**
              **Exhibits**
              
              **31****Item 14.**
              **Principal
                  Accountant Fees and Services**
              
              **31**




2


**Explanatory
        Note**
 
 This
        Annual Report on Form 10-KSB/A is filed as an amendment to the Annual Report
        on
        Form 10-KSB for the year ended December 31, 2007 filed by City Loan, Inc.
        (f/k/a
        Enigma Software Group, Inc., the “Company”) on March 28, 2008 (the “Original
        10-KSB”). The Company is amending Item 8A, Controls and Procedures, to include
        Management’s Report on Internal Control over Financial Reporting, to provide the
        required disclosures under provisions of Item 308 in Regulation S-B and to
        reflect certain revisions to the certifications contained in Exhibits 31.1
        and
        31.2.
 
 This
        Amendment to the Annual Report on Form 10-KSB of the Company has not been
        updated or modified in any other way and speaks only as of the date of the
        original filing, March 28, 2008.


**PART
      I**





**Item
      1. Description of Business.**





Enigma
      Software Group, Inc. (“Enigma” or the “Company”), is a Delaware corporation,
      headquartered in Connecticut, that was formed in 2005 and is the surviving
      corporation of a reverse takeover with Maxi Group, Inc. (“Maxi”); however, the
      business of the Company actually commenced in 1999. The Company is a developer
      of security software products designed to give customers information and control
      over the programs installed on their computers in an automated and easy-to-use
      way, thereby enhancing transparency and user-control. The Company sells and
      distributes its software products, which are downloadable, over the Internet.





Maxi,
      which was a non-operating public company, was incorporated on June 17, 1986
      in the State of Nevada. On December 29, 2004, Maxi entered into a Share
      Exchange Agreement (the "Acquisition Agreement") with Adorons.com, Inc.
      (formerly known as Enigma Software Group, Inc.) a closely-held, Delaware
      corporation which commenced operations in 1999 (“Adorons”). Adorons was a
      developer of an Internet-based search network and downloadable security software
      products designed to give customers instant access to information on the web
      and
      control over the programs installed on their computers in an automated and
      easy-to-use way, thereby enhancing transparency and user-control.





Pursuant
      to the terms of the Acquisition Agreement, which closed on February 16,
      2005, Maxi acquired substantially all of the issued and outstanding capital
      stock of Adorons, in exchange for 14,158,953 newly issued shares of Maxi's
      common stock (the "Exchange"). In addition, Maxi acquired for $50,000,
      97,633,798 shares of its own common stock from certain of its stockholders
      prior
      to the Exchange, which shares were canceled on February 16, 2005. Three
      stockholders of Adorons, who held 151,858 shares of common stock, did not
      exchange their shares for Maxi common stock at the time of the Exchange.
      However, on April 8, 2005, these stockholders did exchange all of their
      shares for 429,305 shares of Maxi common stock. For reporting purposes, these
      shares are considered to have been exchanged as of February 16, 2005.





The
      14,588,258 shares of common stock represented approximately 89.81% of the
      ownership interests in Maxi. The Exchange, which resulted in the stockholders
      of
      Adorons obtaining control of Maxi, represented a recapitalization of Maxi,
      or a
      "reverse takeover" rather than a business combination. As a non-operating
      company, the assets and liabilities of Maxi were not material to the reverse
      takeover. For accounting purposes, Adorons was considered to be an acquirer
      in
      the reverse acquisition transaction and, consequently, the financial statements
      are the historical financial statements of Adorons and the reverse takeover
      has
      been treated as a recapitalization of Adorons. Additionally, on
      February 16, 2005, Maxi issued 135,000 shares of common stock to a related
      party for the assumption of certain liabilities that amounted to approximately
      $46,000.





On
      April 14, 2005, Maxi completed a reincorporation merger to the state of
      Delaware and changed its name to Enigma Software Group, Inc. On May 17,
      2005, Adorons merged into its parent company, Enigma Software Group, Inc.,
      and
      ceased to exist as a separate company. Henceforth, Enigma Software Group, Inc.
      (“Enigma”) is defined as the Company.





The
      Company presently employs eight persons on a full-time basis.





***Principal
      Product and its Market:***





The
      Company's principal product SpyHunter® (“SpyHunter”) is an in-house developed
      software utility program that is used to scan and remove Spyware and Adware
      from
      customers’ computers and is marketed under the name SpyHunter. The Company
      estimates that during the years ended December 31, 2007 and 2006, its
      expenditures for research and development related to SpyHunter and other
      products amounted to $105,000 and $138,000, respectvely.




3





Spyware
      and other parasitic programs are installed on computers without the computer
      owners' knowledge or consent. Spyware programs allow their makers to monitor
      Internet browsing patterns, inundate computers with "pop-up" ads, transmit
      sensitive user data (including personal and financial information), and more.
      Many people are familiar with freeware, shareware, cookies, media players,
      interactive content and file sharing, but what they may not realize is that
      some
      of the aforementioned may contain hidden code or components that allow the
      developers of these applications and tools to collect and disseminate
      information about those using them.





To
      protect our customers from Spyware and other threats, SpyHunter scans the files
      on a computer's hard drive, as well as Windows registry settings. SpyHunter
      then
      compares these files against our spyware database. SpyHunter's database consists
      of complete component profiles (files, registry settings, MD5 file signatures,
      and other diagnostic information) of various adware applications, spyware
      programs, backdoor trojans, browser hijackers, tracking cookies, worms,
      keyloggers, etc. that commonly afflict computers connected to the Internet.
      If
      SpyHunter's scanning process is unable to detect a suspicious threat, the
      customer has the option to rapidly generate a diagnostic report. SpyHunter
      will
      then transmit this information directly to our spyware helpdesk database, which
      is supervised by our support department. Using this updated information, the
      customer is now able to successfully detect and remove the parasitic program
      which is compromising their system.





Spyware
      makers consistently update and alter their programs to avoid detection by
      anti-Spyware utilities like SpyHunter. For this reason, SpyHunter's spyware
      database is updated regularly using the collective diagnostic reports generated
      through our user base, coupled with the spyware component profiles assembled
      through our technical team's active research.





The
      Company operates in an extremely competitive sector of the software development
      industry. The market for our products and services is dynamic and subject to
      frequent technological changes. The intensity of this competition and the pace
      of change have steadily increased as customers have become more educated as
      to
      the threats of spyware, adware and malware. A number of companies offer freeware
      products that provide some of the functionality of our products, and as a
      result, our products have been affected by the availability of such freeware
      products, making it difficult for us to maintain our competitive position.
      Many
      of our competitors have significantly greater financial, marketing, service,
      support, technical and other resources available to them. Competitors with
      greater resources are able to undertake more extensive marketing campaigns,
      adopt more aggressive pricing policies and make more attractive offers to
      potential employees, distributors, resellers or other strategic partners. We
      expect additional competition from other established and emerging companies
      as
      the market for our products continues to develop.




***Distribution
      Methods of the Product:***





SpyHunter
      is downloaded over the Internet upon authorization of the customer’s credit card
      issuer. It is not sold in retail stores, but copies may be ordered on CD format
      from the Company’s website. Most users have historically found Enigma’s websites
      through advertisements purchased by the Company from Internet advertising
      companies and other advertising networks and search engines. Trial versions
      of
      SpyHunter are also available on download sites such as download.com and
      tucows.com. The Company also operates an affiliate program where other website
      operators can become resellers of Enigma products on a pay-for-performance
      basis. Most of the Company’s marketing agreements are short term purchase orders
      that either party can terminate, while other marketing is based on automated
      auctions for search engine advertising. None of the Company’s marketing
      agreements generate significant revenue for the Company.




4





***Trademarks
      and Patents:***





SpyHunter®
      (“SpyHunter”), is the Company’s owned trademark, which was registered in the
      United States of America on May 16, 2006. The Company has no other trademarks,
      expect for “Enigma Software Group” and “Applications for the Masses”, each of
      which is a Common Law Trademark. The Company has no patents.





**Item
      2. Description of Property.**





At
      December 31, 2007 and 2006, the Company had no significant fixed assets,
      having sold some of its excess assets during the year ended December 31,
      2005, as employees were terminated, and having written down in that year, any
      remaining assets to a negligible value due to an impairment loss resulting
      from
      the Company vacating its office space at 17 State Street, New York, New
      York.  The
      lease
      for that office space, which was entered into during 2004, was an operating
      lease for 6,236 square feet of office space requiring monthly rent of $16,629
      and which was due to expire on November 30, 2007. In early 2006, the
      Company moved its offices to Stamford CT, where until mid 2007 it occupied
      space
      within an office suite complex, for which there was no lease. Rather the Company
      entered into an office service agreement with the operator of the office suite,
      giving the Company a license to use designated offices as well as business
      center facilities and services.





The
      office services agreement covered services, such as telephone, heat,
      electricity, furniture, lighting, coffee, water, restroom facilities, reception,
      conference facilities, mailbox, parking and office cleaning. The office services
      agreement was in effect until August 31, 2007, before which date the
      Company vacated the premises. On February 27, 2007, the Company signed a 15
      month lease at a nearby facility at a lower cost, effective March 1, 2007.
      The
      Company presently occupies this space under a lease that expires in May 2008
      and
      which the Company believes will be renewed for an additional 12 month period
      at
      that time.





The
      Company believes that this office space will provide sufficient space for its
      operations in the near future.





The
      Company does not have a policy with respect to investments in (i) real estate
      or
      interests in real estate, (ii) investments in real estate mortgages, or (iii)
      securities of or interests in persons primarily engaged in real estate
      activities, as the Company does not invest in such assets in the ordinary course
      of its business.





**Item
      3. Legal Proceedings.**





From
      time
      to time the Company is involved in routine legal matters incidental to its
      business. In the opinion of management, the ultimate resolution of such matters
      will not have a material adverse effect on its financial position, results
      of
      operations or liquidity .





**Item
      4. Submission of Matters to a Vote of Security Holders** **.**





No
      matter
      was submitted to a vote of the security holders during the fourth quarter of
      the
      fiscal year covered by this report.




5




**PART
      II**




**Item
              5.**
            **Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity
                Securities.**




***Market
      Information***




As
      of
      March 26, 2008, the most recent trading day on which shares of the Company
      were
      traded, the Company’s shares of common stock, par value $0.001 per share (the
“Common Stock”) were quoted on the Nasdaq Over the Counter Bulletin Board (the
“OTCBB”), under the trading symbol ENGM, at the closing bid price of $0.015 per
      share.


.


The
      following table gives the range of high and low bid prices for the Company’s
      Common Stock, during the years ended December 31, 2006 and
      2007:





**Fiscal
                2006***
            
            **Low**
            
            ******High**First
                Quarter
            
            $
            0.06
            
            $
            0.25Second
                Quarter
            
            $
            0.05
            
            $
            0.09Third
                Quarter
            
            $
            0.04
            
            $
            0.07Fourth
                Quarter
            
            $
            0.02
            
            $
            0.15**Fiscal
                2007***First
                Quarter
            
            $
            0.05
            
            $
            0.59Second
                Quarter
            
            $
            0.20
            
            $
            0.65Third
                Quarter
            
            $
            0.13
            
            $
            0.40Fourth
                Quarter
            
            $
            0.02
            
            $
            0.25





* The
      high
      and low prices listed have been rounded up to the next highest two decimal
      places.





The
      market price of our Common Stock is subject to significant fluctuations in
      response to variations in our quarterly operating results, general trends in
      the
      market for the products we distribute, and other factors, over many of which
      we
      have little or no control. Broad market fluctuations, as well as general
      economic, business and political conditions, may adversely affect the market
      for
      our Common Stock, regardless of our actual or projected performance.




***Holders***




Our
      common shares are not widely held. As of March 24, 2008, there were 27 holders
      of record of the Company’s Common Stock. Of the Company’s 6,387,372 shares
      outstanding, 4,728,676 or approximately 74% were held in street name. For those
      shares held in street name, there were 214 NOBO’s, Non-Objecting Beneficial
      Owners, as of March 5, 2008, accounting for in excess of 3.4 million
      shares.




***Dividends***




The
      Company has not declared any cash dividends within the past two years on its
      Common Stock. The Company does not anticipate or contemplate paying dividends
      in
      the foreseeable future. It is the present intention of management to utilize
      available funds, if any, for the development of the Company’s business.










***Securities
      Authorized for Issuance Under Equity Compensation
      Plans***




Number
                of securities to
              be
                issued upon exercise of
              outstanding
                options,
              warrants
                and
              rights
            
            Weighted-average
              exercise
                price of
              outstanding
                options,
              warrants
                and
              rights
            
            Number
                of securities remaining
              available
                for future issuance
              under
                equity compensation
              plans
                (excluding
              securities
                reflected in column (a))(a)
            
            (b)
            
            (c)Equity
                compensation plans
              approved
                by security holders
            
            
            8,570,001
            
            $
            0.20
            
            
            429,999Equity
                compensation plans not
              approved
                by security holders
            
            
            none
            
            
            none
            
            
            noneTotal
            
            
            8,570,001
            
            $
            0.20
            
            
            429,999





***Sales
      of Equity Securities***




On
      June
      28, 2006, the Company sold Debentures to Dutchess Private Equities Fund, LP
      and
      Dutchess Private Equities Fund, II, LP (collectively “Dutchess”) in the
      principal amount of One Million dollars ($1,000,000), convertible into shares
      of
      Common Stock of the Company. The issuance and sale of the Debentures is intended
      to be exempt from registration by virtue of Section 4(2) of the 1933 Act and
      the
      provisions of Regulation D thereunder, based on the Company’s belief that the
      offer and sale of the Debentures did not involve a public offering, as all
      of
      the purchasers were “accredited” investors and no general solicitation was
      involved in the offering.





On
      June
      28, 2006, the Company issued 7,433,988 shares of its Preferred Stock to Colorado
      Stark and Alvin Estevez in exchange for 12,052,001 shares of such holders shares
      of the Company’s Common Stock. The issuance of the Preferred Stock is intended
      to be exempt from registration by virtue of Section 4(2) of the 1933 Act and
      the
      provisions of Regulation D thereunder, based on the Company’s belief that the
      issuance of the Preferred Stock did not involve a public offering, as all of
      the
      purchasers were “accredited” investors and no general solicitation was involved
      in the offering.





On
      July
      20, 2007, the Company entered into a new Debenture Agreement (the “New Debenture
      Agreement”) with its secured lender, Dutchess Private Equities Fund, Ltd. as
      successor in interest to Dutchess Private Equities Fund, LP & Dutchess
      Private Equities Fund, II, LP (“Dutchess”) and immediately closed the
      transaction pursuant to which the Company issued secured debentures, convertible
      into shares of common stock of the Company, in the principal amount of five
      hundred thousand dollars ($500,000) (the “New Debentures”). The New Debentures
      bear interest at 12% per annum and are due in July of 2012. Interest only
      payments are due on the New Debentures until their maturity. The New Debentures
      are convertible into shares of common stock of the Company at the lesser of
      seven cents ($.07), or seventy-five percent (75%) of the lowest closing bid
      price of the Company’s common stock during the twenty (20) trading days
      immediately preceding a notice of conversion.





At
      the
      same time, the Company entered into a Warrant Agreement (the “New Warrant
      Agreement” or the “New Warrant”) with Dutchess, whereby the Company issued to
      Dutchess warrants to purchase 25,000,000 shares of the common stock of the
      Company at the exercise price of $0.01 per share of common stock. The term
      of
      the New Warrant is five years and it contains registration rights.





In
      consideration for the issuance of the New Debentures and the New Warrant,
      Dutchess agreed that all liquidated damages due from the Company to Dutchess,
      which were estimated to be approximately $1,000,000 at that time, plus
      additional daily accruals, resulting principally from the Company’s failure to
      have its then recent registration statement on Form SB-2 declared effective
      by
      the Securities and Exchange Commission prior to the deadline stipulated in
      the
      loan documents between the Company and Dutchess, and the inability of the
      Company to make the required loan principal payments resulting from such delay
      in effectiveness, were declared settled.




6





**Item
      6. Management's** **Discussion** **and Analysis or Plan of Operation.**





This Management's **** Discussion
      and Analysis or Plan of Operation (MD&A) contains forward-looking statements that involve known and unknown
      risks, significant 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 those forward-looking statements. You
      can
      identify forward-looking statements by the use of the words “may,” “will,”
“should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “intends,” “potential,” “proposed,” or “continue” or the negative of
      those terms. These statements are only predictions. In evaluating these
      statements, you should specifically consider various factors, including the
      risk
      factors outlined below. These factors may cause our actual results to differ
      materially from any forward-looking statements. Although we believe that the
      exceptions reflected in the forward-looking statements are reasonable, we cannot
      guarantee future results, levels of activity, performance or achievements.
      Therefore, actual results may differ materially and adversely from those
      expressed in any forward-looking statements. We undertake no obligation to
      revise or update publicly any forward-looking statements for any
      reason.




**Risk
      Factors**




Our
      financial condition, business, operation and prospects involve a high degree
      of
      risk. You should carefully read and consider the risks and uncertainties
      described below as well as the other information in this report before deciding
      to invest in our Company. We consider these risks to be significant to your
      decision whether to invest in our Common Stock at this time. If any of the
      following risks actually occur, our business, results of operations and
      financial condition could be seriously harmed, the trading price of our Common
      Stock could decline and you may lose all or part of your
      investment.




**Risks
      Related to Our Business and Industry**





***As
      of December 31, 2007 and 2006, there was substantial doubt about our
      ability to continue as a going concern.***  ***The
      Company may not be able to continue its operations and the financial statements
      do not include any adjustments that might result*** ***from
      the outcome of this uncertainty.***





As
      of
      December 31, 2007 and 2006, the Company’s independent public accounting
      firm issued a “going concern opinion” wherein they stated that the accompanying
      financial statements were prepared assuming the Company will continue as a
      going
      concern. The Company did not generate sufficient cash flows from revenues during
      the years ended December 31, 2007 and 2006 to fund its operations. Also, as
      of December 31, 2007, the Company had negative net working capital of
      approximately $3.7 million. In addition, as discussed in Note O of the *Notes
      to Consolidated Financial Statements* ,
      the
      Company was in default of its debenture agreements. These matters raise
      substantial doubt about the Company’s ability to continue as a going concern.
      The financial statements do not include any adjustments that might result from
      the outcome of this uncertainty.




7




***The
      Company continues to have negative cash flow and could run out of cash in one
      months or less.***




Due
      to
      the default and the recourse rights of the Company’s lender, the Company’s
      working capital resources could be depleted within one month or less. If this
      situation were to occur, the Company would require additional funds of
      approximately $1,700,000 to pay its lender and cure the default. Please refer
      to
      Liquidity and Capital Resources in Management’s Discussion and Analysis of
      Financial Condition and Results of Operations.




***If
      we do not continue to innovate and provide products and services that are useful
      to users, we may not remain competitive, and our revenues and operating results
      could suffer.***




Our
      success depends on providing products and services that people use for a high
      quality Internet experience. Our competitors are constantly developing
      innovations in web search, online advertising and providing information to
      people. As a result, we must continue to invest significant resources in new
      product development in order to introduce new high-quality products and services
      that people will use. If we are unable to predict user preferences or industry
      changes, or if we are unable to modify our products and services on a timely
      basis, we may lose users and advertisers. Our sales will decline also if our
      innovations are not responsive to the needs of our users and advertisers, are
      not appropriately timed with market opportunity, or are not effectively brought
      to market.




***We
      have a material weakness in internal controls due to a limited segregation
      of
      duties, and if we fail to maintain an effective system of internal controls,
      we
      may not be able to accurately report our financial results or prevent fraud.
      As
      a result, current and potential stockholders could lose confidence in our
      financial reporting which could harm the trading price of our
      stock.***




Effective
      internal controls are necessary for us to provide reliable financial reports
      and
      prevent fraud. Inferior internal controls could cause investors to lose
      confidence in our reported financial information, which could have a negative
      effect on the trading price of our stock. With only eight employees at the
      Company, of which only one employee is involved in the financial function full
      time and one employee part-time, there is very limited segregation of duties,
      which the Company has identified as a material weakness in our internal
      controls. However, we have implemented procedures to both limit access to bank
      accounts and to segregate the approval of invoices from disbursements of cash,
      but total segregation of duties is not practicable. As of December 31, 2007,
      the
      Company’s foreign subsidiary, UAB Enigma Software LT, (”UAB Enigma”) had 16
      employees, none of whom are involved in the financial function. UAB Enigma
      uses
      an outside accounting service for recording, processing, summarizing and
      reporting transactions.





***Our
      corporate culture has contributed to our success, and if we cannot maintain
      this
      culture as we grow, our business may be harmed as we might become less
      responsive to the market conditions that affect our
      products.***




We
      believe that a critical contributor to our success has been our corporate
      culture, which we believe fosters innovation, creativity and teamwork. As our
      organization grows, and we are required to implement more complex organizational
      management structures, we may find it increasingly difficult to maintain the
      beneficial aspects of our corporate culture. This could negatively impact our
      future success.




8




***Existing
      or new legislation could expose us to substantial liability, restrict our
      ability to deliver services to our users, limit our ability to grow and cause
      us
      to incur significant expenses in order to comply with such laws and
      regulations.***




There
      are
      a number of emerging initiatives in the computer software industry. One
      example is the Consumer Protection Against Computer Spyware Act that provides
      protection for consumers against certain types of software. The aim of most
      of
      the emerging initiatives is to define which practices in the software industry
      are acceptable, which practices are violations of existing law, and what will
      require new laws. This
      type of legislation could impact us negatively in several ways, primarily
      because it would reduce the proliferation of Spyware, thereby making it more
      difficult to market an anti-Spyware software removal product.





During
      2005, legislation pertaining to Spyware was enacted in 12 states, and is being
      considered in 28 additional states. This type of legislation imposes severe
      penalties for companies who are in the business of distributing and installing
      Spyware. Typically companies will be charged fines ranging from $1,000 to
      $1,000,000 for each instance of installing Spyware. In some states such as
      New
      York, in addition to sharp penalties, there are also criminal charges that
      can
      be brought for installing Spyware.





This
      type
      of legislation could impact our business negatively because it would reduce
      the
      proliferation of Spyware, thereby making it more difficult to market an
      anti-Spyware software removal product .





***Our
      intellectual property rights are valuable, and any inability to protect them
      could reduce the value of our products, services and
      brand.***




The
      technology and software we have developed, which underlie our products and
      services, are very important to us. Our proprietary products are not protected
      by patents. However, SpyHunter is protected as a registered trademark. To
      further protect our intellectual property rights, we license our software
      products and require our customers to enter into license agreements that impose
      restrictions on their ability to use the software or transfer it to other users.
      Additionally, we seek to avoid disclosure of our trade secrets through a number
      of means, including, but not limited to, requiring those persons with access
      to
      our proprietary information to execute confidentiality agreements with us,
      and
      by restricting access to our source code. In addition, we protect our software,
      documentation, templates and other written materials under trademark, trade
      secret and copyright laws. Even with all of these safeguards, there can be
      no
      assurance that such precautions will provide meaningful protection from
      competition or that competitors will not independently be able to develop
      similar technology. The copyright, trademark and trade secret laws, which are
      a
      significant source of protection for our intellectual property, offer only
      limited protection. In addition, legal standards relating to the validity,
      enforceability and scope of protection of intellectual property rights in
      software are uncertain and still evolving, and the future viability or value
      of
      any of our intellectual property rights is uncertain. Effective trademark,
      copyright and trade secret protection may not be available in every country
      in
      which our products are distributed or made available. ** If,
      in
      the future, litigation is necessary to enforce our intellectual property rights,
      to protect our trade secrets, or to determine the validity and scope of the
      proprietary rights of others, such litigation could result in substantial costs
      and diversion of resources and could have a material adverse effect on our
      business, operating results and/or financial condition. As a result, ultimately,
      we may be unable, for financial or other reasons, to enforce our rights under
      the various intellectual property laws described above.




9




***We
      may be subject to intellectual property rights claims in the future, which
      are
      costly to defend, and could require us to pay damages and limit our ability
      to
      use certain technologies in the future.***




The
      Company has not been a party to an intellectual property suit. However, as
      we
      face increasing competition, the possibility of intellectual property rights
      claims against us grows. Our revenues rely significantly on our intellectual
      property and to the extent we become subject to any intellectual property
      claims, they would have a material effect on the Company, and our technologies
      may not be able to withstand third-party claims or rights against their use.
      Any
      intellectual property claims, with or without merit, could be time-consuming,
      expensive to litigate, or settle, and could divert management resources and
      attention. **** An
      adverse determination could also prevent us from offering our products and
      services to others and may require that we procure substitute products or
      services . With
      respect to an intellectual property rights claim, we may have to pay damages
      or
      stop using technology found to be in violation of a third party’s rights. We may
      have to seek a license for the technology, which may not be available on
      reasonable terms and may significantly increase our operating expenses. The
      technology also may not be available for license to us at all. As a result,
      we
      may be required to develop alternative non-infringing technology, which could
      require significant effort and expense. If we cannot license or develop
      technology for the infringing aspects of our business, we may be forced to
      limit
      our product and service offerings and we may be unable to compete effectively.
      Any of these results could harm our brand and operating results.




***Our
      ability to offer our products and services may be affected by a variety of
      U.S.
      and foreign laws.***




The
      laws
      relating to the liability of providers of online services for activities of
      their users are currently unsettled both in the U.S. and abroad. Claims have
      been threatened and filed under both U.S. and foreign law for defamation, libel,
      invasion of privacy and other data protection claims, tort, unlawful activity,
      copyright or trademark infringement, or other theories based on the nature
      and
      content of the materials searched and the ads posted or the content generated
      by
      our users. From time to time, we have received notices from individuals who
      do
      not want their names or web sites to appear in our web search results when
      certain keywords are searched. It is also possible we could be held liable
      for
      misinformation provided over the web when that information appears in our web
      search results. If one of these complaints results in liability to us, it could
      be potentially costly, encourage similar lawsuits, distract management and
      harm
      our reputation and possibly our business. Whether or not existing laws
      regulating or requiring licenses for certain businesses of our advertisers
      (including, for example, distribution of pharmaceuticals, adult content,
      financial services, alcohol or firearms), are applicable to us may be unclear.
      Existing or new legislation could expose us to substantial liability, restrict
      our ability to deliver services to our users, limit our ability to grow and
      cause us to incur significant expenses in order to comply with such laws and
      regulations. Several other federal laws could have an impact on our business.
      Compliance with these laws and regulations is complex and may impose significant
      additional costs on us. For example, the Digital Millennium Copyright Act (the
      “DMCA”) has provisions that limit, but do not eliminate, our liability for
      listing or linking to third-party web sites that include materials that infringe
      copyrights or other rights, so long as we comply with the statutory requirements
      of the DMCA. The Children’s Online Protection Act and the Children’s Online
      Privacy Protection Act restrict the distribution of materials considered harmful
      to children and impose additional restrictions on the ability of online services
      to collect information from minors. In addition, the Protection of Children
      from
      Sexual Predators Act of 1998 requires online service providers to report
      evidence of violations of federal child pornography laws under certain
      circumstances. Any failure on our part to comply with these regulations may
      subject us to additional liabilities.




10




***If
      we were to lose the services of our founders or our senior management team,
      we
      may not be able to execute our business strategy.***




Our
      future success depends in large part upon the continued service of key members
      of our senior management team. In particular, our founders, Colorado Stark
      and
      Alvin Estevez, are critical to our overall management, as well as to the
      development of our technology, our culture and our strategic direction. Richard
      Scarlata, our Chief Financial Officer is the only full-time trained financial
      professional in our organization; he performs most of the duties that in many
      other cases would be performed by several people within a larger and deeper
      organization. We do not maintain any key-person life insurance policies. The
      loss of any of our management or key personnel could seriously harm our
      business.




***If
      we are unable to retain or motivate key personnel or hire qualified personnel,
      we may not be able to grow effectively.***




Our
      performance is largely dependent on the talents and efforts of highly-skilled
      individuals. Our future success depends on our continuing ability to identify,
      hire, develop, motivate and retain highly-skilled personnel for all areas of
      our
      organization; as well as to identify, contract with, motivate and retain
      contract personnel on an outsourced basis, for special projects. Competition
      in
      our industry for qualified employees and contractors is intense. Our continued
      ability to compete effectively depends on our ability to attract new employees
      and to retain and motivate our existing
      employees and to retain contract
      personnel . As
      we
      become a more mature company, we may find our recruiting efforts more
      challenging. The incentives to attract, retain and motivate employees provided
      by our stock option grants or by future arrangements, such as through cash
      bonuses, may not be as effective as in the past. If we do not succeed in
      attracting excellent personnel or retaining or motivating existing personnel,
      we
      may be unable to grow effectively.




***Our
      two founders run our business and affairs collectively, which may harm their
      ability to manage effectively.***




Colorado
      Stark, our Executive Chairman, and Alvin
      Estevez ,
      our
      President and Chief Executive Officer (“CEO”), currently provide leadership as a
      team. Our Executive Chairman and CEO provide general supervision, direction,
      and
      control, subject to the control of the board of directors. As a result, they
      tend to operate collectively and to consult extensively with each other before
      significant decisions relating to all aspects of our operations are made. This
      may slow the decision-making process, and a disagreement among these individuals
      could prevent key strategic decisions from being made in a timely manner. If
      our
      two founders are unable to continue working well together in providing cohesive
      leadership, our business could be harmed.




***We
      have a short operating history and a relatively new business model in an
      emerging and rapidly evolving market. This makes it difficult to evaluate our
      future prospects and may increase the risk of your
      investment.***




From
      1999
      to 2003, we were engaged in analyzing the consumer software and internet service
      markets, which ultimately led to the development of SpyHunter, which was
      launched in 2003. As a result, we first derived cash from sales of consumer
      software security and privacy products in 2003. In 2005 and 2006, we attempted
      to develop an internet advertising search engine and spent considerable hours
      and dollars developing this service, however, our lack of success in this
      regard, has led us to abandon our efforts. You must consider our business and
      prospects in light of the risks and difficulties that we have encountered,
      and
      will continue to encounter, as an early-stage company in a new and rapidly
      evolving market. We may not be able to successfully address these risks and
      difficulties, which could materially harm our business and operating results.




11




***We
      have to keep up with rapid technological change to remain
      competitive.***




Our
      future success will depend on our ability to adapt to rapidly changing
      technologies, to adapt our services to evolving industry standards and to
      improve the performance and reliability of our services. In addition, the
      widespread adoption of new Internet, networking or telecommunications
      technologies or other technological changes could require substantial
      expenditures to modify or adapt our services or infrastructure.




***Our
      main product SpyHunter from which we have derived almost all of our revenue
      is
      currently has recently been updated with a number of product enhancements.
      It
      took us longer than expected to introduce these enhancements and as result
      ours
      sales in 2007 suffered. We continue to enhance our product with new spyware
      definitions, but if the market does not accept these product enhancements,
      our
      sales will decline.***




The
      markets for certain of our products and services are new and the markets for
      all
      of our products and services are likely to change rapidly. Our future success
      will depend on our ability to anticipate changing customer requirements
      effectively, and in a timely manner, and to offer products and services that
      meet these demands. The development of new or enhanced software products and
      services is a complex and uncertain process. We recently added additional
      features to our SpyHunter product, which are primarily two sets of changes
      that
      we implemented.  The first set contains features that actively monitor a
      user’s computer in order to prevent new spyware infections; a
      scheduler to automatically check for new infections on the machine; and
      Domain Name Server (“DNS”) protection to prevent companies from spoofing URL's
      to trick users.  These are features that most of our competitors have
      and we did not until recently.  Adding these features has made our product
      more competitive. The second set of changes that we added are transparent to
      the
      user as additional features but have made our product more effective. It now
      contains the ability to remove security threats at the WinLogon Notify
      level.




Historically,
      almost all of our revenue has come from our SpyHunter product, and we anticipate
      the majority of our revenue during 2008 and perhaps future years will be derived
      from further enhanced versions of SpyHunter. We have experienced, and may
      continue to experience design, development, testing and other difficulties
      that
      could delay or prevent the introduction of new products or product enhancements.
      Further, we may experience delays in market acceptance of new products or
      product enhancements as customers evaluate the advantages and disadvantages
      of
      upgrading to our new products or services.




***Recently,
      our software product, SpyHunter, has been designated as a security threat by
      certain competitors. The Company disputed these designations and all of them
      were withdrawn. However, other competitors may make similar allegations in
      the
      future, and if the Company is not able to successfully dispute such allegations,
      our customers may cease to purchase our product and result in a decrease in
      our
      revenues.***




Several
      of the Company’s competitors recently identified the Company’s core software
      product, SpyHunter, as a security threat to computers. The Company vigorously
      disputed these determinations that our product is a security threat, and all
      of
      the competitors withdrew the designation. Other competitors of the Company
      have
      made similar claims before, and the Company has been successful in disputing
      them as well. However, if other competitors make similar allegations in the
      future and we are unsuccessful in our efforts to defend our product against
      any
      such security threat designation, the acceptance of our product, as well as
      the
      revenue stream we receive as a result of the sales of our product, may
      substantially decrease.




12




***There
      is significant competition in our market, which could make it difficult to
      attract customers, cause us to reduce prices and result in reduced gross margins
      or loss of market share.***




The
      market for our products and services is highly competitive, dynamic and subject
      to frequent technological changes. We expect the intensity of competition and
      the pace of change either to be maintained or at least be increased in the
      future. A number of companies offer freeware products that provide some of
      the
      functionality of our products. The Company’s products have been affected by the
      availability of such freeware products, thus we may not be able to maintain
      our
      competitive position against current or potential competitors, especially those
      with significantly greater financial, marketing, service, support, technical
      and
      other resources. Competitors with greater resources may be able to undertake
      more extensive marketing campaigns, adopt more aggressive pricing policies
      and
      make more attractive offers to potential employees, distributors, resellers
      or
      other strategic partners. We expect additional competition from other
      established and emerging companies as the market for our products continues
      to
      develop. We may not be able to compete successfully against current and future
      competitors.




***We
      may not be able to access third party technology, which we depend upon to
      conduct our business, and as a result, we could experience delays in the
      development and introduction of new products and services or enhancements of
      existing products and services.***




If
      we
      lose the ability to access third party technology which we use, are unable
      to
      gain access to additional products or are unable to integrate new technology
      with our existing systems, we could experience delays in our development and
      introduction of new products and services and related improvements or
      enhancements until equivalent or replacement technology can be accessed, if
      available, or developed internally, if feasible. If we experience these delays,
      our sales could be substantially reduced. We license technology that is
      incorporated into our products and services from third parties. In light of
      the
      rapidly evolving nature of technology, we may increasingly need to rely on
      technology licensed to us by other vendors, including providers of development
      tools that will enable us to quickly adapt our technology to new products and
      services. Technology from our current or other vendors may not continue to
      be
      available to us on commercially reasonable terms, or at all.




**Risks
      Related to Our Stock Being Publicly Traded**




***Our
      stock price may be volatile.***




Our
      Common Stock has been trading in the public market for three years. Until
      recently, trading volume had been extremely light. During the first nine months
      of 2007, weekly trading volume averaged approximately 1.2% of the total
      outstanding shares. However, since September 30, 2007 and through December
      31,
      2007, weekly trading volume averaged approximately 5.4% of the total outstanding
      shares, which period coincides with the issuance to Dutchess of 1,396,106 shares
      of Common Stock upon conversion of debentures. Such shares represent
      approximately 22% of the current outstanding shares and are presumed to have
      been disposed of by Dutchess shortly after their issuance. As of March 24,
      2008,
      74% of our outstanding shares were held in street name. As of that date there
      were 27 holders of record and as of March 5, 2008, 214 non-objecting beneficial
      owners. We cannot predict the extent to which the trading market for our Common
      Stock will change, or how liquid that market might become. The trading price
      of
      our Common Stock has been and is expected to continue to be highly volatile
      as
      well as subject to wide fluctuations in price in response to various factors,
      some of which are beyond our control. These factors include:




·
            
            Quarterly
                variations in our results of operations or those of our competitors.





·
            
            Announcements
                by us or our competitors of acquisitions, new products, significant
                contracts, commercial relationships or capital commitments.




13




·
            
            Disruption
                to our operations.




·
            
            The
                emergence of new sales channels in which we are unable to compete
                effectively.




·
            
            Our
                ability to develop and market new and enhanced products on a timely basis.




·
            
            Commencement
                of, or our involvement in, litigation.




·
            
            Any
                major change in our board of directors or management.




·
            
            Any
                debenture conversions and subsequent sales of registered shares.




·
            
            Changes
                in governmental regulations or in the status of our regulatory approvals.




·
            
            Changes
                in earnings estimates or recommendations by securities analysts.




·
            
            General
                economic conditions and slow or negative growth of related markets.




In
      addition, the stock market in general, and the market for technology companies
      in particular, have experienced extreme price and volume fluctuations that
      have
      often been unrelated or disproportionate to the operating performance of those
      companies. These broad market and industry factors may seriously harm the market
      price of our Common Stock, regardless of our actual operating performance.
      In
      addition, in the past, following periods of volatility in the overall market
      and
      the market price of a company’s securities, securities class action litigation
      has often been instituted against these companies. Such litigation, if
      instituted against us, could result in substantial costs and a diversion of
      our
      management’s attention and resources.




***We
      do not intend to pay dividends on our Common Stock.***




We
      have
      never declared or paid any cash dividend on our Common Stock. We currently
      intend to retain any future earnings and do not expect to pay any dividends
      in
      the foreseeable future.




***Our
      two founders own a majority of the Company’s preferred stock, which will
      significantly impact our stockholders ability to influence corporate
      matters.***




Until
      June 28, 2006, the date of the Dutchess Financing, our founders, executive
      officers, directors (and their affiliates) and employees together owned
      approximately 77.0% of the voting power of our outstanding capital stock. In
      particular, our two founders, Colorado Stark and Alvin Estevez combined,
      controlled approximately 74.2% of the voting power of our outstanding capital
      stock. With the issuance of the Debentures to Dutchess, Colorado Stark and
      Alvin
      Estevez exchanged their shares of Common Stock for shares of newly issued Series
      A Convertible Preferred Stock (the “Preferred Stock”). While the Preferred Stock
      ranks senior to the Common Stock with respect to dividends, and on parity with
      the Common Stock with respect to liquidation, the holders of shares of the
      Preferred Stock shall generally vote together with the holders of shares of
      the
      Common Stock on an as-if-converted basis. Furthermore, the shares of Preferred
      Stock owned by Messrs. Stark and Estevez have anti-dilution protection, whereby
      they will maintain the majority voting power of the Company’s capital stock.
      Consequently, Colorado Stark and Alvin Estevez’ ownership of the Preferred Stock
      allows them to retain significant influence over management and affairs and
      over
      all matters requiring stockholder approval, including the election of directors
      and significant corporate transactions, such as a merger or other sale of the
      Company or its assets, for the foreseeable future. This concentrated control
      limits the ability of stockholders to influence corporate matters and, as a
      result, we may take actions that our stockholders do not view as beneficial.
      As
      a result, the market price of our Common Stock could be adversely affected.
      ( *See
      Notes B, I and O of Notes to Consolidated Financial
      Statements.)*




14




***Provisions
      in our charter documents and under Delaware law could discourage a takeover
      that
      stockholders may consider favorable.***




Provisions
      in our Certificate of Incorporation and By-laws may have the effect of delaying
      or preventing a change of control or changes in our management. These provisions
      include the following:




·
            
            Our
                board of directors has the right to elect directors to fill a vacancy
                created by the expansion of the board of directors or the resignation,
                death or removal of a director, which may prevent stockholders from
                being
                able to fill vacancies on our board of directors.




·
            
            Our
                stockholders may act by written consent, provided that such consent
                is
                signed by all the shareholders entitled to vote with respect to the
                subject matter thereof. As a result, a holder, or holders, controlling
                a
                majority of our capital stock would not be able to take certain actions
                without holding a stockholders’ meeting.




·
            
            Our
                Certificate of Incorporation prohibits cumulative voting in the election
                of directors. This limits the ability of minority stockholders to
                elect
                director candidates.




As
      a
      Delaware corporation, we are also subject to certain Delaware anti-takeover
      provisions. Under Delaware law, a corporation may not engage in a business
      combination with any holder of 15% or more of
      its capital stock
      unless the holder has held the stock for three years or, among other things,
      the
      board of directors has approved the transaction. Our board of directors could
      rely on Delaware law to prevent or delay an acquisition of us.




***You
      may experience substantial dilution as a result of the Dutchess financing
      transaction, as well as if we raise funds through the issuance of additional
      equity and/or convertible securities or issue stock to vendors in lieu of making
      cash payments for services.***




You
      may
      experience substantial dilution if Dutchess converts its remaining Debentures
      into Common Stock of the Company. Since the conversion price of the Debentures
      fluctuates at a substantial percentage discount (25%) to fluctuating market
      prices, the number of shares issuable to Dutchess, upon conversion of the
      Debentures, is potentially limitless. In other words, the lower the average
      trading price of the Company’s shares at the time of conversion, the greater the
      number of shares that can be issued to Dutchess. This perceived risk of dilution
      may cause Enigma shareholders to sell their shares, thus contributing to a
      downward movement in the Company’s stock price, thereby potentially encouraging
      other Enigma shareholders to sell, or sell short, which could in turn further
      contribute to a spiraling stock price decline in Enigma’s Common Stock. You may
      also experience substantial dilution if Messrs. Stark and Estevez convert their
      shares of Preferred Stock into shares of Common Stock ( *See
      Notes B and I o* f *Notes
      to Consolidated Financial Statements* ).
      The
      overall ownership of Dutchess at any one moment is limited to 9.9% of the
      outstanding shares of Common Stock in accordance with the Financing documents.
      However, Dutchess is free to sell any registered shares, which have been issued
      to them, into the market, thereby enabling Dutchess to convert the remaining
      Debentures or exercise additional warrants into shares of Common Stock. Since
      July 30, 2007, Dutchess has converted $54,157 of debentures due 2011 into
      1,396,106 registered shares of the Company’s Common Stock. In addition, the
      Company issued 800,000 unregistered shares of the Company’s Common Stock to
      three investor relations consulting firms. The total of 2,196,106 shares of
      the
      Company’s Common Stock so issued, represents approximately 52% of the Company’s
      outstanding Common Stock prior to such issuances.




15




***Future
      sales of our Common Stock or sales of registered shares or shares subject to
      SEC
      Rule 144 may negatively affect the market price of our Common
      Stock.***




As
      of
      March 26, 2008, there were 6,387,372 shares of our Common Stock outstanding,
      at
      a closing market price of $0.015 for a total market valuation of $95,811. We
      cannot predict the effect, if any, that future sales of shares of our Common
      Stock into the market will have on the market price of our Common Stock.
      However, sales or issuances of substantial amounts of Common Stock, including
      future shares issued upon the exercise of 40,000,000 Warrants, future shares
      issued upon the additional conversion of Debentures, or upon Messrs. Stark
      and
      Estevez converting their Preferred Stock into Common Stock, or upon exercise
      of
      stock options (of which 6,806,758 were fully vested as of December 31, 2007
      and
      an additional approximate 2.2 million shares were either unvested or reserved
      for issuance), or the perception that such transactions could occur, may
      materially and adversely affect prevailing market prices for our Common
      Stock.




***We
      could terminate our Securities and Exchange Commission Registration, which
      could
      cause our Common Stock to be de-listed from the Over the Counter Bulletin Board
      (“OTCBB”).***




As
      a
      public company with fewer than 300 shareholders, Enigma files its periodic
      reports with the Securities and Exchange Commission (the “SEC”) and registers
      its shares of Common Stock under the Securities Exchange Act of 1934 (the
“Exchange Act”) on a voluntary basis. Since the Company has fewer than 300 stockholdersof
      record, we are eligible to de-register our Common Stock under the Exchange
      Act.
      Although the Company does not currently plan to de-register its Common Stock,
      there can be no assurance that we would not de-register the Common Stock at
      some
      point in the future. If the Company were to take such action, it could inhibit
      the ability of the Company’s common stock holders to trade the shares in the
      open market, thereby severely limiting the liquidity of such shares.
      Furthermore, if we were to de-register, we would no longer be required to file
      annual and quarterly reports with the SEC and would no longer be subject to
      various substantive requirements of SEC regulations. De-registration would
      reduce the amount of information available to investors about our Company and
      may cause our Common Stock to be de-listed from the OTCBB. In addition,
      investors would not have the protections of certain SEC regulations to which
      we
      would no longer be subject. The Company has no intention of terminating the
      registration of the Common Stock, and in fact is constrained from doing so under
      the terms of its agreements with Dutchess.




***Because
      the market for and liquidity of our shares is volatile and limited, and because
      we are subject to the "Penny Stock" rules, the level of trading activity in
      our
      Common Stock may be reduced.***




Our
      Common Stock is quoted on the OTCBB (ENGM). The OTCBB is generally considered
      to
      be a less efficient market than the established exchanges or the NASDAQ markets.
      While our Common Stock continues to be quoted on the OTCBB, an investor may
      find
      it more difficult to dispose of, or to obtain accurate quotations as to the
      price of our Common Stock, compared to if our securities were traded on NASDAQ
      or a national exchange. In addition, our Common Stock is subject to certain
      rules and regulations relating to "penny stocks" (generally defined as any
      equity security that is not quoted on the NASDAQ Stock Market and that has
      a
      price less than $5.00 per share, subject to certain exemptions). Broker-dealers
      who sell penny stocks are subject to certain "sales practice requirements"
      for
      sales in certain nonexempt transactions (i.e., sales to persons other than
      established customers and institutional "accredited investors"), including
      requiring delivery of a risk disclosure document relating to the penny stock
      market and monthly statements disclosing recent bid and offer quotations for
      the
      penny stock held in the account, and certain other restrictions. If the
      broker-dealer is the sole market maker, the broker-dealer must disclose this,
      as
      well as the broker-dealer's presumed control over the market. For as long as
      our
      securities are subject to the rules on penny stocks, the liquidity of our Common
      Stock could be significantly limited. This lack of liquidity may also make
      it
      more difficult for us to raise capital in the future.




16




**Additional
      Information**





We
      are
      obligated to file reports with the SEC pursuant to the Exchange Act. The public
      may read and copy any materials that we file with the SEC at the SEC’s Public
      Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may
      obtain information on the operation of the Public Reference Room by calling
      the
      SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
      proxy and information statements, and other information regarding issuers that
      file electronically with the SEC. We file electronically with the SEC. The
      address of that site is http://www.sec.gov.




**General
      Discussion on Results of Operations and Analysis of Financial
      Condition**




***For
      the years ended December 31, 2007 and 2006***




We
      begin
      our General Discussion and Analysis with a discussion of the Critical Accounting
      Policies and the Use of Estimates, which we believe are important for an
      understanding of the assumptions and judgments underlying our financial
      statements. We continue with a discussion of the Results of Operations for
      the
      years ended December 31, 2007 and 2006, followed by a discussion of
      Liquidity and Capital Resources available to finance our
      operations.




We
      are a
      developer of Internet-based systems and downloadable security software products
      designed to give our customers instant access to information on the web and
      control over the programs installed on their computers in an automated and
      easy
      to use way, thereby enhancing transparency and user control. Our business
      strategy is to leverage our knowledge of internet marketing, as well as our
      existing base of more than 750,000 users, to continue to develop Internet
      software products that further the values on which the Internet is based. Our
      consumer software product line is focused on delivering Internet privacy and
      security to individual users, homes, offices, and small businesses. Sales of
      SpyHunter® (“SpyHunter”) commenced in June 2003. In late January 2005,
      we began to license a new and improved product, SpyHunter 2.0, and in May 2006,
      with the introduction of SpyHunter 2.7, added important new features as well
      as
      changed the pricing structure. In October 2006 we introduced SpyHunter 2.8,
      and
      in March 2007, SpyHunter 2.9, each of which further enhanced our detection
      and
      removal features. Our latest product SpyHunter 3.0 was introduced in the fall
      of
      2007 and incorporates all of the foregoing features as well as significant
      upgrades to make our SpyHunter product more competitive. These new features
      include one that actively monitors a user’s computer in order to prevent new
      spyware infections, a scheduler to automatically check for new infections
      on the machine, and a Domain Name Server (“DNS”) protection to prevent companies
      from spoofing URL's to trick users.




**Critical
      Accounting Policies and the Use of Estimates**




**Revenue
      Recognition**




We
      recognize revenue from the sales of license fees and subscriptions of SpyHunter
      in accordance with accounting principles generally accepted in the United States
      of America that have been prescribed for the software industry. Revenue
      recognition requirements in the software industry are very complex and require
      us to make some estimates.




Specifically,
      we recognize such revenues in accordance with Statement of Position (“SOP”)
      No. 97-2 “Software Revenue Recognition,” as amended by SOP No. 98-9
“Modification of SOP No. 97-2, Software Revenue Recognition, With Respect
      to Certain Transactions.” These statements of position provide guidance for
      recognizing revenues related to sales by software vendors. We sell our principal
      software product, SpyHunter, along with its 6 month subscription service over
      the Internet. Customers order SpyHunter and simultaneously provide their credit
      card information to us. Upon receipt by us of authorization from the credit
      card
      issuer, the customer is able to download the product over the Internet. For
      the
      sales price of $29.99, we provide a license to use our product and post-contract
      customer support (“PCS”), which consists primarily of free updates to our
      software products as and when such updates are available, as well as e-mail
      and
      telephonic support.




17




For
      sales
      of SpyHunter 1 series that occurred during the years ended December 31,
      2003 and 2004, as well as during the month of January 2005, this PCS was
      provided for an indefinite period into the future. However, with the
      introduction at the end of January 2005 of our new and improved product,
      SpyHunter 2.0, PCS was limited to one year from the date of purchase. For
      SpyHunter 2.7, which was introduced in May 2006, and which replaced SpyHunter
      2.0, and for SpyHunter 2.8, which was introduced in October 2006, and represents
      an upgrade over SpyHunter 2.7, as well as for SpyHunter 2.9, which was
      introduced in March 2007 and which contains further upgrades, PCS is limited
      to
      six months. Licensees of the SpyHunter 1 series were provided with PCS up until
      March 10, 2005, from which point forward we no longer supported that
      product, and at which time we began to recognize all of the revenue from the
      sales of SpyHunter series 1.




SpyHunter
      2.7, 2.8, 2.9 and 3.0 contain improvements that are in recognition of the more
      challenging security threats that the Company noted in early 2006 and were
      developed in response to the needs of our customers. As part of Enigma’s renewed
      commitment to quality and customer satisfaction, spyware definition updates
      are
      a major facet of our customer support.




Because
      of the continuing threat of new spyware and adware, SpyHunter is not functional
      without these definition updates, which comprise the bulk of our PCS. The
      remainder of PCS consists of e-mail and telephonic customer support, which
      makes
      the product user friendly. Accordingly we believe that all of the value is
      attributable to PCS, and hence, the revenue from sales is attributable entirely
      to PCS and was deferred and recognized over 12 months in the case of the
      SpyHunter 2.0 and over 6 months in the cases of SpyHunter 2.7, 2.8, 2.9 and
      3.0,
      in each case being the respective periods of PCS. Also in each case we utilize
      the 1⁄2 month convention in the month of sale and the corresponding final month of
      PCS. For all products, the renewal rate for PCS was and is $29.99, the same
      as
      the original sales price.




In
      accordance with SOP No. 97-2 and SOP No. 98-9, the fee is required to
      be allocated to the various elements based on vendor specific objective evidence
      (“VSOE”) of fair value. With respect to sales of SpyHunter 2.0, which had PCS
      limited to one year after the sale, and SpyHunter 2.7, 2.8, 2.9 and 3.0, which
      have PCS limited to six months after the sale, VSOE does exist for the
      allocation of revenue to the various elements of the arrangement, as we consider
      all of the revenue from such sales to be attributable to the service element
      because the SpyHunter download is useless without it. Accordingly, we recognized
      the license fees for SpyHunter 2.0 during the 12-month period, and for SpyHunter
      2.7, 2.8, 2.9 and 3.0, for the 6-month period immediately subsequent to the
      sale.




**Reserves
      for Product Returns**




Our
      policy with respect to product returns is spelled out in our End User License
      Agreement (“EULA”), which states “...products purchased that are downloadable are
      NOT refundable; however, Enigma Software Group, Inc. reserves the right to
      award
      refunds to a customer on a per case basis.”  As
      of
      December 31, 2007, we had not accrued a reserve for potential refunds or
      chargebacks, as our experience has been such that returns and chargebacks are
      not material to our overall revenues. We may voluntarily accept greater or
      fewer
      products for return.




**Income
      Taxes**




We
      make
      estimates to determine our current provision for income taxes, as well as our
      income taxes payable. Our estimates with respect to the current provision for
      income taxes take into account current tax laws and our interpretation of
      current tax laws, as well as possible outcomes of any future tax audits. Changes
      in tax laws or our interpretation of tax laws and the resolution of any future
      tax audits could significantly impact the amounts provided for income taxes
      in
      our financial statements.




18




**Legal
      Contingencies**




From
      time
      to time, we are involved in routine legal matters incidental to our business.
      In
      the opinion of management, the ultimate resolution of such matters will not
      have
      a material adverse effect on our financial position, results of operations
      or
      liquidity.




**Results
      of Operations For the Years Ended December 31, 2007 and
      2006**




**Overview**




Our
      goals
      for the past several years were to launch SpyHunter, generate significant
      licensing fees and continue to build on that success by generating even greater
      licensing fees. We are making progress in accomplishing these goals. Our
      business plan going forward is to continue to develop both Internet software
      products and services for consumers in order to establish recurring subscription
      revenue.




**Revenues**




For
      the
      years ended December 31, 2007 and 2006, reported revenues from the sale of
      software products and subscriptions were $3,150,364 and $1,207,824,
      respectively. This increase of approximately 161% for the current year period
      reflects both an increase in the number of new subscriptions, as a result of
      our
      increased marketing efforts, as well as an increase in the number of renewals,
      resulting from the reduction in the subscription period from 12 months to 6
      months. However, because of our accounting policy for revenue recognition,
      ( *See
      Note D2 of Notes to Financial Statements)* this is
      not the actual cash derived from sales of software products and subscriptions
      during the respective periods ( *See
      “Liquidity and Capital Resource” below* ).





Actual
      unit sales, net of credits and chargebacks, for the year ended December 31,
      2007
      reflect an increase of over 200% compared to the prior year. This was the case
      for both new (i.e., first-time) sales and renewal sales. Net unit sales
      increased from approximately 38,000 in 2006 to approximately 124,000 in 2007.
      Since a change in the subscription period from 12 months to 6 months also
      results in a 50% reduction of the deferral period for revenues, this change
      has
      a skewing effect in the comparability of amounts of reported revenues from
      one
      year to the next. With respect to such skewing difference, while it cannot
      be
      quantified precisely, it should be noted that as of December 31, 2007, deferred
      revenue as reported on the balance sheet was $1,102,224 as compared to $527,205
      as of December 31, 2006, an increase of $575,019. The change in deferred revenue
      for each fiscal year, as reported in the *Consolidated
      Statements of Cash Flows* ,
      was an
      increase in deferred revenue for the current year, a “source of cash” of
      $575,019, while for the prior year, the decrease in deferred revenue had the
      effect of being a “use of cash” of $42,407.




For
      years ended December 31, 2007, commission income
      and other revenue were $263,603 and $119,657, respectively. The increases are
      primarily attributable to commissions earned on sales of third-party owned
      products.




19




**Expenses**




Expenses
        for the years ended December 31, 2007 and 2006 were $4,466,788 and
        $2,079,563, respectively.




**Year
                Ended**
              **December 31,****2007**
            
            **Year
                Ended**
              **December 31,****2006**Marketing
                and selling
            
            $
            1,081,002
            
            $
            214,725General
                and administrative
            
            
            3,239,394
            
            
            1,850,261Depreciation
                and amortization
            
            
            146,382
            
            
            14,577Total
                expenses
            
            $
            4,466,788
            
            $
            2,079,563




For
      the
      year ended December 31, 2007, marketing and selling expenses increased by
      approximately $866,000, and were almost than 5 times greater than such expenses
      for the prior year. Marketing and selling expenses include both the cost of
      advertising and the cost of commissions paid to third-parties for sales of
      SpyHunter on their respective websites. Thus, these increases were both
      responsible for and reflective of the increased unit sales discussed above
      under
      revenues. Marketing costs, which are expensed as incurred, relate directly
      to
      the level of unit sales activity for new subscriptions, as opposed to the
      revenue reported for the period, which may have been entirely or partially
      deferred, in accordance with SOP 97-2, as discussed above.




For
      the
      year ended December 31, 2007, general and administrative expenses increased
      by
      approximately $1.4 million. The increase principally reflects increased
      compensation and outsourcing expense ($108,000), increased shareholder and
      financial reporting expenses ($49,000), increased professional fees ($23,000),
      expenses associated with UAB Enigma ($377,000), and an increase in the cost
      of
      stock-based compensation expense ($804,000).




Depreciation
      and amortization expense increased by approximately $132,000 for the year ended
      December 31, 2007, when compared to the prior year. The increase is associated
      with the depreciation of fixed assets acquired by UAB Enigma ($10,000), the
      amortization of deferred financing costs ($76,000), and the amortization of
      deferred investor relations expenses associated with the issuance of 800,000
      unregistered shares of Common Stock to three investor relations consulting
      firms
      ($46,000).




**Operating
      Loss and Net Loss**




As
      a
      result of the foregoing the Company incurred an operating loss of $1,052,811
      for
      the year ended December 31, 2007, as compared to an operating loss of $752,082
      for the prior year.




These
      losses were further increased by the incurrence of costs associated with the
      Dutchess Financing: principally; the recognition of discount expense on
      convertible debentures, debenture interest expense, fair value adjustments
      for
      derivatives and warrants and accretion adjustments for the beneficial conversion
      feature of the Preferred Stock, as well as the incurrence of a provision for
      liquidated damages, and a provision for debenture redemption
      premiums.




**Liquidity
      and Capital Resources For the Years Ended December 31, 2007 and
      2006**




At
      December 31, 2007 and 2006, we had cash and cash equivalents of $95,223 and
      $471,254, respectively.




20




Net
      cash
      provided by operating activities for the year ended December 31, 2007 was
      $331,551, which compares favorably to net cash used in operating activities
      for
      the year ended December 31, 2006, of $893,298. The positive swing in net
      cash provided by operating activities of approximately $1,225,000 reflects
      the
      increase in SpyHunter unit sales for the year, which amounted to approximately
      $2,600,000, net of increases in operating expenses, namely marketing and selling
      expenses ($860,000) and increases in general & administrative expenses net
      of non-cash options expense ($585,000) and net changes in working capital
      items.




Net
      cash
      used in investing activities for the year ended December 31, 2007 was $36,748,
      and principally represents capital expenditures for furniture, fixtures and
      computer equipment for UAB Enigma.





Net
      cash
      used in financing activities for the year ended December 31, 2007 was $670,834
      and represents a portion of the payments required to be made to Dutchess due
      to
      the fact that the Registration Statement had not become effective and as result
      of the debt restructuring in July 2007 ( *See
      Notes B and O of Notes to Consolidated Financial Statements* ).




Actual
      results may be better or worse than anticipated, depending upon the Company’s
      actual sales results in future months. The Company’s liquidity position is
      extremely severe, as without the funds derived from the sale of Debentures
      to
      Dutchess, the Company would have run out of cash in July 2006. This was
      anticipated in the Company’s earlier filings, as was evidenced by the going
      concern opinion included in its 2005 audited financial statements.


On
        March
        26, 2008, pursuant to provisions in the Old Debenture and the New Debenture,
        Dutchess issued to the Company a notice of an event of default (the “Default
        Notice”), due to the Company’s failure to make regular monthly interest payments
        and payments of principal under the terms of the Old Debenture and failure
        to
        make required interest payments under the New Debenture (the “Default”).
        Pursuant to the Old Debenture, the Company is obligated to pay Dutchess interest
        at the rate of twelve percent (12%) per annum, on a monthly basis, and
        amortizing monthly cash payments in the amount of $104,166.67, and under
        the New
        Debenture the Company is obligated to pay Dutchess interest at the rate of
        twelve percent (12%) per annum, compounded daily, on a monthly basis.
        Accordingly, as of March 24, 2008, the Company owed Dutchess an aggregate
        amount
        of $1,637,568.18 under both Debentures, including principal, interest and
        liquidated damages arising out of the Default. As a secured creditor, Dutchess
        is entitled to exercise its default remedies pursuant to a Security Agreement
        entered into in connection with the Old Debenture, including taking possession
        of all of the assets of the Company.
 
 In
        contemplation of Dutchess issuing the Default Notice, the Company and Dutchess
        entered into negotiations to resolve the Default. As a consequence of these
        discussions, the Company and Dutchess have developed the following plan (the
        “Plan”) to restructure the Company and to cure the Default. If effected, under
        the Plan Dutchess would waive the liquidated damages arising out of the Default
        and rescind acceleration of the Debentures. The Plan is currently structured
        as
        described below.
 
 First,
        the Plan contemplates that Title America Corp., a Nevada corporation (“Title
        America”), an affiliate of Dutchess and sole shareholder of Tool City, Inc., a
        California corporation (“Tool City”), would enter into a Securities Purchase
        Agreement, with the holders of all of the Company’s shares of Series A
        Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred
        Stock”), pursuant to which such individuals, who are the Company’s Executive
        Chairman and Chief Executive Officer, would sell all of the Series A Preferred
        Stock to Dutchess and as a result would no longer be stockholders of the
        Company
        (the “Preferred Stock Purchase”). The amount paid by Title America for the
        Series A Preferred Stock would equal $1,000, an amount which will be paid
        from
        Title America’s working capital. Based on the closing bid price of the Company’s
        shares of common stock, par value $0.001 per share (the “Common Stock”), on
        March 20, 2008, if the Preferred Stock Purchase is effected, Dutchess would
        own
        100% of the Company’s Preferred Stock, and would beneficially own 98.81% of the
        Company’s Common Stock, based on the conversion rights of the shares of
        Preferred Stock, the conversion of the Debentures into shares of Common Stock,
        and the exercise of 40,000,000 common stock purchase warrants (the “Warrants”)
        held by Dutchess, without giving effect to certain blockers on conversion
        or
        exercise provided for in the Debentures or the Warrants, which will be removed
        in conjunction with the Preferred Stock Purchase.


21





In
      addition, upon the closing of the proposed Preferred Stock Purchase, Dutchess
      is
      expected to appoint Theodore Smith, Michael Novielli and Douglas Leighton (the
      “New Directors”) to the Company’s Board of Directors (the “Board”). The Plan
      contemplates that all of the current members of the Company’s Board, Alvin
      Estevez, Colorado Stark and Edwin J. McGuinn, Jr., the sole member of the
      Company’s Audit Committee and Compensation Committee, would resign from the
      Board ten (10) calendar days following the mailing to the Company’s stockholders
      of a Schedule 14F-1 Information Statement pertaining to the appointment of
      the
      New Directors to the Company’s Board. As a result of the Preferred Stock
      Purchase and the election of the New Directors, Dutchess is expected to acquire
      control of the Company.


The
        Plan contemplates that following the closing of the Preferred Stock Purchase,
        the Company and Title America intend to enter into a Share Exchange Agreement
        (the “SEA”). Pursuant to the SEA, the Company would acquire all of the stock of
        Tool City and Tool City would become a wholly-owned subsidiary of the Company.
        In exchange for all of the common stock of Tool City, the Company would issue
        to
        Title America shares of a new series of Preferred Stock of the Company (the
        “Series B Preferred Stock”) which would be convertible into shares of Common
        Stock and would have an aggregate liquidation preference of $8,314,000. The
        Plan
        contemplates that the shares of Series A Preferred Stock acquired by Dutchess
        in
        the Preferred Stock Purchase would then be cancelled, whereupon Dutchess
        and its
        affiliates would beneficially own approximately 95.67% of the Company’s Common
        Stock, based on the conversion rights of the Series B Preferred Stock and
        the
        Debentures and their ownership of the Warrants.


The
      Plan
      contemplates that following the closing of the Preferred Stock Purchase, the
      Company and Title America intend to enter into a Share Exchange Agreement (the
      “SEA”). Pursuant to the SEA, the Company would acquire all of the stock of Tool
      City and Tool City would become a wholly-owned subsidiary of the Company. In
      exchange for all of the stock of Tool City, the Company would issue to Title
      America shares of a new series of Preferred Stock of the Company (the “Series B
      Preferred Stock”) which will be convertible into shares of Common Stock and will
      have an aggregate liquidation preference of $8,314,000. The Plan contemplates
      that the shares of Series A Preferred Stock acquired by Dutchess in the
      Preferred Stock Purchase would then be cancelled, whereupon Dutchess
      and its affiliates would beneficially
      own approximately 95.67% of the
      Company’s Common Stock ,
      based
      on the conversion rights of the Series B Preferred Stock and the Debentures
      and
      their ownership of the Warrants.


Management
        believes that the Company would have an increased ability to satisfy its
        obligations under the Debentures after its acquisition of Tool City. Tool
        City
        provides title and auto pawn loans against the equity in vehicle owner’s cars.
        Tool City has historically had minimal credit losses due to its low
        loan-to-value ratios, technological advancements permitting the tracking
        of
        vehicles serving as collateral for outstanding loans, and the liquidity of
        collateral against which Tool City makes loans. Revenues are generated from
        interest on outstanding loans, sales from repossessed cars, and the resale
        of
        pawned items. Tool City currently has nine employees, and was founded in
        1996 to
        serve consumers located in Southern California. All of the outstanding common
        stock of Tool City was recently purchased by Title America. Accordingly,
        the
        Company would enter into a new line of business upon the acquisition of Tool
        City.
 
 The
        Plan
        further contemplates that after the acquisition of Tool City, the Company
        would
        exit its existing software business and sell substantially all of the assets
        of
        such business to Enigma Software Group USA, LLC, a Connecticut limited liability
        company (“Enigma Software Group”), formed by Messrs. Estevez and Stark for the
        purposes of effecting the Asset Purchase (as defined below). The parties
        are
        expected to enter into an Asset Purchase Agreement (the “APA”), whereby Enigma
        Software Group would assume substantially all of the assets and liabilities,
        excluding the Debentures, including interest due thereon and liquidation
        damages, of the Company (the “Asset Purchase”). It is expected that the Enigma
        Software Group would indemnify the Company in connection with such liabilities
        that it assumes and would assure that at the closing of the Asset Purchase
        the
        Company retains $172,500 in cash. In addition, Messrs. Estevez and Stark,
        and
        certain other employees, would cancel an aggregate amount of options
        representing the right to purchase 8,203,676 of the Company’s Common
        Stock.




22




On
        March
        27, 2008, the Company filed a Current Report on Form 8-K reporting the
        foregoing. The Company expects to file additional Current Reports on Form
        8-K
        reporting aspects of the transactions contemplated by the Plan.
 
 There
        will be no opportunity for any stockholder to vote on the above transactions.
        Management believes the Plan is the only viable alternative to realize
        significant value for the Company’s stockholders. The Company cannot currently
        satisfy the obligations owed under the Debentures and is incurring liquidated
        damages on a daily basis. The Plan offers the Company’s stockholders the
        potential benefits of a new line of business. Management believes that the
        Plan
        is in the best interests of the stockholders since it avoids the high costs
        of
        litigation and bankruptcy and the unknown results of such proceedings. Moreover,
        the Plan is intended to allow the Company’s common stockholders to maintain the
        same percentage ownership interest in the Company that they presently own
        on a
        fully-diluted basis.
 
 The
        Company notes that neither it nor Dutchess nor any of their affiliates has
        yet
        entered into any binding agreement with respect to the Plan, and the
        transactions contemplated by the Plan and described above represent solely
        intentions and expectations with respect to the Plan. There can be no assurance
        that the Plan will be implemented as summarized above, or at all.
 
 In
        the
        event the Plan and the transactions contemplated thereunder are not consummated,
        the Company would be in financial distress and would have to pursue other
        opportunities to satisfy the Default. There can be no assurance that any
        viable
        alternatives would be available. As a result, the Company could be faced
        with
        the immediate foreclosure on its assets by Dutchess.





**Item
      7.**  **Financial
      Statements.**




Information
      in response to this Item is set forth in the Financial Statements, beginning
      on
      Page F-1 of this filing.





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




As
      previously reported in Forms 8-K and 8-K/A filed with the SEC on
      January 24, 2006 and January 30, 2006, respectively, the Company’s Board of
      Directors (the “Board”) dismissed its independent registered public accounting
      firm, Eisner LLP (“Eisner”), and engaged the services of Bagell, Josephs, Levine
& Company, L.L.C. (“BGL”). The Board approved the dismissal of Eisner, who
      had served as the Company’s independent public accountants for the two fiscal
      years ended December 31, 2004, and the subsequent interim periods through
      September 30, 2005 and the appointment of BJL.




The
      Company is not aware, and has not been advised by its independent registered
      public accountants, of any disagreement on any matter of accounting principles
      or practices, financial statement disclosure, or auditing scope or procedure
      for
      the years ended December 31, 2007 and 2006.




**Item
      8A. Controls and Procedures**




We
        carried out an evaluation of the effectiveness of the design and operation
        of
        our disclosure controls and procedures (as defined in Exchange Act Rules
        13a-15(e) and 15d-15(e)) as of December 31, 2007. This evaluation was carried
        out under the supervision and with the participation of our Chief Executive
        Officer, Mr. William Atkinson and Chief Financial Officer, Mr. Jack Thomsen.
        Based upon that evaluation, our Chief Executive Officer and Chief Financial
        Officer concluded that, as of December 31, 2007, our disclosure controls
        and
        procedures were not effective due to the material weaknesses described below.


23


MANAGEMENT’S
        REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 Management
        of the Company is responsible for establishing and maintaining effective
        internal control over financial reporting as defined in Rule 13a-15(f) under
        the
        Exchange Act. The Company’s internal control over financial reporting is
        designed to provide reasonable assurance to the Company’s management and Board
        of Directors regarding the preparation and fair presentation of published
        financial statements in accordance with United States’ generally accepted
        accounting principles (US GAAP), including those policies and procedures
        that:
        (i) pertain to the maintenance of records that, in reasonable detail, accurately
        and fairly reflect the transactions and dispositions of the assets of the
        Company, (ii) provide reasonable assurance that transactions are recorded
        as
        necessary to permit preparation of financial statements in accordance with
        US
        GAAP and that receipts and expenditures are being made only in accordance
        with
        authorizations of management and directors of the Company, and (iii) provide
        reasonable assurance regarding prevention or timely detection of unauthorized
        acquisition, use, or disposition of the Company’s assets that could have a
        material effect on the financial statements.
 
 Management
        conducted an evaluation of the effectiveness of internal control over financial
        reporting based on the framework in Internal Control-Integrated Framework
        issued
        by the Committee of Sponsoring Organizations of the Treadway Commission.
        Management’s assessment included an evaluation of the design of our internal
        control over financial reporting and testing of the operational effectiveness
        of
        our internal control over financial reporting. Based on this assessment,
        management concluded the Company did not maintain effective internal control
        over financial reporting as of December 31, 2007 due to the Company’s limited
        number of employees. With regard to such personnel, there was a weakness
        as a
        result of the limited segregation of duties amongst our employees. However,
        to
        the extent possible, the initiation of transactions, the custody of assets
        and
        the recording of transactions should be performed by separate individuals.
         The Certifying Officers evaluated the impact of our failure to have
        segregation of duties on our assessment of our disclosure controls and
        procedures and has concluded that the control deficiency that resulted
        represented a material weakness.
 
 To
        remediate the material weaknesses in our disclosure controls and procedures
        identified above, in addition to working with our independent auditors, we
        shall
        refine our internal procedures to begin to implement segregation of
        duties.
 
 Limitations
        on the Effectiveness of Internal Controls
 
 Notwithstanding,
        our management does not expect that our disclosure controls and procedures
        or
        our internal control over financial reporting will necessarily prevent all
        fraud
        and material error. Our disclosure controls and procedures are designed to
        provide reasonable assurance of achieving our objectives and our Chief Executive
        Officer and Chief Financial Officer concluded that our disclosure controls
        and
        procedures are effective at that reasonable assurance level. Further, the
        design
        of a control system must reflect the fact that there are resource constraints,
        and the benefits of controls must be considered relative to their costs.
        Because
        of the inherent limitations in all control systems, no evaluation of controls
        can provide absolute assurance that all control issues and instances of fraud,
        if any, within the Company have been detected. These inherent limitations
        include the realities that judgments in decision-making can be faulty, and
        that
        breakdowns can occur because of simple error or mistake. Additionally, controls
        can be circumvented by the individual acts of some persons, by collusion
        of two
        or more people, or by management override of the internal control. The design
        of
        any system of controls also is based in part upon certain assumptions about
        the
        likelihood of future events, and there can be no assurance that any design
        will
        succeed in achieving its stated goals under all potential future conditions.
        Over time, control may become inadequate because of changes in conditions,
        or
        the degree of compliance with the policies or procedures may
        deteriorate.
 This
        annual report does not include an attestation report of the Company’s registered
        public accounting firm regarding internal control over financial reporting.
        Management’s report was not subject to attestation by our registered public
        accounting firm pursuant to temporary rules of the Securities and Exchange
        Commission that permit the Company to provide only management’s report in the
        Annual Report.
 
 Changes
        in internal control
 
 There
        have been no significant changes in our internal controls over financial
        reporting during the quarter ended December 31, 2007 that have materially
        affected or are reasonably likely to materially affect such
        controls.




**Item
      8B. Other Information.**




None.




24




**PART
      III**




**Item
              9.**
            **Directors,
                Executive Officers, Promoters and Control Persons; Compliance****with
                Section 16(a) of the Exchange
                Act.**




Set
      forth
      below is certain information concerning each of the directors and executive
      officers of the Company as of March 27, 2007:





Name
            
            Age
            
            Position
            
            With
                CompanySinceColorado
                Stark
            
            36
            
            Executive
                Chairman, Director
            
            1999Alvin
                Estevez
            
            36
            
            President
                and CEO, Director
            
            1999Edwin
                J. McGuinn, Jr.
            
            56
            
            Director
            
            2005Richard
                M. Scarlata
            
            65
            
            CFO
                and Treasurer
            
            2004





*Colorado
      Stark.* Mr.
      Stark co-founded the Company in 1999 and currently serves as its Executive
      Chairman. Having
      worked in the investment banking industry for over 12 years, Mr. Stark offers
      Enigma his expertise in sales, business development, raising capital, and
      structuring transactions to enhance shareholder value. From 2001 to
      2003, in addition to serving as Enigma Software Group's Executive Chairman,
      Mr.
      Stark also served as president of Brill Capital. Brill Capital was a Venture
      Capital Placement agent that helped US companies, in the fields of
      biotechnology and communications, raise capital from Taiwan.





**  *Alvin
      Estevez.* Mr.
      Estevez  is
      also a
      co-founder of the Company and currently serves as its President and CEO, having
      held such positions since 1999. He comes from a network security background
      and
      prior to co-founding Enigma, he worked at defense contractor Northrop Grumman,
      as well as with related subsidiaries and entities. Mr. Estevez brings to the
      Company the experience of managing large groups of technical personnel along
      with the expertise of building enterprise level technology systems.





*Edwin
      J. McGuinn, Jr.* Mr.
      McGuinn currently serves as a Director of the Company, having been so elected
      in
      March 2005. Mr. McGuinn also serves on the Audit Committee and the Compensation
      Committee and has been designated the Audit Committee Financial Expert. Mr.
      McGuinn is *independent* ,
      as that
      term is used in Item 7(d) (3) (iv) of Schedule 14A under the Exchange
      Act. ** Mr.
      McGuinn is currently the Chairman and CEO of MRU Holdings, Inc., having held
      such position since April 2004. MRU Holdings, Inc. is a specialty finance
      company that provides undergraduate and graduate students with funds for higher
      education. Prior to joining MRU Holdings, Inc., Mr. McGuinn was the President
      and CEO of eLOT, Inc., having held such positions from May 2000 until November
      2004. eLOT, Inc. is a company whose focus was the development of consumer
      e-commerce products and integrated network management systems for the sale
      of
      state and governmental lottery tickets on the Internet. Prior to joining eLOT,
      Inc., Mr. McGuinn was President and CEO of Limitrader.com from January 1999
      until May 2000. Limitrader.com is the first Internet based trading platform
      for
      the new issue and secondary trading of corporate bonds. Mr. McGuinn also sits
      on
      the Board of Directors of eLOT, Inc. and the board of a venture capital company
      and several development stage companies specializing in financial technology
      and
      Internet services.




25





*Richard
      M. Scarlata.* Mr.
      Scarlata became CFO of the Company as of December 30, 2004. From 1999 until
      that date, Mr. Scarlata was self-employed as a consultant, providing financial,
      accounting and business advisory services to clients. From 1993,
      Mr. Scarlata held at different intervals the CFO and CEO positions at
      Rockefeller Center Properties, Inc., a publicly traded REIT. Mr. Scarlata
      possesses an MBA degree in Finance, and has been a CPA since 1970. Previously,
      Mr. Scarlata had also served as an Adjunct Professor of Finance at Monroe
      College in The Bronx, NY.




**Audit
      Committee**




In
      March
      2005, the Company adopted an Audit Committee Charter and designated Edwin J.
      McGuinn Jr., the sole member of the Audit Committee, as the independent audit
      committee financial expert. The appointment of Mr. McGuinn satisfies the
      definition of independence in accordance with SEC rules and NASDAQ listing
      standards.





The
      Audit
      Committee makes such examinations as are necessary to monitor the corporate
      financial reporting and the external audits of the Company, to provide to the
      Board of Directors (the “Board”) the results of its examinations and
      recommendations derived there from, to outline to the Board improvements made,
      or to be made, in internal control, to nominate independent auditors, and to
      provide to the Board such additional information and materials as it may deem
      necessary to make the Board aware of significant financial matters that require
      Board attention.




**Compensation
      Committee**




In
      March
      2005, the Company adopted a Compensation Committee Charter. The compensation
      committee is authorized to review and make recommendations to the Board
      regarding all forms of compensation to be provided to the executive officers
      and
      directors of the Company, including stock compensation, and bonus compensation
      to all employees. Mr. McGuinn is the sole member of the Compensation
      Committee.




**Nominating
      Committee**




The
      Company does not have a Nominating Committee and the full Board acts in such
      capacity for the immediate future due to the limited size of the Board, which
      consists of three members.




**Compliance
      with Section 16(a) of the Exchange Act**




Section
      16(a) of the Securities Exchange Act of 1934 requires that the Company’s
      directors and executive officers and persons who beneficially own more than
      ten
      percent (10%) of a registered class of its equity securities, file with the
      SEC
      reports of ownership and changes in ownership of its common stock and other
      equity securities. Executive officers, directors, and greater than ten percent
      (10%) beneficial owners are required by SEC regulation to furnish the Company
      with copies of all Section 16(a) reports that they file. Based solely upon
      a
      review of the copies of such reports furnished to us or written representations
      that no other reports were required, the Company believes that, during 2006
      all
      filing requirements applicable to its executive officers, directors, and greater
      than ten percent (10%) beneficial owners were met.




26




**Code
      of Ethics**




In
      March
      2005, the Company adopted a Code of Ethics. The Code of Ethics applies to the
      Company’s CEO, CFO, principal accounting officer and all persons performing
      similar functions.




**Item
      10. Executive Compensation** .




The
      following table sets forth information concerning all cash and non-cash
      compensation awarded to, earned by or paid to all of the executive officers
      of
      the Company, who served during the fiscal year ended December 31, 2007, for
      services in all capacities to the Company:





SUMMARY
                COMPENSATION TABLEName
                & Principal Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
                Awards
              ($)
            
            Option
                Awards(1)
              ($)
            
            Non-Equity
                Incentive Plan Compensation
              ($)
            
            Nonqualified
                Deferred Compensation Earnings
              ($)
            
            All
                Other Compensation
              ($)
            
            Total
              ($)Alvin
                Estevez President & CEO
            
            
            2007
            
            $
            150,000
            
            
            0
            
            
            0
            
            $
            3,015
            
            
            0
            
            
            0
            
            $
            35,500
            (2)(3)
            $
            188,5152006
            
            $
            150,000
            
            
            0
            
            
            0
            
            $
            11,056
            
            
            0
            
            
            0
            
            $
            32,750
            (2)(3)
            $
            193,806Colorado
                Stark Executive Chairman
            
            
            2007
            
            $
            150,000
            
            
            0
            
            
            0
            
            $
            3,015
            
            
            0
            
            
            0
            
            $
            35,500
            (2)(3)
            $
            188,5152006
            
            $
            150,000
            
            
            0
            
            
            0
            
            $
            11,056
            
            
            0
            
            
            0
            
            $
            29,596
            (2)(3)
            $
            190,652Richard
                M. Scarlata CFO & Treasurer
            
            
            2007
            
            $
            110,000
            
            
            0
            
            
            0
            
            $
            132,847
            
            
            0
            
            
            0
            
            $
            20,500
            (3)
            $
            263,3472006
            
            $
            110,000
            
            
            0
            
            
            0
            
            $
            11,070
            
            
            0
            
            
            0
            
            $
            12,500
            (3)
            $
            133,570





(1)
      See
      Notes D [8] and J of the Notes to Consolidated Financial
      Statements.




(2)
      The
      amounts for both Alvin Estevez and Colorado Stark include a perquisite payment
      for automobile allowance in the amount of $20,000. Messrs. Estevez and Stark
      also serve as directors of the Company, but without compensation for the
      director services.




(3)
      The
      balance of the amounts for both Alvin Estevez and Colorado Stark include
      Enigma’s matching of employee contributions to the Company’s 401(k) defined
      contribution plan (“401(k) Plan”). The amount for Richard M. Scarlata represents
      Enigma’s matching of employee contributions to the 401(k) Plan. Under the 401(k)
      Plan, which became effective on May 1, 2004, eligible employees are able to
      make contributions to the 401(k) Plan, which are matched by the Company at
      the
      rate of 100% of an individual employee’s contribution up to the maximum
      allowable by law, which for 2007 was generally $15,500. See Note K of the Notes
      to Consolidated Financial Statements.




**Employment
      Agreements**




Messrs.
      Estevez, Stark, and Scarlata each have an employment agreement with the Company
      that currently extends until December 31, 2010. The employment agreements
      each provide for an initial term of employment of three years, which term is
      automatically extended for an additional one year term unless either party
      notifies the other of its intention not to renew for an additional year. The
      employment agreements provide for annual discretionary performance bonuses
      and
      additional incentive awards, including stock options and stock grants. In
      addition, the employment agreements each contain non-compete, non-disclosure
      and
      non-solicitation restrictive covenants, which last for a period of 12 months
      following the date of the employee’s termination from the Company. A copy of
      each of these employment agreements was filed as an exhibit to the Company’s
      Form 8-K filed on February 16, 2005.




27





Messrs.
      Estevez, Stark and Scarlata participate in the Company’s defined contribution
      plan, the Enigma Software Group, Inc. 401(k) Plan, (the "401(k) Plan"). The
      401(k) Plan became effective on May 1, 2004. Eligible employees are able to
      make contributions to the 401(k) Plan, which are matched by the Company at
      the
      rate of 100% of an individual employee’s contribution up to the maximum
      allowable by law, which for 2007 was generally $15,500.





The
      Company recognizes compensation costs associated with stock options over each
      employee’s service period, which in all cases is the vesting period for such
      stock option grants. The 2007 stock option awards vest ratably over a period
      of
      12 months from the date of grant, which is the requisite service period for
      such
      awards. No other conditions, such as market or performance conditions, must
      be
      satisfied in order for the option awards to fully vest.





The
      following table sets forth information with respect to outstanding equity awards
      at December 31, 2007 held by the persons named in the Summary Compensation
      Table:





OUTSTANDING
                EQUITY AWARDS AT FISCAL YEAR-END (1)Option
                Awards (1)
            
            Stock
                AwardsName
            
            Number
                of Securities Underlying Unexercised Options
              (#)
                Exercisable
            
            Number
                of Securities Underlying Unexercised Options (#)
                Unexercisable
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options (#)
            
            Option
                Exercise Price
              ($)
            
            Option
                Expiration Date
            
            Number
                of Shares or Units of Stock That Have Not Vested (#)
            
            Market
                Value of Shares or Units of Stock That Have Not Vested ($)
            
            Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested (#)
            
            Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested ($)Alvin
                Estevez
              President
                & CEO
            
            
            0
              225,000
              26,293
            (2)
              (3)
              (4)
            
            0
              0
            
            
            0
              0
            (3)
              (5)
            $
              $
            0.0715
              1.2100
            
            
            4/12/2011
              5/17/2010
            
            
            0
            
            
            0
            
            
            0
            
            0Colorado
                Stark
              Executive
                Chairman
            
            
            0
              225,000
              20,238
            (2)
              (3)
              (4)
            
            0
              0
            
            
            0
              0
            (3)
              (5)
            $
              $
            0.0715
              1.2100
            
            
            4/12/2011
              5/17/2010
            
            
            0
            
            
            0
            
            
            0
            
            0Richard
                M. Scarlata
              CFO
                & Treasurer
            
            
            1,100,000
              225,000
              161,718
            (2)
              (3)
              (4)
            
            0
              0
              0
            
            
            274,998
              0
              16,894
            (3)
              (4)
            $
              $
              $
            0.1500
              0.0650
              1.1000
            
            
            8/16/2017
              4/12/2016
              5/17/2015
            
            
            0
            
            
            0
            
            
            0
            
            0





(1)
      See
      Notes D [8] and J of Notes to Consolidated Financial Statements.




(2)
      Represents stock option grants for the year ended December 31, 2007; such grants
      vest ratably on the last day of each month of April 2007 to March, 2008. Messrs.
      Estevez and Stark received no option grants in 2007.




(3) Represents
      stock option grants for the year ended December 31, 2006; such grants vested
      ratably on the first day of each month of May 2006 to April, 2007.




(4)
      Represents stock option grants for the year ended December 31, 2005; Mr.
      Scarlata’s grant vests 16,894 shares on January 1, 2008.




(5)
      The
      2006 and 2005 stock option awards for Messrs. Estevez and Stark and were fully
      vested at December 31, 2007.




28




**Compensation
      of Directors**




The
      following table sets forth information with respect to director’s compensation
      for the fiscal year ended December 31, 2007:





DIRECTOR
                COMPENSATION




Name
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards ($)
            
            Option
                Awards ($)
            
            Non-Equity
                Incentive Plan Compensation
              ($)
            
            Nonqualified
                Deferred Compensation Earnings
            
            All
                Other Compensation
              ($)
            
            Total
              ($)Edwin
                J. McGuinn, Jr.
            
            $
            10,000
            
            
            0
            
            $
            41,250
            
            
            0
            
            
            0
            
            
            0
            
            $
            51,250




Non-employee
      Directors of the Company are paid $10,000 per year in director fees, payable
      quarterly. No fees are paid for meeting attendance or for committee service.





Non-employee
      Directors also receive non-qualified stock options as follows:





Initial
      Grant .
      Upon a
      Board member who is not an employee joining the Board, such member shall receive
      a grant of Stock Options to purchase 75,000 shares of Stock with an exercise
      price equal to the Fair Market Value. The Option shall vest 25,000 Shares on
      the
      one year anniversary of the date of grant, 25,000 Shares on the second
      anniversary of the date of grant, and 25,000 Shares on the three year
      anniversary of the date of grant as long as the Board member is still a member
      of the Board as of such date. The Option shall have a term of ten
      years.




Annual
      Grant .
      Every
      Board member who is not an employee shall be entitled to an annual grant of
      Stock Options to purchase 25,000 Shares on the last trading day in March
      following the first anniversary of the member joining the Board. The Options
      shall fully vest on the date of grant with a term of ten years. The exercise
      price shall be the Fair Market Value.




Special
      Grant . Every
      Board member who is not an employee and has been a Board Member prior to the
      date of the Amendment of this Plan shall be entitled to a one time special
      grant
      of Stock Options to purchase 100,000 Shares on the last trading day of the
      month
      in which this Amendment of the Plan is adopted. The Options shall fully vest
      on
      the date of grant with a term of ten years. The exercise price shall be the
      Fair
      Market Value.




During
      the year ended December 31, 2007, Mr. McGuinn was awarded options to
      purchase 25,000 shares exercisable at $0.25 per share and options to purchase
      100,000 shares exercisable at $0.35 per share. The Options were fully vested
      upon the date of grant. During the year ended December 31, 2006, Mr.
      McGuinn was awarded an Option to purchase 3,000 shares exercisable at $0.065
      per
      share. The Option was fully vested upon the date of grant. During the year
      ended
      December 31, 2005, Mr. McGuinn was awarded an Option to purchase 39,000
      shares exercisable at $1.26 per share. The Option vested as to 13,000 shares
      on
      each of March 8, 2006 and March 8, 2007, and shall vest with respect to the
      remaining 13,000 shares on March 8, 2008, as long as Mr. McGuinn remains a
      Board
      member at such time.




29




**Item
      11. Security Ownership of Certain Beneficial Owners and
      Management** **.**




The
      following table sets forth certain information with respect to the beneficial
      ownership of the Common Stock of the Company as of March 25, 2008, for: (i)
      each
      person who is known by the Company to beneficially own more than 5 percent
      of
      the Company’s Common Stock, (ii) each of the Company’s directors, (iii) each of
      the Company’s Named Executive Officers, and (iv) all directors and executive
      officers as a group. As of March 25, 2008, the Company had 6,387,372 shares
      of
      Common Stock outstanding.




**Title
                of Class**
            
            **Name
                and Address**
              **of
                Beneficial Owner (1)**
            
            **Shares
                Beneficially Owned**
            
            **Percentage
                of**
              **Shares**
              **Beneficially**
              **Owned**
            
            **Percentage
                of**
              **Total
                Voting**
              **Power**
            
            **Position**Common
                Stock
            
            Colorado
              Stark
            
            
            199,979,477
            
            
            37.23
            %
            
            37.23
            %
            
            Executive
                Chairman
              &
                DirectorCommon
                Stock
            
            Alvin
              Estevez
            
            
            197,940,948
            
            
            36.86
            %
            
            36.86
            %
            
            President
                & CEO and DirectorCommon
                Stock
            
            Dutchess
              Private Equities Fund, Ltd.50
              Commonwealth AvenueBoston,
              MA 02116
            
            
            132,773,099
            
            
            24.72
            %
            
            24.72
            %Common
                Stock
            
            Edwin
              J. McGuinn, Jr.
            
            
            0
            
            
            0
            
            
            0
            
            
            DirectorCommon
                Stock
            
            Richard
              M. Scarlata
            
            
            0
            
            
            0
            
            
            0
            
            
            CFO
                & TreasurerDirectors
              and Executive Officers as a Group(4
              persons)
            
            
            397,920,425
            
            
            74.09
            %
            
            74.09
            %





(1)  Except
        where otherwise indicated, the address of the beneficial owner is deemed
        to be
        the same address as the Company.





The
      following table sets forth certain information with respect to the beneficial
      ownership of the Preferred Stock of the Company as of March 25, 2008, for:
      (i)
      each person who is known by the Company to beneficially own more than 5 percent
      of the Company’s Preferred Stock, (ii) each of the Company’s directors, (iii)
      each of the Company’s Named Executive Officers, and (iv) all directors and
      executive officers as a group. As of March 25, 2008, the Company had 7,433,988
      shares of Preferred Stock outstanding.





**Title
                of Class**
            
            **Name
                and Address**
              **of
                Beneficial Owner**
            
            **Shares**
              **Beneficially**
              **Owned**
            
            **Percentage**
              **of
                Shares Beneficially Owned**
            
            **Percentage**
              **of**
              **Total
                Voting Power**
            
            **Position**Preferred
                Stock
            
            
            Colorado
                Stark
            
            
            3,736,036
            
            
            50.3
            %
            
            50.3
            %
            
            Executive
                Chairman & DirectorPreferred
                Stock
            
            
            Alvin
                Estevez
            
            
            3,697,952
            
            
            49.7
            %
            
            49.7
            %
            
            President
                & CEO and DirectorPreferred
                Stock
            
            
            Edwin
                J. McGuinn, Jr.
            
            
            0
            
            
            0
            
            
            0
            
            
            DirectorPreferred
                Stock
            
            
            Richard
                M. Scarlata
            
            
            0
            
            
            0
            
            
            0
            
            
            CFO
                & TreasurerDirectors
                  and Executive Officers as a Group (4 persons)
            
            
            **7,433,988**
            
            
            **100**
            **%**
            
            **100**
            **%**





30




**Securities
      Authorized for Issuance Under Equity Compensation Plans**




On
      March
      8, 2005, the Company adopted a Stock Option and Grant Plan (the “Plan”), a copy
      of which was filed as an exhibit to the Company’s Form 10-KSB for the fiscal
      year ended December 31, 2004. On March 13, 2007, the Plan was amended to,
      among other things, allow for an increase to 9,000,000 shares, the maximum
      aggregate number of shares of Common Stock reserved and available for issuance
      under the Plan. The Plan has been approved by the Company’s
      stockholders.





The
      following table sets forth certain information with respect to the
      Plan:




Number
                of securities to
              be
                issued upon exercise of
              outstanding
                options,
              warrants
                and
              rights
            
            
            Weighted-average
              exercise
                price of
              outstanding
                options,
              warrants
                and
              rights
            
            
            Number
                of securities remaining
              available
                for future issuance
              under
                equity compensation
              plans
                (excluding
              securities
                reflected in column(a)
            
            
            (b)
            
            
            (c)Equity
                compensation plans
              approved
                by security holders
            
            
            8,570,001
            
            $
            0.20
            
            
            429,999Equity
                compensation plans not
              approved
                by security holders
            
            
            none
            
            
            none
            
            
            noneTotal
            
            
            8,570,001
            
            $
            0.20
            
            
            429,999




**Item
      12. Certain Relationships and Related Transactions** **,
      and Director Independence**




There
      were no related party transactions during fiscal year 2007.




Edwin
      J.
      McGuinn, Jr. is an independent director of the Company, and as such, he
      satisfies the definition of independence in accordance with SEC rules and NASDAQ
      listing standards. Colorado Stark and Alvin Estevez are not independent
      directors of the Company.





**Item
      13. Exhibits** **.**




Listed
      in
      the Exhibit Index on page 34 hereof.




**Item
      14. Principal Accountant Fees and Services**




**Audit
      Fees**




The
      aggregate fees billed or to be billed for professional services rendered by
      our
      independent registered public accounting firm for the audit of our annual
      financial statements, review of financial statements included in our quarterly
      reports and other fees that are normally provided by the accounting firm in
      connection with statutory and regulatory filings or engagements for the fiscal
      years ended December 31, 2007 and 2006, were $81,632 and $66,817,
      respectively.





**Audit
      Related Fees**




The
      aggregate fees billed or to be billed for audit related services by our
      independent registered public accounting firm that are reasonably related to
      the
      performance of the audit or review of our financial statements, other than
      those
      previously reported in this Item 14, for the fiscal years ended
      December 31, 2007 and 2006 were $-0- and $-0-, respectively.




31




**Tax
      Fees**




The
      aggregate fees billed for professional services rendered by our independent
      registered public accounting firm for tax compliance, tax advice and tax
      planning for the fiscal years ended December 31, 2007 and 2006 were $2,500
      and $2,500, respectively.




**All
      Other Fees**




The
      aggregate fees billed for products and services provided the Company’s
      predecessor accounting firm for the fiscal years ended December 31, 2007
      and 2006 were $5,000 and $17,000, respectively.




**Audit
      Committee**




**A** fter
      his
      joining the Board of Directors in March 2005, Mr. McGuinn was designated as
      the
      sole member of the audit committee and the independent audit committee financial
      expert. It is the policy of the Company for all work performed by its
      independent registered public accounting firm to be approved in advance by
      the
      Board of Directors. All of the services described above in this Item 14 were
      approved in advance by the Board of Directors during 2007 and 2006.





32


**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**CITY
                LOAN, INC.**Date:
                August 5, 2008
            By:
            /s/
              William AtkinsonWilliam
                Atkinson
              Chief
                Executive Officer




In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





Signature
            
            Title
            
            Date/s/
                William
                Atkinson
              William
                  Atkinson
            
            Chief
                Executive Officer
              (Principal
                Executive Officer)
            
            August
                5, 2008/s/
                Jack Thomsen
              Jack
                Thomsen
            
            Chief
                Financial Officer
              (Principal
                Financial Officer)
            
            August
                5, 2008/s/
                Michael Novielli
                Michael
                Novielli
            
            Director
            
            August
                5, 2008/s/ Douglas
              Leighton
              Douglas
                Leighton
            
            Director
            
            August
                5, 2008/s/ Theodore
              Smith
              Theodore
                Smith
            
            Director
            
            August
                5, 2008




33


**INDEX
      TO EXHIBITS**


EXHIBIT
                  NO.
              
              DESCRIPTION
                  OF EXHIBIT2
              
              Share
                  Exchange Agreement, effective as of February 16, 2005, by and among
                  the
                  Company, Enigma and the Stockholders (incorporated by reference
                  to Exhibit
                  2 in the Company’s Form 8-K filed February 18, 2005 (the “February 18 Form
                  8-K”)).2.1
              
              Agreement
                  and Plan of Merger, dated March 9, 2005 (incorporated by reference
                  to
                  Exhibit 2.1 in the Company’s Form 8-K filed March 8, 2005).3(i)
              
              Articles
                  of Incorporation of the Company (incorporated by reference to Exhibit
                  3(i)
                  in the Company’s Form 10-KSB, filed April 10, 2006).3(ii)
              
              Bylaws
                  of the Company (incorporated by reference to Exhibit 3(ii) in the
                  Company’s Form 10-KSB, filed April 10, 2006).4.1
              
              Certificate
                  of Designation of Series A Convertible Preferred Stock, filed June
                  29,
                  2006 (incorporated by reference to Exhibit 4.1 in the Company’s Form 8- K
                  filed on June 30, 2006).10.1
              
              Lease
                  Agreement, dated as of April 2004, by and between Enigma and RFR/SF
                  17
                  State Street LP (incorporated by reference to Exhibit 10.1 of the
                  February
                  18 Form 8-K).10.2
              
              Employment
                  Agreement, dated as of November 15, 2004, by and between Enigma
                  and
                  Colorado Stark (incorporated by reference to Exhibit 10.2 of the
                  February
                  18 Form 8-K).10.3
              
              Employment
                  Agreement, dated as of November 15, 2004, by and between Enigma
                  and Alvin
                  Estevez (incorporated by reference to Exhibit 10.3 of the February
                  18 Form
                  8-K).10.4
              
              Employment
                  Agreement, dated as of December 30, 2004, by and between Enigma
                  and
                  Richard M. Scarlata (incorporated by reference to Exhibit 10.4
                  of the
                  February 18 Form 8-K).10.5
              
              Audit
                  Committee Charter, dated March 8, 2005 (incorporated by reference
                  to
                  Exhibit 10.5 in the Company’s Form 10-KSB filed March 29, 2005 (the “2004
                  Form 10-KSB”)).10.6
              
              Compensation
                  Committee Charter, dated March 8, 2005 (incorporated by reference
                  to
                  Exhibit 10.6 of the 2004 Form 10-KSB).10.7
              
              Stock
                  Option and Grant Plan, dated March 8, 2005 (incorporated by reference
                  to
                  Exhibit 10.7 of the 2004 Form 10-KSB).10.8
              
              Subscription
                  Agreement, dated June 28, 2006, by and among Enigma Software Group,
                  Inc.,
                  Dutchess Private Equities Fund, LP and Dutchess Private Equities
                  Fund, II,
                  LP. (incorporated by reference to Exhibit 10.1 in the Company’s Form 8-K
                  filed on June 30, 2006).10.9
              
              Debenture
                  Registration Rights Agreement, dated June 28, 2006, by and among
                  Enigma
                  Software Group, Inc., Dutchess Private Equities Fund, LP and Dutchess
                  Private Equities Fund, II, LP. (incorporated by reference to Exhibit
                  10.2
                  in the Company’s Form 8-K filed on June 30, 2006).10.10
              
              Debenture
                  Agreement, dated June 28, 2006, by and among Enigma Software Group,
                  Inc.,
                  Dutchess Private Equities Fund, LP and Dutchess Private Equities
                  Fund, II,
                  LP. (incorporated by reference to Exhibit 10.3 in the Company’s Form 8-K
                  filed on June 30, 2006).10.11
              
              Share
                  Exchange Agreement, dated June 28, 2006, among Enigma Software
                  Group,
                  Inc., Colorado Stark and Alvin Estevez (incorporated by reference
                  to
                  Exhibit 10.4 in the Company’s Form 8-K filed on June 30, 2006).10.12
              
              Debenture
                  Agreement between the Company and Dutchess entered into July 20,
                  2007
                  (incorporated by reference to Exhibit 99.1 in the Company’s Form 8- K
                  filed on July 25, 2007).10.13
              
              Warrant
                  Agreement between the Company and Dutchess entered into July 20,
                  2007
                  (incorporated by reference to Exhibit 99.2 in the Company’s Form 8-K filed
                  on July 25, 2007).
  34
  10.14
              
              Warrant
                  Agreement between the Company and Dutchess entered into July 20,
                  2007(incorporated
                  by reference to Exhibit 99.2 in the Company’s Form 8-K filed on July 25,
                  2007).10.13
              
              Amendment
                  No. 1 to the Stock Option Plan (incorporated by reference to Exhibit
                  A of
                  the Company’s Definitive Schedule 14C Information Statement, filed on
                  April 12, 2007).14
              
              Code
                  of Ethics, dated March 8, 2005 (incorporated by reference to Exhibit
                  14 of
                  the 2004 Form 10-KSB).16
              
              Letter
                  on change in certifying accountant (incorporated by reference to
                  Exhibit
                  16.1 of the Company’s Form 8-K/A filed January 30,
                  2006).21
              
              Subsidiaries
                  (incorporated by reference to Exhibit 21 of the 2004 Form
                  10-KSB).31.1*
              
              Certifications
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.31.2*
              
              Certifications
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.32.1*
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.32.2*
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.
 *
              Filed
              herewith.




35






Enigma
      Software Group, Inc.




Annual
      Report to Shareholders




**Index
      to Financial Statements**




**Page**Report
                  of Independent Registered Public Accounting Firm
              
              
              F-2Consolidated
                  Balance Sheet
              
              
              F-3Consolidated
                  Statements of Operations
              
              
              F-4Consolidated
                  Statements of Changes in Capital Deficit
              
              
              F-5Consolidated
                  Statement of Temporary Equity
              
              
              F-6Consolidated
                  Statements of Cash Flows
              
              
              F-7Notes
                  to Consolidated Financial Statements
              
              
              F-8
                  - F-32




F-1




**BAGELL,
      JOSEPHS, LEVINE & COMPANY, L.L.C.**


Certified
      Public Accountants





406
      Lippincott Drive, Ste. J


Marlton,
      NJ 08053-4168


(856)
      346-2828 Fax (856) 396-0022




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors and Stockholders


Enigma
      Software Group, Inc.


150
      Southfield Avenue, Suite 1432


Stamford,
      Connecticut 06902-7756





We
      have
      audited the accompanying consolidated balance sheet of Enigma Software Group,
      Inc., as of December 31, 2007, and the related consolidated statements of
      operations, stockholders’ equity and cash flows for each of the years in the
      two-year period ended December 31, 2007. Enigma Software Group, Inc.’s
      management is responsible for these financial statements. 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 consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Enigma Software Group,
      Inc.
      as of December 31, 2007, and the results of its operations and its cash flows
      for each of the years in the two-year period ended December 31, 2007 in
      conformity with accounting principles generally accepted in the United States
      of
      America.





The
      accompanying financial statements have been prepared assuming the Company will
      continue as a going concern. As discussed in Note 1 to the financial statements,
      unless the Company is successful in generating new sources of revenue, or
      obtaining debt or equity financing, or restructuring its business, the Company
      is likely to deplete its working capital during 2008. These matters raise
      substantial doubt about the Company’s ability to continue as a going concern.
      Management’s plan in regard to these matters is also described in Note 1. The
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.







*/s/
      BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.*


Bagell,
      Josephs, Levine & Company, L.L.C.


Marlton,
      NJ 08053





March
      27,
      2008





AMERICAN
      INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA)


CENTER
      FOR AUDIT QUALITY (CAQ)


NEW
      JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS


PENNSYLVANIA
      INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS




F-2




**Enigma
                Software Group, Inc.**
              **Consolidated
                Balance Sheet**
              **December 31,
                2007**




**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            95,223Accounts
                receivable
            
            
            415,780Prepaid
                expenses
            
            
            5,375Deferred
                expense, net
            
            
            65,302Other
                current assets
            
            
            16,620Total
                current assets
            
            
            598,300Property
                and equipment, net
            
            
            36,889Other
                assets
            
            
            14,325**Total
                Assets**
            
            $
            649,514**LIABILITIES,
                TEMPORARY EQUITY AND CAPITAL DEFICIT**Current
                Liabilities:Accounts
                payable and accrued expenses
            
            $
            70,115Current
                portion of secured convertible debenture, due 2011, net
            
            
            409,176Current
                portion of secured convertible debenture, due 2012, net
            
            
            500,000Debenture
                redemption premium payable
            
            
            227,294Accrued
                debenture interest
            
            
            18,674Accrued
                liability for liquidated damages
            
            
            114,214Derivative
                liability
            
            
            832,412Warrant
                liability
            
            
            1,116,281Dividend
                payable in connection with Preferred Stock beneficial
                conversion
            
            
            1,550Deferred
                revenue
            
            
            1,102,224Total
                current liabilities
            
            
            4,391,940Secured
                convertible debentures, due 2011, net, less current
                portion
            
            
            -Secured
                convertible debentures, due 2012, net, less current
                portion
            
            
            -Commitments
                and contingencies**Total
                Liabilities**
            
            
            4,391,940**TEMPORARY
                EQUITY**Series
                A convertible preferred stock, par value $0.001, 10,000,000 shares
                authorized; 7,433,988 issued and outstanding
            
            
            3,162**CAPITAL
                DEFICIT**Series
                A convertible preferred stock, par value $0.001, 10,000,000 shares
                authorized;
              7,433,988
                issued and outstanding
            
            
            4,272Common
                stock, par value $0.001, 250,000,000 shares authorized;6,387,372
                issued and outstanding
            
            
            6,387Additional
                paid-in capital
            
            
            1,277,233Accumulated
                deficit
            
            
            (5,033,480
            )Total
                capital deficit
            
            
            (3,745,588
            )**Total
                Liabilities, Temporary Equity and Capital Deficit**
            
            $
            649,514




*See
                notes to consolidated financial
                statements.*




F-3




**Enigma
                Software Group, Inc.**
              **Consolidated
                Statements of Operations**
              **Years
                ended December 31,**




2007
            
            2006**Revenues:**Sales
                of software products and subscriptions
            
            $
            3,150,364
            
            $
            1,207,824Commission
                income and other revenue
            
            
            263,603
            
            
            119,657Total
                revenues
            
            
            3,413,967
            
            
            1,327,481**Expenses:**Marketing
                and selling
            
            
            1,081,002
            
            
            214,725General
                and administrative
            
            
            3,239,394
            
            
            1,850,261Depreciation
                and amortization
            
            
            146,382
            
            
            14,577Total
                expenses
            
            
            4,466,788
            
            
            2,079,563Operating
                loss
            
            
            (1,052,811
            )
            
            (752,082
            )Debenture
                interest expense
            
            
            (110,302
            )
            
            (61,000
            )Provision
                for debenture redemption premium
            
            
            (257,294
            )
            
            (104,166
            )Provision
                for liquidated damages
            
            
            (517,919
            )
            
            (96,295
            )Discount
                expense on convertible debentures
            
            
            (900,000
            )
            
            (100,000
            )Fair
                value adjustments for derivatives and warrants
            
            
            (188,599
            )
            
            (760,095
            )Accretion
                adjustment for beneficial conversion featureof
                Preferred Stock
            
            
            89,282
            
            
            (92,925
            )Loss
                before income tax provision
            
            
            (2,937,643
            )
            
            (1,966,563
            )Income
                tax provision
            
            
            -
            
            
            -**Net
                loss**
            
            $
            (
                2,937,643
            )
            $
            (
                1,966,563
            )Basic
                net loss per common share
            
            $
            (0.63
            )
            $
            (0.20
            )Diluted
                net loss per common share
            
            $
            (0.63
            )
            $
            (0.20
            )Weighted
                average shares outstanding:Basic
            
            
            4,671,632
            
            
            10,068,680Diluted
            
            
            4,671,632
            
            
            10,068,680




*See
                notes to consolidated financial
                statements.*





F-4




**Enigma
                Software Group, Inc.**
              **Consolidated
                Statement of Changes in Capital Deficit**
              **For
                the two years ended December 31,
                2007**




**Preferred
                    Stock**
              
              **Common
                    Stock**
              
              **Additional**
                  **Paid-in**
              
              **Accumulated**
              
              **Total**
                  **Capital****Shares**
              
              **Par****value**
              
              **Shares**
              
              **Par****value**
              
              **Capital**
              
              **Deficit**
              
              **Deficit****Balance
                  - December 31, 2005**
              
              
              
              
              
              
              
              
              **16,243,267**
              
              **$**
              **16,243**
              
              **$**
              **(55,502**
              **)**
              **$**
              **(129,274**
              **)**
              **$**
              **(168,533**
              **)**Exchange
                  and cancellation of common shares for newly issued preferred
                  shares
              
              
              7,433,988
              
              $
              7,434
              
              
              (12,052,001
              )
              
              (12,052
              )
              
              4,618Stock
                  based compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              178,985
              
              
              
              
              
              178,985To
                  provide for temporary equity
              
              
              
              
              
              (5,404
              )
              
              
              
              
              
              
              
              25,378
              
              
              
              
              
              19,974Net
                  loss for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,966,563
              )
              
              (1,966,563
              )**Balance
                  - December 31, 2006**
              
              
              **7,433,988**
              ****
              **$**
              **2,030**
              ****
              ****
              **4,191,266**
              ****
              **$**
              **4,191**
              ****
              **$**
              **153,479**
              ****
              **$**
              **(2,095,837**
              **)**
              **$**
              **(1,936,137**
              **)**Issuance
                  of registered commonshares
                  upon conversion ofdebentures
              
              
              
              
              
              
              
              
              1,396,106
              
              
              1,396
              
              
              52,761
              
              
              
              
              
              54,157Issuance
                  of restricted commonshares
              
              
              
              
              
              
              
              
              800,000
              
              
              800
              
              
              111,145
              
              
              
              
              
              111,945Stock
                  based compensationexpense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              983,134
              
              
              
              
              
              983,134To
                  relieve temporary equity
              
              
              
              
              
              2,242
              
              
              
              
              
              
              
              
              (23,286
              )
              
              
              
              
              (21,044
              )Net
                  loss for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,937,643
              )
              
              (2,937,643
              )**Balance
                  - December 31, 2007**
              
              
              **7,433,988**
              
              **$**
              **4,272**
              
              
              **6,387,372**
              
              **$**
              **6,387**
              
              **$**
              **1,277,233**
              
              **$**
              **(5,033,480**
              **)**
              **$**
              **(3,745,588**
              **)**
   *See
                  notes to consolidated financial
                  statements.*


F-5





**Enigma
                Software Group, Inc.**
              **Consolidated
                Statement of Temporary Equity**
              **For
                the two years ended December 31,
                2007**




**Balance
                - December 31, 2005**
            
            **$**
            **-**To
                provide for temporary equity
            
            
            5,404**Balance
                - December 31, 2006**
            
            **$**
            **5,404**To
                relieve temporary equity
            
            
            (
                2,242
            )**Balance
                - December 31, 2007**
            
            **$**
            **3,162**




*See
                notes to consolidated financial
                statements.*





F-6




**Enigma
                Software Group, Inc.**
              **Consolidated
                Statements of Cash Flows**
              **For
                the years ended
                December 31,**




2007
            
            2006**Cash
                flows from operating activities:**Net
                loss
            
            $
            (2,937,643
            )
            $
            (1,966,563
            )Adjustments
                to reconcile net loss to net cash provided by (used) in operating
                activities:Stock
                based compensation expense
            
            
            983,134
            
            
            178,985Discount
                expense on convertible debentures
            
            
            900,000
            
            
            100,000Provision
                for liquidated damages
            
            
            517,919
            
            
            96,295Provision
                for debenture redemption premium
            
            
            257,294
            
            
            104,166Fair
                value adjustments for derivatives and warrants
            
            
            188,599
            
            
            760,095Depreciation
                and amortization
            
            
            146,382
            
            
            14,577Accretion
                adjustment for beneficial conversion feature of Preferred
                Stock
            
            
            (89,282
            )
            
            92,925Changes
                in:Accounts
                receivable
            
            
            (163,393
            )
            
            (201,092
            )Prepaid
                expenses
            
            
            (5,375
            )
            
            6,501Other
                current assets
            
            
            (15,349
            )Other
                assets
            
            
            (3,237
            )
            
            (11,088
            )Accounts
                payable and accrued expenses
            
            
            (31,191
            )
            
            (35,692
            )Accrued
                debenture interest
            
            
            8,674
            
            
            10,000Deferred
                revenue
            
            
            575,019
            
            
            (42,407
            )Net
                cash provided by (used in) operating activities
            
            
            331,551
            
            
            (893,298
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (36,748
            )
            
            (12,456
            )Net
                cash used in investing activities
            
            
            (36,748
            )
            
            (12,456
            )**Cash
                flows from financing activities:**Repayment
                of current portion of secured convertible debentures, due
                2011
            
            
            (536,667
            )Payment
                of accrued debenture redemption premium
            
            
            (134,167
            )Issuance
                of convertible debentures
            
            
            
            
            
            1,000,000Less:
                Deferred financing costs incurred in connection with issuance of
                convertible debentures, due 2011
            
            
            
            
            
            (95,000
            )Net
                cash (used in) provided by financing activities
            
            
            (670,834
            )
            
            905,000**Net
                decrease in cash and cash equivalents**
            
            
            (376,031
            )
            
            (754
            )Cash
                and cash equivalents - beginning of year
            
            
            471,254
            
            
            472,008**Cash
                and cash equivalents - end of year**
            
            $
            95,223
            
            $
            471,254**Supplemental
                disclosure of cash flow information:**Cash
                paid for Interest
            
            $
            101,628
            
            $
            51,000




*See
                notes to consolidated financial
                statements.*





F-7




**Enigma
      Software Group, Inc.**


**Notes
      to Consolidated Financial Statements**


**For
      the years ended December 31, 2007 and 2006**




**NOTE
      A - **CORPORATE ORGANIZATION, GOING CONCERN AND DESCRIPTION OF
      BUSINESS****




***Corporate
      organization***





Enigma
      Software Group, Inc. (“Enigma” or the “Company”), is a Delaware corporation,
      headquartered in Connecticut, that was formed in 2005 and is the surviving
      corporation of a reverse takeover with Maxi Group, Inc. (“Maxi”). Enigma
      commenced operations in 1999 and is a developer of security software products
      designed to give customers control over the programs installed on their
      computers in an automated and easy-to-use way, thereby enhancing transparency
      and user-control. In February of 2005, Enigma, upon completion of a reverse
      takeover transaction with Maxi, began trading on the Over the Counter Bulletin
      Board (the “OTCBB”). Enigma currently trades on the OTCBB under the symbol
“ENGM.” The consolidated financial statements include the accounts of the
      Company and its three wholly-owned subsidiaries. The only intercompany
      transactions are investments in and advances to, subsidiaries, which have been
      eliminated in consolidation. UAB Enigma Software Group LT (“UAB Enigma”), one of
      the Company’s wholly-owned subsidiaries, is a foreign corporation formed under
      the laws of the Republic of Lithuania. UAB Enigma, which is a cost center,
      has
      no revenues other than intercompany revenues. UAB Enigma commenced operations
      in
      the fourth quarter of 2006 and its financial statements, which are prepared
      in
      the local currency, have been converted to U.S. dollars using the appropriate
      exchange rates. A foreign currency translation loss, which is not material
      to
      the consolidated results, is included in General and Administrative expenses
      for
      the years ended December 31, 2007 and 2006.




***Going
      Concern - The Company is in default under certain debentures, does not have
      the
      ability to satisfy its obligations and may not be able to continue its
      operations***




The
      Company did not generate sufficient cash flows from revenues to fund its
      operations and debt service during the years ended December 31, 2007 and
      2006. In June 2006, Enigma entered into a One Million Dollar
      ($1,000,000) convertible debenture agreement (the “Old Debenture Agreement”)
      with Dutchess Private Equities Fund, LP and Dutchess Private Equities Fund,
      II,
      LP (see Notes B and G).





In
      July
      2007, the Company entered into a new Five Hundred Thousand Dollar ($500,000)
      convertible debenture agreement (the “New Debenture Agreement”) with Dutchess
      Private Equities Fund, Ltd. as successor in interest to Dutchess Private
      Equities Fund, LP & Dutchess Private Equities Fund, II, LP (“Dutchess”) (see
      Notes B and G).




F-8





At
      December 31, 2007, the Company had a net working capital deficit of
      approximately $3.8 million. After adding back a derivative liability, a warrant
      liability and a dividend payable in connection with a preferred stock beneficial
      conversion feature, all of which totaled approximately $2.0 million, the Company
      still had net a working capital deficit of approximately $1.8 million (of which
      approximately $1.3 was due to Dutchess).





At
      December 31, 2006, the Company had a net working capital deficit of
      approximately $1.9 million. After adding back a derivative liability, a warrant
      liability, and a dividend payable in connection with a preferred stock
      beneficial conversion feature, all of which totaled approximately $1.8 million,
      the Company still had net working capital deficit of approximately $100,000.





Beginning
      on January 2, 2007, the Company had been required to make monthly amortizing
      principal payments and redemption premium payments to Dutchess each in the
      amount of approximately $104,167. Due to its deteriorating cash position the
      Company was unable to make the full required payment on March 1, 2007 and in
      subsequent months, thereby creating multiple Events of Default under the
      Financing documents. Such Events of Default were cured in July 2007. (See Notes
      B and G).





Subsequent
      to July 2007, in accordance with an agreement with Dutchess (see Notes B and
      G),
      the Company was required to make monthly amortizing principal payments and
      redemption premium payments on the Old Debenture Agreement, as well as interest
      payments on both the Old Debenture Agreement and the New Debenture Agreement.
      Due to its deteriorating cash condition, the Company was unable to make the
      payments due to Dutchess on neither December 1, 2007, January 2, 2008, February
      1, 2008, nor March 2, 2008, thereby creating new multiple Events of Default.
      The
      financial statements do not include any adjustments that might result from
      the
      outcome of these uncertainties.





Dutchess
      and the Company have developed a plan for the curing of these new multiple
      Events of Default in a manner that is fair and equitable to the shareholders
      of
      the Company as well as to the parties to the agreement (See Note O).





***Description
      of Business***




Enigma’s
      products utilize proprietary technology and target the consumer market. The
      Enigma consumer software product line is currently distributed exclusively
      over
      the Internet by download, and is focused on delivering Internet privacy and
      security to individual users, home offices, and small businesses. Enigma’s
      integrated products work to protect customers’ computers from Spyware, unwanted
      advertising, tracking, and malicious hacker attacks. The Company’s SpyHunter®
product (“SpyHunter”) is a utility that is used to scan and remove Spyware and
      Adware from customers’ computers. Enigma has derived most of its revenue to date
      from SpyHunter license fees, including subscriptions for updates and customer
      service. Users are able to download trial versions of Enigma’s products from its
      various websites and then can decide whether to purchase fully licensed versions
      over the Internet via credit card. Users who purchase the fully licensed version
      pay a fee of $29.99, download the product to their computers and are then
      entitled to receive support and regular updates for 6 months from the date
      of
      purchase.




F-9




**NOTE
      B - **FINANCING
      TRANSACTION****




On
      June 28, 2006, the Company entered into a Subscription Agreement (the
“Subscription Agreement”) with Dutchess pursuant to which the Company issued
      secured debentures, convertible into shares of the Company’s common stock, par
      value $0.001 per share (the “Common Stock”), in the principal amount of
      One Million Dollars ($1,000,000) (the “Old Debentures”) (See Note G).
      Dutchess funded Five Hundred Thousand Dollars ($500,000) to the Company upon
      the
      initial closing and funded an additional Five Hundred Thousand Dollars
      ($500,000) to the Company on July 25, 2006 (the “Financing”); simultaneous
      with the Company’s filing of the Registration Statement with the SEC, covering
      the shares of Common Stock underlying the Old Debentures.





The
      filing of the Registration Statement was in accordance with a Debenture
      Registration Rights Agreement (the “Registration Rights Agreement”), which was
      also entered into by the Company and Dutchess on June 28, 2006, and under
      which the Company was obligated to register 58,000,000 shares of Common Stock
      underlying the exercise of the warrants (the “Old Warrants”) and the shares
      underlying the conversion of the Old Debentures. Also, in connection with the
      Financing, on June 28, 2006, the Company and Dutchess entered into the Old
      Debenture Agreement, a Security Agreement and a Warrant Agreement (the “Old
      Warrant Agreement”.)





Pursuant
      to the Security Agreement, the Company granted Dutchess a first priority
      security interest in certain property of the Company in order to secure the
      prompt payment, performance and discharge in full of all of the Company’s
      obligations under the Old Debentures and exercise and discharge in full of
      all
      of the Company’s obligations under the Old Warrants.





***Liquidated
      Damages***




The
      Registration Rights Agreement between the Company and Dutchess provides for
      liquidated damages to the extent that the Company does not attain certain
      milestones within specified time frames. Pursuant to the Registration Rights
      Agreement, liquidated damages amounting to approximately $20,000 per month,
      were
      payable by the Company, in the event that the Registration Statement was not
      declared effective within 90 calendar days after the closing of the Financing.
      Such liquidated damages were payable for each 30 calendar day period after
      the
      90 day milestone on a pro-rata, compounded daily basis, until the Registration
      Statement was declared effective. Furthermore, liquidated damages amounting
      to
      approximately $20,000 per month were payable by the Company, in the event that
      it failed to respond to any SEC comments or correspondence within seven business
      days of receipt of such by the Company and within nine business days in the
      case
      of SEC staff accounting comments. In addition, liquidated damages accrued as
      a
      result of the Company’s inability to make the full required monthly payments of
      $104,167 (see Note A). As a result, as of June 30, 2007, liquidated damages
      totaling $953,510 had been accrued by the Company in connection with these
      provisions, as (1) the Registration Statement was not declared effective until
      June 7, 2007; (2) the Company had required more than nine business days to
      respond, in each case, to the SEC staff’s numerous rounds of comments on the
      Registration Statement; and (3) the inability of the Company to make the
      required principal payments in full. However, as discussed below, in connection
      with the New Debenture Agreement, the Company was relieved of a portion of
      the
      liability for such liquidated damages, plus such damages that had continued
      to
      accrue from June 30, 2007 to the issuance of the New Debenture. With the
      Registration Statement having been declared effective, if Dutchess’ right to
      sell is suspended for any reason for a period of 5 business days, then the
      Company must pay liquidated damages in the amount of 2% of the face amount
      of
      the then outstanding Old Debentures for each 10 day calendar period that the
      suspension is in effect.




F-10





As
      a
      result of the Company’s default in December 2007, liquidated damages of
      approximately $114,000 were accrued by the Company at December 31, 2007.
      Additional liquidated damages continue to accrue at the approximate monthly
      rate
      of $114,000, absent a curing of the default (See Note O).





***Exchange
      of Common Stock for Preferred Stock***




In
      connection with the Financing, the Company’s two founders and principal
      stockholders, Colorado Stark and Alvin Estevez, each exchanged their shares
      of
      Common Stock (collectively 12,052,001 shares of Common Stock) for an aggregate
      7,433,988 shares of newly issued Series A Convertible Preferred Stock, par
      value
      $0.001 per share (the “Preferred Stock”), convertible initially at the rate of
      $0.07 (the “Initial Conversion Price”). While the Preferred Stock ranks senior
      to the Common Stock with respect to dividends, and on parity with the Common
      Stock with respect to liquidation, the holders of shares of the Preferred Stock
      shall generally vote together with the holders of shares of the Common Stock
      on
      an as-if-converted basis. The number of shares issuable upon conversion of
      the
      Preferred Stock, issued as an anti-dilutive device to Colorado Stark and Alvin
      Estevez, work in tandem with the number of shares issuable upon conversion
      of
      the Debentures. Prior to the Financing between the Company and Dutchess, Messrs.
      Stark and Estevez, owned 74.2% of the Company’s Common Stock. Assuming the full
      conversion of the 58,000,000 shares underlying the exercise of the Old Warrants
      and the shares underlying the conversion of the Old Debentures that the Company
      was obligated to register, the maximum amount of dilution to be experienced
      by
      Messrs. Stark and Estevez is 15%. Such number was derived assuming Dutchess’
full conversion of the 58,000,000 shares, as well as Messrs. Stark and Estevez’
conversion of their shares of Preferred Stock into shares of the Company’s
      Common Stock at the Initial Conversion Price. Assuming such conversion, Dutchess
      would own 58,000,000 shares of the Company’s Common Stock, Messrs. Stark and
      Estevez would own 106,199,827 shares of the Company’s Common Stock, and the
      number of shares outstanding immediately prior to the time of such conversion
      would remain at 4,191,266. In this instance, Messrs. Stark and Estevez would
      own
      63.1% of the Company’s Common Stock, a 15% decrease from the 74.2% of Common
      Stock they owned prior to entering into the Financing.




F-11




The
      conversion rate of Dutchess’ Old Debentures is a fluctuating 25% discount from
      the market price around the time of conversion, with a maximum conversion rate
      of $0.07 per share (the “Maximum Conversion Price”). Furthermore, the conversion
      rate of the Preferred Stock fluctuates with the conversion rate of Dutchess’ Old
      Debentures and the exercise price of the Old Warrants as set forth in Article
      3.2(d) # (vi) of the Certificate of Designation of the Series A Convertible
      Preferred Stock, and is thus a discount of 25% from current market price.
      Dutchess’ overall ownership at any one moment is limited to 9.9% of the
      outstanding shares of Common Stock in accordance with the Financing documents.
      However, Dutchess is free to sell any shares into the market, which have been
      issued to them, thereby enabling Dutchess to convert the remaining Old
      Debentures or exercise additional Old Warrants into shares of Common Stock.
      The
      shares of Common Stock that will be issued, if the shares of Preferred Stock
      are
      converted, will be very dilutive to the Company’s common stockholders (see Notes
      G and I).





***Debt
      restructure***





On
      July
      15, 2007, the Company and Dutchess reached an agreement whereby, among other
      things, the Company agreed to pay down the remaining principal of the Old
      Debentures, plus a required 25% redemption premium, plus accrued interest,
      on
      the first business day of every month commencing August 1, 2007. Accordingly,
      these liabilities are classified entirely as current liabilities on the
      accompanying balance sheet. During the six-month period ended December 31,
      2007,
      the Company paid Dutchess $278,000 in principal reductions and $69,500 in
      redemption premiums. However, due to its deteriorating cash condition, the
      Company was unable to make the required payments to Dutchess on neither December
      1, 2007, January 2, 2008, February 1, 2008, nor on March 3, 2008, thereby
      creating new multiple Events of Default. Dutchess and the Company have reached
      an agreement on curing these new multiple Events of Default (See Note
      O).





On
      July
      20, 2007, in connection with the New Debenture Agreement the Company issued
      a
      new secured convertible debenture to Dutchess in the amount of $500,000 (the
      “New Debenture”) on similar terms to those of the Old Debenture and Dutchess
      agreed to forego the payment of liquidated damages, which as of June 30, 2007
      had accrued in the amount of $953,510. No cash was received by the Company
      upon
      the issuance of the New Debenture; however the Company was relieved of the
      current liability for liquidated damages, plus such damages that continued
      to
      accrue from June 30, 2007 to the issuance of the New Debenture, the total of
      which the Company estimates to have been in excess of $1,000,000. As a result
      of
      the Company’s failure to make the payments required on December 1, 2007, the
      principal under the New Debenture was accelerated and this liability and its
      required debenture redemption premiums payable are classified entirely as
      current liabilities on the accompanying balance sheet.




F-12




**NOTE
      C - **REVERSE
      TAKEOVER****




Maxi,
      a
      non-operating public company, was incorporated on June 17, 1986 in the
      State of Nevada. On December 29, 2004, Maxi entered into a Share Exchange
      Agreement (the "Acquisition Agreement") with Adorons.com, Inc. (formerly known
      as Enigma Software Group, Inc.) a closely-held, Delaware corporation which
      commenced operations in 1999 (“Adorons”). Adorons was a developer of an
      Internet-based search network and downloadable security software products
      designed to give customers instant access to information on the web and control
      over the programs installed on their computers in an automated and easy-to-use
      way, thereby enhancing transparency and user-control.




Pursuant
      to the terms of the Acquisition Agreement, which closed on February 16,
      2005, Maxi acquired substantially all of the issued and outstanding capital
      stock of Adorons, in exchange for 14,158,953 newly issued shares of Maxi's
      common stock (the "Exchange"). In addition, Maxi acquired for $50,000,
      97,633,798 shares of its own common stock from certain of its stockholders
      prior
      to the Exchange, which shares were canceled on February 16, 2005. Three
      stockholders of Adorons, who held 151,858 shares of common stock, did not
      exchange their shares for Maxi common stock at the time of the Exchange.
      However, on April 8, 2005, these stockholders did exchange all of their
      shares for 429,305 shares of Maxi common stock. For reporting purposes, these
      shares are considered to have been exchanged as of February 16, 2005.




The
      14,588,258 shares of common stock represented approximately 89.81% of the
      ownership interests in Maxi. The Exchange, which resulted in the stockholders
      of
      Adorons obtaining control of Maxi, represented a recapitalization of Maxi,
      or a
      reverse takeover rather than a business combination. As a non-operating company,
      the assets and liabilities of Maxi were not material to the reverse takeover.
      For accounting purposes, Adorons was considered to be an acquirer in the reverse
      acquisition transaction and, consequently, the financial statements are the
      historical financial statements of Adorons and the reverse takeover has been
      treated as a recapitalization of Adorons. Additionally, on February 16,
      2005, Maxi issued 135,000 shares of common stock to a related party for the
      assumption of certain liabilities that amounted to approximately
      $46,000.




On
      April 14, 2005, Maxi completed a reincorporation merger to the state of
      Delaware and changed its name to Enigma Software Group, Inc. On May 17,
      2005, Adorons merged into its parent company, Enigma Software Group, Inc.,
      and
      ceased to exist as a separate company.




F-13




**NOTE
      D - **SIGNIFICANT
      ACCOUNTING POLICIES****




**[1]**
            ***Fair
                value of financial
                instruments***




At
      December 31, 2007 and 2006, the Company’s financial instruments included
      cash, accounts receivable and accounts payable. The carrying values of these
      instruments approximate their fair value because of their short-term nature.




At
      December 31, 2007 and 2006, financial instruments also included the
      Debentures. Because the Debentures contain a conversion features that are deemed
      to be an embedded derivatives requiring bifurcation from the debt host
      instrument, they are precluded from being accounted for as conventional
      convertible debt. Specifically, the Company has concluded that since, among
      other things, the Debenture contracts do not contain economic characteristics
      and risks that are contained in their embedded derivative (i.e., the Company’s
      Common Stock) and the host instruments do not meet the definition of
      conventional convertible debt required by Emerging Issues Task Force Issue
      No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in a Company’s Own Stock” (“EITF 00-19”), as they contain
      provisions that could result in the conversion ratio not being fixed, the
      Debentures should be accounted for pursuant to the provisions of Statement
      of
      Financial Accounting Standards No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” (“FAS 133”). Accordingly, the fair value of
      the derivative liabilities as of the December 31, 2007 and 2006, have been
      estimated using a Black-Scholes-Merton model with the following assumptions:




December
                31, 2007
            
            December
                31, 2006Debenture
                conversion price (1)
            
            $
            .0188
            
            $
            0.35Expected
                live of the debt (2)
            
            
            3
                months current
            
            
            2
                months current
              5
                year non-currentEstimated
                dividends (3)
            
            $
            0.00
            
            $
            0.00Expected
                volatility (4)
            
            
            282.19
            %
            
            221.13
            %Risk-free
                interest rate (5)
            
            
            3.63
            %
            
            4.65
            %




(1)
            Debenture
                conversion price equal to 75% of the closing market price of the
                Company’s
                Common Stock as of the last trading day on which the Company’s Common
                Stock traded prior to December 31, 200 7 and 2006.




(2)
            A
                three month live in the case of December 31, 2007 non-current Debentures
                is assumed; while in the case of December 31, 2006, a five year life
                in
                the case of the non-current portion of the Debentures and an average
                2
                month life in the case of the current portion of the Debentures is
                assumed.




(3)
            Estimated
                the amount of dividends the Company would pay to be zero.




F-14




(4)
            The
                expected volatility at December 31, 2007 and 2006 of 282.19% and
                221.13%
                respectively, are based on the average of the historical volatility
                for
                the Company’s Common Stock during its respective 34 and 22 months of
                trading activity.




(5)
            The
                risk-free interest rate of 3.63% and 4.65% at December 31, 2007 and
                2006,
                respectively, is based on the U.S. Treasury constant maturity rate
                for the
                period equal to the expected life of the derivative instrument.




**[2]**
            ***Revenue
                recognition:***




With
      respect to license fees generated from the sales of software products and
      subscriptions services for downloadable security software products, the Company
      recognizes revenues in accordance with Statement of Position (“SOP”)
      No. 97-2, "Software Revenue Recognition," as amended by SOP No. 98-9,
      "Modification of SOP No. 97-2, Software Revenue Recognition, With Respect
      to Certain Transactions." These statements provide guidance for recognizing
      revenues related to sales by software vendors. The Company sells its SpyHunter
      software with the subscription service for spyware definition updates and
      product support over the Internet. Customers place their orders and
      simultaneously provide their credit card information to the Company. Upon
      receipt of authorization from the credit card issuer, the Company licenses
      the
      customer to download SpyHunter over the Internet. For a fee of $29.99, the
      Company provides a subscription for post-contract customer support ("PCS")
      for a
      period of six months from purchase, which consists primarily of e-mail support
      and free updates of its SpyHunter software, as and when such updates are
      available. In accordance with SOP No. 97-2 and SOP No. 98-9, the fee
      is required to be allocated to the various elements, based on vendor-specific
      objective evidence ("VSOE") of fair value.




During
      May 2006, the Company introduced SpyHunter 2.7, and in the fourth quarter of
      2006 and the first quarter of 2007, introduced SpyHunter 2.8 and SpyHunter
      2.9,
      respectively. The Company introduced SpyHunter 3 Security Suite® during the
      fourth quarter of 2007. In all cases, the Company provides PCS for a period
      of
      six months. The Company considers all revenue from the sales of SpyHunter to
      be
      attributable to the service elements.




With
      respect to commission income, the Company recognizes such revenue at the time
      of
      delivery of the product or the service for which the commission is earned.




The
      Company’s license agreement for its SpyHunter software does not provide the
      Company’s customers with any right of return. However, the Company may decide to
      accept customer returns on a case-by-case basis. For the years ended
      December 31, 2007 and 2006, customer returns and chargebacks were
      minimal.




**[3]**
            ***Property,
                plant and equipment:***




Furniture,
      equipment and computer hardware are depreciated using the straight-line method
      over their estimated useful lives of up to five years. Purchased computer
      software products are amortized using the straight-line method over their
      estimated useful lives of three years. Leasehold improvements are amortized
      by
      the straight-line method over the shorter of the remaining term of the lease
      or
      the economic useful life of the asset. The Company evaluates its long-lived
      assets in accordance with SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets”. In the evaluation, the Company compares the
      values of such assets to the estimated undiscounted future cash flows expected
      from the use of the assets and their eventual disposition. When the estimated
      undiscounted future cash flows are less than the carrying amount, an impairment
      loss is recognized equal to the difference between the assets’ fair value and
      their carrying value.




F-15




**[4]**
            ***Software
                development costs:***




The
      Company accounts for software development costs in accordance with Statement
      of
      Financial Accounting Standards (“SFAS”) No. 86, “Computer Software to Be
      Sold, Leased, or Otherwise Marketed”. Such costs are expensed prior to
      achievement of technological feasibility and thereafter are capitalized. There
      have been very limited software development costs incurred between the time
      the
      SpyHunter 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 general and administrative
      expense.




**[5]**
            ***Advertising
                expenses:***




Advertising
      expenses, consisting primarily of space purchased from various Internet-based
      marketers as well as search engines, are expensed as incurred. For the years
      ended December 31, 2007 and 2006, advertising expense amounted to $612,248
      and $87,193, respectively, and is included in marketing and selling expenses
      in
      the Company’s Consolidated Statement of Operations for those respective
      years.




**[6]**
            ***Income
                taxes:***




The
      Company uses the asset and liability method to account for income taxes. Under
      this method, deferred tax assets and liabilities are recognized for the future
      tax consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using the enacted tax
      rates expected to apply to taxable income in the years during which those
      temporary differences are expected to be recovered or settled.




**[7]**
            ***Accounting
                estimates:***




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenue, costs and expenses
      during the period. Estimates are used in accounting for cost of post-contract
      customer support, sales returns and allowances, lives of depreciable and
      amortizable assets, employee benefits, valuation of derivatives, provision
      for
      income taxes, realization of deferred tax assets and stock-based compensation
      expenses. Actual results could differ from those estimates.




F-16




**[8]**
            ***Stock-based
                compensation expense:***




The
      Company recognizes compensation costs associated with stock options over each
      employee’s service period, which in all cases is the vesting period for such
      stock option grants. In December 2004, the Financial Accounting Standards Board
      (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123
      (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R established
      standards that require companies to record the cost resulting from all
      share-based payment transactions using the fair value method. Transition under
      SFAS 123R permits using a modified version of prospective application under
      which compensation costs are recorded for unvested shares outstanding or a
      modified retrospective method under which all prior periods impacted by SFAS
      123R are restated. SFAS 123R became effective, for the Company, as of January
      1,
      2006, with early adoption permitted. Enigma adopted prospective application
      in
      2006, and accordingly compensation costs associated with stock options that
      were
      unvested at December 31, 2005 and which vested in the first quarter of 2006
      were
      expensed in the first quarter of 2006. This resulted in a charge to earnings
      of
      $108,263 in that quarter. Accordingly, the financial statements for the
      Company’s prior interim periods and fiscal years did not reflect any restated
      amounts. In addition, for compensation costs incurred in the subsequent quarters
      of 2006 in connection with stock options granted and vested during 2006, the
      Company recorded charges to earnings of $70,722 in those quarters, resulting
      in
      a total charge of $178,985 for the year ended December 31, 2006. For the year
      ended December 31, 2007,  compensation
      costs incurred in connection with granted and vested during the year as well
      as
      older options which vested, the Company recorded a charge to earnings of
      $983,134. All stock-based compensation expense is included in General and
      Administrative expense on the Company’s Consolidated Statement of Operations.
      Since the portion of this expense related to Incentive Stock Options (“ISOs”) is
      not deductible for tax purposes, its recording gave rise to a deferred tax
      asset
      of approximately $344,000 and $61,000 at December 31, 2007 and 2006. However,
      since the Company has reported net losses before income tax provision for the
      years ended December 31, 2007 and 2006, and has utilized all if its Net
      Operating Loss carryforwards, such benefits will not be realizable, and as
      a
      result, have been entirely offset by a valuation reserve.





**[9]**
            ***Earnings
                per share:***




Basic
      earnings (loss) per share are computed by dividing the income/(loss) available
      to common stockholders by the weighted average number of common shares
      outstanding. For the years ended December 31, 2007 and 2006 diluted
      earnings per share would include the dilutive effect, if any, from the potential
      exercise of stock options using the treasury stock method, as well as the
      potential conversion of shares of Preferred Stock into Common Stock, the
      potential conversion of Convertible Debentures into shares of Common Stock
      and
      the potential issuance of shares of Common Stock upon potential exercise of
      Warrants. Since such treatment for the years ended December 31, 2007 and
      2006 would be anti-dilutive, diluted earnings per share are equivalent to basic
      earnings per share.




F-17




**[10]**
            ***Future
                impact of recently issued accounting standards:*******




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value,
      establishes a framework for measuring fair value and expands disclosures about
      fair value measurements. SFAS No. 157 applies under other accounting
      pronouncements that require or permit fair value measurements, but it does
      not
      require any new fair value measurements. SFAS No. 157 is effective for fiscal
      years beginning after November 15, 2007, and interim periods within those fiscal
      years. The Company adopted these disclosures with respect to its outstanding
      debentures and warrants.




**[11]**
            ***Cash
                and cash equivalents:***




The
      Company considers all highly liquid investments with an original maturity of
      three months or less to be cash equivalents.




**NOTE
      E - **CONCENTRATIONS
      OF CREDIT RISK****




CASH
        AND
        CASH EQUIVALENTS




The
      Company has placed its cash and cash equivalents with highly capitalized
      financial institutions insured by the Federal Deposit Insurance Corporation
      (“FDIC”). At December 31, 2007 and 2006, such cash balances were in excess
      of FDIC limits.




ACCOUNTS
        RECEIVABLE




The
      Company utilizes a third-party servicer (the “servicer”) that acts as a retail
      merchant to process its sales of software products and to collect its sales
      receipts from the customers’ credit card companies. The servicer holds the
      receipts until the end of the month subsequent to the month of the sale, at
      which time it remits the funds, net of the servicer’s commission, to the
      Company. This process represents a significant concentration of the Company’s
      accounts receivable. Accordingly, if the servicer were not able to pay the
      amounts owed to the Company, the impact would have a material adverse effect
      upon the Company’s liquidity, financial position and results of
      operation.




F-18




**NOTE
      F - **PROPERTY
      AND EQUIPMENT****




Property
      and equipment is comprised of the following at December 31:




**2006**
            
            **2005**
            
            **Estimated**
              **Useful
                Lives**Computer
                hardware
            
            $
            40,642
            
            $
            23,163
            
            **3
                years**Furniture
                and fixtures
            
            
            **6,060**
            
            
            **3,293**
            
            **5
                - 6 years**Telecommunications
                equipment
            
            
            **2,502**
            
            
            
            
            **3
                years**Gross
                property and equipment
            
            
            **49,204**
            
            
            **26,456**Less
                accumulated depreciation
            
            
            **12,315**
            
            
            **12,077**Net
                property and equipment
            
            $
            36,889
            
            $
            14,379





During
      the years ended December 31, 2007 and 2006, the Company recorded
      depreciation expense of $14,238 and $5,077, respectively. Also during the years
      ended December 31, 2007 and 2006 the Company acquired property and equipment
      totaling $36,748 and $12,746, respectively, and during the year ended December
      31, 2007, wrote off fully depreciated assets and associated accumulated
      depreciation of $14,000.




**NOTE
      G - **SECURED
      CONVERTIBLE DEBENTURES********


**[1]** ***SECURED
      CONVERTIBLE DEBENTURES DUE 2011***





The
      Old
      Debentures bear interest at 12% per annum, payable monthly, and are due in
      June
      of 2011. However, in connection with the Company’s default as of December 4,
      2007, (see Note B), the maturity of the Old Debentures has been accelerated
      and
      accordingly, the Old Debentures are reported as a current liability in the
      balance sheet. The Old Debentures are convertible into shares of Common Stock
      of
      the Company at the lesser of $0.07 per share or seventy-five percent (75%)
      of
      the lowest closing bid price of the Common Stock during the 20 trading days
      immediately preceding a notice of conversion (the “Conversion Price”). The Old
      Warrants are also exercisable at the Conversion Price and may be exercised
      any
      time after issuance through and including June 28, 2011. The shares of
      Common Stock that will be issued, if the underlying Old Debentures are converted
      and the Old Warrants are exercised, will be very dilutive to the Company’s
      common stockholders (see Note I).





During
      the third and fourth quarters of the year ended December 31, 2007, Dutchess
      converted a total of $54,157 face amount of the Old Debentures, at varying
      conversion prices ranging from $0.0188 to $0.07, into 1,396,106 registered
      shares of the Company’s Common Stock.




F-19





The
      potential conversion of the Old Debentures into shares of Common Stock and
      the
      potential issuance of shares of Common Stock upon the potential exercise of
      the
      Old Warrants give rise to a derivative liability (the “Derivative Liability”)
      and a warrant liability (the “Warrant Liability”), respectively. The Company has
      calculated the potential fair value of each respective liability using the
      Black-Scholes-Merton option-pricing model: the annualized historical volatility
      of the Company’s stock price over a period of 34 months of 282.19%; an estimated
      exercise price of $0.0188, equal to the Conversion Price at December 31, 2007;
      a
      discount rate of 3.63% equal to the yield on 5 year US Treasury Notes issued
      December 28, 2007; an estimated life of 3 months for the Old Debentures; and
      an
      estimated life of 3.5 years for the Old Warrants.




**[2]
      ***SECURED
      CONVERTIBLE DEBENTURES DUE 2012*****





On
      July
      20, 2007, the Company entered into the New Debenture Agreement with Dutchess
      and
      immediately closed the transaction pursuant to which the Company issued the
      New
      Debentures. Interest only payments were due on the New Debentures until their
      maturity. However, in connection with the Company’s default as of December 4,
      2007, (see Note B), the maturity of the New Debentures has been accelerated
      and
      accordingly, the New Debentures are reported as a current liability in the
      balance sheet. The New Debentures are convertible into shares of Common Stock
      of
      the Company at the lesser of seven cents ($.07), or seventy-five percent (75%)
      of the lowest closing bid price of the Company’s Common Stock during the twenty
      (20) trading days immediately preceding a notice of conversion. At the same
      time, the Company entered into a warrant agreement (the “New Warrant”) with
      Dutchess, whereby the Company issued to Dutchess warrants to purchase 25,000,000
      shares of the Common Stock of the Company at the exercise price of $0.01 per
      share of Common Stock. The term of the New Warrant is five years and it contains
      registration rights. The shares of Common Stock that will be issued, if the
      underlying New Debentures are converted and the New Warrants are exercised,
      will
      be very dilutive to the Company’s common stockholders (see Note I).





In
      consideration for the issuance of the New Debentures and the New Warrant,
      Dutchess agreed that all liquidated damages due from the Company to Dutchess,
      which the Company and Dutchess estimate to have been approximately $1,000,000
      as
      of July 20, 2007, plus additional daily accruals, resulting principally from
      the
      Company’s failure to have its recent registration statement on Form SB-2
      declared effective by the SEC prior to the deadline stipulated in the
      Registration Rights Agreement between the Company and Dutchess, and the
      inability of the Company to make the required loan principal payments resulting
      from such delay in effectiveness, were declared settled.





The
      potential conversion of the New Debentures into shares of Common Stock and
      the
      potential issuance of shares of Common Stock upon the potential exercise of
      the
      New Warrants give rise to a Derivative Liability and a Warrant Liability
      respectively, as well. The Company has calculated the potential fair value
      of
      each respective liability using the Black-Scholes-Merton option-pricing model:
      the annualized historical volatility of the Company’s stock price over a period
      of 34 months of 282.19%; an estimated exercise price of $0.0188, equal to the
      Conversion Price at December 31, 2007; a discount rate of 3.63% equal to the
      yield on 5 year US Treasury Notes issued December 28, 2007; an estimated life
      of
      3 months for the New Debentures; and an estimated life of 4.5 years for the
      New
      Warrants.




F-20




**[3]
      ***ESTIMATED
      FAIR VALU*****E****





These
      calculations resulted in an estimated fair value of $832,412 for the
      convertibility feature of the Old and New Debentures and an estimated fair
      value
      of $1,116,281 for the Old and New Warrants at December 31, 2007. Such amounts
      were recorded as liabilities in the Company’s consolidated financial statements
      as of December 31, 2007, giving rise to a charge to earnings for year ended
      December, 2007 of $188,599. For the year ended December 31, 2006, the charge
      to
      earnings for the fair value adjustment of derivatives and warrants was $760,095.




**[4]
      ***DEBT
      DISCOUNT EXPENSE*****





In
      connection with the issuance of the Old Debentures and the calculation of the
      fair value of the Warrant Liability and Derivative Liability at the time of
      issuance, a discount of $1 million was netted against the liability for the
      Old Debentures, thereby reducing that liability to a net of zero. As the Old
      Debentures were due 60 months from the closing of the Financing, the $1,000,000
      discount was to be amortized as an expense at the rate of $16,667 per month.
      This was done through December 31, 2006, giving rise to a discount expense
      on
      the Old Debentures for the year ended December 31, 2006 of $100,000.  However,
      as a result of the principal payments required to be made to Dutchess, due
      to
      the Registration Statement not having become effective, as well as the Company’s
      default as of December 4, 2007, unamortized debt discount expense of $900,000
      associated with the then current portion of Old Debentures, was expensed during
      the year ended December 31, 2007.





In
      connection with the issuance of the New Debentures and the calculation of the
      fair value of the Warrant Liability and Derivative Liability at the time of
      issuance, a discount of $500,000 was netted against the liability for the New
      Debentures, thereby reducing that liability to a net of zero. As the New
      Debentures were due 60 months from the closing of the Financing, the $500,000
      discount was to be amortized as an expense at the rate of $8,333 per month.
      However, as a result of the Company’s default as of December 4, 2007, no
      discount expense was taken and the New Debentures are reported in the
      consolidated balance sheet as a current liability.




**NOTE
      H - **TEMPORARY
      EQUITY****




As
      of
      December 31, 2007, the Company did not have a sufficient quantity of
      authorized Common Stock to meet it potential obligations for conversion of
      the
      Old and New Debentures, the exercise of the Old and New Warrants and the
      conversion of the Preferred Stock. At the December 31, 2007 exercise price
      of $0.0188 per share, the remaining outstanding Old Debentures could have been
      converted into 21,764,700 shares of the Company’s Common Stock; the Old Warrants
      could have been exercised for 15,000,000 shares of the Company’s Common Stock;
      the outstanding New Debentures could have been converted into 26,595,745 shares
      of the Company’s Common Stock; the New Warrants could have been exercised for
      25,000,000 shares of the Company’s Common Stock; and the Preferred Stock could
      have been converted into 270,191,009 shares of the Company’s Common Stock. The
      aggregate of the common shares outstanding and those shares due upon the
      conversions and the Warrant exercise, as of December 31, 2007, was
      approximately 365 million shares of Common Stock, which exceeded the
      250 million shares of Common Stock authorized in the Company’s Certificate
      of Incorporation.




F-21




During
      the year ended December 31, 2007, the Company was successful in increasing
      the
      number shares of its authorized Common Stock from 100 million to 250 million
      shares. However, because the number of shares issuable upon conversion of the
      Old and New Debentures as well the number of shares issuable upon conversion
      of
      the Preferred Stock varies inversely with the price of the Company’s Common
      Stock, the 150 million share increase in authorized shares of Common Stock
      proved to be insufficient.




Accordingly,
      the excess of such shares, 114,938,826, represented by 3,162,407 shares of
      the
      Company’s Preferred Stock, has been reclassified to Temporary Equity on the
      Consolidated Balance Sheet until this situation can be resolved. Management
      intends to study its alternatives to remedy this situation, including further
      increasing the number of authorized shares of Common Stock, with the consent
      of
      the Company’s shareholders. In addition, at December 31, 2007, based on the
      Company’s stock trading price and the conversion price of the preferred shares,
      a beneficial conversion feature estimated to be $3,643 exists, with respect
      to
      the Preferred Stock. At December 31, 2006, this beneficial conversion feature
      was estimated to be $92,925. Accordingly, a credit to income of $89,282 was
      required in connection with the Preferred Stock beneficial conversion feature.
      The portion of the estimated beneficial conversion feature of $3,643 that
      relates to the preferred shares deemed to be temporary equity ($1,550) was
      recorded as a dividend payable to preferred shareholders; and the portion that
      relates to the preferred shares in permanent equity ($2,093) was credited to
      Additional Paid-in Capital.




**NOTE
      I - **CAPITAL
      DEFICIT****




The
      Company’s authorized capital stock consists of 250,000,000 shares of Common
      Stock and 10,000,000 shares of Preferred Stock. On August 9, 2007, the majority
      stockholders of the Company voted to increase the number of authorized Common
      Stock shares from 100,000,000 to 250,000,000 and the Company filed a Schedule
      14C to that effect and in September 2007, the increase in authorized Common
      Stock became effective.





As
      of
      December 31, 2007, 6,387,372 shares of Common Stock were issued and outstanding,
      9,000,000 shares of Common Stock were reserved for issuance upon the exercise
      of
      outstanding and future stock options (see Note J), and 57,790,000 shares of
      Common Stock were reserved for conversion of the Old Debentures and exercise
      of
      the Old Warrants. The number of issued and outstanding common shares increased
      during the year ended December 31, 2007 in connection with the conversion of
      debentures in the principal amount of $54,157 due 2011 into 1,396,106 shares
      of
      Common Stock and the issuance of an aggregate of 800,000 shares of Common Stock
      pursuant to Section 4(2) of Securities Act of 1933, as amended, which shares
      were issued as consideration for the retention of three firms to provide
      investor relations services to the Company. These firms were engaged by the
      Company to create and execute a public awareness campaign, to assist in
      responding to inquiries from potential investors, to solicit research firm
      coverage of the Company and to prepare and post on various websites, both
      proprietary and non-proprietary, research reports on the Company.




F-22





In
      addition, 7,433,988 shares of Preferred Stock were issued and outstanding.
      The
      Company has not and will not receive any proceeds from the conversion of the
      Old
      Debentures into Common Stock but will receive proceeds from the exercise of
      the
      Old Warrants, if so exercised. Similarly, the Company will not receive any
      proceeds from the conversion of the New Debentures into Common Stock but will
      receive proceeds from the exercise of the New Warrants, if so
      exercised.





**Preferred
      Stock** - As
      discussed in Note B, in connection with the issuance of the Old Debentures
      to
      Dutchess, Messrs. Stark and Estevez exchanged their combined 12,052,001 shares
      of Common Stock for 7,433,988 shares of Preferred Stock. The terms of the
      Preferred Stock follow:




***Voting,
      Dividend and Other Rights.*** The
      holders of shares of Preferred Stock shall vote together with the holders of
      shares of Common Stock and any other series of preferred stock or common stock
      that, by its terms, votes on an as-if-converted basis with the Common Stock
      on
      all matters to be voted on or consented to by the stockholders of the Company,
      except as may otherwise be required under the Delaware General Corporation
      Law.
      With respect to any such vote or consent, each holder of Preferred Stock shall
      only be entitled to vote the number of shares of Common Stock underlying the
      Preferred Stock that such holder has the right to convert as of the record
      date
      for determination of holders of Common Stock entitled to participate in such
      vote or action by consent. With respect to the payment of dividends and other
      distributions on the capital stock of the Company, other than the distribution
      of the assets upon a liquidation, dissolution or winding-up of the affairs
      of
      the Company, the Preferred Stock shall rank: (i) senior to the Common Stock
      of
      the Company, (ii) senior to any new class or series of stock of the Company
      that
      by its terms ranks junior to the Preferred Stock, or that does not provide
      any
      terms for seniority, as to payment of dividends, or (iii) on a parity with
      any
      new class or series of stock of the Company that by its terms ranks on a parity
      with the Preferred Stock.




***Rights
      upon Liquidation.*** With
      respect to the distribution of assets upon a liquidation, dissolution or
      winding-up of the affairs of the Company, whether voluntary or involuntary,
      the
      Preferred Stock shall rank (i) on a parity with the Common Stock, (ii) senior
      to
      any new class or series of stock of the Company that by its terms ranks junior
      to the Preferred Stock, or that does not provide any terms for seniority, as
      to
      distribution of assets upon liquidation, dissolution or winding-up, (iii) on
      a
      parity with any new class or series of stock of the Company that by its terms
      ranks on a parity with the Preferred Stock as to distribution of assets upon
      liquidation, dissolution or winding-up of the Company and (iv) with the consent
      of the holders of all of the then outstanding shares of the Preferred Stock,
      junior to any new class of stock of the Company that by its terms ranks senior
      to the Preferred Stock as to distribution of assets upon liquidation,
      dissolution or winding-up of the Company.




F-23




***Conversion
      Rights.*** The
      holders of the Preferred Stock entered into a Lock-Up Agreement with the
      Company, whereby the holders of Preferred Stock agreed not to convert their
      shares of Preferred Stock into shares of the Company’s Common Stock from
      February 6, 2007, until in either case ending on the earlier to occur of (i)
      three hundred and sixty (360) days after the effective date of the Registration
      Statement (which would be approximately June 1, 2008) or (ii) the date on which
      the full face amount, accrued interest and penalties, if any, on the Debentures
      have been paid or (iii) the conversion in full of the Old Debentures, any
      accrued interest thereon and the full exercise of the Old Warrants (either
      being
      the “Lock-Up Period”). However, the holders of the Preferred Stock may convert
      their shares of Preferred Stock during the Lock-Up Period upon and after the
      occurrence of Dutchess acquiring a percentage threshold of the shares of the
      Company’s Common Stock, whether through partial conversion of the shares
      underlying the Old Debentures or exercise of the shares underlying the Old
      Warrants, on a pro rata basis with subsequent conversions of Common Stock that
      have been issued to Dutchess as a result of conversions of the Old Debentures
      and exercise of the Old Warrants.




In
      the
      event that the outstanding shares of Common Stock shall be subdivided into
      a
      greater number of shares, and no equivalent subdivision or increase is made
      with
      respect to the Preferred Stock, the conversion price, concurrently with the
      effectiveness of such subdivision or other increase, shall be proportionately
      decreased. In the event that the outstanding shares of Common Stock shall be
      combined or consolidated into a lesser number of shares of Common Stock, and
      no
      equivalent combination or consolidation is made with respect to the Preferred
      Stock, the conversion price then in effect shall, concurrently with the
      effectiveness of such combination or consolidation, be proportionately
      increased.




Each
      share of Preferred Stock shall automatically convert into shares of Common
      Stock
      at the then-effective conversion price, immediately upon the earlier of (i)
      the
      repayment in full by the Company of its obligations under the Old Debenture
      Agreement, or (ii) the conversion in full of the Old Debentures and any accrued
      interest thereon.




The
      number of shares issuable upon conversion of the Preferred Stock, issued as
      an
      anti-dilutive device to Messrs. Stark and Estevez, work in tandem with the
      number of shares issuable upon conversion of the Old Debentures. As discussed
      in
      the Company’s Certificate of Designation of the Preferred Stock, in the event of
      a conversion of the Preferred Stock, and provided that the weighted average
      of
      the price per share of the shares of Common Stock underlying the Debentures
      upon
      the conversion of such Debentures is less than the then-effective conversion
      price for the Preferred Stock, such conversion price shall be adjusted equitably
      such that it is equal to the weighted average of the price per share of the
      shares of Common Stock underlying the Old Debentures upon the conversion of
      such
      Old Debentures.




F-24




Since
      the
      Preferred Stock is intended to provide anti-dilution protection to the owners
      of
      the Preferred Stock, it is not considered to be a derivative as defined in
      FASB
      Opinion 133, and accordingly has not been considered in calculating the diluted
      weighted average of the shares outstanding.




**Common
      Stock**




***Voting,
      Dividend and Other Rights.*** Each
      outstanding share of Common Stock will entitle the holder to one vote on all
      matters presented to the stockholders for a vote. Holders of shares of Common
      Stock will have no preemptive, subscription or conversion rights. The Company’s
      Board of Directors (the “Board”) will determine if and when distributions may be
      paid out of legally available funds to the holders. Enigma has not declared
      any
      cash dividends during the past two fiscal years with respect to the Common
      Stock. A declaration of any cash dividends in the future will depend on a
      determination by the Board as to whether, in light of earnings, financial
      position, cash requirements and other relevant factors existing at the time,
      it
      appears advisable to do so. In addition, the Company has not declared or paid
      any dividends and has no plans to pay any dividends to the
      stockholders.




***Rights
      Upon Liquidation.*** Upon
      liquidation, subject to the right of any holders of the Preferred Stock to
      receive preferential distributions, each outstanding share of Common Stock
      may
      participate pro rata in the assets remaining after payment of, or adequate
      provision for, all known debts and liabilities.




***Majority
      Voting.*** The
      holders of a majority of the outstanding shares of Common Stock (in concert
      with
      the holders of the Preferred Stock) constitute a quorum at any meeting of the
      stockholders. A plurality of the votes cast at a meeting of stockholders elects
      the directors of the Company. The Common Stock does not have cumulative voting
      rights.




**NOTE
      J - **STOCK
      OPTION PLAN****




During
      the year ended December 31, 2005, the Company granted options, under the 2005
      Stock Option and Grant Plan (the “Stock Option Plan”), to 18 employees, a
      non-employee director and several consultants to purchase an aggregate of
      1,257,595 shares of the Company’s Common Stock at exercise prices ranging from
      $1.10-$1.26. The options were scheduled to vest over periods of up to three
      years, which is the requisite service period for such awards. No other
      conditions, such as market or performance conditions, must be satisfied in
      order
      for the option awards to fully vest. Subsequent to the granting of the options,
      11 employees were terminated by the Company in 2005 and their options were
      terminated. As a result, option grants for 319,984 shares were cancelled and
      returned to the Stock Option Plan, and the total number of options outstanding
      at December 31, 2005 was 937,611.




F-25





During
      April of 2006, the Company granted options under the Stock Option Plan to seven
      employees, a non-employee director and several consultants to purchase an
      additional aggregate of 1,438,000 shares of the Company’s Common Stock at
      exercise prices ranging from $0.065-$0.0715. These options generally vested
      ratably over a period of 12 months from the date of grant, which is the
      requisite service period for such awards. No other conditions, such as market
      or
      performance conditions, must have been satisfied in order for the option awards
      to fully vest. Thus, all such options are now fully vested. Accordingly, the
      Company recognizes compensation costs associated with stock options over each
      employee’s respective service period, which in all cases is the vesting period
      for such stock option grants.





In
      November of 2006, three
      employees of the Company ,
      namely,
      Alvin Estevez, Colorado Stark and Richard Scarlata,  returned
      a portion of their 2005 options, which totaled 391,610 shares, to the Company
      and the Company cancelled them, adding them back to the pool for new option
      grants. Also in November of 2006, the Company granted an employee of UAB Enigma
      options to purchase 1,000,000 shares of the Company’s Common Stock at an
      exercise price of $0.03. These options were to vest over a period of three
      years
      from the date of grant, which was the requisite service period for such award.
      No other conditions, such as market or performance conditions, were to be
      satisfied in order for the option award to fully vest. However, this
      individual’s employment was terminated in the second quarter of 2007, and as
      part of the termination agreement, 125,000 options were deemed vested at the
      date of termination of employment (at the $0.03 option exercise price) and
      the
      other 875,000 shares were returned to the pool.





On
      March
      13, 2007, the majority shareholders of the Company voted to adopt amendments
      to
      the Company’s Stock Option Plan to (a) increase the number of shares of Common
      Stock reserved and available for issuance under the Stock Option Plan from
      3,000,000 shares of Common Stock to 9,000,000 shares of Common Stock, (b)
      automatically grant stock options to new members of the Board, who are not
      employees of the Company, to purchase 75,000 shares of Common Stock, (c)
      automatically grant annual stock options to every Board member, who is not
      an
      employee of the Company, to purchase 25,000 shares of Common Stock, and (d)
      grant one time stock options to every Board member, who is not an employee
      of
      the Company, if such individual was a member of the Board prior to the date
      of
      the amendment of the Stock Option Plan, to purchase 100,000 shares of the Common
      Stock. The amended Stock Option Plan became effective on May 8, 2007 in
      accordance with a Schedule 14C Information Statement, which was filed with
      the
      SEC on April 12, 2007 and mailed to all registered shareholders shortly
      thereafter.  As
      a
      result of that amendment, an annual option for 25,000 shares was granted to
      the
      Company’s sole independent director, Mr. McGuinn, at an exercise price of $0.25
      per share. Such option vested immediately. Also, as a result of that amendment,
      a one time option for 100,000 shares was granted to Mr. McGuinn as of May 31,
      2007, at an exercise price of $0.35. Such option vested immediately as
      well.




F-26





On
      August
      16, 2007, as approved by the Board of Directors of the Company, the Company
      granted options under the Stock Option Plan to six employees of the Company,
      several consultants, and 19 employees of the Company’s wholly-owned foreign
      subsidiary, UAB Enigma, to purchase an additional aggregate of 6,370,000 shares
      of the Company’s Common Stock at an exercise price of $0.15. Subsequently, with
      the termination of several employees, 34,000 options were cancelled and returned
      to the pool. A portion of the options issued vested immediately upon issuance
      and the remainder vest ratably over the months through March 31, 2008, which
      is
      the requisite service period for such awards. No other conditions, such as
      market or performance conditions, must be satisfied in order for the option
      awards to fully vest. The following table presents the status of options
      outstanding under the Stock Option Plan as of December 31, 2007:





Year
                of Grant
            
            #
                granted
            
            #
                cancelled
            
            #
                exercised
            
            #
                outstanding
            
            #
                vested
            
            #
                unvested2005
            
            
            1,257,595
            
            
            (711,594
            )
            
            0
            
            
            546,001
            
            
            (366,731
            )
            
            179,2702006
            
            
            2,438,000
            
            
            (875,000
            )
            
            0
            
            
            1,563,000
            
            
            (1,563,000
            )
            
            02007
            
            
            6,495,000
            
            
            (
                34,000
            )
            
            0
            
            
            6,461,000
            
            
            (4,876,997
            )
            
            1,584,003Total
            
            
            10,190,595
            
            
            (1,620,594
            )
            
            0
            
            
            8,570,001
            
            
            (6,806,728
            )
            
            1,763,273





The
      fair
      value of each stock option granted is charged to earnings as such option vests.
      The fair value of each stock option granted was estimated as of the date of
      issuance using the Black-Scholes-Merton option-pricing model. The following
      table shows the range of assumptions for each group of options issued:




Dividend
              Yield
            
            Expected
              Volatility
            
            Risk-Free
              Interest
                Rate
            
            Expected
              LifePro-forma
                Fiscal Year ended Dec. 31, 2005
            
            
            0
            %
            
            18.76
            %
            
            3.91
            %
            
            5
                yearsOptions
                granted during the Fiscal Year ended Dec. 31, 2005
            
            
            0
            %
            
            172.78
            %
            
            3.91-4.00
            %
            
            5
                yearsOptions
                granted during the Quarter
              ended
                June 30, 2006
            
            
            0
            %
            
            195.41
            %
            
            4.84
            %
            
            5
                yearsOptions
                granted during the Quarter
              ended
                Dec. 31, 2006
            
            
            0
            %
            
            210.14
            %
            
            4.60
            %
            
            5
                yearsOptions
                granted during the Quarter
              ended
                Mar. 31, 2007
            
            
            0
            %
            
            249.23
            %
            
            4.51
            %
            
            5
                yearsOptions
                granted during the Quarter
              ended
                June 30, 2007
            
            
            0
            %
            
            251.08
            %
            
            4.83
            %
            
            5
                yearsOptions
                granted during the Quarter
              ended
                September 30, 2007
            
            
            0
            %
            
            254.13
            %
            
            4.60
            %
            
            5
                years




The
      Company does not currently pay cash dividends on its Common Stock and does
      not
      anticipate doing so in the foreseeable future. Accordingly, the expected
      dividend yield is zero. Expected volatility is based on the average of the
      historical volatility for the Company’s Common Stock for the period from
      commencement of trading in February 2005 to the date of the calculation. The
      risk free interest rate is equal to the U.S. Treasury constant maturity rate
      for
      securities issued nearest the option grant date and for the period equal to
      the
      expected life of the option. Since the Company has no experience on which to
      base the expected lives of a stock option, five years, or 1⁄2 of the option
      exercise period for all grantees, other than Messrs. Stark and Estevez, was
      used. The option exercise period for Messrs. Stark and Estevez is five years,
      which was used to determine the value of their options as well.




F-27




**NOTE
      K - **PROFIT
      SHARING PLAN****




The
      Company has a defined contribution plan, the Enigma Software Group, Inc. 401(k)
      Plan, (the "401(k) Plan"), under which eligible employees are able to make
      contributions that are matched, effective September 1, 2006, by the Company
      at the rate of 100% of an individual employee’s contribution, up to the maximum
      allowable by law. For 2007, that amount is generally $15,500 (for employees
      50
      years of age and older it is $20,500). Such amounts for 2006 were $15,000 and
      $20,000, respectively. Prior to September 1, 2006, the Company matched 50%
      of the first $10,000 of an individual employee's contribution. The Company's
      contributions to the 401(k) Plan for the years ended December 31, 2007 and
      2006
      were $105,434 and $76,481.




**NOTE
      L - **PROVISION
      FOR INCOME TAXES****




The
      reconciliation of the income tax benefit computed at the U.S. federal statutory
      tax rate to the income tax benefit is as follows:





**2007**
            
            **2006**Computed
                benefit
            
            **$**
            **(334,300**
            **)**
            **$**
            **(668,600**
            **)**State
                tax benefit, net of federal effect
            
            
            **(
                25,000**
            **)**
            
            **(
                50,000**
            **)**Income
                tax benefit
            
            **$**
            **(309,300**
            **)**
            **$**
            **(718,600**
            **)**





As
      the
      income tax benefits of $309,300 and $718,600 may not be realized, they have
      been
      entirely offset by valuation allowances.





The
      tax
      effects of the temporary differences that give rise to deferred tax assets
      and
      liabilities at December 31, 2007 and 2006 are presented below:




**2007**
            
            **2006**Deferred
                revenue
            
            **$**
            **(1,102,224**
            **)**
            **$**
            **(527,205**
            **)**Net
                operating loss carryforwards
            
            
            **1,102,224**
            
            
            **527,205**Net
                deferred tax asset
            
            **$**
            **0**
            
            **$**
            **0**




F-28




As
      of
      December 31, 2006, the Company had a federal net operating loss
      carryforward of approximately $987,000 available to offset future taxable income
      through 2021.




**NOTE
      M - **LEGAL
      PROCEEDINGS****




From
      time
      to time the Company is involved in routine legal matters incidental to its
      business. In the opinion of management, the ultimate resolution of such matters
      will not have a material adverse effect on its financial position, results
      of
      operations or liquidity.




**NOTE
      N - **COMMITMENTS
      AND CONTINGENCIES****




***Office
      Lease:***




At
      December 31, 2006, there was no lease for the Company’s then current office
      space, which was located within an office suite complex in Stamford,
      Connecticut. Rather, the Company had entered into an office service agreement
      with the operator of the office suite giving the Company a license to use
      designated offices as well as business center facilities and services. The
      office services agreement, which had covered services such as: telephone, heat,
      electricity, furniture, lighting, restroom facilities, reception, conference
      facilities, mailbox, parking and office cleaning, was in effect until
      August 31, 2007. In February 2007, the Company notified the operator of the
      office suite complex that would not renew again and would vacate the premises
      prior to August 31, 2007. On February 27, 2007, the Company signed a 15
      month lease at a nearby facility at a lower cost and moved into that space,
      which is its current space shortly thereafter. The lease expires May 31, 2008.
      The Company intends to renew the lease for another 15 month term.




Rent
      expense and office services expenses amounted to $75,025 and $79,587 for the
      years ended December 31, 2007 and 2006, respectively.




**NOTE
      O - **SUBSEQUENT
      EVENTS****




On
      March
      26, 2008, pursuant to provisions in the Old Debenture and the New Debenture,
      Dutchess issued to the Company a notice of an event of default (the “Default
      Notice”), due to the Company’s failure to make regular monthly interest payments
      and payments of principal under the terms of the Old Debenture and failure
      to
      make required interest payments under the New Debenture (the “Default”).
      Pursuant to the Old Debenture, the Company is obligated to pay Dutchess interest
      at the rate of twelve percent (12%) per annum, on a monthly basis, and
      amortizing monthly cash payments in the amount of $104,166.67, and under the
      New
      Debenture the Company is obligated to pay Dutchess interest at the rate of
      twelve percent (12%) per annum, compounded daily, on a monthly basis.
      Accordingly, as of March 24, 2008, the Company owed Dutchess an aggregate amount
      of $1,637,568.18 under both Debentures, including principal, interest and
      liquidated damages arising out of the Default. As a secured creditor, Dutchess
      is entitled to exercise its default remedies pursuant to a Security Agreement
      entered into in connection with the Old Debenture, including taking possession
      of all of the assets of the Company.




F-29


In
          contemplation of Dutchess issuing the Default Notice, the Company and Dutchess
          entered into negotiations to resolve the Default. As a consequence of these
          discussions, the Company and Dutchess have developed the following plan
          (the
“Plan”) to restructure the Company and to cure the Default. If effected, under
          the Plan, Dutchess would waive the liquidated damages arising out of the
          Default
          and rescind acceleration of the Debentures. The Plan is currently structured
          as
          described below.
 
 First,
          the Plan contemplates that Title America Corp., a Nevada corporation (“Title
          America”), an affiliate of Dutchess and sole shareholder of Tool City, Inc., a
          California corporation (“Tool City”), would enter into a Securities Purchase
          Agreement, with the holders of all of the Company’s shares of Series A
          Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred
          Stock”), pursuant to which such individuals, who are the Company’s Executive
          Chairman and Chief Executive Officer, would sell all of the Series A Preferred
          Stock to Dutchess and as a result would no longer be stockholders of the
          Company
          (the “Preferred Stock Purchase”). The amount paid by Title America for the
          Series A Preferred Stock would equal $1,000, an amount which will be paid
          from
          Title America’s working capital. Based on the closing bid price of the Company’s
          shares of common stock, par value $0.001 per share (the “Common Stock”), on
          March 20, 2008, if the Preferred Stock Purchase is effected, Dutchess would
          own
          100% of the Company’s Preferred Stock, and would beneficially own 98.81% of the
          Company’s Common Stock, based on the conversion rights of the shares of
          Preferred Stock, the conversion of the Debentures into shares of Common
          Stock,
          and the exercise of 40,000,000 common stock purchase warrants (the “Warrants”)
          held by Dutchess, without giving effect to certain blockers on conversion
          or
          exercise provided for in the Debentures or the Warrants, which will be
          removed
          in conjunction with the Preferred Stock Purchase.
  In
          addition, upon the closing of the proposed Preferred Stock Purchase, Dutchess
          is
          expected to appoint Theodore Smith, Michael Novielli and Douglas Leighton
          (the
“New Directors”) to the Company’s Board of Directors (the “Board”). The Plan
          contemplates that all of the current members of the Company’s Board, Alvin
          Estevez, Colorado Stark and Edwin J. McGuinn, Jr., the sole member of the
          Company’s Audit Committee and Compensation Committee, would resign from the
          Board ten (10) calendar days following the mailing to the Company’s stockholders
          of a Schedule 14F-1 Information Statement pertaining to the appointment
          of the
          New Directors to the Company’s Board. As a result of the Preferred Stock
          Purchase and the election of the New Directors, Dutchess is expected to
          acquire
          control of the Company.
  
 F-30


The
        Plan
        contemplates that following the closing of the Preferred Stock Purchase,
        the
        Company and Title America intend to enter into a Share Exchange Agreement
        (the
“SEA”). Pursuant to the SEA, the Company would acquire all of the stock of Tool
        City and Tool City would become a wholly-owned subsidiary of the Company.
        In
        exchange for all of the common stock of Tool City, the Company would issue
        to
        Title America shares of a new series of Preferred Stock of the Company (the
        “Series B Preferred Stock”) which would be convertible into shares of Common
        Stock and would have an aggregate liquidation preference of $8,314,000. The
        Plan
        contemplates that the shares of Series A Preferred Stock acquired by Dutchess
        in
        the Preferred Stock Purchase would then be cancelled, whereupon Dutchess
        and its
        affiliates would beneficially own approximately 95.67% of the Company’s Common
        Stock, based on the conversion rights of the Series B Preferred Stock and
        the
        Debentures and their ownership of the Warrants.
  Management
        believes that the Company would have an increased ability to satisfy its
        obligations under the Debentures after its acquisition of Tool City. Tool
        City
        provides title and auto pawn loans against the equity in vehicle owner’s cars.
        Tool City has historically had minimal credit losses due to its low
        loan-to-value ratios, technological advancements permitting the tracking
        of
        vehicles serving as collateral for outstanding loans, and the liquidity of
        collateral against which Tool City makes loans. Revenues are generated from
        interest on outstanding loans, sales from repossessed cars, and the resale
        of
        pawned items. Tool City currently has nine employees, and was founded in
        1996 to
        serve consumers located in Southern California. All of the outstanding common
        stock of Tool City was recently purchased by Title America. Accordingly,
        the
        Company would enter into a new line of business upon the acquisition of Tool
        City.
 
 The
        Plan
        further contemplates that after the acquisition of Tool City, the Company
        would
        exit its existing software business and sell substantially all of the assets
        of
        such business to Enigma Software Group USA, LLC, a Connecticut limited liability
        company (“Enigma Software Group”), formed by Messrs. Estevez and Stark for the
        purposes of effecting the Asset Purchase (as defined below). The parties
        are
        expected to enter into an Asset Purchase Agreement (the “APA”), whereby Enigma
        Software Group would assume substantially all of the assets and liabilities,
        excluding the Debentures, including interest due thereon and liquidation
        damages, of the Company (the “Asset Purchase”). It is expected that the Enigma
        Software Group would indemnify the Company in connection with such liabilities
        that it assumes and would assure that at the closing of the Asset Purchase
        the
        Company retains $172,500 in cash. In addition, Messrs. Estevez and Stark,
        and
        certain other employees, would cancel an aggregate amount of options
        representing the right to purchase 8,203,676 of the Company’s Common
        Stock.




F-31


On
          March
          27, 2008, the Company filed a Current Report on Form 8-K reporting the
          foregoing. The Company expects to file additional Current Reports on Form
          8-K
          reporting aspects of the transactions contemplated by the Plan.
 
 There
          will be no opportunity for any stockholder to vote on the above transactions.
          Management believes the Plan is the only viable alternative to realize
          significant value for the Company’s stockholders. The Company cannot currently
          satisfy the obligations owed under the Debentures and is incurring liquidated
          damages on a daily basis.The Plan offers the Company’s stockholders the
          potential benefits of a new line of business. Management believes that
          the Plan
          is in the best interests of the stockholders since it avoids the high costs
          of
          litigation and bankruptcy and the unknown results of such proceedings.
          Moreover,
          the Plan is intended to allow the Company’s common stockholders to maintain the
          same percentage ownership interest in the Company that they presently own
          on a
          fully-diluted basis.
 
 The
          Company notes that neither it nor Dutchess nor any of their affiliates
          has yet
          entered into any binding agreement with respect to the Plan, and the
          transactions contemplated by the Plan and described above represent solely
          intentions and expectations with respect to the Plan. There can be no assurance
          that the Plan will be implemented as summarized above or at all.
 
 In
          the
          event the Plan and the transactions contemplated thereunder are not consummated,
          the Company would be in financial distress and would have to pursue other
          opportunities to satisfy the Default. There can be no assurance that any
          viable
          alternatives would be available. As a result, the Company could be faced
          with
          the immediate foreclosure on its assets by Dutchess.
  
 F-32