PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

Enigma Software Group, Inc.
Condensed Balance Sheet
March 31, 2006
(unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	167,705
Accounts receivable		40,879
Prepaid expenses and other current assets		5,028

Total current assets		213,612

Property and equipment, net		5,833
Security deposit		6,700

Total Assets	$	226,145

LIABILITIES AND CAPITAL DEFICIT
Current Liabilities:
Accounts payable and accrued expenses	$	115,271
Income taxes payable		86,166
Deferred revenue		378,167

Total current liabilities		579,584

Commitments and contingencies

CAPITAL DEFICIT
Common stock, par value $0.001, 100,000,000 shares authorized;
16,243,267 issued and outstanding		16,243
Additional paid-in capital		74,204
Accumulated deficit		(443,886	)

Total capital deficit		(353,439	)

Total Liabilities and Capital Deficit	$	226,145

See notes to condensed financial statements.

Enigma Software Group, Inc.
Condensed Statements of Operations
For the three-month periods ended March 31,
(unaudited)

	2006			2005

Revenues:
Sales of software products	$	297,440		$	4,982,038
Commission income and advertising revenues		24,839			53,517
Total revenues		322,279			5,035,555

Expenses:
Marketing and selling		20,427			174,065
General and administrative		620,359			792,749
Depreciation and amortization		1,167			40,261

Total costs and expenses		641,953			1,007,075
Operating (loss) income		(319,674	)		4,028,480
Interest income		5,062			3,651
(Loss) income before income tax provision		(314,612	)		4,032,131
Income tax provision					1,777,166
Net (loss) income	$	(314,612	)	$	2,254,965

Basic net (loss)/income per common share	$	(.02	)	$	0.15
Diluted net (loss)/income per common share	$	(.02	)	$	0.15

Weighted average shares outstanding:
Basic		16,243,267			15,428,245
Diluted		16,243,267			15,438,695

See notes to condensed financial statements.

Enigma Software Group, Inc.

Condensed Statement of Changes in Capital Deficit

For the three-month period ended March 31, 2006

Additional

Total

Common

Stock

Paid-in

Accumulated

Capital

Par value

Capital

Deficit

Balance - December 31, 2005

16,243,267

16,243

(55,502

)

(129,274

)

(168,533

)

Stock based compensation expense

129,706

Net loss for the three-month period

(314,612

)

(314,612

)

Balance - March 31, 2006 (unaudited)

16,243,267

16,243

74,204

(443,886

)

(353,439

)

See notes to condensed financial statements.

Enigma Software Group, Inc.
Condensed Statements of Cash Flows
For the three-month periods ended March 31,
(unaudited)
	2006			2005
Cash flows from operating activities:
Net (loss) income	$	(314,612	)	$	2,254,965
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Interest income on officer’s loan					(819	)
Stock based compensation expense		129,706
Depreciation and amortization		1,167			40,261
Changes in:
Restricted cash					954,640
Accounts receivable		10,417			(136,193	)
Prepaid expenses and other current assets		2,744			98,548
Security Deposit		(6,700	)
Deferred tax asset					1,775,000
Accounts payable and accrued expenses		54,244			(173,203	)
Deferred revenue		(191,445	)		(4,642,338	)
Note payable		10,176

Net cash (used in) provided by operating activities		(304,303	)		170,861

Cash flows from investing activities:
Purchase of property and equipment					(3,523	)

Net (decrease)/increase in cash and cash equivalents		(304,303	)		167,338
Cash and cash equivalents - beginning of period		472,008			615,734

Cash and cash equivalents - end of period	$	167,705		$	783,072

Non-cash transaction:
Common shares redeemed in connection with repayment of loan and interest by shareholder				$	123,485

See notes to condensed financial statements.

Enigma Software Group, Inc.

Notes to Condensed Financial Statements

For the three-month period ended March 31, 2006

(unaudited)

Note A - Basis of presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), with the instructions of Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2005 included in the Enigma Software Group, Inc. Form 10-KSB filing with the SEC on April 10, 2006. The results for the interim period are not necessarily indicative of the results for the full fiscal year.

Note B - Going Concern - The Company continues to lose money and may not stay in operations

During the year ended December 31, 2005, the Company did not generate sufficient cash flows from revenues to fund its operations and during the three months ended March 31, 2006 the Company has not generated sufficient cash flows from revenues to fund its operations (see Note D-1). As its cash position continued to deteriorate during the first quarter of 2006, it became obvious that 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 K).

At March 31, 2006, the Company had negative net working capital of $365,972, including deferred revenue of $378,167. Adding back this deferred revenue, the Company had net working capital $12,195 available to fund ongoing operations. The Company’s net working capital position has continued to deteriorate into the second 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.

The Company is in the 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. There can be no assurance that the Company will be able to raise any new financing or that its new business plan will be successful. In addition, if the Company is able to raise new financing, such new financing will most likely involve substantial dilution to the current stockholders.

Note C - 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.

Enigma Software Group, Inc.

Notes to Condensed Financial Statements

For the three-month period ended March 31, 2006

(unaudited)

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 D - Selected Significant Accounting Policies

[1] 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.

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. 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, during the year ended December 31, 2005, the Company recognized as revenue, all sales from its SpyHunter 1 series software, while no additional cash was received during that year in connection with these sales. Substantially all (99.6%) of the revenue from sales of software products reported during the three months ended March 31, 2005 is due to this revenue recognition policy.

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 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 three month periods ended March 31, 2006 and 2005, the revenue recognized from such sales was approximately $297,400 and $19,000, respectively. Actual cash sales during these periods were approximately $106,000 and $234,000, respectively.

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.

[2] 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 the cost of post-contract customer support, sales returns and allowances, life of depreciable and amortizable assets, employee benefits, provisions for income taxes, realization of deferred tax assets and lease cancellation costs. Actual results could differ from those estimates.

Enigma Software Group, Inc.

Notes to Condensed Financial Statements

For the three-month period ended March 31, 2006

(unaudited)

[3] Stock-based compensation expense

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. We have adopted prospective application and accordingly all compensation costs associated with vested and unvested incentive stock options have been expensed in the first quarter of 2006. This resulted in a charge to earnings of $129,706. Since this expense is non-deductible for tax purposes, the recording of such would give rise to a deferred tax asset of $42,769. However, since the Company has reported a loss for the quarter before taxes and has utilized all if its Net Operating Loss carryforwards, such benefit would not be realizable and as a result, has been entirely offset by a valuation reserve.

[4] Earnings per share:

Basic earnings per share is computed by dividing the income/loss available to common stockholders by the weighted average number of common shares outstanding. For the three month period ended March 31, 2006, diluted earnings per share includes the dilutive effect, if any, from the potential exercise of stock options using the treasury stock method.

Note E - 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 three months ended March 31, 2005, $954,640 of these funds were released to the Company and were reflected in net cash provided by operating activities for the three month period ended March 31, 2005, with the result that net cash provided by operating activities for the three month period ended March 31, 2005 was $170,861. Without the benefit of these funds, the Company would have reported net cash used in operating activities for the three months ended March 31, 2005 in the amount of $783,779.

Note F - Stockholders’ equity

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

Note G - 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 in Note K, the Company vacated its office space at 17 State Street, New York City as of February 28, 2006, as a result of the owner's breach of certain obligations under the Company's lease. 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. In addition, the Company is in dispute with the operator of a co-location facility where the Company had maintained a portion of its computer equipment until March 2006. The Company removed that equipment and ceased paying the operator the amount required under its agreement with the operator. The Company and the operator are in discussion as to a mutually agreeable settlement of the amount owed for the remaining term of the agreement.

Enigma Software Group, Inc.

Notes to Condensed Financial Statements

For the three-month period ended March 31, 2006

(unaudited)

Note H - Stock Option Plan

During the year ended December 31, 2005, the Company granted options, under the 2005 Stock Option and Grant Plan (the”Stock Option Plan”), to employees, a non-employee director and consultants to purchase an aggregate of 1,257,595 shares of the Company’s common stock at exercise prices ranging from $1.10-$1.26. The options vest over periods of up to three years. Subsequent to the granting of the options, 11 employees were terminated by the Company 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 and March 31, 2006 was 953,610.

The fair value of each option was estimated as of the date of issuance using the Black-Scholes-Merton 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 I - 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 contribution to the 401(k) Plan for the three-month periods ended March 31, 2006 and 2005 was $13,876 and $13,885, respectively.

Note J - Provision for Income Taxes

The income tax benefit or expense for the three month periods ended March 31, 2006 and 2005 differed from the amounts computed by applying the fereral income tax rate of 34% to the pre-tax loss or income as a result of the following:

	Three Months Ended March 31, 2006			Three Months Ended March 31, 2005

Computed (Benefit) Provision	$	(64,589	)	$	1,370,925
Provision for State & Local Income Taxes					406,241
Deferred Tax Asset Associated with Share-Based Compensation		(42,769	)
Total Calculated (Benefit) Provision		(107,358	)
Increase in Valuation Allowance		107,358

Net (Benefit) Provision	$	0		$	1,777,166

Note K - Lease Cancellation

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 2. 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.

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.

•

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 consist principally of compensation, occupancy 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 quarters 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.

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 both limit access to bank accounts and to segregate the approval of invoices from 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 restricting access to our source code. In addition, we protect our software, documentation, templates and other written materials under trademark, trade secret and copyright laws. Even with all of these safeguards, there can be no assurance that such precautions will provide meaningful protection from competition or that competitors will not independently be able to develop similar technology. The copyright, trademark and trade secret laws, which are a significant source of protection for our intellectual property, offer only limited protection. In addition, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in software are uncertain and still evolving, and the future viability or value of any of our intellectual property rights is uncertain. Effective trademark, copyright and trade secret protection may not be available in every country in which our products are distributed or made available.

If, in the future, litigation is necessary to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others, such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results and/or financial condition. As a result, ultimately, we may be unable, for financial or other reasons, to enforce our rights under the various intellectual property laws described above.

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 could also prevent us from offering our products and services to others and may require that we procure substitute products or services.

With respect to 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.

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 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.

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 Notes to Condensed Financial Statements. We have not yet 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 risk. 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:

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

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

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

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Retaining employees from the businesses we acquire.

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

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 customers evaluate the advantages and disadvantages of upgrading to our new products or 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 at least 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.

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 in 2003, 2004, and the first three quarters of 2005, significant operating expenditures. 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 and in 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 SpyHunter™ (“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.

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

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

Risks Related to Our Stock Being Publicly Traded

Our stock price may be volatile.

Our common stock has been trading in the public market for slightly more than one year. 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 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:

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

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

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Disruption to our operations.

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

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

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Commencement of, or our involvement in, litigation.

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Any major change in our board of directors or management.

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

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Changes in earnings estimates or recommendations by securities analysts.

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

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

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

We have never declared or paid any cash dividend on our 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 SEC, 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 our stockholders 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 the Company or its assets, for the foreseeable future. This concentrated control limits the ability of stockholders to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. As a result, the market price of our common stock could be adversely affected.

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

Provisions in our articles 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:

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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.

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

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

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

You may experience 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 were outstanding as of March 31, 2006 and 2,391,610 were outstanding as of this filing) 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 shareholder’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.

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 three-month periods ended March 31, 2006 and 2005

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 three-month periods ended March 31, 2006 and 2005, 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^TM (“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^TMAnonymous Surfing).

Critical Accounting Policies and the Use of Estimates

Revenue Recognition

We recognize revenue from the license fees of SpyHunter and Adoronsin 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 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 $21,270,075 and consisted of $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 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, ($21,270,075) during the 90 day period from 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 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 three-month period ended March 31, 2006, revenue in the amount of $297,440 was reported, while acual cash sales were only $105,995. The difference of $191,444 was attributable to partial recognition of sales deferred from prior periods, net of a partial deferment of first quarter 2006 sales. Similarly, for the three-month period ended March 31, 2005, revenue in the amount $4,982,038 was reported, while actual cash sales were $234,071. The difference of $4,747,967 was attributable to partial recognition of sales deferred from periods prior to the first quarter of 2005, net of a partial deferment of first quarter 2005 sales.

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 sales of other companies products or from on-line advertising of such products on our various websites.

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 March 31, 2006, we had not accrued a reserve for potential refunds or chargebacks, as our experience has been such that returns and chargebacks are not material to our overall revenues. We may voluntarily accept greater or fewer products for return.

Income Taxes

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

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. In addition, the Company is in dispute with the operator of a co-location facility where the Company had maintained a portion of its computer equipment until March 2006. The Company removed that equipment and ceased paying the operator the amount required under its agreement with the operator. The Company and the operator are in discussion as to a mutually agreeable settlement of the amount owed for the remaining term of the agreement.

Results of Operations For the Three-Month Periods Ended March 31, 2006 and 2005

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 was deferred and not recognized as revenue until 2005, while the cash was received and used principally during 2003 and 2004 to support our operations. Therefore, all 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.

Revenues

For the three-month period ended March 31, 2006, reported revenues from the sales of software products were $297,440, consisting of revenue recognized from sales of SpyHunter 2.0 and Adorons Easy Security. Also, for the three-months ended March 31, 2006, commission income and advertising revenues were $24,839. For the comparable prior year period, the revenue reported was $53,517 of commission income and advertising revenue.

For the three-month period ended March 31, 2005, reported revenues from the sales of software products totaled $4,982,038, consisting of the non-cash recognition of deferred revenue from sales of the SpyHunter 1 series of approximately $4,962,110 (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 $19,900 of revenue recognized from sales of SpyHunter 2.0 and Adorons Easy Security.

Expenses

Expenses for the three month periods ended March 31, 2006 and 2005 were $641,953 and $1,007,075, respectively.

	Three Months Ended March 31, 2006		Three Months Ended March 31, 2005
Marketing and selling	$	20,427	$	174,065
General and administrative		620,359		792,749
Depreciation and amortization		1,167		40,261
Total expenses	$	641,953	$	1,007,075

For the three months ended March 31, 2006, marketing and selling expenses declined by approximately $153,600, or 88%, from that of the prior year comparable period, reflecting the substantial decline in actual sales of software products (approximately $106,000 in the first quarter of 2006 as compared to approximately $234,000 in the first quarter of 2005). 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 quarter by approximately $80,000, or 34%, 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 three months ended March 31, 2006, general and administrative expenses declined by approximately $172,000, or 22%. The decline was principally due to a decrease in compensation and benefits expense reflecting the lay-off of 11 employees in periods subsequent to the first quarter of 2005.

Depreciation and amortization expense declined by approximately $39,000 during the three months ended March 31, 2006 when compared to the comparable prior year period, principally due to the write down of impaired assets in the fourth quarter of 2005.

Net Income (Loss)

As a result of the foregoing and after accounting for interest income and income tax expense/(benefits), there was a net loss of approximately $315,000 for the three-months ended March 31, 2006 as compared to a net income of approximately $3.2 million for the comparable prior year period.

Liquidity and Capital Resources For the Three-Month Periods Ended March 31, 2006 and 2005

At March 31, 2006 we had cash and cash equivalents of $167,705. This compares unfavorably to cash and cash equivalents of $783,072 and restricted cash of $50,000 at March 31, 2005, and cash and cash equivalents of approximately $472,000 at December 31, 2005.

Net cash used in operating activities for the three-months ended March 31, 2006 was approximately $304,000 as compared to net cash provided by operating activities of approximately $171,000.

This decrease in operating cash flow as compared to the comparable period of 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. As a result the Company is in a liquidity crisis and its continued operations are in jeopardy.

Item 3. Controls and Procedures

A. Evaluation of Disclosure 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 both limit access to bank accounts and to segregate the approval of invoices from disbursements of cash. However, with only seven employees, total segregation of duties is not practicable.

B. Changes in Internal Control over Financial Reporting:

There were no changes in our internal controls over financial reporting identified in connection with our evaluation of these controls as of the end of the period covered by this report that could have significantly affected those controls subsequent to the date of the evaluation referred to in the previous paragraph, including any correction action with regard to significant deficiencies and material weaknesses.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is regularly involved in litigation which is incidental to its business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit

Number Description of Document

31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)**

31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)**

32.1 Section 1350 Certification (CEO)**

32.2 Section 1350 Certification (CFO)**

________

** Filed herewith.

SIGNATURES

In accordance with the requirements 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: May 10, 2006	By:	/s/ Alvin Estevez
		Alvin Estevez, President and Chief Executive Officer



Date: May 10, 2006	By:	/s/ Richard M. Scarlata
		Richard M. Scarlata, Chief Financial Officer

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

		Page
PART I. FINANCIAL INFORMATION		3

Item 1. Condensed Financial Statements		3

	Condensed Balance Sheet at March 31, 2006 (unaudited)	3

	Condensed Statements of Operations for the three-month periods ended March 31, 2006 and 2005 (unaudited)	4

	Condensed Statement of Changes in Capital Deficit for the three-month period ended March 31, 2006 (unaudited)	5

	Condensed Statements of Cash Flows for the three-month periods ended March 31, 2006 and 2005 (unaudited)	6

	Notes to Condensed Financial Statements (unaudited)	7

Item 2. Management's Discussion and Analysis or Plan of Operation		11

Item 3. Controls and Procedures		28


PART II. OTHER INFORMATION		29

Item 1.	Legal Proceedings
Item 2.	Unregistered Shares of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K

SIGNATURES		30