**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**




**FORM
      10-KSB**




(Mark
      One)




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




For
      the
      fiscal year ended December 31, 2005





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





Commission
      File Number: 33-08070-LA





**ENIGMA
      SOFTWARE GROUP, INC.**


(Name
      of
      Small Business Issuer in Its Charter)




**Delaware**
            **20-2675930**(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)





2
                Stamford Landing, Suite 100, Stamford, CT
            06902(Address
                of Principal Executive Offices)
            (Zip
                Code)





(888)
      360-0646


(Issuer's
      Telephone Number, Including Area Code)





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
            
            Name
                of Each Exchange on Which RegisteredCommon
                Stock, $.001 Par Value
            
            Over-the-Counter
                Bulletin Board





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





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
x No
o





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. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes
o No
x




State
      issuer’s revenues for its most recent fiscal year. $22,022,725




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. $256,580.31 as of March 31,
      2006.




**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. 16,243,267 shares
      of
      Common Stock, $0.001 par value, outstanding as of March 24, 2006.




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












**ENIGMA
      SOFTWARE GROUP, INC.**





**TABLE
      OF CONTENTS TO ANNUAL REPORT**


**ON
      FORM 10-KSB**


**YEAR
      ENDED DECEMBER 31, 2005**




**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**
              
              **23****PART
                  III****Item
                  9.**
              **Directors,
                  Executive Officers, Promoters and Control Persons;****Compliance
                  with Section 16 (a) of the Exchange Act**
              
              **24****Item
                  10.**
              **Executive
                  Compensation**
              
              **26****Item
                  11.**
              **Security
                  Ownership of Certain Beneficial Owners and Management****and
                  Related Stockholder Matters**
              
              **28****Item
                  12.**
              **Certain
                  Relationships and Related Transactions**
              
              **29****Item
                  13.**
              **Exhibits**
              
              **29****Item
                  14.**
              **Principal
                  Accountant Fees and Services**
              
              **29**


2


**PART
      I**





**Item
      1. Description of Business.**





Enigma
      Software Group, Inc. (the “Company”), is a Delaware corporation 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 develops software and Internet-based systems designed to give
      customers information and control over the programs installed on their computers
      in an automated and easy-to-use way. The Company sells and distributes its
      software products, which are downloadable, over the Internet. The Company’s
      business strategy is to develop its software products that further transparency
      and user control; in this, commitment to customers is paramount.





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 seven persons on a full-time basis. However, during
      the year ended December 31, 2005, it had employed as many as 18 persons on
      a
      full and part-time basis. Eleven employees were terminated by the Company during
      the year, in an effort to reduce fixed operating costs, and some of their
      functions were outsourced, as well as absorbed by the remaining seven
      employees.





3


***Principal
      Products or Services and their Markets:***





The
      Company’s principal product is a software program marketed under the name
      SpyHunterTM. SpyHunter is an anti-spyware software program that hunts down and
      removes spyware and adware from a customer’s computer. SpyHunter utilizes
      proprietary developed techniques to remove difficult programs that other
      anti-spyware programs cannot. In addition to scanning and removing spyware
      and
      adware, SpyHunter also has the ability to rapidly generate support logs and
      interface directly with our customer support department for new spyware threats.
      Spyware & adware are files that are installed on computers without the
      customer’s knowledge. They allow companies to monitor Internet browsing
      patterns, and even allow companies to inundate computers with annoying "pop
      up"
      ads. Many people are familiar with freeware, shareware, cookies, media players,
      interactive content, and file sharing. What they may not realize is that some
      of
      the aforementioned may contain code or components that allow the developers
      of
      these applications and tools to actually collect and disseminate information
      about those using them.





Adorons
      Easy Security is an internet security utility that functions as a browser helper
      object with three main features. Its primary feature is a security control
      which
      defaults at the highest level of security. While high security is good for
      protecting the user, it makes it impossible to interact with most websites.
      The
      user can easily reduce the security level for a website, enabling the user
      to
      access the features of that particular website. Once a user allows the computer
      to trust a site, it adds that site to a database of sites that the user trusts.
      It leaves the browser on maximum security for any site for which the user has
      not agreed to lower security. Secondly, it offers a deletion utility that,
      with
      the touch of one button, will remove temporary internet files, browser history,
      and other evidence of online activity. Anonymous browsing is the third main
      feature. Anonymous browsing allows the user to view the internet through a
      proxy
      which will prevent that website from knowing the IP address of the user. Enigma
      sells a one year license for for Adorons Easy Security for $29.99. Adorons
      Firewall, which is currently being offered as a bundle with Adorons Easy
      Security, is a PC software firewall that monitors all ports of the machine
      and
      gives the user control to let information be transferred to or from the computer
      that only they understand or have initiated.





The
      Company also offers JustRealMail, a Spam protection technology that utilizes
      a
      challenge response protocol. When a user of the JustRealMail system is sent
      an
      e-mail, the sender will immediately receive a request to verify that the sender
      is an actual person. The sender may easily do so by reading a series of
      characters on a webpage and entering them in a form. Once a particular sender
      has been validated, there will not need to repeat this process. JustRealMail
      is
      an effective measure in preventing automated spam messages. This product is
      an
      online service that is currently being offered by Enigma at no
      cost.





***DistributionMethods
      of the Products or Services:***





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 such as Google, Yahoo, Fastclick, TravelMarketPlace, FindWhat,
      LookSmart, MarketBanker, 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 Company marketing agreements are short term
      purchase orders that either party can terminate. Others are based on automated
      auctions for search engine advertising.





4


**Item
      2. Description of Property.**





At
      December 31, 2005, the Company had no significant fixed assets, having sold
      some
      of its excess assets during the year, as employees were terminated, and having
      written down 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 (see Item 3 Legal Proceedings). 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 expires
      on November 30, 2007. There is no lease for the Company’s new office space,
      which is located within an office suite complex in Stamford, Connecticut. 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 for an initial term of six
      months.





**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.





Until
      March 1 2006, the Company leased space at 17 State Street, New York, New York
      (the "Building").  On March 10, 2006, the Company advised the owner of the
      Building that in view of the owner's breach of certain of its obligations under
      the Company's lease of space at the Building, the Company had no choice but
      to
      vacate the premises.  Accordingly, the Company relocated to offices in
      Stamford, Connecticut in order to conserve cash while it attempts to develop
      a
      viable business plan, rebuild its business and explore strategic alternatives,
      such as a sale of the Company, a merger or other transaction.  The Company
      may seek to recover the damages it sustained as a result of the landlord's
      breach.  However, it is possible that a court might find that the Company,
      which takes the position that it was relieved of its obligations to pay rent
      on
      account of the owner's breach, is liable for the amount of unpaid rent over
      the
      remaining term of the lease, plus legal costs, penalties and interest, on the
      unpaid rent, plus additional damages resulting from the Company's vacating
      the
      premises, less a security deposit of $83,147.





**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 31, 2006, the Company’s shares of common stock were quoted on the Nasdaq
      OTCBB under the trading symbol ENGM.





The
      following table gives the range of high and low bid prices for the Company’s
      common equity security, during the year ended December 31, 2005. During the
      year
      ended December 31, 2004, no market was made in the Company’s common stock.
      Trading in the Company’s common stock commenced on February 22, 2005, subsequent
      to the closing of the reverse takeover:





High
                Bid
            Low
                Bid1stQuarter
            $
                2.45
            $
                0.422ndQuarter
            $
                1.54
            $
                0.903rdQuarter
            $
                1.40
            $
                0.304thQuarter
            $
                0.55
            $
                0.20




***Holders***




As
      of
      March 16, 2006, there were 32 holders of record of the Company’s common stock.
      Of the Company’s 16,243,267 shares outstanding, 1,644,578, or approximately
      10.1% were held in street name.




***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. In
      December 2004, Maxi declared a stock dividend of 3.1587 shares of common stock
      for each common share held to holders of record at the close of business on
      December 17, 2004, which in the aggregate totaled 75,311,307 shares of common
      stock.





***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
            953,610
            $
                1.14
            2,046,390Equity
                compensation plans not
              approved
                by security holders
            none
            none
            noneTotal
            953,610
            $1.14
            2,046,390





***Sales
      of Equity Securities***




The
      Company has not sold or repurchased any securities during 2005 and 2004 that
      have not been previously reported.





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, 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 such forward-looking statements. 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. If any of the following risks are realized, our
      business, operating results and financial condition could be harmed and the
      value of our stock could go down. This means that our stockholders could lose
      all or a part of their investment.




**Risks
      Related to Our Business and Industry**




***The
      Company continues to lose money and may not stay in
      operations.***





**At
      December 31, 2005, the Company had negative net working capital of $175,533,
      including deferred revenue of $569,612. Adding back this deferred revenue,
      the
      Company had net working capital $394,079 available to fund ongoing operations.
      The Company’s net working capital position has continued to deteriorate into the
      first quarter of 2006. 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 net working capital reserves
      during the second quarter of 2006.**





***Our
      operating results may fluctuate.***




Our
      operating results may fluctuate as a result of a number of factors, many of
      which are outside of our control. The following factors may affect our operating
      results:




•
            
            Our
                ability to compete effectively.




•
            
            Our
                ability to continue to attract users to our web sites.




•
            
            The
                level of use of the Internet to find information.




•
            
            Our
                ability to attract advertisers.




•
            
            The
                amount and timing of operating costs and capital expenditures related
                to
                the maintenance and expansion of our businesses, operations and
                infrastructure.




•
            
            Our
                focus on long term goals over short-term results.




•
            
            The
                results of our investments in risky projects.




•
            
            General
                economic conditions and those economic conditions specific to the
                Internet
                and Internet advertising.




•
            
            Our
                ability to keep our web sites operational at a reasonable cost and
                without
                service interruptions.




7


•
            
            The
                success of our geographical and product expansion.




•
            
            Our
                ability to attract, motivate and retain top-quality employees.




•
            
            Foreign,
                federal, state or local government regulation that could impede our
                ability to post ads for various industries.




•
            
            Our
                ability to upgrade and develop our systems, infrastructure and products.




•
            
            New
                technologies or services that block the ads we deliver and user adoption
                of these technologies.




•
            
            The
                costs and results of litigation that we face.




•
            
            Our
                ability to protect our intellectual property rights.




•
            
            Our
                ability to realize revenue from agreements under which we guarantee
                minimum payments.




•
            
            Our
                ability to manage activities that violate our terms of services,
                such as
                software piracy.




•
            
            Our
                ability to successfully integrate and manage our acquisitions.




•
            
            Geopolitical
                events such as war, threat of war or terrorist actions.





Because
      our business is evolving and changing, our historical operating results may
      not
      be useful to you in predicting our future operating results. In addition,
      advertising spending has historically been cyclical in nature, reflecting
      overall economic conditions as well as budgeting and buying patterns, and our
      revenues may suffer as a result. In the meantime, we will continue to incur
      operating expenses which consists principally of compensation and benefits
      and
      telecommunications costs as well as legal, auditing and other ancillary costs
      associated with being a public company. If we are not able to generate positive
      cash flow from operations, or to attract additional equity financing or debt
      financing, we will be required to further reduce our cash balances, which may
      lead to a liquidity crisis in the months ahead.




For
      these
      reasons, comparing our operating results on a period-to-period basis may not
      be
      meaningful, and you should not rely on past results as an indication of future
      performance. Quarterly and annual expenses as a percentage of net revenues
      may
      be significantly different from historical or projected rates. Our operating
      results in future periods may fall below expectations, which could cause our
      stock price to fall.




***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 (i) enhance our web search technology and our
      existing products and services and (ii) 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 operating results would
      also suffer 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.




***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 our business as well as the trading price of our
      stock.***




8


Effective
      internal controls are necessary for us to provide reliable financial reports
      and
      prevent fraud. If we cannot provide reliable financial reports or prevent fraud,
      our brand and operating results could be harmed. Any failure or difficulties
      in
      implementing required new or improved controls could harm our operating results
      or cause us to fail to meet our reporting obligations. Inferior internal
      controls could also cause investors to lose confidence in our reported financial
      information, which could have a negative effect on the trading price of our
      stock. During the year ended December 31, 2005, we found it necessary to reduce
      our staffing in order to conserve cash, as our level of business activity
      declined. As a result, there is very limited segregation of duties. We have
      implemented procedures to limit access to bank accounts and in connection with
      the approval of invoices and disbursements of cash. However, with only seven
      employees at the Company, total segregation of duties is not
      practicable.




***Our
      corporate culture has contributed to our success, and if we cannot maintain
      this
      culture as we grow, our business may be harmed.***




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. In addition, the effects of our stock being publicly traded
      may
      create disparities in wealth among our employees, which may adversely impact
      relations among employees and our corporate culture in general.




***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. Legislation
      such as the SPYACT, or other legislation originally proposed in California
      and
      Massachusetts, would make it extremely difficult for contextual marketing
      companies to operate or would prohibit the aspects of the service that uses
      computers to match advertisements to the content on a user’s machine. In
      addition, several states, such as Utah and Pennsylvania, passed laws to protect
      users from Spyware, but these laws were almost immediately repealed as they
      would stifle innovation and prevent most existing companies from conducting
      business in those states. We may face risks from legislation that could be
      passed in the future.




There
      are
      also risks associated with international data protection. The interpretation
      and
      application of data protection laws in Europe and elsewhere are still uncertain
      and in flux. It is possible that these laws may be interpreted and applied
      in a
      manner that is inconsistent with our data practices. If so, in addition to
      the
      possibility of fines, this could result in an order requiring us to change
      our
      data practices, which in turn could have a material effect on our
      business.




***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 underlies our products and
      services, are very important to us. Our proprietary products are not protected
      by patents. To 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.




9


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.




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




Companies
      in the Internet, technology and media industries own large numbers of patents,
      copyrights, trademarks and trade secrets and frequently enter into litigation
      based on allegations of infringement or other violations of intellectual
      property rights. As we face increasing competition, the possibility of
      intellectual property rights claims against us grows. 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 also could prevent us from offering our products and
      services to others and may require that we procure substitute products or
      services .




With
      respect to any 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.




10


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.




***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 a 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. 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 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 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 to work well together in providing cohesive
      leadership, our business could be harmed.




11


***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.***




We
      first
      derived cash from our sales of consumer software security and privacy products
      in 2003, all of which revenue, as well as that of 2004 and the month of January
      2005, had been deferred for financial reporting purposes and was recognized
      in
      the first and second fiscal quarters of 2005, as is discussed in the *Notes
      to Financial Statements* .
      We have
      not generated a significant amount of revenue from advertising, and we have
      only
      a short operating history with our advertising services. As a result, we have
      very little operating history for you to evaluate in assessing our future
      prospects. The internet advertising industry is an immature industry that has
      undergone rapid and dramatic changes in its short history. You must consider
      our
      business and prospects in light of the risks and difficulties we will 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. As discussed in our *Notes
      to Financial Statements* ,
      to
      date, we have generated very little success with this business model and are
      striving to develop a new model. If we are unsuccessful in this regard, the
      Company could conceivably run out of cash during the second quarter of
      2006.




***It
      has been and may continue to be expensive to obtain and maintain
      insurance.***




We
      contract for insurance to cover potential risks and liabilities. In the current
      environment, insurance companies are increasingly specific about what they
      will
      and will not insure. It is possible that we may not be able to get enough
      insurance to meet our needs, may have to pay very high prices for the coverage
      we do get, or may not be able to acquire any insurance for certain types of
      business risks. This could leave us exposed to potential claims. If we were
      to
      be found liable for a significant claim in the future, our operating results
      could be negatively impacted.




***Acquisitions
      could result in operating difficulties, dilution and other harmful
      consequences.***




We
      do not
      have any experience acquiring companies. We have evaluated and expect to
      continue to evaluate, a wide array of potential strategic transactions. From
      time to time, we may engage in discussions regarding potential acquisitions.
      Any
      of these transactions could be material to our financial condition and results
      of operations. In addition, the process of integrating an acquired company,
      business or technology may create unforeseen operating difficulties and
      expenditures and is risky. The areas where we may face risks
      include:




•
            
            The
                need to implement or remediate controls, procedures and policies
                appropriate for a public company or companies that prior to the
                acquisition lacked these controls, procedures and policies.




•
            
            Diversion
                of management time and focus from operating our business to acquisition
                integration challenges.




•
            
            Cultural
                challenges associated with integrating employees from the acquired
                company
                into our organization.




•
            
            Retaining
                employees from the businesses we acquire.




•
            
            The
                need to integrate each company’s accounting, management information, human
                resource and other administrative systems to permit effective management.





12


Also,
      the
      anticipated benefit of any of our acquisitions may not materialize. Future
      acquisitions or dispositions could result in potentially dilutive issuances
      of
      our equity securities, the incurrence of debt, contingent liabilities or
      amortization expenses, or write-offs of goodwill, any of which could harm our
      financial condition. Future acquisitions may require us to obtain additional
      equity or debt financing, which may not be available on favorable terms, or
      at
      all.




***We
      occasionally become subject to commercial disputes that could harm our
      business.***




From
      time
      to time, we are engaged in disputes regarding our commercial transactions.
      These
      disputes could result in monetary damages or other remedies that could adversely
      impact our financial position or operations. Even if we prevail in these
      disputes, they may distract our management from operating our business while
      consuming our limited resources.




***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. Our failure to adapt
      to
      such changes would harm our business. New technologies and advertising media
      could adversely affect us. 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.




***If
      we are unable to introduce new products or product enhancements on a timely
      basis, or if the market does not accept these products or product enhancements,
      our business will suffer.***




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 may experience design,
      development, testing and other difficulties that could delay or prevent the
      introduction of new products or product enhancements and could increase research
      and development costs. Further, we may experience delays in market acceptance
      of
      new products or product enhancements as we engage in marketing and education
      of
      our user base regarding the advantages and system requirements for the new
      products and services.




***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 be increased in the
      future.




A
      number
      of companies offer products that provide some of the functionality of our
      products. 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.




13


***If
      our restructuring program is not successful, we may not achieve the operational
      and financial objectives we have set, and our business, financial condition
      and
      results of operations could be materially adversely
      affected.***




We
      continue, in our restructuring program, to address the core issues that are
      facing our business. The primary focus of this program is our effort to build
      a
      new and more sustainable business model, which we believe will enable us to
      provide better services to our users.




If
      we
      fail to complete our restructuring program successfully, and in particular,
      fail
      to do so in a timely and cost-effective manner, our business, financial
      condition and results of operation could be materially adversely affected.
      In
      connection with our restructuring efforts, we have incurred significant
      operating expenditures in fiscal years 2003, 2004 and 2005. We have dedicated
      technology consultants and personnel to effect these improvements even as we
      maintain our current systems with other in-house and outsourced personnel.
      As
      long as we are focused on improving our systems and business processes, we
      are
      limited in the time and resources we can dedicate to launching new products
      and
      services to meet the needs of our customers and to better compete in the
      marketplace. We have already experienced significant delays in the launch of
      our
      new systems, which have in turn caused delays in the launch of new products
      or
      services, as well as with upgrades of current ones. Our inability to meet the
      needs of our customers will affect our ability to effectively compete, to
      attract and retain customers and to market new products and
      services.




We
      cannot
      assure you that our restructuring program will achieve the goals we have set
      for
      it. The implementation of new systems is a complex process that requires
      communication and coordination throughout our organization and has significant
      execution risks. We have experienced delays in various stages of these projects
      and cannot assure you when or if these projects will be successfully completed.
      Even if our new systems architecture is launched successfully, we cannot assure
      you that it will enable us to increase our revenues to a significant extent
      and
      in the time frames we currently contemplate. We cannot assure you that our
      business will ultimately realize the additional benefits we hope to achieve
      from
      improved systems or that our new systems will not have unintended adverse
      impacts on our ability to service our customers and operate our business as
      planned.




***We
      are transitioning from a license fee revenue model to an advertising based
      revenue model. There can be no assurance this new business model will be
      profitable.***




Historically,
      we have derived substantially all of our revenues from license fees on
      SpyHunterTM (“SpyHunter”), some of which revenue has been deferred for financial
      reporting purposes as discussed in the *Notes
      to Financial Statements* .
      SpyHunter Series 1 experienced a sustained, substantial decline in product
      sales
      volume during the year ended December 31, 2004. License revenues from SpyHunter
      2.0, which was introduced in late January 2005, have not attained the levels
      experienced by SpyHunter Series 1 in its product life cycle, and are expected
      to
      continue to decline and could possibly be phased out completely during 2006.
      We
      are devoting a large portion of our financial and personnel resources to develop
      new Internet search products. The Company’s business plan includes investing in
      new products that have recurring subscription revenue, such as Spam filtering
      systems and Internet proxy services, as well as developing an advertising based
      revenue model. While we believe that products and services currently under
      development may be well received, there can be no assurance that we will develop
      a product or business model that will be profitable. Previously, our product
      sales were non-recurring and substantially all of our reported and deferred
      revenue for 2003, 2004 and 2005 should be deemed as non-recurring revenue. In
      early
      2006, it became obvious to management that the Company’s business plan with
      respect to an advertising based revenue model was no longer viable, as the
      encouraging test results it had noted in the latter half of 2005 dissipated
      in
      January 2006. We continue to try to adjust this model.




14


***We
      may not be able to access third party technology, which we depend on 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. 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 since February 22, 2005.
      To
      date, trading volume has been very light, as approximately 90% of our
      outstanding shares are unregistered, and cannot yet be traded. We cannot predict
      the extent to which a trading market will develop for our common stock 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.




•
            
            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 or management.




•
            
            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.




15


***We
      do not intend to pay dividends on our common stock.***




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




***We
      have and will continue to incur increased costs as a result of being a public
      company.***




As
      a
      public company, we have and will continue to incur significant legal, accounting
      and other expenses that we did not incur as a private company. We will incur
      costs associated with our public company reporting requirements. We also
      anticipate that we will incur costs associated with recently adopted corporate
      governance requirements, including requirements under the Sarbanes-Oxley Act
      of
      2002, as well as new rules implemented by the Securities and Exchange Commission
      and the NYSE and NASDAQ. We expect these rules and regulations to increase
      our
      legal and financial compliance costs and to make some activities more
      time-consuming and costly. We also expect that these new rules and regulations
      may make it more difficult and more expensive for us to obtain director and
      officer liability insurance and we may be required to accept reduced policy
      limits and coverage or incur substantially higher costs to obtain the same
      or
      similar coverage. As a result, it may be more difficult for us to attract and
      retain qualified individuals to serve on our Board of Directors or as executive
      officers. We are currently evaluating and monitoring developments with respect
      to these new rules, and we cannot predict or estimate the amount of additional
      costs we may incur or the timing of such costs.




***The
      concentration of our capital stock ownership with our founders, executive
      officers, employees, and our directors and their affiliates will limit your
      ability to influence corporate matters.***




Our
      founders, executive officers, directors (and their affiliates) and employees
      together own approximately 77.0% of our common stock, representing approximately
      77.0% of the voting power of our outstanding capital stock. In particular,
      our
      two founders, Colorado Stark and Alvin Estevez, combined control approximately
      74.2% of our outstanding common stock, representing approximately 74.2% of
      the
      voting power of our outstanding capital stock. Colorado Stark and Alvin Estevez
      therefore have 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 our
      Company or its assets, for the foreseeable future. This concentrated control
      limits the ability of the remaining stockholders to influence corporate matters
      and, as a result, the Company 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.




***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 stockholders 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 prohibit cumulative voting in the election
                of
                directors. This limits the ability of minority stockholders to elect
                director candidates.




16


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 the Company.




***You
      may experience dilution if we raise funds through the issuance of additional
      equity and/or convertible securities.***




If
      we
      raise additional funds through the issuance of equity securities or convertible
      securities, you may experience dilution of your percentage ownership. This
      dilution may be substantial. In addition, these securities may have powers,
      preferences and rights that are senior to the holders of our common stock and
      may further limit our ability to pay dividends on our common stock.




***Our
      common stock has a small public float and future sales of our common stock,
      may
      negatively affect the market price of our common
      stock.***




As
      of
      March 31, 2006, there were 16,243,267 shares of our common stock outstanding,
      at
      a closing market price of $0.07 for a total market valuation of approximately
      $1,137,000. As a group, our officers, directors and all other persons who
      beneficially own more than 10% of our total outstanding shares, beneficially
      own
      12,052,051 shares of our common stock. Our common stock has a public float
      of
      approximately 1.6 million shares, which shares in the hands of public investors,
      and which, as the term "public float" is defined by NASDAQ, excludes shares
      that
      are held directly or indirectly by any of our officers or directors or any
      other
      person who is the beneficial owner of more than 10% of our total shares
      outstanding. These shares are held by a relatively small number of stockholders
      of record. 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 of substantial amounts of common stock, including future
      shares issued upon the exercise of warrants (of which none are presently
      outstanding), or stock options (of which 953,610 are presently outstanding;
      see
      Item 11 of this report) and/or conversion of preferred stock (of which none
      has
      been issued or is outstanding at present) into common stock, or the perception
      that such transactions could occur, may materially and adversely affect
      prevailing market prices for our common stock.




***There
      are 3,000,000 shares of our common stock reserved for issuance in connection
      with the potential exercise of stock options, as a result of which you may
      experience dilution.***





On
      March
      8, 2005, the Board of Directors adopted the 2005 Stock Option and Grant Plan
      (the “Stock Option Plan”); because it believes that it is important to provide a
      mechanism to grant stock options and other stock awards to employees,
      non-employee directors and consultants as an incentive, and to tie their
      interests closer to those of our stockholders. However, the issuance of any
      shares under the Stock Option Plan, which could total as much as 3,000,000
      shares of our common stock, if and when issued, could potentially dilute any
      existing stockholder’s investment by as much as 15.6%.





***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 Over-the-Counter Bulletin Board ("OTC BB") (Symbol
      ENGM). The OTC BB is generally considered to be a less efficient market than
      the
      established exchanges or the NASDAQ markets. While we anticipate seeking to
      be
      listed on the NASDAQ Small-Cap Market at some time in the future, it is
      impossible at this time to predict when, if ever, such application will be
      made
      or whether such application will be successful. While our common stock continues
      to be quoted on the OTC BB, 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.




17


**Additional
      Information**





We
      are
      obligated to file reports with the Securities and Exchange Commission (“SEC”)
      pursuant to the Securities Exchange Act of 1934, as amended, (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, 2005 and 2004***





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, 2005 and 2004, 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 700,000 users, to further develop our Adorons
      Internet Search Engine Product in an effort to develop on-line advertising
      revenues, as well as 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 commenced in June
      2003.
      In late January 2005, we began to license a new and improved product, SpyHunter
      2.0, as well as a product known as Adorons TM Easy
      Security (previously known as Adorons TM Anonymous
      Surfing).




18


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




**Revenue
      Recognition**




We
      recognize revenue from the license fees of SpyHunter and Adorons  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 revenues in accordance with 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 software products over the Internet. Customers order the
      product and simultaneously provide their credit card information to us. Upon
      receipt of authorization from the credit card issuer, the customer downloads
      the
      products over the Internet. As part of the sales price of $29.99, we provide
      post-contract customer support (“PCS”) consisting primarily of e-mail support
      and free updates to our software products as and when such updates are
      available.




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, as well as Adorons,
      PCS is limited to one year from the date of purchase. Licensees of the SpyHunter
      1 series were provided with PCS up until March 10, 2005, from which point
      forward we no longer support that product.




Our
      sales
      of software arrangements are considered to be multiple deliverables. In
      accordance with SOP No. 97-2 and SOP No. 98-9, the license fee is required
      to be
      allocated to the various elements based on vendor specific objective evidence
      (“VSOE”) of fair value. On all sales of SpyHunter 1 series which occurred from
      June 2003 through January 2005, VSOE did not exist for the allocation of revenue
      to the various elements of the arrangement. As a result, we deferred all revenue
      from these arrangements. This deferred revenue totaled approximately
      $21,275,000; and consisted of approximately $6,320,000 deferred for the year
      ended December 31, 2003, approximately $14,850,000 for the year ended December
      31, 2004 and approximately $105,000 for the month of January 2005.




We
      informed all of our customers that as of March 10, 2005, we would no longer
      support and/or provide updates to the SpyHunter 1 series software and we offered
      SpyHunter 2.0 to existing customers free of charge for a period of 90 days.
      Accordingly, we have recognized as revenue, all proceeds from the sales of
      SpyHunter 1 series that occurred from June 2003 through January 2005
      (approximately $21,275,000) during the 90 day period March 11, 2005 through
      June
      10, 2005, at the daily rate of 1/90 of the total deferred revenues.




With
      respect to sales of SpyHunter 2.0 and Adorons Easy Security, which have PCS
      limited to one year after the sale, VSOE does exist for the allocation of
      revenue to the various elements of the arrangement, as we consider the revenue
      from such sales to be attributable entirely to the service element. Accordingly,
      we recognize the license fees from these products during the 12-month period
      immediately subsequent to the sale. During the year ended December 31, 2005,
      the
      amount of revenue so recognized was approximately $640,000 on sales of
      approximately $1,210,000, with balance of $569,612 deferred revenue to be
      recognized in the year ending December 31, 2006.





Customers
      are also able to order a CD version of, and an extended download service for,
      SpyHunter 2.0, in which case we earn commission income, all of which is
      recognized at the time of delivery of the product or service; as is any
      commission income that we earn on the sales of products of other companies
      or
      from on-line advertising of such products on our various websites.





19


**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, 2005, 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 a greater or
      fewer number of 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.




**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. As discussed in the *Notes
      to Financial Statements* and
      above, until March 1, 2006, the Company had leased space at 17 State Street,
      New
      York, New York (the "Building").  On March 10, 2006, the Company advised
      the owner of the Building that in view of the owner's breach of certain of
      its
      obligations under the Company's lease of space at the Building, the Company
      had
      no choice but to vacate the premises.  Accordingly, the Company relocated
      to offices in Stamford, Connecticut in order to conserve cash while it attempts
      to develop a viable business plan, rebuild its business and explore strategic
      alternatives, such as a sale of the Company, a merger or other
      transaction.  The Company may seek to recover the damages it sustained
      as a result of the landlord's breach.  However, it is possible that a court
      might find that the Company, which takes the position that it was relieved
      of
      its obligations to pay rent on account of the owner's breach, is liable for
      the
      amount of unpaid rent over the remaining term of the lease, plus legal costs,
      penalties and interest, on the unpaid rent, plus additional damages resulting
      from the Company's vacating the premises, less a security deposit of
      $83,147.




**Results
      of Operations For the Years Ended December 31, 2005 and
      2004**




**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 were successful in accomplishing these goals, but as
      discussed above, all of the revenue associated with the SpyHunter 1 series
      had
      been deferred while the cash was received and used principally during 2003
      and
      2004 to support our operations. Therefore, a ll
      of our
      deferred revenue reported for the 2003
      and 2004, approximately $21.1 million, was
      realized and recorded as non-recurring revenue during 2005, without any cash
      flow effect. 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.




20


**Revenues**




For
      the
      year ended December 31, 2005, revenues from the sales of software products
      totaled $21,915,358, consisting of the non-cash recognition of deferred revenue
      from sales of the SpyHunter 1 series of approximately $21,275,000 (the cash
      generated by these license fees having all been received during the years ended
      December 31, 2003, 2004 and the month of January 2005 and used to support
      operations of those years and period, respectively); and approximately $640,000
      of revenue recognized from sales of SpyHunter 2.0 and Adorons Easy Security.
      Also for the year ended December 31, 2005, commission income and advertising
      revenues totaled $107,367. For 2004, the Company reported no revenue, reflecting
      the deferral of 100% of such revenue in connection with the application of
      our
      revenue recognition policy.





**Expenses**




Expenses
        for the years ended December 31, 2005 and 2004 were $3,281,380 and $13,299,988,
        respectively.


**Year
                Ended**
              **December
                31,****2005**
            
            **Year
                Ended**
              **December
                31,****2004**Marketing
                and selling
            
            $
            308,015
            
            $
            7,755,841General
                and administrative
            
            
            2,425,265
            
            
            5,457,123Write-down
                of impaired assets
            
            
            387,055Depreciation
                and amortization
            
            
            161,045
            
            
            87,024Total
                expenses
            
            $
            3,281,830
            
            $
            13,299,988




For
      year
      ended December 31, 2005, marketing and selling expenses declined by
      approximately $7.4 million, or 96%, from that of the prior year, reflecting
      the
      substantial decline in actual sales of software products (approximately $1.3
      million in 2005 as compared to approximately $14.8 in 2004). Marketing and
      selling expenses are expensed as incurred and relate directly to the level
      of
      sales activity as opposed to the revenue reported for the period, which may
      have
      been entirely or partially deferred, as discussed above. Actual sales of
      software products (as compared to reported revenues from sales) declined for
      the
      year by approximately million $13.5 million, or 91%, as anti-spyware products
      became accessible to consumers as part of bundled software products offered
      by
      other software vendors, and as SpyHunter reached maturity in its product
      life-cycle.




For
      the
      year ended December 31, 2005, general and administrative expenses declined
      by
      approximately $3.0 million, or 56%. The decline was principally due to a
      decrease in compensation and benefits expense as during the year ended December
      31, 2004, approximately $2.2 million in bonuses were paid out to senior
      management, while there was no such comparable expense incurred during 2005.




**Write-down
      of Impaired Assets**





At
      December 31, 2005, the Company incurred an impairment charge of $387,055,
      representing: the difference between what the Company had received and expects
      to receive, $2,785 and $1,000, respectively, from the disposal of its excess
      furniture and fixtures; the abandonment of its leasehold improvements (see *Notes
      to Financial Statements* ),
      and
      their respective carrying values at that date; and the security deposit of
      $83,147, on its office lease. At December 31, 2004, the Company had not incurred
      an impairment charge.





21


**Net
      Income (Loss)**




As
      a
      result of the foregoing and after accounting for interest income and income
      tax
      provision/(benefit), net income was approximately $10.2 million for the year
      ended December 31, 2005, compared to a net loss of approximately $4.8 million
      for the year ended December 31, 2004.







**Liquidity
      and Capital Resources For the Years Ended December 31, 2005 and
      2004**




At
      December 31, 2005, we had cash and cash equivalents of $472,008. This compares
      unfavorably to cash and cash equivalents of $615,734 and restricted cash of
      $1,004,640 at December 31, 2004.




Net
      cash
      used in operating activities for the year ended December 31, 2005 was
      approximately $137,000 and reflects the release of $1,004,640 from restricted
      cash as well as a refund of prepaid income taxes of $256,711, without which
      we
      would have reported approximately $1.4 million of net cash used in operating
      activities. For the year ended December 31, 2004, although 100% of our revenue
      was deferred in accordance with our accounting policy, net cash provided by
      operating activities was approximately $1.4 million, which was net of $310,821
      in additions to restricted cash and $256,711 in prepaid income taxes, the latter
      of which was refunded in 2005.




This
      decrease in operating cash flow as compared to the prior year reflects a decline
      in sales of our software products and our strategic shift to broaden our
      business by developing an Internet-based search network. Because our business
      is
      evolving and changing, our operating cash flow may continue to suffer, and
      past
      operations are not a good gauge for anticipating future operations. Advertising
      spending has historically been cyclical in nature, reflecting overall economic
      conditions as well as budgeting and buying patterns, and this could negatively
      impact on our operating cash flow as we attempt to develop this source of
      revenue. In the meantime we will continue to incur operating expenses,
      principally compensation and benefits and telecommunications costs as well
      as
      legal, auditing and other ancillary costs associated with being a public
      company.





Based
      on
      the Company’s business model and encouraging test results during the latter half
      of 2005, management had believed that the Company would be able to meet its
      obligations as they came due, as well as its budgeted working capital
      requirements for its planned activities, at least through the third quarter
      of
      2006, by continuing to further reduce costs and by attempting to raise capital
      through debt or equity financing. However, by early February 2006, such attempts
      to raise debt or equity capital proved fruitless, and it became obvious to
      management that the Company’s business plan was no longer viable, as the
      encouraging test results it had noted in the latter half of 2005 dissipated
      in
      January 2006. In addition, in March 2006, in order to further stem its outflow
      of cash while it attempts to develop a viable business plan and rebuild its
      business, the Company broke its office space lease and relocated to offices
      outside of New York. The Company may incur damages for the amount of unpaid
      rent
      over the remaining term of the lease, plus legal costs, penalties and interest,
      on the unpaid rent, minus the security deposit. The amount and extent of such
      damages are at the present time, unknown. The Company is hopeful that it will
      be
      successful in negotiating an acceptable settlement with landlord.




Net
      cash
      used in investing activities for the year ended December 31, 2005 was $6,500,
      as
      compared to $517,599 used in investing activities for the year ended December
      31, 2004. Acquisitions of furniture and fixtures, computer and
      telecommunications equipment and leasehold improvements accounted for the major
      portion of investing activities in 2004.




Cash
      used
      in financing activities for the year ended December 31, 2005 and 2004, was
      $0
      and $217,670, respectively.




22


**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 Commission on January
      24, 2006 and January 30, 2006, respectively, the
      Board
      of Directors the
      Company dismissed
      its independent registered public accounting firm, Eisner LLP, (“Eisner”) and
      engaged the services of Bagell, Josephs, Levine & Company, L.L.C. 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, 2005 and 2004.





The
      audit
      report of Eisner on the financial statements of the Company as of and for the
      two fiscal years ended December 31, 2004 did not contain any adverse
      opinion or disclaimer of opinion, nor was it qualified or modified as to audit
      scope or accounting principles **.**








**Item
      8A. Controls and Procedures**





Our
      disclosure controls and procedures are designed to ensure that material
      information relating to the Company are made known by others within the Company
      to our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and
      others in the Company involved in the preparation of our annual report and
      our
      quarterly reports. The Company has evaluated, with the participation of the
      Company’s CEO and CFO, the effectiveness of the design and operation of the
      Company’s disclosure controls and procedures as of December 31, 2005, pursuant
      to Exchange Act Rule 15d-15. Based upon that evaluation, the CEO and CFO
      concluded that the Company’s disclosure controls and procedures are effective in
      timely alerting them to material information relating to the Company required
      to
      be included in the Company’s periodic filings with the Commission. During the
      year ended December 31, 2005, the Company found it necessary to reduce staffing
      in order to conserve cash, as its level of business activity declined. As a
      result there is very limited segregation of duties. The Company has implemented
      procedures to limit access to bank accounts and in connection with the approval
      of invoices and disbursements of cash. However, with only seven employees,
      total
      segregation of duties is not practicable.




**Item
      8B. Other Information.**





None.





23


**PART
      III**





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





**Identify
      Directors and Executive Officers**





Set
      forth
      below is certain information concerning each of the directors and executive
      officers of the Company as of March 24, 2006:




Name
            
            Age
            
            Position
            
            With
                CompanySinceColorado
                Stark
            
            34
            
            Executive
                Chairman, Director
            
            1999Alvin
                Estevez
            
            35
            
            President
                and CEO, Director
            
            1999Edwin
                J. McGuinn, Jr.
            
            54
            
            Director
            
            2005Richard
                M. Scarlata
            
            63
            
            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 12 years, Mr.
      Stark offers the Company his experience in building successful, high growth
      enterprises. Mr. Stark also spent two years, from 2001 to 2003, as president
      of
      Brill Capital. Under His leadership Brill Capital financed innovative companies
      in the fields of Biotechnology and Communications.




*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., 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., 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, 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.


24


*Richard
      M. Scarlata.* Mr.
      Scarlata currently serves as CFO and Treasurer of the Company. Mr.
      Scarlata became CFO 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 2005,
      all
      filing requirements applicable to its executive officers, directors, and greater
      than ten percent (10%) beneficial owners were met.





**Code
      of Ethics**





In
      March
      2005, the Company adopted a Code of Ethics.




25


**Item
      10. Executive Compensation.**





The
      following table sets forth information concerning all cash and non-cash
      compensation awarded to, earned by or paid to the executive officers of the
      Company, who were serving at the end of fiscal year 2005, for services in all
      capacities to the Company:




**SUMMARY
      COMPENSATION TABLE**




Annual
                Compensation
            Long-Term
                CompensationAwards
            PayoutsName
                And Principal Position
              (a)
            Year
              (b)
            Salary
                ($)
              (c)
            Bonus
                ($)
              (d)
            Other
                Annual Compensation ($)
              (e)
            Restricted
                Stock Awards ($)
              (f)
            Securities
                Underlying Options/SARs (#)
              (g)
            LTIP
                Payouts ($
              (h)
            All
                Other Compensation ($)
              (i)Colorado
                Stark,
              Executive
                Chairman
              and
                Director
            2005
            150,000
            0
            40,000
            0
            134,924
            0
            02004
            87,769
            1,100,000
            2,648
            0
            0
            0
            02003
            0
            1,150,000
            0
            0
            0
            0
            0Alvin
                Estevez,
              President
                and CEO
              and
                Director
            2005
            150,000
            0
            40,000
            0
            175,286
            0
            02004
            87,769
            1,100,000
            4,423
            0
            0
            0
            02003
            0
            1,150,000
            0
            0
            0
            0
            0Richard
                M. Scarlata,
              CFO
                and Treasurer
            2005
            110,000
            0
            0
            0
            289,649
            0
            02004
            0
            0
            0
            0
            0
            0
            02003
            0
            0
            0
            0
            0
            0
            0





The
      following table sets forth the grant of stock options made during the fiscal
      year ended December 31, 2005 to the persons named in the Summary Compensation
      Table:







**OPTION/SAR
      GRANTS IN LAST FISCAL YEAR**


**(Individual
      Grants)**




Name
              (a)
            Number
                of
              Securities
              Underlying
              Options/SARs
              Granted
              #
              (b)
            Percent
                of
              Total
              Option/SARs
              Granted
                to
              Employees
              In
                Fiscal
              Year
              (c)
            Exercise
                Of
              Base
                Price
              ($/Sh)
              (d)
            Expiration
              Date
              (e)Colorado
                Stark
            134,924
            14.1%
            $1.21
            May
                17, 2010Alvin
                Estevez
            175,286
            18.4%
            $1.21
            May
                17, 2010Richard
                M. Scarlata
            289,649
            30.4%
            $1.10
            May
                17, 2015








26


The following
      table sets forth information with respect to unexercised stock options held
      by
      the persons named in
      the Summary Compensation Table at December 31, 2005:





**AGGREGATED
      OPTION/SAR EXERCISES IN LAST FISCAL YEAR**


**AND
      FISCAL YEAR-END OPTION/SAR VALUES**




Name
              (a)
            Shares
              Acquired
              On
                Exercise
              #
              (b)
            Value
              Realized
              (c)
            Number
                of
              Unexercised
              Securities
              Underlying
              Option/SARs
              At
                FY-End #
              Exercisable/
              Unexercisable
              (d)
            Value
                of
              Unexercised
              In-the-Money
              Option/SARs
              At
                FY-End ($)
              Exercisable/
              Unexercisable
              (e)Colorado
                Stark
            0
            0
            134,924
            0Alvin
                Estevez
            0
            0
            175,286
            0Richard
                M. Scarlata
            0
            0
            289,649
            0





The following
      table sets forth information with respect to awards made to persons named in
      the
      Summary Compensation Table pursuant to a long-term incentive plan in the fiscal
      year ending December 31, 2005 .




**LONG-TERM
      INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR**


Estimated
                    Future Payouts Under
                  Non-Stock
                    Price-Based PlansName
                  (a)
                Number
                    of
                  Shares,
                    Units Or
                  Other
                    Rights
                  #
                  (b)
                Performance
                    Or
                  Other
                    Period Until
                  Maturation
                    Or
                  Payout
                  (c)
                Threshold
                  ($
                    Or #)
                  (d)
                Target
                  ($
                    Or #)
                  (e)
                Maximum
                  ($
                    Or #)
                  (f)Colorado
                    Stark
                0
                n/a
                n/a
                n/a
                n/aAlvin
                    Estevez
                0
                n/a
                n/a
                n/a
                n/aRichard
                    M. Scarlata
                0
                n/a
                n/a
                n/a
                n/a
  **Compensation
        of Directors**





All
      non-employee directors are paid an annual director’s fee of $10,000 payable
      ratably during each quarter. No additional amounts are paid for attendance
      at
      meetings, committee participation or special assignments, except for
      reimbursement of out-of-pocket expenses in connection with attendance at Board
      of Director's and/or committee meetings. Non-employee directors are granted
      options to purchase shares of the Company’s common stock as follows: (i)
      Non-employee directors receive an initial grant to purchase 39,000 shares upon
      joining the Board of Directors. These options vest equally on the first, second
      and third anniversaries of the grant, as long as the director is still a member
      of the Board of Directors as of such date. The option has a term of 10 years;
      (ii) Non-employee directors receive annual grants on the last trading day in
      March following the first anniversary of joining the Board of Directors to
      purchase 3,000 shares, fully vested with a term of 10 years. During the year
      ended December 31, 2005, Mr. McGuinn was awarded options totaling 39,000 shares
      exercisable at $1.26 per share. The options vest at the rate of 13,000 shares
      each, on March 8, 2006, 2007 and 2008.




27


**Employment
      Agreements**





Messrs.
      Stark, Estevez and Scarlata each have an employment agreement with the Company
      that extends until December 31, 2008. A copy of each of their employment
      agreements was filed as an exhibit to the Company’s Form 8-K filed as of
      February 16, 2005.




**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 24, 2006, 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 24, 2006, the Company  had
      16,243,267 shares of common stock outstanding.





**Name
                and Address**
              **of
                Beneficial Owner(1)**
            **Shares
                Beneficially Owned**
            **Percentage
                of Shares Beneficially Owned**
            **Position**Colorado
                Stark
            6,056,872
            37.3%
            Executive
                Chairman and DirectorAlvin
                Estevez
            5,995,129
            36.9%
            President
                and CEO and DirectorEdwin
                J. McGuinn, Jr.
            0
            0
            DirectorRichard
                M. Scarlata
            0
            0
            CFO
                and TreasurerDirectors
                and Executive Officers as a Group (4 persons)
            12,052,001
            74.2%


__________________________


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





**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. 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))(a)
            (b)
            (c)Equity
                compensation
              plans
                approved by
              security
                holders
            953,610
            $1.14
            2,046,390Equity
                compensation
              not
                approved by
              security
                holders
            0
            
            0Total
            953,610
            $1.14
            2,046,390








28





**Item
      12. Certain Relationships and Related Transactions**





In
      anticipation of the reverse takeover, in December 2004, Mathew Evans, one of
      the
      shareholders of Maxi, who was also at that time a Director, President, CEO,
      CFO
      and Secretary of the Maxi, returned to Maxi (and Maxi cancelled) 750,000 shares
      of its common stock owned by him for no consideration.





During
      2004, Adorons loaned $120,000 to its Alvin Estevez, who is President and CEO
      and
      also one of the Company’s founders as well as a stockholder. This loan,
      including interest at market rates, was repaid prior to the completion of the
      reverse takeover, by the redemption and cancellation of 21,840 shares of
      Adorons’ common stock owned by this individual.





In
      November 2004 the Company entered into a financial advisory agreement with
      an
      entity whose chairman owns approximately 0.05% of the Company’s common stock.
      The agreement provided for a $500,000 advisory fee payable in cash upon the
      Company’s execution of a Share Exchange Agreement with a public company, which
      amount was paid in December 2004 to that entity.




During
      2004, in connection with the preparation of financial statements for the 2002
      and 2003 fiscal years, Nobska Associates, LLC, a company of which
      Richard M. Scarlata, the Company’s CFO and Treasurer is a principal, was
      paid a fee of $23,850 and was reimbursed for out-of-pocket expenses totaling
      $293 for services rendered.




**Item
      13. Exhibits and Reports on Form 8-K**




**Exhibits**





Listed
      on
      page 46 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
      year ended December 31, 2005 was $82,000.





**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 year ended December 31,
      2005
      was $-0-.








**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 year ended December 31, 2005 was $18,600.








29





**All
      Other Fees**





The
      aggregate fees billed for products and services provided by our independent
      registered public accounting firm and the Company’s predecessor accounting firm
      while the Company was a non-public entity for pre-merger professional services
      other than those previously reported in this Item 14, for the fiscal year ended
      December 31, 2004 were $105,000 and $138,243, respectively.





**Audit
      Committee**





During
      2004, **** the
      Company’s Board of Directors functioned as its audit committee. During 2005,
      after his joining the Board of Directors in March, 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.





30


**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.





**Enigma Software
              Group, Inc.**Date:
                April 10, 2006
            By
            /s/
                Alvin
                EstevezAlvin
              Estevez
              President
                and 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/
              Alvin Estevez
            
            President
              and Chief Executive Officer
            
            April
              10, 2006Alvin
                Estevez
            
            (Principal
                  Executive Officer)/s/
                Colorado Stark
            
            Executive
                Chairman
            
            April
                10, 2006Colorado
                Stark/s/
                Richard M. Scarlata
            
            Chief
                Financial Officer and Treasurer
            
            April
                10, 2006Richard
              M. Scarlata
            
            (Principal
              Financial Officer)/s/
                Edwin J. McGuinn, Jr.
            
            Director
            
            April
                10, 2006Edwin
              J. McGuinn, Jr.








31





**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.3(ii)*
              
              Bylaws
                  of the Company.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).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).23
                  (i)*
              
              Consent
                  of expert23
                  (ii)*
              
              Consent
                  of expert31.1*
              
              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.





32


Enigma
      Software Group, Inc.


Annual
      Report to Shareholders


**Index
      to Financial Statements**








PageReport
                of Independent Registered Public Accounting Firm
            
            F-2Report
                of Independent Registered Public Accounting Firm
            
            F-3Balance
                Sheet
            
            F-4Statements
                of Operations
            
            F-5Statements
                of Changes in Capital Deficit
            
            F-6Statements
                of Cash Flows
            
            F-7Notes
                to Financial Statements
            
            F-8










F-1


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











Board
      of
      Directors and Stockholders


Enigma
      Software Group, Inc.


Stamford,
      CT 06902





We
      have
      audited the accompanying balance sheet of Enigma Software Group, Inc., (the
      “Company”) as of December 31, 2005, and the related statements of operations,
      changes in capital deficit, and cash flows for the year ended December 31,
      2005.
      These financial statements are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements based
      on our audit.





We
      conducted our audit 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. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Enigma Software Group, Inc., as
      of
      December 31, 2005, and the results of its operations and its cash flows for
      the
      year ended December 31, 2005, 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 A to the financial statements,
      the Company did not generate sufficient cash flows from revenues during the
      year
      ended December 31, 2005, to fund its operations. Also at December 31, 2005,
      the
      Company had negative net working capital of $175,533. The Company’s net working
      capital position has continued to deteriorate into the first quarter of 2006.
      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 2006. 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 A. The
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.








Bagell,
      Josephs, Levine & Company, LLC





Gibbsboro,
      New Jersey


March
      21,
      2006








F-2





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors and Stockholders


Enigma
      Software Group, Inc.








We
      have
      audited the accompanying statements of operations, changes in capital deficit
      and cash flows of Enigma Software Group, Inc. (formerly known as Adorons.com,
      Inc.) (the "Company") for the year ended December 31, 2004. These financial
      statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audit.





We
      conducted our audit 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. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the results of operations and cash flows of Enigma Software
      Group, Inc. (formerly known as Adorons.com, Inc.) for the year ended
      December 31, 2004, in conformity with accounting principles generally
      accepted in the United States of America.








Eisner
      LLP





New
      York,
      New York


March
      29,
      2005





With
      respect to Note B


April
      8,
      2005







F-3


**Enigma
      Software Group, Inc.**


**Balance
        Sheet**
 **December
        31, 2005**





**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            472,008Accounts
                receivable
            
            
            51,296Prepaid
                expenses and other current assets
            
            
            7,772Total
                current assets
            
            
            531,076Property
                and equipment, net
            
            
            7,000**Total
                Assets**
            
            $
            538,076**LIABILITIES
                AND CAPITAL DEFICIT**Current
                Liabilities:Accounts
                payable and accrued expenses
            
            $
            50,831Income
                taxes payable
            
            
            86,166Deferred
                revenue
            
            
            569,612Total
                current liabilities
            
            
            706,609Commitments
                and contingencies**CAPITAL
                DEFICIT**Common
                stock, par value $0.001, 100,000,000 shares authorized;16,243,267
                issued and outstanding
            
            
            16,243Additional
                paid-in capital
            
            
            (55,502
            )Accumulated
                Deficit
            
            
            (129,274
            )Total
                capital deficit
            
            
            (168,533
            )**Total
                Liabilities and Capital Deficit**
            
            $
            538,076


*See
        notes to financial statements.*


F-4


**Enigma
      Software Group, Inc.**


**Statements
        of Operations**




Year
                ended December 31,2005
            
            2004**Revenues:**Sales
                of software products
            
            $
            21,915,358
            
            $
            0Commission
                income and advertising revenues
            
            
            107,367
            
            
            0Total
                revenues
            
            
            22,022,725
            
            
            0**Expenses:**Marketing
                and selling
            
            
            308,015
            
            
            7,755,841General
                and administrative
            
            
            2,425,265
            
            
            5,457,123Write-down
                of impaired assets
            
            
            387,055Depreciation
                and amortization
            
            
            161,045
            
            
            87,024Total
                costs and expenses
            
            
            3,281,380
            
            
            13,299,988Operating
                income (loss)
            
            
            18,741,345
            
            
            (13,299,988
            )Interest
                income
            
            
            13,448
            
            
            27,764Income
                (loss) before income tax provision
            
            
            18,754,793
            
            
            (13,272,224
            )Income
                tax provision (benefit)
            
            
            8,581,697
            
            
            (8,495,000
            )**Net
                income (loss)**
            
            $
            10,173,096
            
            $
            (4,777,224
            )Basic
                net income/(loss) per common share
            
            $
            0.63
            
            $
            (0.33
            )Diluted
                net income/(loss) per common share
            
            $
            0.63
            
            $
            (0.33
            )Weighted
                average shares outstanding:Basic
            
            
            16,129,178
            
            
            14,650,001Diluted
            
            
            16,129,178
            
            
            14,650,001


*See
        notes to financial statements.*


F-5


**Enigma
      Software Group, Inc.**


**Statement
        of Changes in Capital Deficit**
 **For
        the two years ended December 31, 2005**


CommonStock
            
            Additional
              Paid-in
            
            Accumulated
            
            TreasuryStock
            
            Total
              CapitalShares
            
            Par
                value
            
            Capital
            
            Deficit
            
            Shares
            
            Amount
            
            Deficit**Balance
                - December 31, 2003**
            
            
            **14,838,198**
            
            **$**
            **14,838**
            
            **$**
            **74,048**
            
            **$**
            **(5,525,146**
            **)**
            
            **(188,197**
            **)**
            **$**
            **(4,660**
            **)**
            **$**
            **(5,440,920**
            **)**Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            (4,777,224
            )
            
            
            
            
            
            
            
            (4,777,224
            )**Balance
                - December 31, 2004**
            
            
            **14,838,198**
            
            **$**
            **14,838**
            
            **$**
            **74,048**
            
            **$**
            **(10,302,370**
            **)**
            
            **(188,197**
            **)**
            **$**
            **(4,660**
            **)**
            **$**
            **(10,218,144**
            **)**Shares
                redeemed in connection withrepayment
                of loan by shareholderon
                February 15, 2005
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (61,743
            )
            
            (123,485
            )
            
            (123,485
            )Shares
                deemed issued in connectionwith
                Maxi Group, Inc. mergeron
                February 16, 2005
            
            
            1,655,009
            
            
            1,655
            
            
            (1,655
            )Shares
                of Treasury Stock cancelledon
                March 8, 2005
            
            
            (249,940
            )
            
            (250
            )
            
            (127,895
            )
            
            
            
            
            249,940
            
            
            128,145Net
                income for the year
            
            
            
            
            
            
            
            
            
            
            
            10,173,096
            
            
            
            
            
            
            
            
            10,173,096**Balance
                - December 31, 2005**
            
            
            **16,243,267**
            
            **$**
            **16,243**
            
            **$**
            **(55,502**
            **)**
            **$**
            **(129,274**
            **)**
            
            -
            
            **$**
            -
            
            **$**
            **(168,533**
            **)**


*See
        notes to financial statements.*


F-6
 
 **Enigma
          Software Group, Inc.**
 **Statements
          of Cash Flows**
 **For
          the years ended December 31,**


2005
                
                2004**Cash
                      Flows From Operating Activities:**Net
                    Income (loss)
                
                $
                10,173,096
                
                $
                (4,777,224
                )Adjustments
                    to reconcile net income (loss) to net cash (used in) provided
                    byoperating
                    activities:Deferred
                    tax asset
                
                
                8,495,000
                
                
                (8,495,000
                )Write-down
                    of impaired assets, net of cash proceeds
                
                
                387,055Depreciation
                    and amortization
                
                
                161,045
                
                
                87,024Interest
                    income on loan repaid by officer
                
                
                (819
                )Changes
                    in:Restricted
                    cash
                
                
                1,004,640
                
                
                (310,821
                )Accounts
                    receivable
                
                
                (38,355
                )
                
                279,628Prepaid
                    expenses and other current assets
                
                
                146,941
                
                
                (111,178
                )Prepaid
                    income taxes
                
                
                256,711
                
                
                (256,711
                )Security
                    Deposit
                
                
                
                
                
                (84,458
                )Accounts
                    payable and accrued expenses
                
                
                (213,749
                )
                
                173,656Income
                    taxes payable
                
                
                86,166Deferred
                    revenue
                
                
                (20,594,957
                )
                
                14,846,087Net
                    cash (used in) provided by operating activities
                
                
                (137,226
                )
                
                1,351,003**Cash
                      Flows From Investing Activities:**Purchase
                    of property and equipment
                
                
                (9,285
                )
                
                (517,599
                )Proceeds
                    from disposition of excess property and equipment
                
                
                2,785
                
                
                --Net
                      cash used in investingactivities
                
                
                (6,500
                )
                
                (517,599
                )**Cash
                      Flows From Financing Activities:**Loans
                    to shareholders and related parties net of repayment
                
                
                
                
                
                (159,663
                )Repayment
                    of bank overdraft
                
                
                
                
                
                (58,007
                )Net
                    cash used in financing activities
                
                
                
                
                
                (217,670
                )**Net
                      (Decrease)/Increase In Cash And Cash
                      Equivalents**
                
                
                (143,726
                )
                
                615,734Cash
                    and cash equivalents - beginning of year
                
                
                615,734
                
                
                --**Cash
                      And Cash Equivalents - End Of Year**
                
                $
                472,008
                
                $
                615,734**Non-Cash
                      Transaction:**Common
                    shares redeemed in connection with repayment of loan and interest
                    by
                    shareholder
                
                $
                123,485**Supplemental
                      Disclosure Of Cash Flow Information:**Cash
                    paid for:Interest
                
                
                --
                
                $
                1,280Taxes
                
                
                2,191
                
                $
                235,647


*See
        notes to financial statements.*


F-7


**Enigma
      Software Group, Inc.**


**Notes
      to Financial Statements**


**For
      the years ended December 31, 2005 and 2004**


**Note
      A - Organization**




Enigma
      Software Group, Inc., (the “Company”), is a Delaware corporation that was formed
      in 2005 and is the surviving corporation of a reverse takeover; however, the
      business of the Company actually commenced in 1999 (see Note B). The Company
      develops software and Internet-based systems designed to give customers
      information and control over the programs installed on their computers in an
      automated and easy-to-use way. The Company’s business strategy is to develop
      products that further the values on which the Internet is based, transparency
      and user control. In promoting these values, commitment to customers is
      paramount.




The
      Company did not generate sufficient cash flows from revenues during the year
      ended December 31, 2005 to fund its operations (see Notes C-2 and D). In order
      to slow the outflow of cash until new sources of revenue could be generated,
      commencing in June 2005 and through December 2005, the Company reduced its
      work
      force, and its executive officers had allowed the Company to defer a portion
      of
      their salary payments. In December 2005 those salary deferrals were paid in
      lump-sums to the executive officers, in compliance with their employment
      contracts.





**Going
      Concern - The Company continues to lose money and may not stay in
      operations:**





At
      December 31, 2005, the Company had negative net working capital of $175,533,
      including deferred revenue of $569,612. Adding back this deferred revenue,
      the
      Company had net working capital $394,079 available to fund ongoing operations.
      The Company’s net working capital position has continued to deteriorate into the
      first quarter of 2006. 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 net working capital reserves
      during the second quarter of 2006.





Based
      on
      the Company’s business model, as well as encouraging test results during the
      third and fourth quarters of 2005, management had believed that the Company
      would be able to meet its obligations as they came due, as well as its budgeted
      working capital requirements for its planned activities, at least through
      September 30, 2006, by continuing to further reduce costs and by attempting
      to
      raise capital through debt or equity financing. However, by early February
      2006,
      such attempts to raise debt or equity capital had proved fruitless, and it
      became obvious to management that the Company’s business plan was no longer
      viable, as the encouraging test results it had noted in the latter half of
      2005
      dissipated in January 2006. The Company’s cash position continued to deteriorate
      during the first quarter of 2006, and it became obvious that additional drastic
      actions would be necessary in order to gain time as the Company continues to
      develop additional sources of revenue, seeks new sources of capital and reviews
      strategic alternatives (see Note M).





The
      Company is in process of developing a new business plan, which is designed
      to
      build a new revenue model based upon the Company’s prior development and
      marketing successes. This new business plan will also entail raising capital
      for
      product development, marketing and increased avenues of distribution, as well
      as
      such strategic alternatives as acquisitions of complimentary security software
      businesses.








F-8


**Note
      B - Reverse** **Takeover**




Maxi
      Group, Inc. (“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. Henceforth, Enigma Software Group, Inc. (“Enigma”) is defined
      as the Company.




**Note
      C - Significant Accounting Policies**




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




At
      December 31, 2005, the Company’s financial instruments consist of cash, accounts
      receivable and accounts payable. At December 31, 2004, the Company’s financial
      instruments consisted of cash, restricted cash, accounts receivable, accounts
      payable, and notes receivable from shareholder/officer. The carrying values
      of
      these instruments approximate their fair value because of their short-term
      nature.




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




With
      respect to license fees generated from the sales of downloadable security
      software products, the Company recognizes revenues in accordance with 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 TM software
      ("SpyHunter") over the Internet. Customers order the product and simultaneously
      provide their credit card information to the Company. Upon receipt of
      authorization from the credit card issuer, the Company licenses the customer
      to
      download SpyHunter over the Internet. As part of the sales price, the Company
      provides post-contract customer support ("PCS") which consists primarily of
      e-mail support and free updates to its SpyHunter software, as and when such
      updates are available. The sales of software arrangements by the Company are
      considered to be multiple deliverables. 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.





F-9


In
      connection with the issuance of SpyHunter 2.0, which was released in late
      January 2005, the Company announced to all of its existing customers that as
      of
      March 10, 2005, the Company would no longer support and/or provide updates
      to its SpyHunter software issued prior to the introduction of SpyHunter 2.0
      (“SpyHunter 1 series”) and the Company ceased to offer the SpyHunter 1 series,
      for which PCS had been provided for an indefinite period. As an incentive to
      purchase the recently released SpyHunter 2.0, the Company offered this new
      software to its existing customers free of charge for a period of 90 days.
      Since
      VSOE did not exist for the allocation of revenue to the various elements of
      the
      SpyHunter 1 series arrangement, the Company had deferred all revenue from such
      arrangements during the years ended December 31, 2003 and 2004. However, with
      the discontinuance of the SpyHunter 1 series, the Company began to recognize
      its
      deferred revenue related to the SpyHunter 1 series beginning March 11,
      2005, ratably over a period of 90 days. Accordingly, the Company recognized
      as
      revenue during the first six months of 2005, all sales from its SpyHunter 1
      series software, while no additional cash was received during that period in
      connection with these sales. The revenue recognized during the six month period
      ended June 30, 2005 from such sales was approximately $21,275,000, which amount
      represents all revenue from the sales of SpyHunter 1 series software, which
      sales occurred almost entirely in the years 2003 and 2004.





SpyHunter
      2.0 provides for twelve months of post-contract customer support and updates,
      if
      any. Accordingly, the Company recognizes revenue from sales of SpyHunter 2.0
      ratably over the 12-month period subsequent to each sale of SpyHunter 2.0.
      The
      Company considers revenue from SpyHunter 2.0 sales to be attributable entirely
      to the service element. Similarly, the Company recognizes revenues from sales
      of
      its Adorons TM Easy
      Security  (previously
      known as Adorons TM Anonymous Surfing) software ratably over the 12-month period subsequent to
      each
      sale. The Company considers revenue from the sales of this product to be
      attributable to the service element as well. During the year ended December
      31,
      2005, the revenue recognized from such sales was approximately $640,000
      representing approximately 3% of the Company’s revenue from software products
      for the year.





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;
      and
      with respect to on-line advertising, at the time the advertising revenue is
      generated as determined by the consumer’s click-through to the advertiser’s
      website.





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, 2005 and 2004, the Company had no customer returns or
      chargebacks.




**[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. At December 31, 2005, the Company incurred an impairment
      charge of $387,055, representing the difference between what the Company had
      received and expects to receive, $2,785 and $1,000, respectively, from the
      disposal of its excess furniture and fixtures, as well as the abandonment of
      its
      leasehold improvements (see Note M), and their respective carrying values at
      that date; and the security deposit of $83,147, on its office lease. At December
      31, 2004, the Company had not incurred an impairment charge.




F-10


**[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 has been very
      limited software development costs incurred between the time the SpyHunterTM
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, 2005 and 2004, advertising expense amounted to $88,611 and
      $5,636,743, respectively, and is included in marketing and selling expenses
      in
      the Company’s 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, life of depreciable and
      amortizable assets, employee benefits, provision for income taxes, realization
      of deferred tax assets and impairment of long-lived assets. Actual results
      could
      differ from those estimates.




F-11


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




The
      Company records compensation expense for its stock-based employee compensation
      plans in accordance with the intrinsic-value method prescribed by Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”
Intrinsic value is the amount by which the market price of the underlying stock
      exceeds the exercise price of the stock option or award on the measurement
      date,
      generally the date of grant. The Company’s options are issued with a strike
      price equal to the market price of the underlying stock at date of grant and,
      accordingly, no compensation cost has been recognized for its stock option
      plans. In December 2004, the Financial Accounting Standards Board (“FASB”)
      issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised
      2004), “Share-Based Payment” (“SFAS 123 (revised 2004”). SFAS 123 (revised 2004)
      establishes standards that require companies to record the cost resulting from
      all share-based payment transactions using the fair value method. Transition
      under SFAS 123 (revised 2004) requires using a modified version of prospective
      application, under which compensation costs are recorded for all unvested
      share-based payments outstanding or a modified retrospective method, under
      which
      all prior periods impacted by SFAS 123 are restated. SFAS 123 (revised 2004)
      is
      effective, for the Company, as of January 1, 2006, with early adoption
      permitted.  The
      impact of adoption of SFAS 123 (revised 2004) cannot be presently predicted,
      as
      it will depend on amounts of share-based payments that are granted in the
      future. As of December 31, 2005 there was $667,346 of total unrecognized
      compensation costs related to unvested stock options granted under the Company’s
      stock option plan. The cost is expected to be recognized over the 17 month
      weighted-average remaining contractual life.





The
      following table illustrates the effect on net income (loss) and earnings (loss)
      per share for the years ended December 31, 2005 and 2004 if the Company had
      applied the fair value recognition provisions of SFAS 123 (revised 2004) to
      stock-based employee compensation:




Year
                ended December 31,2005
            
            2004Net
                income (loss), as reported
            
            $
            10,173,096
            
            $
            (4,777,224
            )Deduct:
                Total stock-based employee compensationexpense
                determined under fair value basedmethod
                for all awards
            
            
            74,127
            
            
            0Pro
                forma net income (loss)
            
            $
            10,098,969
            
            $
            (4,777,224
            )Earnings
                (loss) per share:As
                reported:Basic
            
            $
            0.63
            
            $
            (0.33
            )Diluted
            
            $
            0.63
            
            $
            (0.33
            )Pro
                forma:Basic
            
            $
            0.60
            
            $
            (0.33
            )Diluted
            
            $
            0.60
            
            $
            (0.33
            )





The
      fair
      value of each option grant on the date of grant is estimated using the
      Black-Scholes option-pricing model reflecting the following weighted average
      assumptions:  Volatilty,
      90%; Expected Life of Options, 5 years; Risk Free Interest Rate, 3.91% ; and
      Dividend Yield, 0%. The weighted-average fair value of options granted during
      the year ended December 31, 2005 was $0.79.





F-12


**[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 year ended December 31, 2005, diluted earnings per share reflects the
      potential dilution assuming common shares were issued upon the exercise of
      outstanding options and the proceeds thereof were used to purchase outstanding
      common shares. Options to purchase 953,610 shares of common stock were
      outstanding during the year ended December 31, 2005, but were not included
      in
      the computation of diluted earnings per share because the options’ exercise
      prices were greater than the average market price of the common shares and,
      therefore, the effect would be anti-dilutive. For the year ended December 31,
      2004,  the
      basic
      and diluted weighted average shares outstanding are the same because no options
      were outstanding during the year.







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




In
      June
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
      replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 will
      become effective for accounting changes and corrections of errors made in fiscal
      year 2006 and beyond. The effect of this statement on the Company’s Financial
      Statements will depend on the nature and significance of future accounting
      changes subject to this statement.





**[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
      D - Restricted Cash**




Under
      a
      credit card processing agreement with a financial institution, which was
      terminated as of December 31, 2004, the Company had been required to
      maintain a security reserve deposit as collateral. The amount of the deposit
      was
      at the discretion of the financial institution and as of December 31, 2004
      it was $1,004,640. During the year ended December 31, 2005, these funds were
      released to the Company and have been reflected in net cash provided by
      operating activities for the year ended December 31, 2005, with the result
      that
      net cash used in operating activities for the year ended December 31, 2005
      was
      $136,225. Without the benefit of these funds, the Company, in all likelihood,
      would have exhausted its cash resources prior to December 31, 2005.




**Note
      E - Concentrations of Credit Risk**




Cash
      and
      cash equivalents




The
      Company has placed its cash and cash equivalents and had placed its restricted
      cash with highly capitalized financial institutions insured by the Federal
      Deposit Insurance Corporation (“FDIC”). At December 31, 2005 and 2004, 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-13


**Note
      F - Property and Equipment**




Property
      and equipment consist of the following at December 31:




**Estimated****2005**
            
            **2004**
            
            **Useful
                Lives**Computer
                hardware
            
            **$**
            **14,000**
            
            **$**
            **376,861**
            
            
            3
                - 5 yearsFurniture
                and fixtures
            
            
            **0**
            
            
            **144,715**
            
            
            5
                yearsCommunication
                systems and equipment
            
            
            **0**
            
            
            **28,099**
            
            
            3
                yearsLeasehold
                improvements
            
            
            **0**
            
            
            **21,202**
            
            
            Life
                of leasePurchased
                software
            
            
            **0**
            
            
            **8,770**
            
            
            3
                years**14,000**
            
            
            **579,647**Less
                accumulated depreciation and amortization
            
            
            **7,000**
            
            
            **114,194****$**
            **7,000**
            
            **$**
            **465,453**





During
      the years ended December 31, 2005 and 2004, the Company recorded depreciation
      and amortization expense of $161,045 and $87,024, respectively. As discussed
      in
      Note C-3, the Company recognized an impairment charge of $387,055 during the
      year ended December 31, 2005. As the Company terminated 61% of its employees
      during the year ended December 31, 2005 and outsourced their functions to
      independent contractors as well as remaining employees, the computer and
      communications equipment, software and furniture and fixtures used by these
      employees became excess. At December 31, 2005, the Company had sold some of
      that
      property and equipment to its employees and former employees, and had entered
      into an agreement with a third party to sell a portion of the remainder. Since
      this property and equipment was principally computer and telecommunications
      equipment, its fair value was deemed to be de minimis and the undepreciated
      balance was written off, net of a token amount of actual and anticipated
      proceeds.





Until
      March 1, 2006, the Company leased space at 17 State Street, New York, New York
      (the "Building").  On March 10, 2006, the Company advised the owner of the
      Building that in view of the owner's breach of certain of its obligations under
      the Company's lease of space at the Building, the Company had no choice but
      to
      vacate the premises.  Accordingly, the Company relocated to offices in
      Stamford, Connecticut in order to conserve cash while it attempts to develop
      a
      viable business plan, rebuild its business and explore strategic alternatives,
      such as a sale of the Company, a merger or other transaction.  The Company
      may seek to recover the damages it sustained as a result of the landlord's
      breach.  However, it is possible that a court might find that the Company,
      which takes the position that it was relieved of its obligations to pay rent
      on
      account of the owner's breach, is liable for the amount of unpaid rent over
      the
      remaining term of the lease, plus legal costs, penalties and interest, on the
      unpaid rent, plus additional damages resulting from the Company's vacating
      the
      premises, less a security deposit of $83,147 (see Note M). The furniture and
      fixtures at this location as well as the leasehold improvements of the demised
      premises were abandoned and the Company deemed them to be worthless as of
      December 31, 2005. In addition, the Company has taken an impairment charge
      of
      $83,147 for the security deposit, which may be at risk.




**Note** **G
      - Stockholders’ equity**




The
      Company has 10,000,000 shares of authorized and unissued capital stock
      designated as Preferred Stock, $0.001 par value.




F-14


**Note
      H - Provision for Income Taxes**




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




**2005**
            
            **2004**Computed
                provision (benefit)
            
            **$**
            **6,234,900**
            
            **$**
            **(4,512,000**
            **)**State
                tax provision (benefit), net of federal effect
            
            
            **3,080,003**
            
            
            **(1,496,000**
            **)**Decrease
                in valuation allowance
            
            
            
            
            
            **(2,274,000**
            **)**Other
            
            
            **(732,936**
            **)**
            
            **(213,000**
            **)**Income
                tax provision (benefit)
            
            **$**
            **8,581,967**
            
            **$**
            **(8,495,000**
            **)**








The
      tax
      effects of the temporary differences that give rise to deferred tax assets
      and
      liabilities at December 31, 2005 and 2004 are presented below:




**2005**
            
            **2004**Deferred
                revenue
            
            **$**
            **4,270,060**
            
            **$**
            **2,861,000**Net
                operating loss (carrybacks) carryforwards
            
            
            **(4,270,060**
            **)**
            
            **5,634,000**Net
                deferred tax asset
            
            **$**
            **0**
            
            **$**
            **8,495,000**





As
      of
      December 31, 2004, the Company had a federal net operating loss carryforward
      of
      approximately $12,559,000 available to offset future taxable income through
      2024. This net operating loss carryforward was fully utilized during the year
      ended December 31, 2005.




**Note
      I - Commitments and Contingencies**




**[1]**  **Lease:**




During
      2004, the Company entered into an operating lease for 6,236 square feet of
      office space for its corporate offices at 17 State Street in downtown Manhattan
      (see Note M). The lease, which requires minimum monthly rental payments of
      approximately $16,600, expires on November 30, 2007. In connection with the
      lease, the Company had provided to the landlord, as a security deposit, an
      irrevocable and unconditional letter of credit in the principal amount of
      $83,147. The letter of credit is collateralized by a certificate of deposit
      account, which matures on December 31, 2007.




Rent
      expense amounted to $199,583 and $264,473 for the years ended December 31,
      2005
      and 2004, respectively.







The
      following is a schedule by years, of future minimum annual lease payments under
      the operating lease at 17 State Street, as of December 31, 2005:





**Year**
            
            **Operating
                Lease**2006
            
            $
            199,5522007
            
            
            182,923Total
                minimum lease payments
            
            $
            382,475








F-15


**[2]**  **Consulting
      agreement:**




In
      April
      of 2000, the Company entered into an eighteen-month consulting agreement with
      an
      individual. Under the terms of the agreement the consultant would receive
      125,000 shares of the Company’s common stock that would vest over the term of
      the agreement. The agreement was terminated in 2001 and the consultant received
      59,000 shares of the Company’s common stock in connection with the services that
      were provided through the termination date. The Company and the consultant
      reached an agreement and the consultant exchanged the shares for Maxi shares
      of
      common stock on April 8, 2005, as discussed in Note B.




**[3]**  **Contingencies:**




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 the Company’s financial position,
      results of operations or liquidity. As discussed above and in Note M, the
      Company vacated its office space at the Building during the first quarter of
      2006, as a result of the owner's breach of certain obligations under the
      Company's lease at the Building. It is possible that a court might find that
      the
      Company is liable for the amount of unpaid rent over the remaining term of
      the
      lease, plus legal costs, penalties and interest, on the unpaid rent, plus
      additional damages resulting from the Company's vacating the premises, less
      a
      security deposit of $83,147.





**Note
      J - Profit Sharing Plan**




During
      2004, the Company adopted a 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 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, 2005 and 2004 were $70,307
      and
      $107,936, respectively.




**Note** **K
      - Stock Option Plan**




During
      the year ended December 31, 2005, the Company adopted the 2005 Stock Option
      and
      Grant Plan (the “Stock Option Plan”), and granted options, under the Stock
      Option Plan to employees, a non-employee director and to two 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. Exercise prices are determined by
      the
      closing price of the Company’s common stock on the date of the grant or the most
      recent previous closing price if the common stock has not traded on that day
      (the “Closing Price”). In the case of non-employee directors, consultants and
      all employees except the Company’s two co-founders, the price of the grant is
      equal to the Closing Price. For the Company’s two co-founders, the price of the
      grant is equal to 110% of the Closing Price. The options vest over periods
      of up
      to three years and are generally exercisable for a period of 10 years from
      the
      date of the grant, except that for the Company’s two co-founders, the grants are
      exercisable for a period of five years from the date of the grant. Subsequent
      to
      the granting of the options, eleven employees were terminated by the Company
      during the year ended December 31, 2005, and their unvested options were
      terminated. As a result, option grants for 303,985 shares were cancelled and
      returned to the Stock Option Plan, and the total number of options outstanding
      at December 31, 2005 was 953,610, of which 60,929 have vested and another 89,860
      options were scheduled to vest on January 1, 2006. No options were exercised
      during the year ended Decmeber 31, 2005, as the market price of the Company’s
      common stock was significantly below the exercise prices during a substantial
      portion of the year.





F-16


The
      fair
      value of each option was estimated as of the date of issuance using the
      Black-Scholes option-pricing model, with the following weighted-average
      assumptions: dividend yield of 0%; expected volatility of 90%; risk-free
      interest rates ranging from 3.91% to 4.00%; and expected lives of five years
      from the date of grant.




**Note
      L - Transactions with Related Parties**




During
      2004, Adorons loaned $120,000 to its Chief Executive Officer, who is also one
      of
      the Company’s founders as well as a stockholder. This loan, including interest
      at market rates, was repaid prior to the completion of the reverse takeover,
      by
      the redemption and cancellation of 21,840 shares of Adorons’ common stock owned
      by this individual. This redemption and cancellation of shares is presented
      in
      the Statement of Changes in Stockholders Equity (Capital Deficit) as 61,743
      shares, which is the number of newly issued common shares of Maxi that this
      individual would have received in connection with the Exchange.





In
      November 2004, the Company entered into a financial advisory agreement with
      an
      entity whose chairman owns approximately 0.05% of the Company’s common stock.
      The agreement provided for a $500,000 advisory fee payable in cash upon the
      Company’s execution of a Share Exchange Agreement with a public company, which
      amount was paid in December 2004 to that entity.




**Note
      M - Subsequent Event**




Until
      March 1, 2006, the Company leased space at 17 State Street, New York, New York
      (the "Building").  On March 10, 2006, the Company advised the owner of the
      Building that in view of the owner's breach of certain of its obligations under
      the Company's lease of space at the Building, the Company had no choice but
      to
      vacate the premises.  Accordingly, the Company relocated to offices in
      Stamford, Connecticut in order to conserve cash while it attempts to develop
      a
      viable business plan, rebuild its business and explore strategic alternatives,
      such as a sale of the Company, a merger or other transaction.  The Company
      may seek to recover the damages it sustained as a result of the landlord's
      breach.  However, it is possible that a court might find that the Company,
      which takes the position that it was relieved of its obligations to pay rent
      on
      account of the owner's breach, is liable for the amount of unpaid rent over
      the
      remaining term of the lease, plus legal costs, penalties and interest, on the
      unpaid rent, plus additional damages resulting from the Company's vacating
      the
      premises, less a security deposit of $83,147.





F-17