UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K/A





AMENDMENT
NO. 1





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





For the
fiscal year ended December
31,
2009





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





For the
transition period from


Commission
file number 000-53475





CYBERDEFENDER
      CORPORATION(Name
      of registrant in its
charter)





California
                            
                            65-1205833(State
      or other jurisdiction of incorporation or organization)
                            
                            (I.R.S.
      Employer Identification No.)617 West 7thStreet, Suite 401, Los Angeles,
      California
                            
                            90017(Address
      of principal executive offices)
                            
                            (Zip
      Code)





Issuer’s
telephone number (213)
689-8631





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





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





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





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





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈


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




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





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


 ̈ Yes
x
No





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





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





List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (eg., Part I, Part II, etc.) into which the document is
incorporated:  (1) Any annual report to security holders; (2) Any
proxy or information statement; and (3) Any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933.  The listed documents
should be clearly described for identification
purposes.  None








EXPLANATORY
NOTE





On April
29, 2010 we received a comment letter from the Securities and Exchange
Commission relating to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009 which we filed with the Securities and Exchange Commission on
March 31, 2010 (the “Original Report”).  The primary purpose of this
amendment to the Original Report (the “Amendment”) is to respond to the comment
letter.





In this
Amendment we have revised the following:





·
            Item
      7. Management’s Discussion of Financial Condition and Results of
      Operations.  We have revised this disclosure to clearly label
      certain gross sales information as non-GAAP, disclose why management
      believes the information is useful and provide a table that clearly
      reconciles the non-GAAP measure to
GAAP.





·
            Item
      9A. Disclosure Controls and Procedures.  We have included
      additional information relating to our disclosure controls and
      procedures.





·
            Item
      15. Exhibits.  We have included our amended bylaws as an exhibit
      to this amendment.





·
            Signatures.  We
      have included the signature of our Principal Accounting Officer, who is
      also our Chief Financial Officer.





This
Amendment includes information contained in the Original Report, and we have
made no attempt in the Amendment to modify or update the disclosures presented
in the Original Report, except as identified above.  The disclosures
in this Amendment continue to speak as of the date of the Original Report, and
do not reflect events occurring after the filing of the Original
Report.  Accordingly, this Amendment should be read in conjunction
with our other filings made with the Securities and Exchange Commission
subsequent to the filing of the Original Report, including any amendments to
those filings.  The filing of this Amendment shall not be deemed to be
an admission that the Original Report, when made, included any untrue statement
of a material fact or omitted to state a material fact necessary to make a
statement not misleading.





Forward-Looking
Statements





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





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





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





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





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





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





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





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





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





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




Overview




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





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





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





On
September 27, 2007, we announced the launch of CyberDefenderULTIMATE and
CyberDefenderCOMPLETE.  These are bundled products that include EDC as
well as support services.  CyberDefenderULTIMATE provides year round
support for any software or hardware connected to a subscriber’s computer while
CyberDefenderCOMPLETE provides a one time live technical support
call.  These products also include 2 gigabytes of online
backup.  We also offer a free Internet security toolbar called
MyIdentityDefender (“MyID”).  MyID is free to use and generates
revenue through search advertising. On November 20, 2008, the Company announced
the launch of CyberDefender Registry Cleaner.  CyberDefender Registry
Cleaner eliminates clutter and junk that builds up within a computer's registry
due to the installation and removal of programs, deletion and creation of files
and cached records from Web surfing.  The annual subscription rate
varies depending on the marketing or distribution channels we use. Additionally,
we offer stand alone technical support services available as a one-time call or
as an annual subscription.




1




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





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





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





Critical
Accounting Policies and Estimates





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





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





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





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





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





As part
of the sales price of its software licenses, the Company provides renewable
product support and content updates, which are separate components of product
licenses and sales. Term licenses allow customers to use the Company’s products
and receive product support coverage and content updates for a specified period,
generally twelve months. The Company invoices for product support, content
updates and term licenses at the beginning of the term. These revenues contain
multiple element arrangements where “vendor specific objective evidence”
(“VSOE”) may not exist for one or more of the elements. EDC is in substance a
subscription and the entire fee is deferred and is recognized ratably over the
term of the arrangement.




2




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





The
Company also uses third parties to sell its software and therefore evaluates the
criteria of FASB ASC Topic 605, “Revenue Recognition,” in
determining whether it is appropriate to record the gross amount of revenue and
related costs or the net amount earned as commissions. The Company is the
primary obligor, is subject to inventory risk, has latitude in establishing
prices and selecting suppliers, establishes product specifications, and has the
risk of loss. Accordingly, the Company's revenue is recorded on a gross
basis.





During
2009, the Company also offered two products which were free to the subscriber,
CyberDefender FREE 2.0 and MyIdentityDefender Toolbar. Revenues are earned from
advertising networks which pay the Company to display advertisements inside the
software or through the toolbar search. The Company recognizes revenue from the
advertising networks monthly based on a rate determined either by the quantity
of the ads displayed or the performance of the ads based on the amount of times
the ads are clicked by the user. Furthermore, advertising revenue is recognized
provided that no significant Company obligations remain at the end of a period
and collection of the resulting receivable is probable. The Company’s
obligations do not include guarantees of a minimum number of
impressions.





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




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





Software Development
Costs.The Company
accounts for software development costs in accordance with FASB ASC Topic 985,
“Software.” Such costs
are expensed prior to achievement of technological feasibility and thereafter
are capitalized. There have been very limited software development costs
incurred between the time the software and its related enhancements have reached
technological feasibility and its general release to customers. As a result, all
software development costs have been charged to product development
expense.





Stock Based Compensation and Fair
Value of our Shares.The Company applies FASB
ASC Topic 718, “Compensation –
Stock Compensation,”which requires companies to measure and recognize
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value. For non-employee stock based
compensation, the Company recognizes an expense in accordance with FASB ASC
Topic 505, “Equity,”
and values the equity securities based on the fair value of the security on the
date of grant. For stock-based awards the value is based on the market value of
the stock on the date of grant or the value of services, whichever is more
readily available. Stock option awards are valued using the Black-Scholes
option-pricing model.




3




The
Company accounts for equity instruments issued to consultants and vendors in
exchange for goods and services in accordance with the provisions of FASB ASC
Topic 505, “Equity.”
The measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for performance
by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term
of the consulting agreement. An asset acquired in exchange for the issuance of
fully vested, non-forfeitable equity instruments should not be presented or
classified for accounting purposes as an offset to equity on the grantor’s
balance sheet once the equity instrument is granted. Accordingly, the Company
records the fair value of the fully vested, non-forfeitable common stock issued
for future consulting services as prepaid expense in its balance
sheet.





Contractual
Obligations




We are
committed under the following contractual obligations:





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





Off-Balance
Sheet Arrangements





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





Indemnities





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





Trends,
Events and Uncertainties





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





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


4





Quarter Ended
                        
                        Net Revenue
                        
                        
                        Deferred
                          Revenue31-Mar-08
                        
                        $
                        475,046
                        
                        
                        $
                        1,019,07130-Jun-08
                        
                        
                        742,862
                        
                        
                        $
                        1,673,88930-Sep-08
                        
                        
                        1,202,715
                        
                        
                        $
                        3,220,73831-Dec-08
                        
                        
                        2,467,136
                        
                        
                        $
                        4,552,953Fiscal
      Year 2008 Totals
                        
                        $
                        4,887,75931-Mar-09
                        
                        $
                        3,191,630
                        
                        
                        $
                        6,687,19830-Jun-09
                        
                        
                        3,686,644
                        
                        
                        $
                        8,139,38430-Sep-09
                        
                        
                        4,427,404
                        
                        
                        $
                        9,656,35231-Dec-09
                        
                        
                        7,536,215
                        
                        
                        $
                        10,779,146Fiscal
      Year 2009 Totals
                        
                        $
                        18,841,893





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





Quarter Ended
                          
                          Software
                          
                          
                          
                          
                          
                          Services
                          
                          
                          
                          
                          
                          Ancillary
                          
                          
                          
                          
                          
                          Renewals
                          
                          
                          
                          
                          
                          Total31-Mar-08
                          
                          $
                          147,423
                          
                          
                          
                          25
                          %
                          
                          $
                          68,597
                          
                          
                          
                          11
                          %
                          
                          $
                          72,858
                          
                          
                          
                          12
                          %
                          
                          
                          311,470
                          
                          
                          
                          52
                          %
                          
                          $
                          600,34830-Jun-08
                          
                          
                          680,606
                          
                          
                          
                          41
                          %
                          
                          
                          300,939
                          
                          
                          
                          18
                          %
                          
                          
                          225,910
                          
                          
                          
                          14
                          %
                          
                          
                          445,790
                          
                          
                          
                          27
                          %
                          
                          
                          1,653,24530-Sep-08
                          
                          
                          1,652,904
                          
                          
                          
                          49
                          %
                          
                          
                          853,629
                          
                          
                          
                          26
                          %
                          
                          
                          475,971
                          
                          
                          
                          14
                          %
                          
                          
                          358,434
                          
                          
                          
                          11
                          %
                          
                          
                          3,340,93831-Dec-08
                          
                          
                          2,107,307
                          
                          
                          
                          49
                          %
                          
                          
                          1,493,234
                          
                          
                          
                          35
                          %
                          
                          
                          669,477
                          
                          
                          
                          16
                          %
                          
                          
                          -
                          
                          
                          
                          0
                          %
                          
                          
                          4,270,018Fiscal
      Year 2008 Totals
                          
                          $
                          4,588,240
                          
                          
                          
                          47
                          %
                          
                          $
                          2,716,399
                          
                          
                          
                          28
                          %
                          
                          $
                          1,444,216
                          
                          
                          
                          15
                          %
                          
                          $
                          1,115,694
                          
                          
                          
                          11
                          %
                          
                          $
                          9,864,54931-Mar-09
                          
                          $
                          2,475,095
                          
                          
                          
                          40
                          %
                          
                          $
                          2,645,857
                          
                          
                          
                          43
                          %
                          
                          $
                          606,051
                          
                          
                          
                          10
                          %
                          
                          $
                          463,948
                          
                          
                          
                          7
                          %
                          
                          $
                          6,190,95130-Jun-09
                          
                          
                          2,501,266
                          
                          
                          
                          40
                          %
                          
                          
                          2,678,978
                          
                          
                          
                          43
                          %
                          
                          
                          584,144
                          
                          
                          
                          9
                          %
                          
                          
                          466,747
                          
                          
                          
                          8
                          %
                          
                          
                          6,231,13530-Sep-09
                          
                          
                          2,666,274
                          
                          
                          
                          40
                          %
                          
                          
                          2,915,731
                          
                          
                          
                          43
                          %
                          
                          
                          461,120
                          
                          
                          
                          7
                          %
                          
                          
                          699,068
                          
                          
                          
                          10
                          %
                          
                          
                          6,742,19331-Dec-09
                          
                          
                          4,401,569
                          
                          
                          
                          45
                          %
                          
                          
                          3,705,830
                          
                          
                          
                          38
                          %
                          
                          
                          982,460
                          
                          
                          
                          10
                          %
                          
                          
                          717,949
                          
                          
                          
                          7
                          %
                          
                          
                          9,807,808Fiscal
      Year 2009 Totals
                          
                          $
                          12,044,204
                          
                          
                          
                          42
                          %
                          
                          $
                          11,946,396
                          
                          
                          
                          41
                          %
                          
                          $
                          2,633,775
                          
                          
                          
                          9
                          %
                          
                          $
                          2,347,712
                          
                          
                          
                          8
                          %
                          
                          $
                          28,972,087





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





The
following is a reconciliation of gross sales to net revenue for the years ended
December 31,  2009 and 2008:




5




2008
                    
                    
                    2009Gross
      Sales
                    
                    
                    9,864,549
                    
                    
                    
                    28,972,087Less:
      Returns and chargebacks
                    
                    
                    (1,053,279
                    )
                    
                    
                    (3,904,001
                    )Less:
      Change in deferred revenue
                    
                    
                    (3,923,511
                    )
                    
                    
                    (6,226,193
                    )Net
      revenue
                    
                    
                    4,887,759
                    
                    
                    
                    18,841,893





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





RESULTS
OF OPERATIONS





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





Revenue


Change
      in2009
                    
                    
                    2008
                    
                    
                    $
                    
                    
                    %Revenue
                    
                    $
                    18,841,893
                    
                    
                    $
                    4,887,759
                    
                    
                    $
                    13,954,134
                    
                    
                    
                    285
                    %





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





Cost
of Sales





Change
      in2009
                    
                    
                    2008
                    
                    
                    $
                    
                    
                    %Cost
      of Sales
                    
                    $
                    4,182,462
                    
                    
                    $
                    767,115
                    
                    
                    $
                    3,415,347
                    
                    
                    
                    445
                    %





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





Operating
Expenses





Advertising


Change
      in2009
                    
                    
                    2008
                    
                    
                    $
                    
                    
                    %Advertising
                    
                    $
                    13,081,509
                    
                    
                    $
                    7,106,455
                    
                    
                    $
                    5,975,054
                    
                    
                    
                    84
                    %





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




6




Product
Development


Change
      in2009
                    
                    
                    2008
                    
                    
                    $
                    
                    
                    %Product
      Development
                    
                    $
                    1,851,931
                    
                    
                    $
                    530,010
                    
                    
                    $
                    1,321,921
                    
                    
                    
                    249
                    %





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





Selling,
General and Administrative


Change
      in2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      %S,G
      & A
                      
                      $
                      6,566,661
                      
                      
                      $
                      3,727,253
                      
                      
                      $
                      2,839,408
                      
                      
                      
                      76
                      %





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





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





Investor
Relations and Other Related Consulting


Change
      in2009
                    
                    
                    2008
                    
                    
                    $
                    
                    
                    %Investor
      relations and other related consulting
                    
                    $
                    3,203,788
                    
                    
                    $
                    1,265,616
                    
                    
                    $
                    1,938,172
                    
                    
                    
                    153
                    %





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





Loss
From Operations


Change
      in2009
                    
                    
                    2008
                    
                    
                    $
                    
                    
                    %Loss
      from operations
                    
                    $
                    10,081,575
                    
                    
                    $
                    8,548,098
                    
                    
                    $
                    1,533,477
                    
                    
                    
                    18
                    %





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




7




Other
Income/(Expense)





Change
in fair value of derivative liabilities


Change
      in2009
                    
                    
                    2008
                    
                    
                    $
                    
                    
                    %Change
      in fair value of derivative liabilities
                    
                    $
                    109,058
                    
                    
                    $
                    -0-
                    
                    
                    $
                    109,058
                    
                    
                    
                    100
                    %





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





Interest
expense, net


Change
      in2009
                    
                    
                    2008
                    
                    
                    $
                    
                    
                    %Interest
      expense, net
                    
                    $
                    3,729,814
                    
                    
                    $
                    2,486,334
                    
                    
                    $
                    1,243,480
                    
                    
                    
                    50
                    %





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





Liquidity and Capital Resources





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





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





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





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




8




Operating
Activities





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




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





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





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





Investing
Activities





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





Financing
Activities





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




9




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




Item
9A. Controls and Procedures





Disclosure
Controls and Procedures





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





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





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





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





1.           Due
to the small size of our accounting department, our internal control policies
and procedures are not, and from the date of our inception have not been,
documented in a formalized manner.  This deficiency was first noted in
the Quarterly Report on Form 10-Q for the period ended June 30, 2007 that we
filed with the Securities and Exchange Commission on September 11,
2007.  Written documentation of our policies and procedures is
required for our disclosure controls and procedures to be
effective.  Management evaluated the impact of our failure to have
formalized documentation of our internal controls and procedures on our
assessment of our disclosure controls and procedures and has concluded that the
control deficiency that resulted represented a significant
deficiency.





To
address this significant deficiency, management performed additional analysis
and other procedures to ensure that the financial statements included herein
fairly present, in all material respects, our financial position, results of
operations and cash flows for the periods presented.  There were no
changes to our financial statements as a result of performing the additional
analysis and procedures.




10




Remediation
of Significant Deficiency





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





Management's
Report on Internal Control Over Financial Reporting





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





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





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





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





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.  All internal control
systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.  Because of the inherent limitations of
internal control, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting.  However, these inherent limitations are known features of
the financial reporting process.  Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this
risk.





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





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




11




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





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





Management's
Remediation Initiatives





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





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





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





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





Changes
in Internal Control over Financial Reporting





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





PART
IV


Item
15. Exhibits, Financial Statement Schedules


3.2
                Bylaws
      of the registrant(1)3.2.1
                Amendment
      No. 1 to Bylaws*3.2.2
                Amendment
      No. 2 to Bylaws*31.1
                Certification
      Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*31.2
                Certification
      Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*32
                Certification
      Pursuant to Section 1350 of Title 18 of the United States
      Code*
 
 *Filed
herewith.
 (1)
Incorporated by reference from the registrant’s SB-2 registration statement
filed with the Securities and Exchange Commission on November 3, 2006 as file
number 333-1318430.
  12





SIGNATURES





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





Date:  May
      10, 2010
              CYBERDEFENDER
      CORPORATIONBy:
              /s/ Gary GuseinovGary
      GuseinovChief
      Executive OfficerBy:
              /s/ Kevin HarrisKevin
      HarrisChief
      Financial Officer





Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated
below on this 10th day of May 2010.





SIGNATURE,
TITLE





/s/ Gary GuseinovGary
      GuseinovPresident,
      Chief Executive Officer, and
Director





/s/ Kevin HarrisKevin
      HarrisChief
      Financial Officer, Principal Accounting Officer and
    Director





/s/ Igor
      BarashIgor BarashDirector