UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                   Quarterly Report Under Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                                   FORM 10-QSB

                For the Quarterly Period Ended June 30, 2005

                        Commission File Number: 333-46424

                           CYBER DEFENSE SYSTEMS, INC.
               --------------------------------------------------
             (Exact name of registrant as specified in its charter)

                FLORIDA                                    55-0876130
-------------------------------------           -------------------------------
    (State or other jurisdiction of                     (I.R.S. Employer
      incorporation or organization)                   Identification No.)

       10901 ROOSEVELT BOULEVARD
        ST. PETERSBERG, FLORIDA                              33716
-------------------------------------           -------------------------------
 (Address of principal executive offices)                  (Zip code)

                   Registrant's telephone number: 727-577-0878
                                                 ---------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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 whether the registrant is an accelerated Filer (as
defined in Rule 12-b-2 of the Exchange Act).  YES [_]   NO [X]


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practical date.

       Title of Class                   Number of Shares Outstanding
-----------------------------           -----------------------------
Class A Common Stock
(par value $0.001 per share)            28,668,952 as of August 19, 2005
Class B Common Stock
(Par Value $0.001 per share)               300,000 as of August 19, 2005
Class C Common Stock
Par value $0.001 per share)                      2 as of August 19, 2005



<PAGE>

                                      INDEX

                                                                      Page
                                                                     Number

     PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of
   June 30, 2005 (unaudited) and December 31, 2004..................   1
Consolidated Statements of Operations for the
   Three Months Ended June 30, 2005 and 2004 (unaudited)............   2
Consolidated Statements of Operations for the
   Six Months Ended June 30, 2005 and 2004 (unaudited)..............   3
Consolidated Statements of Cash Flows for the
   Six Months Ended June 30, 2005 and 2004 (unaudited)..............  4-5
Notes to the Consolidated Financial Statements (unaudited)..........  6-17

Item 2. Management's Discussion and Analysis of
             Financial Condition or Plan of Operations.............   17

Item 3. Controls and procedures....................................   22


     PART II. OTHER INFORMATION

Item 1. Legal Proceedings ..........................................  22

Item 2. Unregistered Sales of Equity Securities.....................  22

Item 3. Defaults Upon Senior Securities.............................  22

Item 4. Submission of Matters to a Vote of Security Holders.........  22

Item 5. Other Information ..........................................  22

Item 6. Exhibits and Reports on Form 8-K............................ 22-23

Signatures..........................................................  23


<PAGE>
                           CYBER DEFENSE SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  June 30,2005   December 31, 2004
                                                                  ------------   -----------------
                                                                   (Unaudited)
<S>                                                               <C>            <C>
                                        ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................       $   164,230        $   206,270
Accounts receivable .......................................           863,920            747,155
Inventory .................................................           754,239                 --
Prepaid expenses ..........................................            44,500                 --
Prepaid interest ..........................................           112,636                 --
                                                                  -----------        -----------
TOTAL CURRENT ASSETS ......................................         1,939,525            953,425

OTHER ASSETS
Restricted cash ...........................................            20,000                 --
Note receivable - Techsphere ..............................         1,257,397                 --
Intangible assets, net of accumulated amortization
   of $152,080 and $99,291 respectively ...................           447,920            506,252
Property and equipment, net of accumulated
   depreciation of $2,952 and $29,513 respectively ........            16,789              5,603
Deposits and costs of equipment ...........................           150,976            150,976
Deposits on airships ......................................         1,175,000          1,175,000
Deferred loan origination costs, net of accumulated
  amortization of $95,748 and $15,292 respectively ........         1,089,123             12,849
Security deposits .........................................             7,371              7,156
                                                                  -----------        -----------
TOTAL ASSETS ..............................................       $ 6,104,101        $ 2,811,261
                                                                  ===========        ===========

                      LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable and accrued liabilities ..................       $ 1,463,629        $ 1,319,772
Accounts payable related parties ..........................            42,013            468,176
Assumed debt of subsidiary ................................                --             33,337
Note payable - 21st Century Airships ......................           250,000                 --
Notes payable - related parties ...........................           224,957          1,137,768
Note payable - Quebec, Inc. ...............................           163,220            242,216
                                                                  -----------        -----------
     TOTAL CURRENT LIABILITIES ............................       $ 2,143,819        $ 3,201,269

LONG TERM LIABILITIES
Notes payable AJW Group - net of discount of $2,195,727 ...           604,273                 --
Notes payable - related parties ...........................         1,379,739                 --
                                                                  -----------        -----------
     Total liabilities ....................................         4,127,831          3,201,269
                                                                  -----------        -----------
Minority interest in Cyber Aerospace, Corp. (6.2%) ........                               26,581

Commitments and contingencies .............................                --                 --

 SHAREHOLDERS' DEFICIT:

Class A Preferred stock, $0.001 par value; 100,000,000
   Shares authorized; none issued and outstanding .........                --                 --
Common stock:
Class A, $0.001 par value; 200,000,000 shares
authorized; 28,168,952 and 25,921,562 shares issued
and outstanding respectively ..............................            28,169             25,921
Class B, $0.001 par value; 200,000,000 shares authorized;
300,000 and 150,000 shares issued and outstanding
respectively ..............................................               300                150
Class C, $0.001 par value; 200,000,000 shares authorized;
2 shares issued and outstanding ...........................                --                 --
Additional paid-in capital ................................         9,550,516            461,762
Accumulated other comprehensive loss ......................            (7,064)            (7,064)
Accumulated deficit .......................................        (7,595,651)          (897,358)
                                                                  -----------        -----------
Total shareholder's equity (deficit) ......................         1,976,270           (416,589)
                                                                  -----------        -----------
     TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT ..........       $ 6,104,101        $ 2,811,261
                                                                  ===========        ===========
</TABLE>


                   The accompanying notes are an integral part
                   of these consolidated financial statements

                                       -1-
<PAGE>

                           CYBER DEFENSE SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                            JUNE 30,
                                                --------------------------------
                                                    2005                2004
                                                ------------        ------------
<S>                                             <C>                 <C>
Revenues ................................       $     65,765        $ 2,999,250
                                                ------------        -----------
Expenses
Cost of Sales ...........................             35,391          2,200,000
General and administrative ..............            765,508            355,703
                                                ------------        -----------
Total expenses ..........................            800,899          2,555,703
                                                ------------        -----------

(Loss) profit from Operations ...........           (735,134)           443,547

Other Income (Expense)
Interest income .........................             10,241                 --
Interest expense ........................           (282,253)           (16,898)
                                                ------------        -----------
Other Income (Expense), net .............           (272,012)           (16,898)
                                                ------------        -----------

Net (Loss) income Before Income
 Tax and Minority Interest ..............         (1,007,146)           426,649
                                                ------------        -----------

Provision for income tax ................                 --                 --
Minority interest .......................                 --            (33,477)
                                                ------------        -----------

Net (loss) income .......................       $ (1,007,146)       $   393,172
                                                ------------        -----------
Basic and diluted (loss) income per share       $      (0.04)       $      0.02
                                                ============        ===========
Weighted average number of Class A
 common shares outstanding ..............         28,094,183         18,750,000
                                                ============        ===========
</TABLE>


                   The accompanying notes are an integral part
                   of these consolidated financial statements

                                       -2-
<PAGE>

                           CYBER DEFENSE SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                       SIX MONTHS ENDED
                                                           JUNE 30,
                                                -------------------------------
                                                    2005               2004
                                                ------------       ------------
<S>                                             <C>                <C>
Revenues ................................       $     65,765       $  2,999,250
                                                ------------       ------------

Expenses
Cost of Sales ...........................             35,391          2,200,000

General and administrative expenses .....          1,327,135            469,442
                                                ------------       ------------
Total expenses ..........................          1,362,526          2,669,442
                                                ------------       ------------

(Loss) Profit from Operations ...........         (1,296,761)           329,808

Other Income (Expense)
Interest income .........................             10,241                 --
Interest expense ........................           (834,704)           (22,293)
Write off of computer equipment .........                 --            (12,205)
Impairment of goodwill ..................         (4,577,069)                --
                                                ------------       ------------
Other Income (Expense), net .............         (5,401,532)           (34,498)
                                                ------------       ------------

Net (Loss) Income Before Income
Tax and Minority Interest ...............         (6,698,293)           295,310
                                                ------------       ------------

Provision for income tax ................                 --                 --
Minority interest .......................                 --            (33,472)
                                                ------------       ------------

Net (loss) income .......................       $ (6,698,293)      $    261,838
                                                ------------       ------------

Basic and diluted (loss) income per share       $      (0.25)      $       0.01
                                                ============       ============
Weighted average number of Class A
 common shares outstanding ..............         27,040,107         18,750,000
                                                ============       ============
</TABLE>

                   The accompanying notes are an integral part
                   Of these consolidated financial statements




                                       -3-
<PAGE>

                           CYBER DEFENSE SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                        ------------------------------
                                                            2005              2004
                                                        -----------        -----------
<S>                                                     <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net (loss) income ............................       $(6,698,293)       $   261,838
   Adjustments to reconcile net (loss) income
   To net cash from operating activities:
     Minority interest ..........................                --             33,472
     Interest expense from amortization of
         loan discount ..........................           651,847                 --
     Impairment of goodwill .....................         4,577,069
     Issuance of stock for services .............            94,125
     Depreciation and amortization ..............           134,059             62,998
     Write-off of intangible assets .............             5,543
     Write-off of property and equipment ........
     Loss on currency adjustment ................                                1,268
   Changes in assets and liabilities
    Prepaid expenses ............................          (157,136)                --
    Accounts receivable .........................          (116,765)          (315,000)
    Inventory ...................................          (754,239)                --
    Security deposits ...........................              (215)                --
    Accounts payable and accrued liabilities ....           196,818            232,815
    Accounts payable - related party ............           (76,163)                --
                                                        -----------        -----------
NET CASH FROM OPERATING ACTIVITIES ..............        (2,143,350)           277,391
                                                        -----------        -----------
CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of licenses .........................                --           (600,000)
   Deposits on Airship ..........................                --           (500,000)
   Loan to Techsphere ...........................        (1,007,397)
   Change in related party receivables/payables .                              134,626
   Purchases of equipment........................           (12,000)
                                                        -----------        -----------
NET CASH FROM INVESTING ACTIVITIES ..............        (1,019,397)          (965,374)
                                                        -----------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from note payable ....................                --             45,000
  Gross Proceeds from sale of secured convertible
      Notes payable .............................         2,800,000
  Proceeds from notes payable, related parties ..           286,871            695,791
  Issuance of common stock ......................           255,209                 --
  Payments of loan costs ........................          (133,136)
  Principal payments on notes payable
    related parties .............................           (34,900)            (9,500)
  Payments on debt assumed from subsidiary ......           (33,337)           (40,500)
                                                        -----------        -----------
NET CASH FROM FINANCING ACTIVITIES ..............         3,140,707            690,791
                                                        -----------        -----------
Net (decrease) increase in cash .................           (22,040)             2,808
Cash and cash equivalents, beginning ............           206,270                319
                                                        -----------        -----------
Cash and cash equivalents, ending ...............       $   184,230*       $     3,127
                                                        ===========        ===========
</TABLE>

                     * Includes $20,000 of restricted cash

                   The accompanying notes are an integral part
                   of these consolidated financial statements


                                       -4-
<PAGE>
                           CYBER DEFENSE SYSTEMS, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                    SIX MONTHS ENDED
                                                                                         JUNE 30,
                                                                               ---------------------------
                                                                                  2005              2004
                                                                               ----------       ----------
<S>                                                                            <C>              <C>
Supplemental disclosure of cash flow information:

Cash paid for interest                                                         $   86,443       $       --
Cash paid for income taxes                                                             --               --

Supplemental disclosure of non-cash investing and financing information:
Partial payment of purchase cost of a license
  with a note payable                                                             250,000
Partial payment of note payable by Mr. Robinson
 on behalf of the Company                                                         124,957
Conversion of notes payable into common stock                                     267,000
Conversion of accounts payable - related party
  to a long-term note payable                                                     350,000
Issuance of warrants for discount on notes
 and loan costs                                                                 3,154,168
Common Stock issued for loan costs                                                200,000               --
Common Stock issued for shares of Cyber Aerospace                               4,603,650
Retirement of fully depreciated assets                                                 --           29,513
                                                                               ----------       ----------
</TABLE>



                   The accompanying notes are an integral
                    part of these financial statements




                                       -5-
<PAGE>

                           CYBER DEFENSE SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization, Acquisitions and Mergers and Controlling Shareholder --Cyber
Defense Systems, Inc. ("the Registrant" or "Cyber Defense" or "the Company") was
incorporated on August 19, 2004 in Florida. E-City Software, Inc. ("E-City") was
organized in Nevada on May 12, 2000. On Alert Systems, Inc. ("On Alert") was
incorporated on March 17, 2003 in Nevada and acquired a control position in
E-City in May of 2003 and in Cyber Aerospace Corp. ("Cyber Aerospace") in March
2004. On Alert was merged with and into Cyber Defense on September 1, 2004. On
September 1, 2004 E-City was also merged with and into Cyber Defense following
the On Alert merger. As a result of the aforementioned, Cyber Defense is the
successor to E-City and its shares of class A common stock began trading on the
Over the Counter Bulletin Board ("OTC:BB") under the symbol CYDF on September 7,
2004. Due to the nature of the mergers, the fiscal year end of the Registrant
has been changed to December 31 effective for Fiscal 2003 and the historical
financial statements of the Registrant are now those of On Alert and will
include results of operations for Cyber Aerospace from its date of inception in
March 2004, as it was previously a subsidiary of On Alert, and will also include
the results of operations of E-City from its' date of merger, September 1, 2004.

The majority and controlling shareholders of the company are Proxity, Inc.
("Proxity"), a publicly traded company ("PRXT") and Cherokee Raiders, LP a
Limited partnership, ("Cherokee") owning 66.6% and 22.2% of the Class A common
shares of the Registrant respectively as at June 30, 2005. In addition, Cherokee
also owns all 300,000 of the issued and outstanding shares of Class B common
stock, which allow for 1,000 votes per share, and Cherokee and Proxity each own
one share of the two shares of Class C common stock issued and outstanding. The
Chief Executive Officer of both Proxity and Cherokee is Mr. Robinson, the Chief
Executive Officer of the Registrant.

Basis of Presentation -- The unaudited financial statements included in the Form
10-QSB have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and Item 310(b) of Regulation SB of the Securities Exchange Act of 1934.
The financial information furnished herein reflects all adjustments, which, in
the opinion of management, are necessary for a fair presentation of the
Company's financial position, the results of operations and cash flows for the
periods presented.

Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted, pursuant to such rules and regulations.

Condensed Interim Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of Cyber Defense, and its
subsidiary, (collectively the "Company"). These financial statements are
condensed and, therefore, do not include all disclosures normally required by
accounting principles generally accepted in the United States of America. In the
opinion of management, all adjustments necessary for a fair presentation have
been included in the accompanying condensed consolidated financial statements
and consist of only normal recurring adjustments. The results of operations
presented in the accompanying condensed consolidated financial statements are
not necessarily indicative of the results that may be expected for the full year
ending December 31, 2005 and such financial statements should be read in
conjunction with the Company's Form 10-KSB/A for the year ended December 31,
2004 and other filings made with the Securities Exchange Commission.

                                       -6-
<PAGE>
                           CYBER DEFENSE SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Consolidation - The accompanying consolidated financial statements include the
accounts and transactions of Cyber Defense Systems, Inc. for all periods
presented and the accounts and transactions of its subsidiary from the date of
its acquisition. Intercompany accounts and transactions have been eliminated in
consolidation. At December 31, 2004, the minority interest of $26,581 shown on
the balance sheet represents the shareholdings of stockholders of Cyber
Aerospace other than Cyber Defense, of approximately 6.2% multiplied by the then
cumulative net income of the Cyber Aerospace subsidiary. The acquisition of the
minority interest by the Company was effective as of March 31, 2005 and such
minority interest was therefore eliminated at that date (see Note 3).

Use of 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, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Business Condition - The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements for the six months ended June 30, 2005, the Company
recorded minimal revenue and incurred a net loss of $6,698,293,including a
charge for impairment of goodwill in the amount of $4,577,069, and for the year
ended December 31, 2004, the Company recorded revenues of $3,026,287, but
incurred a net loss of $420,653. The lack of sufficient revenues and the loss
from operations raise substantial doubt about the Company's ability to continue
as a going concern for a reasonable period of time. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets or the amount and classification of liabilities which might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flows to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
successful operations (see Notes 10 and 12).

Cash and Cash Equivalents -- Cash equivalents  include highly liquid  short-term
investments with original maturities of three months or less, readily
convertible to known amounts of cash. At June 30, 2005 and December 31, 2004 the
Company had $64.230 and $106,270 respectively, in excess of federally insured
limits.

Inventory -- At June 30, 2005, inventory of $754,239 primarily consists of work
in process on the CyberBug and CyberScout smaller Unmanned Air Vehicles
("UAV's") and the new propulsion system for the larger UAV's as well as parts
for the airships that the Company sells and services.

Property and Equipment -- Property and equipment consists of computer software
and an automobile. The assets are recorded at cost and depreciation is computed
using the straight-line method over the estimated their useful lives.
Expenditures for maintenance, repairs, and renewals are charged to expense as
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and accumulated depreciation are
removed and any resulting gain or loss is recognized in the statement of
operations.


                                       -7-
<PAGE>
                           CYBER DEFENSE SYSTEMS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Long-lived assets are reviewed for impairment quarterly. Recoverability of
assets to be held and used is measured by comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount that the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Based on the evaluation at
March 31, 2004, an impairment of $12,205 for a reduction in the value of certain
computer equipment was recorded for the three month period then ended and based
on a valuation at March 31, 2005, goodwill of $4,577,069 was impaired.

Income Taxes -- No income taxes have been paid or accrued because the Company
has had no net taxable income since inception for any fiscal period for which a
tax return is required. The Company recognizes the amount of income taxes
payable or refundable for the current year and recognizes deferred tax assets
and liabilities for the future tax consequences attributable to differences
between the financial statement amounts of certain assets and liabilities and
their respective tax bases. Deferred tax assets and deferred liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years those temporary differences are expected to be recovered or settled.
Deferred tax assets are reduced by a valuation allowance to the extent that
uncertainty exists as to whether the deferred tax assets will ultimately be
realized.

Earnings (Loss) Per Share -- Basic (loss) or earnings per share is calculated by
dividing the loss or income available to Class A common shareholders by the
weighted-average number of Class A common shares outstanding during each period.

Research and Development -- Research and development revenue includes receipts
related to the testing of airships on cost plus fixed fee contracts net of the
related expenses.

Recent Accounting Pronouncements -- In April 2003, the FASB issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
The Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts entered
into or modified after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to SFAS 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003. The adoption of SFAS No. 149 had no impact on the
Company's financial statements.

In May 2003, the FASB issued Statement of Accounting Standards No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS No. 150). SFAS No. 150 establishes standards for
classification and measurement in the statement of financial position of certain
financial instruments with characteristics of both liabilities and equity. It
requires classification of a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 had no impact on the Company's financial
statements.

                                       -8-
<PAGE>

                           CYBER DEFENSE SYSTEMS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

In May 2003, the consensus on EITF Issue No. 01-08, "Determining Whether an
Arrangement Contains a Lease," was issued. The guidance in the consensus applies
to the purchase or sale of goods and services under various types of contracts,
including outsourcing arrangements. Based on the criteria in the consensus, both
parties to an arrangement are required to determine whether the arrangement
includes a lease within the scope of SFAS No. 13, "Accounting for Leases." The
new requirement applies prospectively to new or modified arrangements for
reporting periods beginning after May 28, 2003. Accordingly, as of August 1,
2003, the company accounted for new or modified arrangements based on this
guidance. Adoption of this standard did not have an impact on the Company's
financial statements.

In December 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities
which was originally issued in January 2003. FIN 46 or revised provides guidance
on the consolidation of certain entities when control exists through other
entities created after January 31, 2003. The Company does not hold a variable
interest in any enterprise. Accordingly, the Company does not expect the
provisions of FIN 46 to have a material effect on future interim or annual
financial statements.

On December 18, 2003 the SEC issued Staff Accounting Bulletin No. 104, Revenue
Recognition ("SAB 104"), which supersedes SAB 101, Revenue Recognition in
Financial Statements. SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
which was superseded as a result of the issuance of EITF 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables. The adoption of SAB 104 did not
have a material impact the Company's financial position or results of
operations.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. This new standard eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees (APB 25) and requires such transactions
to be accounted for using a fair-valued-based method, with the resulting cost
recognized in the Company's financial statements. This new standard is effective
for annual periods beginning after June 15, 2005. The Company has not awarded or
granted any share-based compensation to date and, therefore, the adoption of
this standard is not expected to have any effect on the Company's financial
position or results of operations until such time as share-based compensation is
granted.

In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary Assets.
SFAS No. 153 amends APB Opinion No. 29, Accounting for Non-monetary
Transactions, to eliminate the exception for non-monetary exchanges of similar
productive assets. The Company will be required to apply this statement to
non-monetary exchanges after December 31, 2005. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.

Fair Values of Financial Instruments -- The carrying amounts reported in the
balance sheet for notes payable approximate their fair values because the
interest rates approximate current interest rates to be charged on similar
borrowings.

                                       -9-
<PAGE>

                           CYBER DEFENSE SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

NOTE 2 - RELATED PARTY TRANSACTIONS

Proxity, Inc. ("Proxity") - Proxity owned 100% of the stock of On Alert Systems,
Inc. at December 31, 2003. On Alert purchased the GDS and Traptec  licenses from
Proxity at Proxity's cost. As of June 30, 2005, the Company had Notes payable to
Proxity of $350,000 (dated August 12, 2005) and accounts payable of $42,013.

On Alert Systems - On Alert was incorporated on March 17, 2003 in Nevada and
acquired a control position in E-City in May of 2003 and in Cyber Aerospace in
March 2004. On Alert was merged with and into Cyber Defense on September 1,
2004.

E-City Software - On May 23, 2003, the Company paid $40,000 for 35,000,000
shares of common stock of E-city Software, Inc., representing 77.6% of the total
shares outstanding. On September 1, 2004, the Company issued 333,562 shares of
Cyber Defense Common Stock Class A for the remaining shares of E-City. E-City
Software, Inc. was a public company which was incorporated in Nevada on May 12,
2000. The Company acquired E-City for its status as a public entity.

Cyber Aerospace - Prior to the three month period ended June 30, 2005, Cyber
Aerospace ("Aerospace") had previously been consolidated with the Company as it
was a 93.8% owned subsidiary. All transactions and account balances between the
Company and Aerospace were eliminated during consolidation. On March 31, 2005,
the Company purchased the minority interest so that Aerospace became a wholly
owned subsidiary and was then merged with and into the Company (see Note 3).

Cherokee Raiders - Cherokee's general partner is William C. Robinson. Cherokee
and Mr. Robinson also own control positions with proxies in Proxity. As of
December 31, 2004, the Company had a note payable to Cherokee of $927,768. As of
June 30, 2005, the Company had a note payable to Cherokee (dated August 12,
2005) in the amount of $1,029,739.

William C.  Robinson - Mr.  Robinson  has  ownership  in  Proxity  and  Cherokee
Raiders. He is also the CEO of the Company. As of June 30, 2005, the Company had
a Note payable to Mr. Robinson in the amount of $124,957.

NOTE 3 - ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY

On March 31, 2005, the Company acquired the 6.19% minority interest in its
majority owned subsidiary, Aerospace, and merged Aerospace into Cyber Defense.
The merger was accounted for by the purchase method of accounting and was
completed in order to consolidate operations into one company, with one name,
and one group of shareholders, as well as to avoid what had become unnecessary
bookkeeping expenses associated with maintaining Aerospace as a separate entity.
For each share of Aerospace, the beneficial owner received one share of Cyber
Defense. As a result, 1,650,000 shares of class A common stock were issued for
the 6.19% ownership, along with 150,000 shares of class B common stock.

Aerospace had been a majority owned subsidiary of On Alert from the date of its
inception in March 2004 through September 1, 2004 at which time it became a
majority owned subsidiary of Cyber Defense pursuant to the Domicile merger
between Cyber Defense, On Alert and E-City.

                                      -10-
<PAGE>

                           CYBER DEFENSE SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

The purchase price for the acquisition of the Cyber Aerospace minority interest
was $4,603,650, comprised of 1,650,000 shares of common stock valued at $2.79
per share. The share price was determined by the average price for shares sold
in the market for the months of February and March discounted at 10% for a block
sale. A nominal value was given to the 150,000 Class B shares issued.

The purchase price was accounted for in accordance with FAS 141, "Business
Combinations". Subsequent to the acquisition and merger, the goodwill was
impaired. Cyber allocated all but $24,593 of the purchase price, to goodwill. As
a result of the losses incurred through March 31, 2005, the minority interest
had been eliminated. There were no net assets attributable to the minority
shareholders. All shares of Class A common stock and Class B common stock that
comprised the purchase price were treated as if they were issued at March 31,
2005.

The assets acquired and liabilities assumed were as follows:

--------------------------------------------------------------------------------
Assets Acquired
Accounts receivable                                                   $   13,386
Deposits on airships for resale                                           21,051
Intangible assets:
        Plans & designs                                                    1,145
        Techsphere marketing rights                                        7,403
                                                                      ----------
        Net Intangibles                                                    8,548
Goodwill                                                               4,577,069
--------------------------------------------------------------------------------
Total Assets Acquired                                                 $4,620,054
--------------------------------------------------------------------------------

Liabilities Assumed
Accounts payable & accrued expenses                                   $   14,168
Notes payable - related parties                                            2,236
--------------------------------------------------------------------------------
Total Liabilities Assumed                                                 16,404
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Net Assets Acquired                                                   $4,603,650
--------------------------------------------------------------------------------

Note 4 - Acquisition of Sales Resource Consultants, Inc.


On May 4, 2005, the Company acquired 100% of the stock of Sales Resources
Consultants, Inc. ("SRC") for a purchase price of $56,000 in cash. The assets of
SRC consist of commission receivables of approximately $56,000 net of reserves
and are included in accounts receivable.

NOTE 5 - INTANGIBLE ASSETS

During 2004, the Company purchased exclusive marketing rights from Techsphere
Systems International ("TSI"). These rights were recorded at their cost of
$500,000 because TSI is a non-related party. These marketing rights are being
amortized over six years, which is the life of the contract and the monthly
amortization expense is $6,944. In addition, the Company also purchased designs
and plans for unmanned air vehicles (UAVs) which have a useful life of 3 years.
The cost was $100,000 and the monthly amortization is $2,777. Total amortization
expense of the intangible assets was $58,326 for the six months ended June 30,
2005.

                                      -11-
<PAGE>

                           CYBER DEFENSE SYSTEMS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

NOTE 6 - NOTE PAYABLE - QUEBEC

On August 23, 2004, the Company and Quebec, Inc., ("Quebec") a Canadian
corporation, executed a Secured Commercial Promissory Note pursuant to the terms
of which the Company borrowed $242,216 from Quebec. Prepaid interest of $9,316
for 61 days was withheld from the initial funding and thereafter interest
accrued at an annual rate of 24%. The Note was secured by securities owned by
Mr. Robinson, the company's Chief Executive Officer, and was to be further
secured by equipment purchased by the Company which was the subject Equipment
upon which deposits were paid from a portion of the loan proceeds. Prepayment
was required from any equity or loan funds raised by the Company and full
payment of all remaining principle and accrued interest was due February 18,
2005. Payment terms were amended on February 8, 2005 to provide for payment of
one half the principal and all accrued interest through March 10, 2005, as well
as transaction costs and extension fees, through the sale of a portion of the
securities owned by Mr. Robinson. All funds paid to the lender from such
securities sales constitute a loan by Mr. Robinson to the Company. If the
Company did not raise equity or loan funds sufficient to repay the remaining
balance due within the 45 day period immediately following the payment of the
first half of the loan, then the remainder of the loan was to be repaid, with
interest, from continued sales of securities pledged by Mr. Robinson, which
payments would constitute additional loans by Mr. Robinson to the Company. Costs
incurred in connection with the loan were capitalized and are being amortized
over the life of the loan. For the six month period ended June 30, 2005,
amortization expense of the loan costs was $9,072.

On April 11, 2005, the Company and Quebec executed another amendment to the
payment terms whereby an extension fee of $25,000 was paid and Quebec agreed to
obtain payment of a portion of the loan by selling, at the earliest time
available to it, and by any legal means available, sufficient shares of the
collateral to re-pay $116,450 of principal and $28,997 for interest through May
10, 2005. During the three months ended June 30, 2005, sales of the securities
pledged by Mr. Robinson paid down $78,996 of loan principal as well as fees,
other related charges and interest of $51,046. Subsequent to June 30, 2005,
further sales of securities pledged by Mr. Robinson were used to pay all
remaining balances of principal and accrued interest in full.

                                      -12-
<PAGE>

                           CYBER DEFENSE SYSTEMS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

NOTE 7 - NOTES PAYABLE

<TABLE>
<CAPTION>
                                                                                      June 30,      December 31,
                                                                                        2005             2004
                                                                                     ----------     -------------
<S>                                                                                  <C>            <C>
Current - Related Parties

Note payable - Joe Theisman - interest accrues at 18%
     per annum, due April 30 through September 30, 2005,
     in equal monthly installments, unsecured. This note
     was converted to common stock on March 31, 2005 .........................       $       --       $  110,000

Note payable - Cherokee Raiders - interest accrues at 12%
     per annum, due on demand and is unsecured ...............................               --           58,993

Note payable - Cherokee Raiders - interest accrues at 12%
     per annum, due November 30, 2005 and is unsecured .......................               --          868,775

Note payable - Jim Alman - interest accrues at 8% per
     annum, due December 5, 2005 .............................................          100,000          100,000

Note payable - Billy Robinson - interest accrues at 12%
     per annum, due on demand and is unsecured (see Note 2) ..................          124,957               --
                                                                                     ----------       ----------
                                                                                     $  224,957       $1,137,768
                                                                                     ----------       ----------

Current - Other

Note payable - 21st Century Airship, Inc. - interest accrues
     at 12% per annum and the Note is due on August 24, 2005 .................       $  250,000
                                                                                     ----------

Long-term - Related Parties

Notes payable - Proxity Inc. - bearing interest at
     12% per annum and due July 1, 2008 ......................................       $  350,000               --

Notes payable - Cherokee Raiders - bearing interest
     at 12% per annum and due July 1, 2008 ...................................        1,029,739               --
                                                                                     ----------       ----------
                                                                                     $1,379,739       $       --
                                                                                     ----------       ----------
Long-term - Other

Notes payable - AJW Partners, LLP and affiliates,
     callable secured convertible notes bearing interest
     at 8% per annum, $1,500,000 due April 4, 2008 and
     $1,300,000 due May 25, 2008; less discount of $2,195,727 ................       $  604,273       $       --
                                                                                     ----------       ----------
                                                                                     $  604,273       $       --
                                                                                     ----------       ----------
</TABLE>

The Notes payable to Cherokee and Proxity have acceleration provisions that
provide for prepayments of principal if certain minimum amounts of financing are
obtained ($3,000,000), and 73,553 and 25,000 shares of Company common stock are
to be issued to Cherokee and Proxity respectively as additional consideration
for the maturity date extensions. (See Note 12)

Subsequent to June 30, 2005, Mr. Robinson loaned additional monies to the
Company by paying in full all remaining principal, interest and fees of $161,555
that was due to Quebec and as a result, his Notes was amended on August 22, 2005
to reflect a total due to him of $286,512. As additional consideration, the
Company also agreed to issue stock equal in value to 10% of the outstanding
balance of his Note with 20,465 shares of its Class A common stock (see Note
12).

The Note payable to 21st Century is in payment of the balance of the license fee
for Techsphere. The Company loaned Techsphere $1,000,000 which was paid to 21st
Century and the total license fee was $1,250,000. The Company is negotiating an
extension of the maturity date.

                                      -13-
<PAGE>

                           CYBER DEFENSE SYSTEMS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

NOTE 8 - STOCKHOLDERS' DEFICIT

Common Stock - At June 30, 2005, the Company had 28,168,952 shares of Class A
Common Stock, 300,000 shares of Class B Common Stock, and 2 shares of Class C
Common Stock issued and outstanding with 200,000,000 shares of each of Class A,
B and C authorized with a par value of $0.001. In addition, the Company had
100,000,000 shares of Class A Preferred Stock authorized, par value $0.001, with
no shares issued and outstanding. The Company had $9,550,516 in additional paid
in capital and an accumulated deficit of $7,595,657 of which $4,577,069
represented a charge at March 31, 2005 for impairment of goodwill that arose
from the acquisition of the remaining minority interest in Cyber Aerospace.
Class B Common Stock allows for 1000 votes per share. Class C Common Stock
allows for one vote per share and entitles the holder to receive the net assets
of the Company upon dissolution. At December 31, 2004, the Company had
25,921,562 shares of Class A Common Stock, 150,000 shares of Class B Common
Stock issued and outstanding and 2 shares of Class C common stock issued and
outstanding with 200,000,000 shares of each of Class A, Class B and Class C
Common Stock authorized, par value $.001.

NOTE 9 - INCOME TAXES

The Company has paid no federal or state income taxes since its incorporation.
As of June 30, 2005 and December 31, 2004, the Company had net operating loss
carry forwards for federal income tax reporting purposes of approximately
$7,600,000 and $875,000 respectively, which if unused, will expire through 2025.
Deferred tax assets are reduced by a valuation allowance to the extent that
uncertainty exists as to whether the deferred tax assets will ultimately be
realized.

NOTE 10 - Working Capital Financings

On February 16, 2005 the Company and Commerce Funding Corporation ("CFC")
executed a Working Capital Financing Proposal relative to a potential secured
financing of up to $3,000,000 for a two year term. All borrowings under this
potential financing would be collateralized by a first security UCC-1 filing on
all assets related to accounts receivable and a Cross Corporate Guaranty by
Proxity, Inc., the Company's major shareholder and parent. In addition, CFC
requires a Limited Guaranty of certain provisions in the loan agreement by the
Company's Chief Executive Officer. The interest rate on borrowings would be
Prime, as quoted in the Wall Street Journal, plus 1/2 % and there will be a one
time facility fee of 1% of the total credit line payable out of the first
funding. In addition, all borrowings are subject to eligibility as defined and
determined by CFC and the advance rate on eligible receivables, as defined, is
90% for direct Government accounts and 80% for Commercial Accounts. Closing of
this transaction is subject to acceptable documentation, due diligence by CFC
and other terms which are to be negotiated amongst the parties.

On February 18, 2005, the Company and Bedlington Securities, Ltd. ("Bedlington")
executed a Convertible Promissory Note (the "Bedlington Note") for the principal
amount of $250,000 was advanced to the Company on February 25, 2005. Interest
was to accrue on the Bedlington Note at the rate of 18% per annum and repayment
terms required six equal monthly payments commencing April 30, 2005 with the
last payment on September 30, 2005 to include all accrued interest. Bedlington
had the right to convert the outstanding amount of the Bedlington Note into
Class A common shares of the Company at any time upon five days notice and such
conversion was to be calculated at 50% of the average closing price of the Class
A common shares for the 30 days preceding the date of conversion.

                                      -14-
<PAGE>

                           CYBER DEFENSE SYSTEMS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

In addition, the Company had the right to pay amounts due under the Bedlington
Note at any time with shares of its Class A common stock pursuant to the same
formula by notifying Bedlington of its intent to do so and requesting a Notice
of Conversion from Bedlington. On February 22, 2005, the Company informed
Bedlington that it would make payment in full with common shares and Bedlington
submitted a Notice of Conversion to the Company. As a result, the Company issued
217,391 shares of its Class A common stock pursuant to the calculation described
above.

On April 1, 2005, the Company entered into a Securities Purchase Agreement,
dated as of April 1, 2005, by and among the Company, and AJW Partners, LLC
("Partners"), AJW Offshore, Ltd. ("Offshore"), AJW Qualified Partners
("Qualified") and New Millenium Capital Partners, II, LLC ("Millenium").
Partners, Offshore, Qualified and Millenium are collectively referred to as the
"Purchasers". We authorized the sale to the Purchasers of Secured Convertible
Term Notes in the aggregate principal amount of $4,000,000. The $4.0 million was
to be funded in three traunches ($1.5 million on April 4, 2005, $1.3 million
upon filing the Registration Statement and $1.2 million upon effectiveness of
the Registration Statement). The offering was made pursuant to Section 4(2) of
the Securities Act of 1933, as amended. The Notes bear interest at 8% per annum,
unless the common stock of the Company is greater than $4.25 per share for each
trading day of a month, in which event no interest is payable during such month.
The notes are convertible into common stock of the Company at a 40% discount to
the average of the three lowest trading prices of the common stock during the 20
trading day period prior to conversion. The beneficial conversion feature of
such discounted conversion is being amortized over the three year life of the
loan.

In connection with the offering, the Company issued an aggregate of 4,000,000
warrants to purchase common stock at a price of $4.25 per share. The warrants
are exercisable for a period of five years. The conversion of the notes are
subject to an effective Registration Statement. The Company has the right to
redeem the notes under certain circumstances and the notes are secured by all of
the Company's assets, except for its accounts receivable and proceeds of
inventory. The proceeds of the offering will be used to repay certain
indebtedness and for working capital. The Company received gross proceeds of
$2.8 million during the three months ended June 30, 2005 and $1.2 million of
gross proceeds on July 29, 2005.

The Company has allocated the proceeds from the first issuance of the Secured
Convertible Term Notes and warrants, based on their relative fair values on the
date of issuance which are as follows: $1,500,000 to the Secured Convertible
Term Notes and $5,182,500 to the warrants. The warrants were valued using the
Black Scholes Pricing model using the following assumptions: volatility of 187%,
risk-free interest rate of 3.90% and a term of five years. The allocation of the
net proceeds resulted in $184,625 being allocated to the Secured Convertible
Term Notes and $637,880 being allocated to the warrants. The Company recognized
a beneficial conversion discount of $336,700 on the date of issuance equal to
the value allocated to the Secured Convertible Term Notes (before offering
costs). The actual amount of the beneficial conversion was $2,432,305, but the
discount is limited to the amount of gross proceeds allocated to the Secured
Convertible Term Notes.

The Company has allocated the proceeds from the second issuance of the Secured
Convertible Term Notes and warrants, based on their relative fair values on the
date of issuance which are as follows: $1,300,000 to the Secured Convertible
Term Notes and $3,460,990 to the warrants. The warrants were valued using the
Black Scholes Pricing model using the following assumptions: volatility of 197%,
risk-free interest rate of 3.68% and a term of five years. The allocation of the
net proceeds resulted in $222,920 being allocated to the Secured Convertible
Term Notes and $593,481 being allocated to the warrants. The Company recognized
a beneficial conversion discount of $354,968 on the date of issuance equal to
the value allocated to the Secured Convertible Term Notes (before offering
costs). The actual amount of the beneficial conversion was $868,150, but the
discount is limited to the amount of gross proceeds allocated to the Secured
Convertible Term Notes.

                                      -15-
<PAGE>

                           CYBER DEFENSE SYSTEMS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Affiliated Business Services, Inc. earned a finders fee of $ 200,000 in cash of
which $107,500 was been paid as of June 30, 2005 and $92,500 was paid on August
9, 2005; and 61,538 shares of Class A common stock, valued at $200,000, for
introducing the Company to the lending group. The total fee of $400,000 is being
amortized over the three year life of the loan.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

On January 1, 2005, we entered into an employment agreement with our Chief
Executive Officer, William Robinson. The term of this agreement is for a period
of one year, subject to renewal for successive one year periods, unless 14 days
prior written notice is provided by either party. Mr. Robinson will receive an
annual salary of not less than $250,000. In addition, we will issue Mr. Robinson
250,000 shares of our Class A Common Stock on the first anniversary of the
effective date of the agreement and every anniversary thereafter. The agreement
may be terminated for due cause, upon death, upon disability, voluntary
termination by him, or us, without due cause by providing 14 days prior written
notice. Mr. Robinson is subject to a non-compete and non-solicitation provision
during the employment term and during a specified Post-Employment Period (as
defined in the employment agreement).

On January 1, 2005, we entered into an employment agreement with our President,
James D. Alman. The term of this agreement is for a period of one year, subject
to renewal for successive one year periods, unless 14 days prior written notice
is provided by either party. Executive will receive an annual salary of not less
than $120,000. In addition, we will issue Mr. Alman 50,000 shares of our Class A
Common Stock on the first anniversary of the effective date of the agreement and
every anniversary thereafter. The Agreement may be terminated for due cause,
upon death, upon disability, voluntary termination by him, or us without due
cause by providing 14 days prior written notice. Mr. Alman is subject to a
non-compete and non-solicitation provision during the employment term and during
a specified Post-Employment Period.

On January 1, 2005, we entered into an employment agreement with our
Vice-President, Barry Nelsen. The term of this agreement is for a period of one
year, subject to renewal for successive one year periods, unless 14 days prior
written notice is provided by either party. Mr. Nelsen will receive an annual
salary of not less than $120,000. In addition, we will issue Mr. Nelsen 40,000
shares of our Class A Common Stock on the first anniversary of the effective
date of the agreement and every anniversary thereafter. The agreement may be
terminated for due cause, upon death, upon disability, or voluntary termination
by him. Mr. Nelsen is subject to a non-compete and non-solicitation provision
during the employment term and during a specified Post-Employment Period.

On January 1, 2005, we entered into an employment agreement with Jaffray
Stephens. The term of this agreement is one year, subject to renewal for
successive one year periods, unless 14 days prior written notice is provided by
either party. Mr. Stephens will receive an annual salary of not less than
$65,000. In addition, we will issue Mr. Stephens 25,000 shares of our Class A
Common Stock on the first anniversary of the effective date of the agreement and
every anniversary thereafter. The Agreement may be terminated for due cause,
upon death, upon disability, voluntary termination by him, or us without due
cause by providing 14 days prior written notice. Mr. Stephens is subject to a
non-compete and non-solicitation provision during the employment term and during
a specified Post-Employment Period.

                                      -16-
<PAGE>

                           CYBER DEFENSE SYSTEMS INC.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

The Company has an exclusive agreement with Traptec Corporation to represent
Traptec Corporation as a marketing representative. The parties have agreed to
divide equally the before tax net profits generated from any such sales as
generated under the agreement. However, the parties have agreed that if their
efforts have not generated over $200,000 in net sales profits, to be divided
equally, by the end of the 2005, the total license fee for that year shall be at
least $100,000 to Traptec Corporation. As of June 30, 2005, no sales have been
made in connection with this license.

On April 13, 2005, Proxity, our majority shareholder, announced its intention to
grant a dividend of shares of our common stock, owned by Proxity, to its holders
of record. For each 500 shares of Proxity common stock held by a Proxity
shareholder on the record date, Proxity will grant a dividend of one share of
common stock of Cyber Defense. Proxity intends to distribute a total of
approximately 560,000 shares of Cyber Defense to its holders. We have agreed to
register such shares under the Securities Act of 1933, as amended. Mr. Robinson,
our CEO owns approximately 33% of the outstanding shares of capital stock of
Proxity.

NOTE 12 - SUBSEQUENT EVENTS

On July 29, 2005 the Securities and Exchange Commission declared our
Registration Statement on Form SB-2 effective. As a result, AJW Partners, LLP
and affiliated purchasers released the third traunche of funding in the amount
of $1,200,000.

On August 10, 2005, AJW Partners, LLP and affiliates converted $500,000 of
Secured Convertible Notes for 500,000 Shares of common stock of the Company
pursuant to terms of the Securities Purchase Agreement.

On August 12, 2005 Cherokee and Proxity agreed to extend the maturity date of
their loans to the Company to July 31, 2008. The new Notes provide for
prepayment in the event of certain amounts of capital or financing being
obtained. As additional consideration for extending the due date of the loans,
the Company will issue shares of its' Class A common stock to Cherokee and
Proxity equal in value to 10% of the amounts due. The bid price on August 12,
2005 was $1.40 per share resulting in 73,553 shares to be issued to Cherokee and
25,000 shares to be issued to Proxity. In addition, on August 12, 2005, the Note
payable to Mr. Robinson was amended to $286,512 to reflect additional monies
that he had loaned to the Company by paying the balance of all principal and
interest due to Quebec. As additional consideration, the Company agreed to issue
to Mr. Robinson 20,465 shares of Class A common stock representing 10% of the
loan amount due at August 12, 2005.

ITEM 2.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF RESULTS OF  OPERATIONS  AND
         LIQUIDITY AND CAPITAL RESOURCES

     GENERAL

     The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Form 10-QSB.

     This management's discussion and analysis of financial conditions and
results of operations contains certain "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Such statements
relating to future events and financial performance are forward-looking
statements that involve risks and uncertainties, detailed from time to time in
the Company's various SEC filings. No assurance can be given that any such
matters will be realized.

                                      -17-
<PAGE>

                              RESULTS OF OPERATIONS

The Three Months  Ended June 30, 2005  Compared to the Three Months Ended
June 30, 2004

     General and administrative expenses totaled $765,508 for the three months
ended June 30, 2005 as compared to $355,703 for the three months ended June 30,
2004, a net increase of $409,805. The increase is primarily due to increased
payroll, specialized consulting and legal fees and a general increase in
overhead.

     Other  income and expense for the three  months  ended  June  30, 2005
consists of interest expense of $282,253, of which $134,847 represented
amortization of deferred loan origination costs, and interest income of $10,241.
Other income and expense for the three months ended June 30, 2004 was comprised
of interest expense of $16,898.

The Six Months  Ended June 30, 2005  Compared to the Six Months Ended
June 30, 2004

     General and administrative expenses totaled $1,327,135 for the six months
ended June 30, 2005 as compared to $469,442 for the six months ended June 30,
2004, a net increase of $857,693. The increase is primarily due to increased
payroll, specialized consulting and legal fees and amortization of loan
origination costs of $51,061 as well as the inclusion of the general and
administrative expenses of Cyber Aerospace for the full six months in 2005
whereas in the 2004 period such expenses were only from March 15, 2004 (the date
of inception) through June 30, 2004.

     Other income and expense for the six months ended June 30, 2005 consists
of interest income of $10,241, interest expense of $834,704 which includes
interest on Notes and debt of $147,406 and $552,451 representing the beneficial
conversion feature of certain debt conversions that has been accounted for as
additional interest, and $134,847 of loan discount amortization resulting from a
beneficial conversion feature related to the conversion to stock discount to
market of 40% and the value of warrants that were issued in the transaction.
Such amount has been accounted for as interest expense. Other income and expense
for the six months ended June 30, 2004 was comprised of interest expense of
$22,293 and the write off of the value of certain computer equipment of $12,205.

  LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary needs for liquidity and capital resources are the
funding of salaries and other administrative expenses related to the management
of the Company as well as for payment of the cost of products sold and
inventory.

     The Company's cash and cash equivalents of $164,230 as of June 30, 2005 is
not sufficient to support current levels of operations for the next twelve
months and it is therefore necessary for the Company to seek additional
financing. Such financing has been obtained as discussed below and in Notes 10
and 12.

     The Company has entered into agreements  with  Equipment  Depot, Inc., of
Deerfield Beach, Florida, to acquire approximately $5,000,000, fair market
value, as appraised, of aerospace R & D and production equipment to further the
fulfillment of the companies' anticipated contracts and purchase orders. The
transactions are expected to close upon the completion of the financing
institution's due diligence and legal review. The Company is paying
approximately $3.0 million, in a combination of cash and the exchange of newly
issued common stock of the Company, valued at $2.50 per share for the purposes
of these transactions, in order to complete the purchase.

                                      -18-
<PAGE>

     On February 16, 2005 the Company and CFC executed a Working Capital
Financing Proposal relative to a potential secured financing of up to $3,000,000
for a two year term. All borrowings under this potential financing would be
collateralized by a first security UCC-1 filing on all assets related to
accounts receivable and a Cross Corporate Guaranty by Proxity, Inc., the
Company's major shareholder and parent. In addition, CFC requires a Limited
Guaranty of certain provisions in the loan agreement by the Company's Chief
Executive Officer. The interest rate on borrowings would be Prime, as quoted in
the Wall Street Journal, plus 1/2 % and there will be a one time facility fee of
1% of the total credit line payable out of the first funding. In addition, all
borrowings are subject to eligibility of accounts receivable as defined and
determined by CFC and the advance rate on eligible receivables, as defined, is
90% for direct Government accounts and 80% for Commercial Accounts. Closing of
this transaction is subject to acceptable documentation, due diligence by CFC
and other terms which are to be negotiated amongst the parties.

     On February 18, 2005, the Company and Bedlington executed a Convertible
Promissory Note (the "Bedlington Note") for the principal amount of $250,000
which amount was advanced to the Company on February 25, 2005. Interest was to
accrue on the Bedlington Note at the rate of 18% per annum and repayment terms
required six equal monthly payments commencing April 30, 2005 with the last
payment on September 30, 2005 to include all accrued interest. Bedlington had
the right to convert the outstanding amount of the Bedlington Note into Class A
common shares of the Company at any time upon five days notice and such
conversion would be calculated at 50% of the average closing price of the Class
A common shares for the 30 days preceding the date of conversion. In addition,
the Company had the right to pay any amounts due under the Bedlington Note at
any time with shares of its Class A common stock pursuant to the same formula by
notifying Bedlington of its intent to do so and requesting a Notice of
Conversion from Bedlington. On February 22, 2005, the Company notified
Bedlington of its intention to make payment in full with common shares and
Bedlington submitted a Notice of Conversion to the Company. As a result, the
Company issued 217,391 shares of its Class A common stock pursuant to the
calculation described above.

     On April 1, 2005, the Company entered into a Securities Purchase Agreement,
by and among the Company, and AJW Partners, LLC ("Partners"), AJW Offshore, Ltd.
("Offshore"), AJW Qualified Partners ("Qualified") and New Millenium Capital
Partners, II, LLC ("Millenium"). Partners, Offshore, Qualified and Millenium are
collectively referred to as the "Purchasers". We authorized the sale to the
Purchasers of Secured Convertible Term Notes in the aggregate principal amount
of $4,000,000. The $4.0 million of gross proceeds was funded in three traunches;
$1.5 million on April 4, 2005, $1.3 million upon filing the Registration
Statement on May 18, 2005 and $1.2 million upon effectiveness of the
Registration Statement on July 29, 2005. The offering was made pursuant to
Section 4(2) of the Securities Act of 1933, as amended. The Notes bear interest
at 8% per annum, unless the common stock of the Company is greater than $4.25
per share for each trading day of a month, in which event no interest is payable
during such month.

     The notes are convertible into common stock of the Company at a 40%
discount to the average of the three lowest trading prices of the common stock
during the 20 trading day period prior to conversion. On August 10, 2005, AJW
Partners, LLP and affiliates converted $500,000 of Secured Convertible Notes for
500,000 Shares of Company common stock pursuant to terms of the Securities
Purchase Agreement.

     In connection with the offering, the Company issued an aggregate of
4,000,000 warrants to purchase common stock at a price of $4.25 per share. The
warrants are exercisable for a period of five years. The conversion of the notes
are subject to an effective Registration Statement and on July 29, 2005 the
Company's Registration Statement on Form SB-2 was declared effective. The
Company has the right to redeem the notes under certain circumstances and the
notes are secured by all of the Company's assets, except for its accounts
receivable and proceeds of inventory. The proceeds of the offering have been
used to repay certain indebtedness and for working capital.


                                      -19-
<PAGE>

      With the funds received from the above described financing and the
financing available from CFC, we believe that the Company is in a position to
fund the anticipated level of operations for at least one year.

Critical Accounting Policies

     The Company's discussion and analysis of its financial condition and
results of operations are based upon Cyber Defense's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
use of estimates that affect the reported amounts of assets, liabilities and
expenses. The Company evaluates its estimates on an ongoing basis, including
estimates for Income tax assets and liabilities and the impairment of the value
of investments.

The Company bases its estimates on historical experience and on actual
information and assumptions that are believed to be reasonable under the
circumstances at that time. Actual results may differ from these estimates under
different assumptions or conditions. The Company believes that the following
critical accounting policies affect its more significant estimates used in the
preparation of its financial statements.

     Accounting for Income Taxes.

     The Company currently records a full valuation allowance against the
deferred tax benefit for net operating losses generated, since in management's
opinion the net operating losses do not meet the more likely than not criteria
for future realization.

     Impairment of Investments.

     The Company reviews estimates of the value of its investments each
reporting period and records an impairment loss to the extent that management
believes that there has been an impairment to the carrying value.

     Recent Accounting Pronouncements

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in contracts entered into or modified after June 30, 2003.

The guidance should be applied prospectively. The provisions of this Statement
that relate to SFAS 133 Implementation Issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue to be applied
in accordance with respective effective dates. In addition, certain provisions
relating to forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to existing contracts as
well as new contracts entered into after June 30, 2003. The adoption of SFAS No.
149 is not expected to have an impact on the Company's financial statements.

     In May 2003, the FASB issued Statement of Accounting Standards No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS No. 150). SFAS No. 150 establishes standards for
classification and measurement in the statement of financial position of certain
financial instruments with characteristics of both liabilities and equity. It
requires classification of a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of this standard did not have an impact our Company's
financial statements.

                                      -20-
<PAGE>


     In May 2003, the consensus on EITF Issue No. 01-08, "Determining Whether an
Arrangement Contains a Lease," was issued. The guidance in the consensus applies
to the purchase or sale of goods and services under various types of contracts,
including outsourcing arrangements. Based on the criteria in the consensus, both
parties to an arrangement are required to determine whether the arrangement
includes a lease within the scope of SFAS No. 13, "Accounting for Leases." The
new requirement applies prospectively to new or modified arrangements for
reporting periods beginning after May 28, 2003. Accordingly, as of August 1,
2003, the company accounted for new or modified arrangements based on this
guidance. Adoption of this standard did not have an impact on our company's
financial statements.

     In December 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities
which was originally issued in January 2003. FIN 46 or revised provides guidance
on the consolidation of certain entities when control exists through other
entities created after January 31, 2003. The Company does not hold a variable
interest in any enterprise. Accordingly, the Company does not expect the
provisions of FIN 46 to have a material effect on future interim or annual
financial statements.

On December 18, 2003 the SEC issued Staff Accounting Bulletin No. 104, Revenue
Recognition ("SAB 104"), which supersedes SAB 101, Revenue Recognition in
Financial Statements. SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
which was superseded as a result of the issuance of EITF 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables. The adoption of SAB 104 did not
have a material impact the Company's financial position or results of
operations.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. This new standard eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees (APB 25) and requires such transactions
to be accounted for using a fair-valued-based method, with the resulting cost
recognized in the Company's financial statements.

This new standard is effective for annual periods beginning after June 15, 2005.
The Company has not awarded or granted any share-based compensation to date and,
therefore, the adoption of this standard is not expected to have any effect on
the Company's financial position or results of operations until such time as
share-based compensation is granted.

In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary Assets.
SFAS No. 153 amends APB Opinion No. 29, Accounting for Non-monetary
Transactions, to eliminate the exception for non-monetary exchanges of similar
productive assets. The Company will be required to apply this statement to
non-monetary exchanges after December 31, 2005. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.

                                      -21-
<PAGE>

ITEM 3. CONTROLS AND PROCEDURES

     Evaluation of disclosure controls and procedures.

     Our chief executive officer who is also our chief financial officer, after
evaluating our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c) and
15d-14(c) have concluded that as of a date within 90 days of the filing date of
this report (the "Evaluation Date") our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.

     Changes in internal controls

     Subsequent to the Evaluation Date, there were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures, nor were there any significant deficiencies
or material weaknesses in our internal controls. As a result, no corrective
actions were required or undertaken.


PART II   OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None

ITEM 2. CHANGES IN SECURITIES

During the quarter the Company issued 149,538 shares of its class A common
stock comprising 61,538 shares valued at $200,000 issued as partial payment of
the finders fee relative to the transaction with AJW Partners, LLP and
affiliates and 88,000 shares issued pursuant to the exercise of an option by an
investor.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

        None

ITEM 5. OTHER INFORMATION

        None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

   a) EXHIBITS

31.1  Certification of the Chief Executive Officer pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.

31.2  Certification of the Chief Financial Officer pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.

32.1  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.

32.2  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.

                                      -22-
<PAGE>

   b) REPORTS ON FORM 8-K

     The Company filed a Current Report on Form 8-K on April 1, 2005 regarding
the acquisition of the 6.19% minority interest in Cyber Aerospace Corporation.

     The Company filed a Current Report on Form 8-K on April 6, 2005 relative to
the sale of Secured Convertible Term Notes in the aggregate amount of $4,000,000
to AJW Partners, LLP and other affiliated purchasers.

     The Company filed a Current Report on Form 8-K on April 25, 2005 regarding
a Joint Venture arrangement between the Company and TSI to purchase and then
lease certain Airships.

     The Company filed a Current Report on Form 8-K on May 25, 2005 regarding
the execution of an option to merge with TSI, a secured loan to TSI and a
license fee arrangement with 21st Century Airships, Inc.

     The Company filed a Current Report on Form 8-K on June 6, 2005 regarding
an additional secured loan to TSI and the execution of a Promissory Note to 21st
Century Airships, Inc. in payment of license fees on behalf of TSI and the
Company.




                                   SIGNATURES

     Pursuant to the requirements 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.

     CYBER DEFENSE SYSTEMS, INC.


     August 22, 2005


                      By:   /s/ William C. Robinson
                            -------------------
                            William C. Robinson
                            Chief Executive Officer and Chairman

                      By:   /s/ David M. Barnes
                            -------------------
                            David M. Barnes
                            Chief Financial Officer


                                      -23-