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/A

                  For the Quarterly Period Ended March 31, 2006

                        Commission File Number: 333-46424

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

                   FLORIDA                             55-0610380
     ---------------------------------           ---------------------
     (State or other jurisdiction of               (I.R.S. Employer
       incorporation or organization)             Identification No.)

    10901 ROOSEVELT BOULEVARD, SUITE 100D
           ST. PETERSBURG, 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)            59,649,044 as of May 14, 2006
        Class B Common Stock
        (Par Value $0.001 per share)               545,455 as of May 14, 2006
        Class C Common Stock
        Par value $0.001 per share)                      2 as of May 14, 2006


<PAGE>

                                      INDEX
                                                                           Page
                                                                          Number
     PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of
   March 31, 2006 (unaudited) and December 31, 2005 .......................    1
Condensed Consolidated Statements of Operations for the
   Three Months Ended March 31, 2006 and 2005 (unaudited) .................    2
Condensed Consolidated Statements of Cash Flows for the
   Three Months Ended March 31, 2006 and 2005 (unaudited) .................  3-4
Notes to the Condensed Consolidated Financial
   Statements (unaudited) ................................................. 5-17

Item 2. Management's Discussion and Analysis of
             Financial Condition or Plan of Operations ....................   18

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


     PART II. OTHER INFORMATION

Item 1. Legal Proceedings .................................................   23

Item 2. Unregistered Sales of Equity Securities ...........................   23

Item 3. Defaults Upon Senior Securities ...................................   23

Item 4. Submission of Matters to a Vote of Security Holders ...............   23

Item 5. Other Information .................................................   23

Item 6. Exhibits and Reports on Form 8-K ..................................   24

Signatures ................................................................   26

<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                             March 31, 2006  December 31, 2005
                                                             --------------  -----------------
                                    ASSETS
CURRENT ASSETS:
<S>                                                           <C>             <C>
Cash and cash equivalents                                     $    209,093    $        476
Accounts receivable                                                210,053         364,299
Inventory                                                          355,890         336,523
Prepaid interest                                                        --          32,580
                                                              ------------    ------------
     TOTAL CURRENT ASSETS                                          775,036         733,878

OTHER ASSETS:
Intangible assets, net of accumulated amortization
  of $69,447 and $61,113 respectively                               30,553          38,887
Property and equipment, net of accumulated depreciation
  of $14,635 and $10,173 respectively                               89,146          91,973
Deposits and costs of equipment                                    150,976         150,976
Airship manufacturing license, net of accumulated
Amortization of $428,987 and $230,993 respectively              13,826,662      14,024,656
Loan costs, net of accumulated amortization of $499,713
and $364,697 respectively                                        1,228,171       1,228,897
Security deposits                                                    7,371           7,371
                                                              ------------    ------------
     TOTAL ASSETS                                             $ 16,107,915    $ 16,276,638
                                                              ============    ============

                      LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable and accrued liabilities                      $  2,933,045    $  2,996,827
Accrued interest                                                   434,681         329,626
Accounts payable related parties                                    53,337          53,337
Deferred revenue                                                   441,667         450,000
Notes payable - related parties' net of discount of
$656,339 and $0, respectively                                    1,027,035       1,562,315
Note payable - unrelated parties, net of discount of
$80,500 and $0, respectively                                     1,689,718       1,728,075
Embedded derivative liability                                   12,843,833      10,057,733
                                                              ------------    ------------
     TOTAL CURRENT LIABILITIES                                  19,423,316      17,177,913
                                                              ------------    ------------

NON-CURRENT LIABILITIES:                                                --              --
Notes payable, net of discount of $3,465,919 and
$2,762,333, respectively                                           951,773         655,358
Deferred taxes                                                          --         217,325
                                                              ------------    ------------

     TOTAL LIABILITIES                                          20,375,089      18,050,596
                                                              ------------    ------------
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;
56,912,893 shares issued and outstanding                            56,913          56,913
Class B, $0.001 par value; 200,000,000 shares authorized;
545,455 shares issued and outstanding                                  545             545
Class C, $0.001 par value; 200,000,000 shares authorized;
2 shares issued and outstanding                                         --              --
Additional paid-in capital                                      15,698,421      14,644,966
Deferred compensation                                             (353,616)             --
Accumulated deficit                                            (19,669,437)    (16,476,382)
                                                              ------------    ------------
Total shareholders' deficit                                     (4,267,174)     (1,773,958)
                                                              ------------    ------------
     TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT              $ 16,107,915    $ 16,276,638
                                                              ============    ============
</TABLE>

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

                                      -1-
<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)


      THREE MONTHS ENDED
            MARCH 31,

                                              2006             2005
                                              ----             ----

Revenues                                 $    165,671        $         --

Cost of revenues                         $     80,541        $         --
                                         ------------        ------------

Gross profit                             $     85,130        $         --

Expenses:
Research and development                       28,386                  --
General and administrative                  1,953,752             561,628
Impairment of goodwill                             --           4,577,069
                                         ------------        ------------
Total expenses                              1,982,138           5,138,697

Loss from operations                       (1,897,008)         (5,138,697)

Other expense
Interest expense                             (522,901)           (552,450)
Derivative valuation loss                    (990,471)                 --
                                         ------------        ------------
Other expense                              (1,513,372)           (552,450)
                                         ------------        ------------

Net loss before income tax                 (3,410,380)         (5,691,147)
                                         ------------        ------------

Income tax benefit                            217,325                  --
                                         ------------        ------------

Net loss                                 $ (3,193,055)       $ (5,691,147)
                                         ============        ============

Basic and diluted loss per share         $      (0.06)       $      (0.22)
                                         ============        ============
Weighted average number of Class A
 common shares outstanding                 56,912,893          25,921,562
                                         ============        ============

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

                                      -2-
<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

      THREE MONTHS ENDED
            MARCH 31,

                                                         2006         2005
                                                         ----         ----
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                         $(3,193,055)   $(5,691,147)
   Adjustments to reconcile net loss to net
   cash from operating activities:
     Interest expense on beneficial conversion ..            --        517,000
     Loan discount accretion                            313,915             --
     Stock option compensation                          633,695             --
     Income tax benefit                                (217,325)            --
     Impairment of goodwill                                  --      4,577,069
     Issuance of warrant for services                    66,144             --
     Issuance of stock for services                          --        244,124
     Depreciation and amortization                      345,806         34,009
     Derivative valuation loss                          990,471             --
   Changes in assets and liabilities:
    Accounts receivable                                 154,246             --
    Inventories                                         (19,367)      (383,679)
    Prepaid interest                                     32,580             --
    Accounts payable and accrued liabilities             81,927        302,945
    Accrued interest                                    138,648             --
    Deferred revenue                                     (8,333)            --
                                                    -----------    -----------
NET CASH FROM OPERATING ACTIVITIES                     (680,648)      (399,679)
                                                    -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES

   Change in related party receivables/payables .            --        (16,267)
   Purchase of equipment                                 (1,635)            --
                                                    -----------    -----------
NET CASH FROM INVESTING ACTIVITIES                       (1,635)       (16,267)
                                                    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from notes payable                        1,082,000             --
   Principal payments on notes payable                 (193,566)            --
   Payments on loan costs                               (85,000)            --
   Proceeds from notes payable, related parties .        87,466             --
   Principal payments on notes payable
    related parties                                          --        (34,900)
   Payments on assumed debt                                  --         (4,000)
   Issuance of common stock                                  --        250,000
                                                    -----------    -----------
NET CASH FROM FINANCING ACTIVITIES                      890,900        211,100
                                                    -----------    -----------
Net (decrease) increase in cash                         208,617       (204,846)
Cash and cash equivalents, beginning                        476        206,270
                                                    -----------    -----------
Cash and cash equivalents, ending                   $   209,093    $     1,424
                                                    ===========    ===========

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


                                      -3-
<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (Unaudited)

      THREE MONTHS ENDED
            MARCH 31,

                                                         2006         2005
                                                         ----         ----

Supplemental disclosure of cash flow information:

Cash paid for interest                              $   19,235   $    7,000
Cash paid for income taxes                                  --           --

Supplemental disclosure of non-cash investing and
  financing information:

Common Stock issued for debt                                --      117,000
Common Stock issued for shares of Cyber Aerospace           --    4,603,650

                                                    ----------   ----------


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

                                      -4-
<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION, ACQUISITIONS AND MERGERS AND CONTROLLING SHAREHOLDERS --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 became 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 Company was
changed to December 31 effective for Fiscal 2003 and the historical financial
statements of the Company are now those of On Alert and 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 includes the results of operations
of E-City from it's date of merger, September 1, 2004. Cyber Aerospace was
merged with and into Cyber Defense effective March 31, 2005 with the acquisition
of the 6.19% minority interest in Cyber Aerospace for 1,650,000 shares of class
A common stock and 150,000 shares of class B common stock. In addition, on
September 19, 2005, the Company acquired its wholly owned subsidiary Techsphere
Systems International, Inc. ("TSI") for 23,076,923 Class A common shares and
245,455 Class B common shares.

The controlling shareholders of the company are Proxity, Inc. ("Proxity"), a
publicly traded company ("PRXT") and Cherokee Raiders, a partnership,
("Cherokee") owning approximately 30.1% and 17.0% of the Class A common shares
of the Company, respectively as of March 31, 2006. In addition, the former
shareholders of TSI also own 245,455 or 45%, of the issued and outstanding
shares of Class B common stock and Cherokee owns 300,000 or 55% of such class B
shares which allow for 1,000 votes per share and as a result, Cherokee is the
controlling shareholder of the Company. Cherokee and Proxity each own one share
of the two shares of Class C common stock issued and outstanding which have
certain liquidation preference rights. The Chief Executive Officer of both
Proxity and Cherokee is Mr. Robinson, the Chief Executive Officer of the
Company.

CONSOLIDATION - The accompanying condensed consolidated financial statements
include the accounts and transactions of Cyber Defense Systems, Inc. for all
periods presented and the accounts and transactions of Cyber Defense, and its
TSI wholly owned subsidiary from its date of acquisition on September 19, 2005,
(collectively the "Company"). Intercompany accounts and transactions have been
eliminated in consolidation.

Basis of Presentation -- The unaudited financial statements included in this
Form 10-QSB/A have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB/A and Item 310(b) of Regulation SB of the Securities
and Exchange Act of 1934, as amended. 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.

                                      -5-
<PAGE>

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

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 Systems,
Inc. and its subsidiary, collectively ("Cyber" or 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, 2006 and such
financial statements should be read in conjunction with the Company's Form
10-KSB for the year ended December 31, 2005 and other filings made with the
Securities and Exchange Commission.

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.

Management's Intentions - 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. For the
quarter ended March 31, 2006 the Company recorded revenues of $165,671 and
incurred a net loss of $2,993,055. For the year ended December 31, 2005, the
Company recorded revenues of $461,244 and incurred a net loss of $15,579,024. As
of March 31, 2006 and December 31, 2005 the net working capital deficit was
$18,448,280 and $16,444,035, respectively. 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 further discussed in Note 4, 5
and 9 as may be required, and ultimately to attain successful operations.

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 March 31, 2006 and December 31, 2005
the Company had $109,093 and $0 of cash, respectively, in excess of federally
insured limits.

Inventory -- At March 31, 2006 and December 31, 2005, inventory of $355,890 and
$336,523, respectively primarily consists of parts for the Unmanned Aerial
Vehicles ("UAV's") and airships that the Company sells and services.

Property and Equipment -- Property and equipment is recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets ranging from 3 to 5 years. 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.

                                      -6-
<PAGE>

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

Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable.
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. For the
quarter ended March 31, 2006, management has determined that no impairment of
its long lived assets was required. For the quarter ended March 31, 2005,
goodwill of $4,577,069 relating to the acquisition of the 6.19% minority
interest in Cyber Aerospace as of March 31, 2005 was impaired.

Manufacturing License -- The Company acquired an exclusive manufacturing license
valued at $14,255,649 with the acquisition of TSI in September, 2005.
Amortization expense relating to the license was $197,994 for the period ended
March 31, 2006. The Company evaluated the carrying value of the license to
determine if the carrying amount warranted revision or may not be recoverable.
In management's opinion, an adjustment is not required at March 31, 2006.

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.

Revenue Recognition - The Company recognizes service revenues when the services,
as specified by the customer and agreed to by the Company, have been performed
and the customer accepts the services, and the services are billed. Airship and
UAV sales are recognized when contract specifications are met, the price is
determined, title passes to the customer and the customer is billed.
Reasonableness of collectibility of all revenue transactions is a key element
before the transactions are recorded.

Share Based Payments - In December 2004, the Financial Accounting Standards
Board issued Statement Number 123 ("FAS 123 (R)"), Share-Based Payments, which
was adopted by the Company on January 1, 2006. The Company recognizes
compensation expense in an amount equal to the fair value of share-based
payments such as stock options granted to employees. The Company has elected to
apply FAS 123 (R) using the modified prospective method. Under this method, the
Company records compensation expense as awards that were outstanding at the date
of adoption continue to vest for the unvested portion of the awards. For the
three months ended March 31, 2006 the Company recorded $663,695 in stock
compensation expense within general and administrative expenses in the
accompanying statement of operations. If the Company had accounted for share
based payments under the provisions of FAS 123(R) for the three months ended
March 31, 2005 no expense would have been recorded as there were no unvested
stock options.

Prior to January 1 2006, the Company used Statement of Financial Accounting
Standards No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS No. 148) to account for our stock based compensation
arrangements. This statement amended the disclosure provision of FASB statement
No. 123 to require prominent disclosure about the effects on reported net income
of an entity's accounting policy decisions with respect to stock-based employee
compensation. As permitted by SFAS No. 123 and amended by SFAS No. 148, we
continued to apply the intrinsic value method under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account
for our stock-based employee compensation arrangements.

                                      -7-
<PAGE>

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

Derivative Instruments - The Company does not hold or issue derivative
instruments for trading purposes. However, the Company has convertible notes
payable that contain embedded derivatives that require separate valuation from
the convertible notes under Emerging Issues Task Force Abstract (EITF) 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock". The Company recognizes these derivatives as
liabilities in the accompanying balance sheet and measures them at estimated
fair value each quarter, and recognizes changes in estimated fair value in the
statement of operations in the respective period. The Company has estimated the
fair value of these embedded derivatives using the Black-Scholes model.

Income Taxes -- No income taxes have been paid or accrued because the Company
has had no net taxable income since inception. 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.

Loss Per Share --Basic loss per share is calculated by dividing loss available
to Class A common shareholders by the weighted-average number of Class A common
shares outstanding during each period. Fully diluted loss per share for the
quarter ended March 31, 2006 and 2005 is anti dilutive due to net losses
incurred by the Company. As of March 31, 2006, potentially dilutive securities
in the future include an aggregate of 11,379,900 Class A common shares subject
to stock options granted under the 2005 Option Plan resulting in a weighted
average of 6,333,381 shares, and 26,110,265 Class A common shares issuable upon
conversion of Convertible Notes, resulting in a weighted average of 23,033,731
shares that would be added to the weighted average shares used to calculate
basic earnings per share. Potentially dilutive securities would exclude Class A
common shares issuable upon exercise of 6,100,000 warrants issued and
outstanding, since the exercise price of the warrants exceeds the average market
price of the Class A Common Stock for the quarter ending March 31, 2006. For the
quarter ended March 31, 2005, potentially dilutive securities include 88,000
shares subject to a stock option held by All- Stars Marketing since August 9,
2004 resulting in 86,240 additional shares that would be added to the weighted
average shares used to calculate basic earnings per share.

Recent Accounting Pronouncements -- In February 2006, the FASB issued Statement
of Financial Accounting Standards No. 155, "Accounting for Certain Hybrid
Financial Instruments," referred to as SFAS No. 155. This statement amends SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities" and SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 155 permits fair value remeasurement
for hybrid financial instruments that contain embedded derivatives that would
require separate accounting. In addition, the statement establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain embedded derivatives. SFAS No. 155 is effective for all
financial instruments acquired or issued beginning after an entity's fiscal year
beginning on or after September 15, 2006 with earlier adoption permitted.
Management believes this Statement will have no impact on the financial
statements of the Company once adopted.

                                      -8-
<PAGE>

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

In March 2006, the FASB issued FASB Statement No. 156, which amends FASB
Statement No. 140. This Statement establishes, among other things, the
accounting for all separately recognized servicing assets and servicing
liabilities. This Statement amends Statement 140 to require that all separately
recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. This Statement permits, but does not require, the
subsequent measurement of separately recognized servicing assets and servicing
liabilities at fair value. An entity that uses derivative instruments to
mitigate the risks inherent in servicing assets and servicing liabilities is
required to account for those derivative instruments at fair value. Under this
Statement, an entity can elect subsequent fair value measurement to account for
its separately recognized servicing assets and servicing liabilities. By
electing that option, an entity may simplify its accounting because this
Statement permits income statement recognition of the potential offsetting
changes in fair value of those servicing assets and servicing liabilities and
derivative instruments in the same accounting period. This Statement is
effective for financial statements for fiscal years beginning after September
15, 2006. Earlier adoption of this Statement is permitted as of the beginning of
an entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. Management believes this Statement will have no
impact on the financial statements of the Company once adopted.

NOTE 2 - RELATED PARTY TRANSACTIONS

Cyber Aerospace - Prior to March 31, 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.

Cherokee Raiders - Cherokee's general partner is William C. Robinson. Cherokee
also owns 300,000 Class B common shares, each of which entitles the holder to
1,000 votes. As a result, Cherokee is the controlling shareholder of the
Company.

William C. Robinson - Mr. Robinson is President, CEO and Chairman of the Company
and has significant ownership and control in Proxity and Cherokee Raiders.

During the quarter ended March 31, 2006, Mr. Robinson advanced an additional
$70,744 to the Company and Mr. Frank Lively, a director of the Company advanced
an additional $16,722.

See Note 5 - Related Party Notes for additional related party disclosure.

                                      -9-
<PAGE>

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

NOTE 3- INTANGIBLE ASSETS AND MANUFACTURING LICENSE

With the acquisition of TSI in September, 2005 the Company acquired an
exclusive, worldwide license with 21st Century Airships, Inc. for the
manufacture of its airships. The value recorded for the license was $14,255,649
pursuant to an independent valuation which is being amortized over the 18 year
life of the license, resulting in monthly amortization of $65,998. Amortization
expense for the quarter ended March 31, 2006 was $197,994. The license agreement
stipulates royalty payments relating to the sales of airships ranging from
$450,000 for a low altitude airship, $600,000 for a medium altitude airship, 10%
of the gross sales price of a high altitude airship and $400,000 for the
manufacture of a low altitude airship used for commercial advertising purposes.
Payments are to be made on any royalties due upon receipt of payment from the
customer on a proportionate basis as defined in the agreement and in full within
120 days of completion of the manufacturing process.

The license agreement calls for a minimum annual royalty payment of $1,000,000
for the period of January 17, 2005 through January 16, 2006 and each annual
period thereafter ending January 16. The Company has accrued $1,200,000 related
to this royalty in the balance sheet as of March 31, 2006. The Company has
executed an amendment to the license agreement in April, 2006 providing payment
terms with respect to the $1,000,000 royalty through January 16, 2006 of
$200,000 each on May 15 and July 15, 2006, and $150,000 each for four months on
the fifteenth of each month ending November 15, 2006.

In 2004, the Company purchased designs and plans for unmanned air vehicles
(UAV's) which have a useful life of 3 years. The cost was $100,000 and the
monthly amortization is $2,778. Amortization expense was $8,334 for the three
months ended March 31, 2006 and 2005.

NOTE 4- NOTES PAYABLE

On March 15, 2006, the Company entered into a Securities Purchase Agreement,
dated as of March 14, 2006 with AJW Partners, LLC, AJW Offshore, Ltd., AJW
Qualified Partners, LLC, and New Millennium Capital Partners II, LLC ("AJW")
whereby the Company authorized the sale of an aggregate of $2,000,000 of 6%
Callable Secured Convertible Notes and warrants to purchase 2,000,000 shares of
common stock for a total offering price of $2,000,000. The $2,000,000 is to be
funded in three tranches ($1,000,000 on March 15, 2006, $500,000 upon filing a
Registration Statement and $500,000 upon effectiveness of the Registration
Statement). The conversion price is the lesser of $3.00 or 50% of the average of
the lowest three intra-day trading prices for the Company's common stock during
the 20 trading days immediately preceding the conversion date. The warrants to
purchase Class A common stock are priced at $1.25 per share. The warrants are
exercisable for a period of five years from the date of issuance. In connection
with the sale, the Company also entered into a Registration Rights Agreement
with AJW, requiring it to file a registration statement with the Securities and
Exchange Commission registering the shares of common stock issuable upon
conversion of the Notes and exercise of the Warrants. The Notes are secured by
all of the Company's assets, except for its accounts receivable and proceeds of
inventory. In addition, the lenders have agreed to subordinate to an
institutional lender. On March 15, 2006 the Company received $1,000,000 and
issued warrants for 1,100,000 shares of common stock valued at $542,190 on the
date of issuance which was recorded as a derivative liability. An aggregate of
$49,290 was recognized as loan costs and $492,900 was recognized as a derivative
valuation loss on issuance of the warrants. The beneficial conversion feature
was valued at $2,599,655 and was recorded as a derivative liability. An
aggregate of $1,000,000 was allocated to discounts on the individual notes,
representing 100% of the face value of the notes, with the remaining $1,599,655
recognized as a derivative valuation loss.

                                      -10-
<PAGE>

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

An analysis of the March 14, 2006 issuance and the significant assumptions used
to value the warrants and the beneficial conversion feature are contained in the
following table:

                                                     March 14,
                                                       2006
                                                     Agreement
                                                     Tranche 1
                                                    -----------

     Issue date                                      3/14/2006
     Aggregate note amounts                         $1,000,000


     Conversion price                               $     0.19
     Term of notes                                     3 years

     Shares issuable upon conversion                 5,172,414

     Warrants issued                                 1,100,000


     Exercise price of warrants                     $     1.25
     Term of warrants at issuance                      5 years


     Market Price on issue dates                    $     0.51
     Risk free interest rate                              4.00%
     Volatility on date of issuance                     261.79%

     Fair value per share of conversion shares          0.5026

     Beneficial conversion feature fair value       $2,599,655

     Note discount amount                           $1,000,000

     Warrant fair value per share                   $   0.4929

     Fair values of warrants                        $  542,190

     Value of warrants allocable to loan costs      $   49,290

     Fair value of derivative related to warrants   $  492,900
     Fair value of derivative allocated to
     beneficial

     conversion feature                             $1,599,655
                                                    ----------
     Aggregate fair value allocated to derivative
     instruments                                    $2,141,845

The Company incurred loan costs totaling $134,290 which consisted of fees paid
in cash of $85,000 and a warrant to purchase 100,000 shares of Class A common
stock as described above valued at $49,290 which will be amortized over the
three year term of the notes.

The carrying value of the March 14, 2006 AJW notes, as well as the notes issued
in 2005 to AJW as of March 31, 2006 and December 31, 2005 was $951,773 and
$655,358 net of discount, respectively. The carrying value will be increased
each quarter over the respective three year lives of the notes as the discount
related to the embedded derivatives is recorded until the carrying value equals
the face value of the notes.

                                      -11-
<PAGE>

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

As of March 31, 2006, the derivative instruments had a fair value of
$11,620,086. An analysis of the valuation of the individual tranches as of March
31, 2006 and the significant assumptions used to value the warrants and the
beneficial conversion feature are contained in the following table:

<TABLE>
<CAPTION>
                                                April 1, 2005    April 1, 2005     April 1, 2005     March 14, 2006
                                                  Agreement        Agreement         Agreement          Agreement
                                                  Tranche 1        Tranche 2         Tranche 3          Tranche 1         Total
                                                --------------   --------------    -------------    ----------------   ------------
<S>                                             <C>              <C>               <C>              <C>                <C>
Revaluation date                                   3/31/2006        3/31/2006        3/31/2006         3/31/2006
Aggregate note amounts                          $      917,692   $    1,300,000    $   1,200,000    $     1,000,000    $  4,417,692
Conversion price                                $        0.268   $        0.268    $       0.268    $         0.223
Remaining term of notes                              2.0 years       2.15 years       2.35 years         2.95 years
Shares issuable upon conversion                      3,423,446        4,850,746        4,477,612          4,477,612
Warrants outstanding                                 1,650,000        1,430,000        1,320,000          1,100,000       5,500,000
Exercise price of warrants                      $         4.25   $         4.25    $        4.25    $          1.25
Remaining term of warrants                           4.0 years       4.15 years       4.35 years         4.95 years
Common stock price                              $         0.53   $         0.53    $        0.53    $          0.53
Risk free interest rate                                   4.82%            4.82%            4.82%              4.82%
Volatility                                              247.96%          247.96%          247.96%            247.96%
Fair value per share of conversion shares               0.5020           0.5055           0.5099             0.5185
Beneficial conversion feature fair value        $    1,718,570   $    2,452,052    $   2,283,134    $     2,321,642    $  8,775,398
Warrant fair value per share                    $       0.5131   $       0.5151    $      0.5175    $        0.5258
Fair value of derivative related to warrants    $      846,615   $      736,593    $     683,100    $       578,380    $  2,844,688
Fair value of derivative related to
    beneficial conversion feature               $    1,718,570   $    2,452,052    $   2,283,134    $     2,321,642    $  8,775,398
                                                --------------   --------------    -------------    ---------------    ------------
Aggregate fair value of derivative instruments  $    2,565,185   $    3,188,645    $   2,966,234    $     2,900,022    $ 11,620,086
                                                ==============   ==============    =============    ===============    ============
</TABLE>

The derivative liability is comprised of the following as of March 31, 2006 and
December 31, 2005:

                                             March 31, 2006   December 31, 2005
                                             --------------   -----------------
Beneficial conversion features related to:
AJW Notes                                    $    2,844,688   $       1,515,756
AJW Warrants                                      8,775,398           8,541,977
James Gardiner Note (See below)                     147,570                  --
William Robinson Note (See Note 5)                  926,720                  --
Frank Lively Note (See Note 5)                      149,457                  --
                                             --------------   -----------------
Total derivative liability                   $   12,843,833   $      10,057,733
                                             ==============   =================

                                      -12-
<PAGE>

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

As of December 31, 2005, the derivative instruments had a fair value of
$10,057,733. An analysis of the valuation of the individual tranches as of
December 31, 2005 and the significant assumptions used to value the warrants and
the beneficial conversion feature are contained in the following table:

<TABLE>
<CAPTION>
                                                      Tranche 1       Tranche 2          Tranche 3       Total
                                                    --------------   -------------     -----------   --------------
<S>                                                  <C>              <C>              <C>           <C>
Valuation date                                         12/31/2005      12/31/2005       12/31/2005
Aggregate note amounts                               $     917,691    $  1,300,000     $ 1,200,000   $   3,417,691
Conversion price                                     $       0.156    $      0.156     $     0.156
Term of notes                                           2.25 years       2.4 years       2.6 years
Shares issuable upon conversion                          5,957,684       8,333,333       7,692,308
Warrants outstanding                                     1,650,000       1,430,000       1,320,000       4,400,000
Exercise price of warrants                           $        4.25    $       4.25     $      4.25
Term of warrants                                        4.25 years       4.4 years       4.6 years
Stock Price                                          $        0.40    $       0.40     $      0.40
Risk free interest rate                                       4.37%           4.37%           4.37%
Volatility                                                  252.54%         252.54%         252.54%
Fair value per share of conversion shares                   0.3867          0.3883          0.3903
Beneficial conversion feature fair value             $   2,303,836    $  3,235,833     $ 3,002,308   $   8,541,977
Warrant fair value per share                         $      0.3367    $     0.3447     $    0.3540
Fair value of derivative related to warrants         $     555,555    $    492,921     $   467,280   $   1,515,756
Fair value of derivative related to
    beneficial conversion feature                    $   2,303,836    $  3,235,833     $ 3,002,308   $   8,541,977
                                                    ---------------   -------------    ------------  --------------
Aggregate fair value of derivative instruments       $   2,859,391    $  3,728,754     $ 3,469,588   $  10,057,733
                                                    ===============   =============    ============  ==============
</TABLE>

The derivative valuation loss reported in the accompanying consolidated
statement of operations results from the revaluation to fair value of the
beneficial conversion feature and attached warrants associated with the above
referenced notes to AJW and the derivative valuation loss related to the change
in valuation of the beneficial conversion features related to notes issued to
James Gardiner (see below), William Robinson and Frank Lively (See note 7). As
the fair value of the derivatives change, a gain or a loss is recognized. The
components of the derivative valuation loss for the three months ended March 31,
2006 and 2005 consists of the following:

<TABLE>
<CAPTION>
                                                                    3 months       3 months
                                                                      ended          ended
                                                                    March 31,      March 31,
                                                                      2006           2005
                                                                  -----------    ----------
<S>                                                               <C>            <C>
Derivative valuation loss on issuance of notes - AJW              $(1,599,655)   $       --

Derivative valuation loss on issuance of warrants -AJW               (492,900)           --

Derivative valuation loss on issuance of note James Gardiner          (37,050)           --

Derivative valuation loss on issuance of note- William Robinson      (361,532)           --

Derivative valuation loss on issuance of notes - Frank Lively         (58,306)           --
Derivative valuation loss - revaluation at March 31, 2006 James
Gardiner                                                              (20,520)           --

Derivative valuation loss - warrant revaluation AJW                  (786,742)           --
Derivative valuation gain - beneficial conversion revaluation -
AJW                                                                 2,366,234            --
                                                                  -----------    ----------
Total derivative valuation loss                                   $  (990,471)   $       --
                                                                  ===========    ==========
</TABLE>

                                      -13-
<PAGE>

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

On January 15, 2006 the Company issued an unsecured note to James Gardiner in
the amount of $90,000 in exchange for cash of $82,000 and fees of $8,000. The
note is due December 31, 2007, is unsecured and bears interest at the rate of
12% and is convertible into Class A common stock at $0.30 per share at any time.
The note contains a beneficial conversion feature due to the conversion price of
$0.30 being lower than the market price of $0.53 on the date of issuance. The
beneficial conversion feature was valued at $127,050 using the Black Scholes
method on the date of issuance, and was recorded as a derivative liability on
the date of issuance. The Company allocated $90,000 of the beneficial conversion
feature as a discount on the note, which will accrete over the life of the note.
The carrying value of the note as of March 31, 2006 was $9,500 and is recorded
in Notes Payable - Unrelated parties in the accompanying balance sheet as of
March 31, 2006. As of March 31, 2006, the derivative liability was valued at
$147,570, which resulted in an additional $20,520 of derivative valuation loss
recorded in the three month period ended March 31, 2006.

An analysis of the valuation of the beneficial conversion feature and the
significant assumptions used are contained in the following table:

<TABLE>
<CAPTION>
                                                                                   Conversion
                                             Issuance date       Report date          date
Valuation date                             January 15, 2006    March 31, 2006    April 20, 2006
                                           -----------------   ---------------   ---------------
<S>                                        <C>                 <C>               <C>
Aggregate note amounts                     $          90,000   $        90,000   $        90,000
Conversion price                           $            0.30   $          0.30   $          0.30
Term of notes                                     1.95 years        1.75 years        1.70 years
Shares issuable/issued upon conversion               300,000           300,000           300,000
Market Price                               $            0.45   $          0.53   $          0.53
Risk free interest rate                                 4.39%             4.80%             4.89%
Volatility on issue date                              253.76%           247.96%           246.20%
Fair value per share of conversion shares             0.4235            0.4919            0.4891
Beneficial conversion feature fair value   $         127,050   $       147,570   $       146,730
Note discount amount                       $          90,000   $        90,000   $        90,000
Fair value of derivative related to
  beneficial conversion feature            $          37,050   $        57,570   $        56,730
</TABLE>

On April 20, 2006 the holder converted the note into 300,000 shares of the
Company's Class A common stock. The derivative on the date of conversion was
valued at $146,730. As a result of the conversion, the Company will recognize a
derivative valuation gain of $840 representing the change of the value from the
March 31, 2006 valuation date to the date of conversion and will reclassify
$146,730 to additional paid in capital and expense the remaining discount on the
note in the amount of $85,000 to interest expense. These transactions will be
recorded in the quarter ending June 30, 2006.

On January 17, 2006 the Company issued an unsecured note in the amount of
$88,637 bearing interest at the rate of 5.0% to a vendor in exchange for
services previously rendered. The note was originally due in full on April 19,
2006. The Company and the vendor have agreed to amend the payment terms of the
note. A payment of $5,000 was made in April, 2006 and monthly payments beginning
May 20, 2006 of $10,000, $15,000, $25,000 through July 20, 2006 with the
remaining balance of principal and accrued interest due August 30, 2006. The
note is personally guaranteed by Mr. Robinson who has pledged certain of his
personal assets as collateral.

                                      -14-
<PAGE>

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

On March 20, 2006 the Company issued an unsecured note in the amount of $57,052
to a vendor in exchange for services previously rendered. The note is due in
three equal monthly installments of $19,024 beginning March 25, 2006. No
interest is due if payments are paid by the due dates. If any monthly
installment is past due, the note bears interest at the rate of 10% per annum.
The note is currently in default. The Company is in discussions with the vendor
to extend the terms of this note.

On April 20, 2006 Mayo Hadden converted $200,000 of his outstanding Convertible
Note into 666,667 shares of common stock at the conversion price of $0.30 per
share.

The Company is currently in discussions with Charles McClure to amend his note
agreement.

<TABLE>
<CAPTION>
                                                                            March 31,    December 31,
                                                                              2006          2005
                                                                           ----------    ----------
<S>                                                                        <C>          <C>
Current - Unrelated parties

Convertible Note payable - Mayo Hadden, unsecured, interest accrues
at 10.0% per annum due February 25, 2007                                    $  331,250   $  331,250

Convertible Notes payable C.M.G. Tech., unsecured, interest accrues
at 10% per annum due February 25, 2007                                         822,094      822,094

Note payable Charles McClure, secured by an airship, interest accrues
at 25.0% per annum and was due December 31, 2005, currently in default .       250,000      250,000

Notes payable to Vendors - unsecured, interest accrues at 12% per
annum due in 4 equal payments from March 5, 2006 to June 5, 2006               106,165      154,887

Commercial Promissory Note, - Equipment Depot, Inc., interest at 9.0%
per annum, secured, due June 19, 2006                                           25,000       25,000

Note payable to vendor - unsecured, interest accrues at 5%
per annum, monthly payments, due August 30, 2006                                88,637           --

Convertible Note payable - James Gardiner, unsecured, interest accrues at
10.0% per annum due February 25, 2007, less discount
of $80,500                                                                       9,500           --

Note payable - 21st Century Airship, Inc. - interest accrues at 12%
per annum. The Note was due on August 24, 2005, paid in full
in March, 2006                                                                      --      144,844

Note payable to vendor - unsecured, interest accrues at 10% per annum due
in three monthly installments from March 25, 2006
to May 25, 2006, currently in default                                           57,072           --
                                                                            ----------   ----------
TOTAL CURRENT UNRELATED PARTIES                                             $1,689,718   $1,728,075
                                                                            ==========   ==========

Long-term - unrelated parties

Notes payable - AJW Partners, LLP and affiliates, callable secured
convertible notes bearing interest at 8.0% per annum, $917,691 due April
4, 2008; $1,300,000 due May 25, 2008 and $1,200,000 due August 4, 2008
less total discount of $2,481,444
and $2,762,333, respectively                                                   936,247      655,358

Notes payable - AJW Partners, LLP and affiliates, callable secured
convertible notes bearing interest at 6.0% per annum,
due March 13, 2009 less total discount of $984,475                              15,525           --


                                                                            ----------   ----------
TOTAL LONG TERM NOTES PAYABLE                                               $  951,772   $  655,358
                                                                            ==========   ==========
</TABLE>

                                      -15-
<PAGE>

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

NOTE 5 - NOTES PAYABLE - RELATED PARTIES

<TABLE>
<CAPTION>
                                                                          March 31,   December 31,
                                                                            2006         2005
                                                                         ----------   ----------
<S>                                                                      <C>          <C>
Convertible Promissory Note - Cherokee Raiders, interest at 12%
per annum, due December 31, 2007, unsecured                                 312,255      312,255

Convertible Promissory Note - Proxity Inc., interest at 12% per annum,
due July 31, 2008, unsecured                                                351,600      351,600

Convertible Promissory Note - William Robinson, interest at 12% per
annum, due December 31, 2007, unsecured, net of discount of
$565,188 and $0, respectively                                                    --      460,851

Convertible Promissory Note - Jim Alman - interest at 12% per
annum, due December 31, 2007, unsecured                                      50,000       50,000

Convertible Promissory Notes - four executive employees - interest at
12% per annum, unsecured, due December 31, 2007                             263,266      263,266

Convertible Promissory Notes - Frank Lively - interest at 12% per
annum, unsecured, due December 31, 2007 net of discount of
$91,151 and $0, respectively                                                 49,914      124,343
                                                                         ----------   ----------
                                                                         $1,027,035   $1,562,315
                                                                         ==========   ==========
</TABLE>

On April 19th, 2006, the Board approved a $1,000,000 line of credit with Mr.
Robinson. On April 19, 2006 pursuant to the line of Credit, the Company entered
into a convertible variable promissory note in the principal amount as of March
31, 2006 of $565,188 including all related accrued interest. The note bears
interest at the rate of 12% per annum, is unsecured and is convertible into
Class A common stock at $0.30 per share. The note is due on December 31, 2007.
The note contains a beneficial conversion due to the conversion price of $0.30
being lower than the market price of $0.53 on the date of issuance. The
beneficial conversion feature was valued at $926,720 on the date of issuance and
recorded as a derivative liability. The Company has allocated $565,188 of the
beneficial conversion feature as a discount on the note, which represents 100%
of the face value of the note, which will accrete over the life of the note. In
addition, the Company recognized a derivative valuation loss on the issuance of
the note in the amount of $361,533. The carrying value of the note as of March
31, 2006 was $0 and is recorded in Notes Payable - related parties in the
accompanying balance sheet as of March 31, 2006.

An analysis of the valuation of the beneficial conversion feature related to Mr.
Robinson's note and the significant assumptions used are contained in the
following table:

Issuance date                                   March 31, 2006
                                               ------------------
Aggregate note amounts                      $       565,188
Conversion price at March 31, 2006          $          0.30
Term of notes at March 31, 2006                  1.75 years
Shares issuable upon conversion                   1,883,960
Market Price                                $          0.53
Risk free interest rate on issue date                  4.80%
Volatility on issue date                             247.96%
Fair value per share of conversion shares            0.4919
Beneficial conversion feature fair value    $       926,720
Note discount amount                        $       565,188
Fair value of derivative related to
  beneficial conversion feature             $       361,532


                                      -16-
<PAGE>

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

On April 19, 2006, the Board approved two convertible promissory notes for
amounts as of April 17th, 2006, of $83,726 and $13,056, respectively with Frank
Lively for cash advanced for working capital plus fees and interest. The notes
bear interest at the rate of 12% per annum, is unsecured and is convertible into
Class A common stock at $0.30 per share. The notes are due on December 31, 2007.
The notes contain a beneficial conversion feature due to the conversion price of
$0.30 being lower than the market price of $0.53 on the date of issuance. The
beneficial conversion feature was valued at $149,457 on the date of issuance and
was recorded as a derivative liability. The Company has allocated $91,151 of the
beneficial conversion feature as a discount on the balance of the notes as of
March 31, 2006 which will accrete over the life of the notes. In addition, the
Company recognized a derivative valuation loss on the issuance of the note in
the amount of $58,306. The carrying value of the notes as of March 31, 2006 was
$0 and is recorded in Notes Payable - related parties in the accompanying
balance sheet as of March 31, 2006.

                                                 Issuance date
                                                March 31, 2006
                                               ------------------
Aggregate note amounts                         $     91,151
Conversion price                               $      0.30
Term of notes                                    1.75 years

Shares issuable upon conversion                     303,837
Stock Price                                    $       0.53
Risk free interest rate                                4.80%
Volatility                                           247.96%

Fair value per share of conversion shares            0.4919
Beneficial conversion feature fair value       $    149,457

                                               $
Note discount amount                           $     91,151
Fair value of derivative related to
  beneficial conversion feature                $     58,306


On April 19, 2006, the Board approved a convertible promissory note for an
aggregate amount as of April 17th, 2006 in the amount of $312,255 plus accrued
interest with Cherokee Raiders, LP, by way of cash advanced for working capital
plus fees and interest. The note bears interest at the rate of 12% per annum, is
unsecured and is convertible into Class A common stock at $0.30 per share. The
note is due on December 31, 2007. This note replaces the note dated December 31,
2005 on identical terms.

The three notes discussed above provide for acceleration of payment from amounts
in excess of a minimum of $7,000,000 that are raised in any type of financing.
Such prepayments would be made on a pro rata basis among certain note holders.
As a result of this acceleration provision, the notes have all been treated as
current liabilities.

                                      -17-
<PAGE>

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

On April 20, 2006 the Company issued an aggregate of 964,443 shares upon
exercise of the conversion rights to Class A common stock at a conversion price
of $0.30 per share associated with Convertible Notes in the aggregate amount of
$289,333. The four executive employees converted an aggregate of $139,419, Frank
Lively converted one of his notes representing deferred salary in the amount of
$49,914, and Mr. Robinson and Cherokee each converted $50,000.

NOTE 6- STOCKHOLDERS' DEFICIT

COMMON STOCK - At March 31 2006 and December 31, 2005, the Company had
56,912,893 shares of Class A Common Stock, 545,455 shares of Class B Common
Stock, and 2 shares of Class C Common Stock issued and outstanding with
200,000,000 shares of Class A and Class B Common Stock authorized, par value
$.001, and 200,000,000 shares of Class C Common Stock authorized, par value
$.001. In addition, the Company had 100,000,000 shares of Class A Preferred
Stock authorized, par value $.001, with no shares issued and outstanding. Class
B Common Stock allows for 1,000 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. Additional paid in capital at March 31, 2006 and
December 31, 2005 was $15,698,421 and $14,644,966, respectively. At March 31,
2006, deferred compensation totaled $353,616. The accumulated deficit as at
March 31, 2006 and December 31, 2005 was $19,469,437 and $16,476,382
respectively.

NOTE 7- INCOME TAXES

The Company has paid no federal or state income taxes since its incorporation.
As of March 31, 2006 and December 31, 2005, the Company had net operating loss
carry forwards for federal income tax reporting purposes of approximately
$7,281,000 and $6,154,864 respectively, which if unused, will expire through
2026. 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 8- COMMITMENTS AND CONTINGENCIES

On January 1, 2006 we entered into a new employment agreement with Mr. Robinson,
the CEO, Chairman and President of the Company. 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. The agreement provides
for standard benefits, vacation and participation in the Company's bonus pool as
defined in the agreement. In addition, the Company shall issue to Employee
options to purchase shares of Company stock (Shares) in accordance with the
Company's Stock Option Plan. 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, 2006, we entered into a new employment agreement with our Vice
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. Mr. Alman will receive an annual
salary of not less than $135,000. The agreement provides for standard benefits,
vacation and participation in the Company's bonus pool as defined in the
agreement. In addition, the Company shall issue to Employee options to purchase
shares of Company stock (Shares) in accordance with the Company's Stock Option
Plan. 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.

                                      -18-
<PAGE>

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

On January 1, 2006, The Company entered into a new employment agreement with
Keith Vierela as Chief Operating Officer. 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. Vierela will receive an annual
salary of not less than $150,000. The agreement provides for standard benefits,
vacation and participation in the Company's bonus pool as defined in the
agreement. In addition, the Company shall issue to Employee options to purchase
shares of Company stock (Shares) in accordance with the Company's Stock Option
Plan. 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. Vierela is subject to a non-compete and
non-solicitation provision during the employment term and during a specified
Post-Employment Period.

On January 1, 2006, TSI entered into a new employment agreement with John
Youngbeck as Executive Vice President. 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. Youngbeck will receive an annual salary
of not less than $100,000. The agreement provides for standard benefits,
vacation and participation in the Company's bonus pool as defined in the
agreement. In addition, the Company shall issue to Employee options to purchase
shares of Company stock (Shares) in accordance with the Company's Stock Option
Plan. 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. Youngbeck is subject to a non-compete and
non-solicitation provision during the employment term and during a specified
Post-Employment Period.

On January 1, 2006, TSI entered into a new employment agreement with Michael
Lawson as Corporate Marketing Officer. 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. Lawson will receive an annual salary of
not less than $100,000. The agreement provides for standard benefits,
commissions of 2% of all gross sales less costs registered by the employee,
vacation and participation in the Company's bonus pool as defined in the
agreement. In addition, the Company shall issue to Employee options to purchase
shares of Company stock (Shares) in accordance with the Company's Stock Option
Plan. 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. Lawson is subject to a non-compete and
non-solicitation provision during the employment term and during a specified
Post-Employment Period.

On January 1, 2006, the Company entered into an hourly consulting agreement for
with Frank Lively. The consulting agreement provides for the cancellation of Mr.
Lively's prior employment agreement. Fees due under the consulting agreement are
convertible into Class A common shares of the Company by Mr. Lively at the
lesser of $0.30 per share or the closing price on the date of conversion.

On January 1, 2006, the Company entered into an hourly consulting agreement for
with Steve Johnson. Fees due under the consulting agreement are convertible into
Class A common shares of the Company by Mr. Johnson at the lesser of $0.30 per
share or the closing price on the date of conversion.

                                      -19-
<PAGE>

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

In January, 2006 the Company entered into a Strategic Consulting Agreement for
finance consulting services. The agreement calls for a minimum term of 90 days
and the payment of the equivalent of $120,000 of the Company's Class A common
stock at a 30% discount to the closing price and 150,000 warrants at a price to
be determined upon the close of a financing transaction as defined in the
agreement. The agreement was cancelled effective April 19, 2006 and the Company
issued an aggregate of 114,285 shares of Class A Common stock valued at $60,571
pursuant to the terms of a cancellation agreement. The warrants potentially
issuable in the agreement were not issued.

In February, 2006, the Company entered into an Investor Relations Agreement for
a term of one year to provide investor and shareholder relations services to the
Company. The agreement calls for a monthly retainer of $6,000 and the issuance
of warrants to purchase 600,000 shares of the Company's Class A common stock at
a strike price of $0.45 per share with a value of $419,760 on the date of grant
using the Black Scholes method. The warrants vest monthly over one year, with
50,000 warrants vesting at the signing of the agreement, subject to immediate
vesting of all remaining warrants should the retainer become 30 days past due.
The warrants expire 7 years after the anniversary date. The value of these
warrants will be recorded ratably over the vesting period of the warrants. The
Company has recognized compensation expense within general and administrative
expenses in the accompanying statement of operations for the period ended March
31, 2006 relative to the vested portion of the warrant in the amount of $66,144
and has recorded deferred compensation in the balance sheet as of March 31, 2006
in the amount of $353,616.

In March, 2006 the Company executed a Due Diligence Agreement with GreenHills
Ventures, LLC. ("GreenHills"). Under the agreement, the Company paid GreenHills
$10,750 plus expenses for GreenHills to perform due diligence on behalf of
potential investors as a due diligence fee. In addition, the Company agreed to
compensate GreenHills for any financing transaction (debt, equity, hybrid
security, merger and acquisition or other similar arrangement financing) with
any qualified purchaser as defined in the agreement. The compensation consists
of the payment of cash of 10% of the aggregate value of any equity or non-loan
financing and 7% of the value to be paid in Class A common stock of the Company.
In the event of a non-equity financing, the compensation consists of payment of
cash of 3% of the aggregate value of the transaction and 7% of the value to be
paid in Class A common stock of the Company.

The agreement calls for the payment of a breakup fee to be paid under certain
conditions as defined in the agreement of 2.5% of the first $5,000,000 of a
financing plus 1% of any amount greater than $5,000,000.

NOTE 9- SUBSEQUENT EVENTS

On April 17, 2006 the Company entered into agreements with Equipment Depot,
Inc., to acquire approximately $4,100,000, as valued, of aerospace R & D and
production equipment to further the fulfillment of the Company's anticipated
contracts and purchase orders. The transaction is expected to close upon the
completion of the financing, institution's due diligence and legal review. The
Company is paying approximately $2.7 million, in a combination of $700,000 in
cash and the exchange of 1,700,000 newly issued common stock of the Company,
valued at $1.00 a share for the purposes of the transactions, to complete the
purchase.

On April 20, 2006, the Company issued an aggregate of 223,333 shares of its
Class A common stock valued at $118,366 to vendors in exchange for services and
to settle existing obligations of the Company.

On April 20, 2006 the Company issued 55,000 shares upon the exercise of stock
options by David Barnes, its Chief Financial Officer at the exercise price of
$0.20 per share for an aggregate of $11,000.

                                      -20-
<PAGE>

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

On April 27, 2006 the "Company entered into an Agreement, (the "Agreement")
dated as of April 25, 2006, by and among the Company, Sierra Nevada Corporation
"Sierra" and TSI. The Agreement is intended to clarify the relationship and
obligations of the parties, which arise from three prior agreements (the
Exclusive Agreement to Provide Integration Services, dated June 30, 2004, the
Memorandum of Agreement dated November 4, 2004 and the Subcontract Agreement
dated May 11, 2005) which were entered into prior to Techsphere becoming a
wholly-owned subsidiary of the Company. The Agreement provides that SNC will
serve as the prime contractor to Government End-Users for all Techsphere
Airships and provided that Sierra will give Techsphere the right of first
refusal to lease or sell other non-Techsphere manufactured airships to Sierra on
competitive terms. The Agreement also is intended to arrive at an understanding
with respect to amounts claimed by Sierra as owed, which arose from certain
expenditures made by Sierra for which they are seeking reimbursement. The
Agreement provides that if all other conditions of the Agreement are fulfilled
that (i) Sierra will reduce its claim from $780,000 to $500,000; (ii) the
Company will within 90 days deliver four MAA-90 airship pods to Techsphere free
and clear of any liens and encumbrances and (iii) if a demonstration contract is
awarded and Techsphere delivers the completed MAA-90 airship to Sierra, Sierra
will set-off the $500,000 payment due from the Company. If the demonstration
contract is not awarded and Techsphere does not deliver to Sierra the completed
airship within 120 days of the date of award of the demonstration contract, the
Company's promissory note to Sierra will become due and payable in accordance
with its terms.

Pursuant to the Agreement, the company issued a note to Sierra dated April 25,
2006 in the amount of $500,000 which bears interest at the rate of 8.5%
beginning August 25, 2006 secured by the above referenced airship pods.

Pursuant to a letter of proposal with Tatonka Capital Corporation ("Tatonka")
dated April 28, 2006, Tatonka will provide construction and transaction
financing up to a total of $1,600,000 based on 80% of the acquisition cost for
equipment related to certain airships. The interest is 12% payable monthly plus
transaction and broker fees in the aggregate of 5% to be deducted from the
funding amounts as they occur. In addition, the Company will grant Tatonka
shares of Class A common stock equal to 1.3% of the common stock of the Company.
The proposal is subject to the completion of satisfactory due diligence, visits
to the Company's facilities and completion of acceptable documentation.

                                      -21-
<PAGE>

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
Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Form 10-QSB/A.

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.

RESULTS OF OPERATIONS

The Three Months Ended March 31, 2006 Compared to the Three Months Ended March
31, 2005

Revenues for the three months ended March 31, 2006 were $165,671. There were no
revenues for the comparable period in 2005.

Cost of revenues for the three months ended March 31, 2006 were $80,541 for
which no comparable prior year amount exists.

Research and development costs relative to the development of the Company's
airships and UAV's totaled $28,386 for the three months ended March 31, 2006 for
which no comparable prior year amount exists.

General and administrative expenses totaled $1,953,752 for the three months
ended March 31, 2006 as compared to $561,628 for the three months ended March
31, 2005, a net increase of $1,392,126. The increase is primarily due to
increases for 2006 in share based payment expenses of $389,571, and increases in
2006 related to depreciation and amortization of $311,797 as well as expenses
related to TSI of $628,679 for the three months ended March 31, 2006 for which
no comparable expenses exist for the three months ended March 31, 2005.

The three months ended March 31, 2005 included an impairment of goodwill in the
amount of $4,577,069 related to the acquisition of the 6.2% minority interest in
Cyber Aerospace, Inc. on March 31, 2005 for which no comparable expense exists
for the three months ended March 31, 2006.

Interest expense for the three months ended March 31, 2006 totaling $522,901
consists of interest expense of $226,487 related to various notes payable and
the accretion of discount of $296,414 on certain notes payable. Interest expense
for the three months ended March 31, 2005 of $552,450 is comprised of interest
expense of $35,450 on notes payable and $517,000 of interest expense pursuant to
the beneficial conversion feature of certain exchanges of debt to common stock.

                                      -22-
<PAGE>

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 $209,093 as of March 31, 2006 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.

Pursuant to such need, on March 15, 2006, the Company entered into a Securities
Purchase Agreement, whereby the Company agreed to issue and sell an aggregate of
$2,000,000 of 6% Callable Secured Convertible Notes and warrants to purchase
2,000,000 shares of common stock at a price of $1.25 per share for a total
offering price of $2,000,000. The $2,000,000 is to be funded in three tranches
of which $1,000,000 was funded on March 15, 2006, $500,000 upon filing the
Registration Statement and $500,000 upon effectiveness of the Registration
Statement. There can be no assurances that the Company's Registration Statement,
when and if filed will be declared effective by the Securities and Exchange
Commission.

On January 15, 2006 the Company issued an unsecured note in the amount of
$90,000 in exchange for cash of $82,000 and fees of $8,000. The note is due
December 31, 2007, is unsecured and bears interest at the rate of 12% and is
convertible into Class A common stock at $0.30 per share at any time. On April
21, 2006, the holder converted the note into 300,000 shares of the Company's
Class A common stock. The note contained a beneficial conversion feature that
will be recognized as a gain upon conversion of $840 in the quarter ending June
30, 2006. In addition, the derivative liability of $147,540 associated with the
note will be reclassified to additional paid in capital.

During the quarter ended March 31, 2006, Mr. Robinson advanced an additional
$70,744 to the Company and Mr. Frank Lively, a director of the Company advanced
an additional $13,056.

On April 17, 2006 the Company entered into agreements with Equipment Depot,
Inc., to acquire approximately $4,100,000, as valued, of aerospace R & D and
production equipment to further the fulfillment of the Company's anticipated
contracts and purchase orders. The transaction is expected to close upon the
completion of the financing, institution's due diligence and legal review. The
Company is paying approximately $2.7 million, in a combination of $700,000 in
cash and the exchange of 1,700,000 newly issued common stock of the Company,
valued at $1.00 a share for the purposes of the transactions, to complete the
purchase.

On April 19th, 2006, the Board approved a $1,000,000 line of credit with Mr.
Robinson. On April 19, 2006 pursuant to the line of Credit, the Company entered
into a convertible variable promissory note in the principal amount as of March
31, 2006 of $565,188 under the line of credit including all related accrued
interest. The note bears interest at the rate of 12% per annum, is unsecured and
is convertible into Class A common stock at $0.30 per share. The note is due on
December 31, 2007.

On April 19, 2006, the Board approved two convertible promissory notes for
amounts as of April 17th, 2006, of $83,726 and $13,056, respectively with Frank
Lively for cash advanced for working capital plus fees and interest. The notes
bear interest at the rate of 12% per annum, is unsecured and is convertible into
Class A common stock at $0.30 per share. The notes are due on December 31, 2007.

                                      -23-
<PAGE>

On April 21, 2006 Mayo Hadden converted $200,000 of his outstanding Convertible
Note into 666,667 shares of common stock at the conversion price of $0.30 per
share. There was no beneficial conversion feature relating to this note.

On April 21, 2006 the Company issued an aggregate of 964,443 shares to four
executive employees upon exercise of the conversion rights to Class A common
stock at a conversion price of $0.30 per share associated with Convertible Notes
in the aggregate amount of $289,333. The four executive employees converted an
aggregate of $139,419, Frank Lively converted his note representing deferred
salary in the amount of $49,914, and Mr. Robinson and Cherokee each converted
$50,000. Mr. Robinson's note contained a beneficial conversion feature and, as a
result of the conversion, the derivative liability associated with this portion
of the note of $81,517 will be reclassified in the quarter ending June 30, 2006
to additional paid in capital. The resultant loss upon conversion was
immaterial.

Pursuant to a letter of proposal dated April 28, 2006 with Tatonka Capital
Corporation, Tatonka will provide construction and transaction financing up to a
total of $1,600,000 based on 80% of the acquisition cost for equipment related
to certain airships. The interest rate is 12% payable monthly plus transaction
and broker fees in the aggregate of 5% to be deducted from the funding amounts
as they occur. In addition, the Company will grant Tatonka shares of Class A
common stock equal to 1.3% of the common stock of the Company. The proposal is
subject to the completion of satisfactory due diligence, visits to the Company's
facilities and completion of acceptable documentation.

The Company has a working capital financing agreement with Commerce Funding
Corporation (CFC) for secured financing of up to $3,000,000 for a two year term
ending March 31, 2007 unless earlier terminated. All borrowings under this
potential financing will 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 largest shareholder. 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 is Prime plus 1/2 %.
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.

The Company is in discussions with other potential lending sources, but there
can be no assurance that these discussions will be successful or that the
Company will obtain sufficient financing or that financing(s) will be structured
on agreeable terms.

Subject to the realization of certain financings as described above and the
financing available from Commerce Funding Corporation, if we generate eligible
receivables to finance, we should be in a position to fund the anticipated level
of operations for at least one year. However, there can be no assurances that
this will be the case. If the Company does not obtain such additional financing
the level of operations may have to be curtailed.

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.

                                      -24-
<PAGE>

Revenue Recognition

The Company recognizes service revenues when the services, as specified by the
customer and agreed to by the Company, have been performed and the customer
accepts the services, and the services are billed. Airship sales are recognized
when contract specifications are met, the price is determined, title passes to
the customer and the customer is billed. Reasonableness of collectibility of all
revenue transactions is a key element before the transactions are recorded.

Derivative Instruments

The Company does not hold or issue derivative instruments for trading purposes.
However, the Company has convertible notes payable that contain embedded
derivatives that require separate valuation from the convertible notes under
Emerging Issues Task Force Abstract (EITF) 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock." The Company recognizes these derivatives as liabilities in the
accompanying balance sheet and measures them at estimated fair value each
quarter, and recognizes changes in estimated fair value in the statement of
operations in the respective period. The Company has estimated the fair value of
these embedded derivatives using the Black-Scholes model.

Share Based Payments

In December 2004, the Financial Accounting Standards Board issued Statement
Number 123 ("FAS 123 (R)"), Share-Based Payments, which was adopted by the
Company on January 1, 2006. The Company recognizes compensation expense in an
amount equal to the fair value of share-based payments such as stock options
granted to employees. The Company has elected to apply FAS 123 (R) on a modified
prospective method. Under this method, the Company records compensation expense
as awards that were outstanding at the date of adoption continue to vest for the
unvested portion of the awards.

Accounting for Income Taxes

No income taxes have been paid or accrued because the Company had no net income
for the fiscal year ended December 31, 2005 or 2004. 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 tax
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.

Impairment of Investments

Long-lived assets are reviewed for impairment quarterly or when events or
changes in circumstances indicate that the carrying amount may not be
recoverable. 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.

                                      -25-
<PAGE>

Recent Accounting Pronouncements

In February 2006, the FASB issued Statement of Financial Accounting Standards
No. 155, "Accounting for Certain Hybrid Financial Instruments," referred to as
SFAS No. 155. This statement amends SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
155 permits fair value remeasurement for hybrid financial instruments that
contain embedded derivatives that would require separate accounting. In
addition, the statement establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain embedded
derivatives. SFAS No. 155 is effective for all financial instruments acquired or
issued beginning after an entity's fiscal year beginning on September 15, 2006
with earlier adoption permitted.

In March 2006, the FASB issued FASB Statement No. 156, which amends FASB
Statement No. 140. This Statement establishes, among other things, the
accounting for all separately recognized servicing assets and servicing
liabilities. This Statement amends Statement 140 to require that all separately
recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. This Statement permits, but does not require, the
subsequent measurement of separately recognized servicing assets and servicing
liabilities at fair value. An entity that uses derivative instruments to
mitigate the risks inherent in servicing assets and servicing liabilities is
required to account for those derivative instruments at fair value. Under this
Statement, an entity can elect subsequent fair value measurement to account for
its separately recognized servicing assets and servicing liabilities. By
electing that option, an entity may simplify its accounting because this
Statement permits income statement recognition of the potential offsetting
changes in fair value of those servicing assets and servicing liabilities and
derivative instruments in the same accounting period. This Statement is
effective for financial statements for fiscal years beginning after September
15, 2006. Earlier adoption of this Statement is permitted as of the beginning of
an entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. Management believes this Statement will have no
impact on the financial statements of the Company once adopted.

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

The Company's principal executive officer and principal 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.

                                      -26-
<PAGE>

                            PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES

On April 20, 2006 the Company issued an aggregate of 797,776 shares of its Class
A common stock pursuant to the conversion of certain convertible notes payable
to certain officers, directors and executive employees of the Company. In
addition, the Company issued 166,667 shares to Cherokee Raiders, LLP pursuant to
conversion of a portion of its note payable from the Company.

On April 20, 2006 the Company issued an aggregate of 966,667 shares of its Class
A common stock pursuant to the conversion of convertible notes from 2 unrelated
parties.

On April 20, 2006 the Company issued an aggregate of 337,617 shares of its Class
A common stock for services rendered by certain vendors of the Company and in
settlement of certain obligations of the Company.

On April 20, 2006 the Company issued 55,000 shares of its Class A common stock
upon the exercise of options by its Chief Financial Officer, David M. Barnes.

All securities described above were issued in reliance upon the exemption set
forth of Section 4(2) of the Securities Act of 1933.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

                                      -27-
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

All references to the Company's Forms 8-K include reference to File No.
333-46424.

4.18 Form of Stock Purchase Warrant dated March 14, 2006 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") (incorporated by reference to Exhibit 4.1 filed with the March 20,
2006 Form 8-K).

10.25 Form of Secured Convertible Note dated March 14, 2006 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") (incorporated by reference to Exhibit 10.1 filed with the March
20, 2006 Form 8-K).

10.26 Securities Purchase Agreement dated March 14, 2006 (without schedules) 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") (incorporated by reference to Exhibit 10.2 filed
with the March 20, 2006 Form 8-K).

10.27 Security Agreement dated March 14, 2006 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")
(incorporated by reference to Exhibit 10.3 filed with the March 20, 2006 Form
8-K).

10.28 Intellectual Property Security Agreement dated March 14, 2006 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") (incorporated by reference to Exhibit 10.4 filed
with the March 20, 2006 Form 8-K).

10.29 Registration Rights Agreement dated March 14, 2006 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") (incorporated by reference to Exhibit 10.4 filed with the March
20, 2006 Form 8-K).

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.


(b) - Reports of Form 8-K

The Company filed a Current Report on Form 8-K on February 1, 2006 regarding the
appointment of Mr. Michael Lawson and Mr. Keith Vierela as directors of the
Company.

The Company filed a Current Report on Form 8-K on March 20, 2006 regarding the
Securities Purchase Agreement dated as of March 14, 2006 with AJW Partners, LLC.
("Partners"), AJW Offshore, Ltd. ("Offshore"), AJW Qualified Partners
("Qualified") and New Millenium Capital Partners, II, LLC.

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<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities and 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.

                                        February 7, 2007


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

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


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