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 September 30, 2005

                        Commission File Number: 333-46424

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

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

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

                   Registrant's telephone number: 727-577-0878

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|

Indicate by check mark whether the registrant is an accelerated Filer (as
defined in Rule 12-b-2 of the Exchange Act). YES |_| NO |X|

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

             Title of Class                    Number of Shares Outstanding
      ----------------------------          ----------------------------------
      Class A Common Stock
      (par value $0.001 per share)          58,617,226 as of November 30, 2005
      Class B Common Stock
      (Par Value $0.001 per share)             545,455 as of November 30, 2005
      Class C Common Stock
      Par value $0.001 per share)                    2 as of November 30, 2005

The Registrant, by this Form 10-QSB/A amends the Form 10-QSB filed on December
5, 2005 including changes to the unaudited financial statements, the unaudited
notes thereto, signature pages and the certifications made by our CEO and CFO.
The remaining information in this Form 10-QSB/A has not been changed or updated
to reflect any changes in information that may have occurred subsequent to the
date of the reporting period that this Form 10-QSB/A relates.

<PAGE>

                                      INDEX

                                                                           Page
                                                                          Number
                                                                          ------
      PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of
   September 30, 2005 (unaudited) and December 31, 2004...................     1
Consolidated Statements of Operations for the
   Three Months Ended September 30, 2005 and 2004 (unaudited).............     2
Consolidated Statements of Operations for the
   Nine Months Ended September 30, 2005 and 2004 (unaudited)..............     3
Consolidated Statements of Cash Flows for the
   Nine Months Ended September 30, 2005 and 2004 (unaudited)..............   4-5
Notes to the Consolidated Financial Statements (unaudited)................  6-21

Item 2. Management's Discussion and Analysis of
           Financial Condition or Plan of Operations......................    22

Item 3. Controls and procedures...........................................    26

      PART II. OTHER INFORMATION

Item 1. Legal Proceedings ................................................    26

Item 2. Changes in Securities.............................................    26

Item 3. Defaults Upon Senior Securities...................................    27

Item 4. Submission of Matters to a Vote of Security Holders...............    27

Item 5. Other Information ................................................    27

Item 6. Exhibits and Reports on Form 8-K..................................    27

Signatures................................................................    28

<PAGE>

                           CYBER DEFENSE SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 September 30,2005   December 31, 2004
                                                                 -----------------   -----------------
                                                                    (Unaudited)
<S>                                                                <C>                  <C>
                              ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................     $     62,628         $   206,270
Accounts receivable ..........................................          366,235             747,155
Inventory ....................................................          560,144                  --
Prepaid expenses .............................................           51,080                  --
Prepaid interest .............................................          125,034                  --
                                                                   ------------         -----------
TOTAL CURRENT ASSETS .........................................        1,165,121             953,425

OTHER ASSETS
Restricted cash ..............................................           20,000                  --
Intangible assets, net of accumulated amortization
   of $52,779 and $99,291 respectively .......................           47,221             506,252
Property and equipment, net of accumulated
   depreciation of $4,153 and $29,513 respectively ...........           97,993               5,603
Deposits and costs of equipment ..............................          150,976             150,976
Deposits on airships .........................................               --           1,175,000

Exclusive manufacturing license - 21st Century airships,
   less accumulated amortization of $32,999 ..................       14,222,650                  --
Deferred loan origination costs, net of accumulated
   amortization of $206,845 and $15,292 respectively .........        1,363,981              12,849
Security deposits ............................................            7,371               7,156
                                                                   ------------         -----------
TOTAL ASSETS .................................................     $ 17,075,313         $ 2,811,261
                                                                   ============         ===========
                      LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable and accrued liabilities .....................     $  2,505,175         $ 1,319,772
Accounts payable related parties .............................           47,420             468,176
Assumed debt of subsidiary ...................................               --              33,337
Accrued interest .............................................          202,350                  --
Note payable - 21st Century Airships .........................          144,844                  --
Notes payable - related parties ..............................        1,105,186           1,137,768
Note payable - Quebec, Inc. ..................................               --             242,216
Deferred salaries ............................................          238,881                  --
Deferred revenue .............................................          458,328                  --
Notes payable ................................................        1,300,000                  --
Embedded derivative liability ................................       11,602,247                  --
                                                                   ------------         -----------
      TOTAL CURRENT LIABILITIES ..............................       17,604,431           3,201,269

LONG TERM LIABILITIES
Notes payable AJW Group - net of discount of $3,066,637 ......          371,063

Deferred taxes ...............................................        1,082,760                  --
                                                                   ------------         -----------
      Total liabilities ......................................       19,058,254           3,201,269
                                                                   ------------         -----------
Minority interest in Cyber Aerospace, Corp. (6.2%) ...........               --              26,581

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

SHAREHOLDERS' EQUITY (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; 56,204,893 and 25,921,562 shares issued
  and outstanding respectively ...............................           56,205              25,921
Class B, $0.001 par value; 200,000,000 shares authorized;
  545,455 and 150,000 shares issued and outstanding
  respectively ...............................................              545                 150
Class C, $0.001 par value; 200,000,000 shares authorized;
  2 shares issued and outstanding ............................               --                  --
Additional paid-in capital ...................................       14,351,905             461,762
Accumulated other comprehensive loss .........................           (7,064)             (7,064)
Accumulated deficit ..........................................      (16,384,532)           (897,358)
                                                                   ------------         -----------
Total shareholders' equity (deficit) .........................       (1,982,941)           (416,589)
                                                                   ------------         -----------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ......     $ 17,075,313         $ 2,811,261
                                                                   ============         ===========
</TABLE>

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


                                       -1-

<PAGE>

                           CYBER DEFENSE SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

                               THREE MONTHS ENDED
                                  SEPTEMBER 30,

                                            2005          2004
                                        -----------   -----------

Revenues ............................   $   114,873   $        --
                                        -----------   -----------

Cost of Sales .......................        88,032            --
                                        -----------   -----------
Gross profit ........................        26,841            --
                                        -----------   -----------
Expenses
General and administrative ..........     1,166,739       195,877
                                        -----------   -----------
Total expenses ......................     1,166,739       195,877
                                        -----------   -----------

Loss from Operations ................    (1,139,898)     (195,877)

Other Income (Expense)
Other income ........................        32,845            --
Interest income .....................        10,386         3,030
Interest expense ....................    (1,028,259)       (3,976)
Derivative valuation loss ...........      (176,862)           --
                                        -----------   -----------
Other Income (Expense), net .........    (1,161,890)         (946)
                                        -----------   -----------

Net Loss Before Income
   Tax and Minority Interest.........    (2,301,788)     (196,823)
                                        -----------   -----------

Provision for income tax ............     1,582,328            --
Minority interest ...................            --         5,865
                                        -----------   -----------
Net loss ............................   $  (719,460)  $  (190,958)
                                        ===========   ===========
Basic and diluted loss per share ....   $     (0.02)  $     (0.01)
                                        ===========   ===========
Weighted average number of Class A
   common shares outstanding ........    31,217,286    21,181,222
                                        ===========   ===========

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


                                       -2-

<PAGE>

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

                                NINE MONTHS ENDED
                                  SEPTEMBER 30,

                                             2005            2004
                                         ------------    ------------

Service Revenues .....................   $    180,638    $    315,000
Airship sales ........................             --       2,700,000
                                         ------------    ------------
                                              180,638       3,015,000
Expenses
Cost of Sales ........................        123,423       2,200,000
                                         ------------    ------------
Gross profit .........................         57,215         815,000
                                         ------------    ------------

General and administrative expenses ..      2,497,513         929,577
Research and development .............        543,191              --
Impairment of goodwill ...............      4,577,069              --
Write off of computer equipment ......             --          12,205
                                         ------------    ------------
Total expenses .......................      7,617,773         941,782
                                         ------------    ------------

Loss from Operations .................     (7,560,558)       (126,782)

Other Income (Expense)
Other Income .........................         32,845
Interest income ......................         20,627           8,581
Interest expense .....................     (1,889,344)        (22,269)
Derivative valuation loss ............     (7,673,072)             --
                                         ------------    ------------
Other Income (Expense), net ..........     (9,508,944)        (13,688)
                                         ------------    ------------
Net Loss Before Income
Tax and Minority Interest ............    (17,069,502)       (140,470)
                                         ------------    ------------

Provision for income tax .............      1,582,328              --
Minority interest ....................             --         (12,791)
                                         ------------    ------------
Net loss .............................   $(15,487,174)   $   (153,261)
                                         ------------    ------------

Basic and diluted loss per share .....   $      (0.54)   $      (0.01)
                                         ============    ============
Weighted average number of Class A
   common shares outstanding .........     28,432,121      19,560,407
                                         ============    ============

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


                                       -3-

<PAGE>

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

<TABLE>
<CAPTION>
                                                               NINE MONTHS ENDED
                                                                   SEPTEMBER 30,
                                                       -------------------------------
                                                            2005              2004
                                                       ------------        -----------
<S>                                                    <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss .........................................   $(15,487,174)       $  (153,261)
  Adjustments to reconcile net (loss) income
  To net cash from operating activities:
      Minority interest ...........................             --             12,791
      Interest expense from amortization of
          loan discount ...........................       1,450,363                 --
      Impairment of goodwill ......................       4,577,069                 --
      Issuance of stock for services ..............         338,750                 --
      Options issued to employees..................          10,800                 --
      Depreciation and amortization ...............         318,522             87,311
      Write-off of intangible assets ..............           5,543                 --
      Derivative valuation loss....................       7,673,072                 --
      Deferred tax benefit.........................      (1,582,328)                --
      Write-off of property and equipment .........              --             12,205
      Loss on currency adjustment .................              --               (524)
      Gain on sale of airship......................              --           (500,000)
   Changes in assets and liabilities
      Prepaid expenses ............................         (45,673)            (6,211)
      Prepaid interest.............................        (125,034)
      Restricted cash..............................         (20,000)           (36,422)
      Accounts receivable .........................         618,698                 --
      Inventory ...................................        (478,623)                --
      Security deposits ...........................            (215)                --
      Accounts payable and accrued liabilities ....        (377,272)           295,022
      Accounts payable - related party ............         (76,163)                --
      Deferred salaries............................          18,854                 --
      Deferred revenue.............................          (4,861)                --
                                                       ------------        -----------
NETCASH FROM OPERATING ACTIVITIES .................      (3,185,672)          (252,667)
                                                       ------------        -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Deposits and costs of equipment..................              --           (142,338)
  Increase in investment on E-City.................              --            (51,300)
  Loan to Techsphere ..............................      (1,074,362)                --
  Cash received in acquisition of Techsphere.......          25,010                 --
  Change in related party receivables/payables.....              --             65,225
  Purchases of equipment...........................         (12,000)                --
                                                       ------------        -----------
NET CASH FROM INVESTING ACTIVITIES ................     (1,061,352)          (164,805)
                                                       ------------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from notes payable .....................              --            332,216
  Gross Proceeds from sale of secured convertible
      Notes payable ...............................       4,000,000                 --
  Proceeds from notes payable, related parties ....         288,471            400,059
  Issuance of common stock ........................         255,209              5,218
  Payments of loan costs ..........................        (248,065)           (14,141)
  Principal payments on notes payable
    related parties ...............................         (53,740)           (20,800)
  Principal payments on notes payable..............        (105,156)           (90,000)
  Payments on debt assumed from subsidiary ........         (33,337)           (57,635)
                                                       ------------        -----------
NET CASH FROM FINANCING ACTIVITIES ................       4,103,382            554,917
                                                       ------------        -----------
Net (decrease) increase in cash ...................        (143,642)           137,445
Cash and cash equivalents, beginning ..............         206,270                319
                                                       ------------        -----------
Cash and cash equivalents, ending .................     $    62,628         $  137,764
                                                       ============        ===========
</TABLE>


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

                                       -4-


<PAGE>

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

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

Cash paid for interest                                                     $  109,333       $    3,105
Cash paid for income taxes                                                         --               --

Supplemental disclosure of non-cash investing and financing information:
Partial payment of purchase cost of a license
   with a note payable                                                        250,000
Payment of note payable by Mr. Robinson                                       288,177               --
Conversion of notes payable into common stock                               1,479,300               --
Issued stock for debt                                                                          400,425
Deposits on inventory purchased with debt                                                      675,000
Plans and designs purchased with debt                                                          100,000
Conversion of accounts payable - related party
  to a long-term note payable                                                 350,000               --
Issuance of warrants for discount on notes
 and loan costs                                                            12,150,732               --
Common Stock issued for loan costs                                            200,000               --
Common Stock issued for shares of Cyber Aerospace                           4,603,650               --
Common stock issued for Techsphere                                          5,316,904               --
Retirement of fully depreciated assets                                             --           31,091
                                                                           ----------       ----------
</TABLE>

The accompanying notes are an integral part of these financial statements


                                       -5-

<PAGE>

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

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization, Acquisitions and Mergers and Controlling 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 is the
successor to E-City and its shares of class A common stock began trading on the
Over the Counter Bulletin Board ("OTC:BB") under the symbol CYDF on September 7,
2004. Due to the nature of the mergers, the fiscal year end of the Registrant
was changed to December 31 effective for Fiscal 2003 and the historical
financial statements of the Registrant are 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 also include the results of
operations of E-City from its date of merger, September 1, 2004. Cyber Aerospace
was merged with and into Cyber Defense effective March 31, 2005. In addition, on
September 19, 2005, the Company acquired Techsphere Systems International, Inc.
("TSI") for 23,076,923 Class A common shares and 245,455 Class B common shares
(see Note 5).

The major and controlling shareholders of the company are the selling
shareholders of TSI; Proxity, Inc. ("Proxity"), a publicly traded company
("PRXT") and Cherokee Raiders, LP a Limited partnership, ("Cherokee") owning
39.4%, 31.1% and 16.6% of the Class A common shares of the Registrant
respectively as at November 30, 2005. In addition, the selling shareholders of
TSI also own 245,455 or 45.0%, 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 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 Registrant. As a
result of the above, Cherokee is the controlling shareholder of the Company.

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

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

Condensed Interim Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of Cyber Defense, and its
TSI wholly owned subsidiary from its date of acquisition on September 19, 2005,
(collectively the "Company"). These financial statements are condensed and,
therefore, do not include all disclosures normally required by accounting
principles generally accepted in the United States of America. In the opinion of
management, all adjustments necessary for a fair presentation have been included
in the accompanying condensed consolidated financial statements and consist of
only normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements are not necessarily
indicative of the results that may be expected for the full year ending December
31, 2005 and such financial statements should be read in conjunction with the
Company's Form 10-KSB/A for the year ended December 31, 2004 and other filings
made with the Securities Exchange Commission.


                                       -6-

<PAGE>

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

Consolidation - The accompanying consolidated financial statements include the
accounts and transactions of Cyber Defense Systems, Inc. for all periods
presented and the accounts and transactions of its TSI wholly owned subsidiary
from the date of its acquisition on September 19, 2005. Intercompany accounts
and transactions have been eliminated in consolidation. At December 31, 2004,
the minority interest of $26,581 shown on the balance sheet represents the
shareholdings of stockholders of Cyber Aerospace other than Cyber Defense, of
approximately 6.2% multiplied by the then cumulative net income of the Cyber
Aerospace subsidiary. The acquisition of the minority interest by the Company
was effective as of March 31, 2005 and such minority interest was therefore
eliminated at that date (see Note 4).

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.

Managements 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. As shown
in the financial statements for the nine months ended September 30, 2005, the
Company recorded minimal revenue and incurred a net loss of $15,487,174
including a charge for impairment of goodwill in the amount of $4,577,069 and a
derivative valuation loss in the amount of $7,673,072 and for the year ended
December 31, 2004, the Company recorded revenues of $3,026,287, but incurred a
net loss of $420,653. The lack of sufficient revenues and the loss from
operations raise substantial doubt about the Company's ability to continue as a
going concern for a reasonable period of time. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded assets or the amount and classification of liabilities which might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flows to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitable operations (see Notes 11 and 13).

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 September 30, 2005 and December 31,
2004 the Company had $0 and $106,270 respectively, in excess of federally
insured limits.

Inventory -- At September 30, 2005, inventory of $560,144 primarily consists of
work in process on the CyberBug and CyberScout smaller Unmanned Air Vehicles
("UAV's") and the new propulsion system for the larger UAV's as well as parts
and raw materials for the airships that Cyber and TSI build, sell and service.
The inventories are valued at the lower of average cost or market.

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


                                       -7-

<PAGE>

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

Long-lived assets are reviewed for recoverability whenever events or changes in
circumstances indicate that it may be impaired and its 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.
Based on the evaluation at March 31, 2004, an impairment of $12,205 for a
reduction in the value of certain computer equipment was recorded for the three
month period then ended and based on a valuation at March 31, 2005 goodwill of
$4,577,069 was impaired.

Certain marketing rights, designs and plans which have been acquired by the
Company, which are more fully described in Note 6, have not been impaired. The
Company concluded, based on industry sales forecasts and internally generated
sales and cash forecasts, that the cost of these assets was likely to be
recoverable in full.

Manufacturing License -- The Company acquired an exclusive manufacturing license
valued at $14,255,649 with the acquisition of TSI in September, 2005 as
described in Note 5. Amortization over the contractual useful life of the
license of 18 years totaled $32,999 as of September 30, 2005. 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 September 30, 2005.

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.

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

Earnings (Loss) Per Share -- Basic (loss) or earnings per share is calculated by
dividing the loss or income available to Class A common shareholders by the
weighted-average number of Class A common shares outstanding during each period.
Fully diluted loss per share for the three and nine months ended September 30,
2005 and 2004 is anti-dilutive due to net losses incurred by the Company. At
September 30, 2005, potentially dilutive securities total 28,461,408 shares and
include 11,379,900 Class A common shares subject to stock options issued on
September 19, 2005 under the 2005 Option Plan, 4,400,000 Class A common shares
issuable upon exercise of warrants and 10,577,513 Class A common shares issuable
upon conversion of the Notes issued in connection with the financing received
from AJW Partners, LLP and affiliates as discussed in Note 11 and 2,103,695
Class A common shares issuable upon the conversion of a related party note
payable to Cherokee. At September 30, 2004, potentially dilutive securities
include 88,000 shares subject to a stock option held by All- Stars Marketing
since August 9, 2004.

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.


                                       -8-

<PAGE>

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

Recent accounting pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. This new standard eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees (APB 25) and requires such transactions
to be accounted for using a fair-valued-based method, with the resulting cost
recognized in the Company's financial statements. This new standard is effective
for annual periods beginning after June 15, 2005. The Company has
awarded/granted share-based compensation during the three months ended September
30, 2005 which was accounted for under APB 25. The adoption of this standard
effective January 1, 2006 is expected to have an effect on the Company's
financial position or results of operations dependent upon the amount of
share-based compensation that is awarded or granted.

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

In May 2005, FASB issued FASB Statement 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("
FAS 154"). FAS 154 changes the requirements for the accounting for and reporting
of a change in accounting principle. The provisions of FAS 154 require, unless
impracticable, retrospective application to prior periods' financial statements
of (1) all voluntary changes in principles and (2) changes required by a new
accounting pronouncement, if a specific transition is not provided. FAS 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate, which requires prospective application of the new method. FAS 154 is
effective for all accounting changes made in fiscal years beginning after
December 15, 2005.

In June 2005, the FASB Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 05-6, "Determining the Amortization Period for Leasehold
Improvements." The guidance requires that leasehold improvements acquired in a
business combination or purchased subsequent to the inception of a lease be
amortized over the lesser of the useful life of the assets or a term that
includes renewals that are reasonably assured at the date of the business
combination or purchase. The guidance is effective for periods beginning after
June 29, 2005. The adoption of EITF No. 05-6 is not expected to have a material
effect on the Company's financial position or results of operations.


                                       -9-

<PAGE>

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

NOTE 2 - RESTATEMENT

Certain adjustments that were made at year end during the audit of the financial
statements at December 31, 2005 pertain to the quarter ended September 30, 2005
and as such, the financial statements have been restated to reflect said
adjustments described in the following paragraphs.

The Company recorded an adjustment to reduce inventories in the amount of
$543,191 to record costs of obtaining a prototype propulsion system for its
airships. The cost was treated as research and development expense.

The Company recorded additional loan cost and related amortization expense
pursuant to the Securities Purchase Agreement with AJW et al in the amount of
$36,910 and $84,569, respectively.

The treatment of the April 1, 2005 financing pursuant to the Securities Purchase
Agreement as of that date with AJW et al as described in Note 11 has been
restated to conform to our accounting treatment at December 31, 2005 of the
derivative Notes and warrants 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." This resulted in a derivative
valuation loss in the amount of $7,673,072 and an embedded derivative liability
recorded in the amount of $11,602,247. Also recorded as a result of this
treatment are additional discounts related to the Notes issued to AJW et al in
the amount of $449,331 and additional interest expense of $2,066.

The Company reclassified $1,105,186 of Notes Payable - related parties from long
term to current due to acceleration clauses contained in the note documentation.

The purchase accounting relative to the acquisition of TSI on September 19, 2005
was revised to reflect deferred taxes arising from the difference between the
book and tax basis of the manufacturing license with 21st Century Airships (21C)
in the amount of $2,665,088 and accrued royalties pursuant to minimum royalties
stipulated in the Company's agreement with 21C in the amount of $673,397. These
adjustments resulted in the reallocation of the purchase price among the value
of the license and property and equipment acquired in the amounts of $3,316,424
and $22,061, respectively.

With the change to the value of the manufacturing license with 21st Century
Airships as discussed above, amortization on the license was recorded from the
date of acquisition through September 30, 2005 in the amount of $32,999 in
accordance with the license's eighteen year life. Additional royalties pursuant
to the license were recorded in the amount of $33,000.

The exclusive marketing rights previously acquired from TSI were eliminated in
the consolidation of TSI with the Company.

The Company recognized a deferred tax benefit in the amount of $1,582,328 for
the nine months ended September 30, 2005.


                                      -10-

<PAGE>

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

The changes to the financial statements resulting from the restatement for the
nine months ended September 30, 2005 are shown below:

<TABLE>
<CAPTION>
                                                      As Originally    Effect of
                                                         Reported     Restatement    As Restated
                                                      -------------   ----------     -----------
<S>                                                    <C>            <C>            <C>
For the nine months ended September 30, 2005
Balance Sheet
   Inventory                                           $ 1,103,335    $  (543,191)   $   560,144
   Current Assets                                        1,708,312       (543,191)     1,165,121
   Intangible assets                                       418,754       (371,533)        47,221
   Property and equipment                                   75,932         22,061         97,993
   Exclusive manufacturing license, 21st Century
    Airships                                            10,939,225      3,283,425     14,222,650
   Deferred loan origination costs                       1,411,640        (47,659)     1,363,981
   Total Assets                                         14,732,210      2,343,103     17,075,313
   Accounts payable and accrued liabilities              1,498,778      1,006,397      2,505,175
   Accrued interest                                        502,350       (300,000)       202,350
   Deferred revenue                                        829,861       (371,533)       458,328
   Derivative liability                                       --       11,602,247     11,602,247
   Total Current Liabilities                             5,667,320     11,937,111     17,604,431
   Notes Payable AJW Group                                 820,394       (449,331)       371,063
   Deferred taxes                                            --         1,082,760      1,082,760
   Total Liabilities                                     6,487,714     12,570,540     19,058,254
   Additional paid in capital                           17,792,773     (3,440,868)    14,351,905
   Accumulated Deficit                                  (9,597,963)    (6,786,569)   (16,384,532)
   Total Shareholder's Deficit                           8,244,496)   (10,227,437)    (1,982,941)
   Total Liabilities and Shareholder's Deficit          14,732,210      2,343,103     17,075,313

Statement of Operations
   General and administrative expenses                   2,346,945        150,568      2,497,513
   Research & development expenses                           --           543,191        543,191
   Total Expenses                                        6,924,014        693,759      7,617,773
   Interest expense                                     (1,887,278)        (2,066)    (1,889,344)
   Derivative valuation loss                                 --        (7,673,072)    (7,673,072)
   Total other income (expense), net                    (1,833,806)    (7,675,138)    (9,508,944)
   Net Loss Before Income Tax and Minority Interest     (8,700,605)    (8,368,897)   (17,069,502)
   Provision for income tax                                  --         1,582,328      1,582,328
   Net Loss                                             (8,700,605)    (6,786,569)   (15,487,174)
   Basic loss per share                                      (0.31)         (0.23)         (0.54)
</TABLE>

NOTE 3 - RELATED PARTY TRANSACTIONS

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

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

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


                                      -11-

<PAGE>

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

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 (see Note 3).

Cherokee Raiders - Cherokee's general partner is William C. Robinson. Cherokee
and Mr. Robinson also own control positions with proxies in Proxity. As of
December 31, 2004, the Company had a note payable to Cherokee of $927,768. As of
September 30, 2005, the Company had a note payable to Cherokee in the amount of
$429,739 primarily due to a reduction in debt due to Cherokee pursuant to
Cherokee's conversion of $600,000 of such debt into Class A common shares at the
rate of $0.20 per share in September 2005. 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 has ownership in Proxity and Cherokee
Raiders. He is also the CEO of the Company. As of September 30, 2005, the
Company had a Note payable to Mr. Robinson in the amount of $282,847 which is
due July 31, 2008 or upon the financing of at least $1,000,000 in gross
proceeds. Subsequent to September 30, 2005 Mr. Robinson loaned an additional
$81,060 to the Company which is payable on July 31, 2008 or upon a financing of
a minimum of $500,000 in gross proceeds.

Frank Lively - Mr. Lively, an officer and director of Techsphere and a director
of the Company, loaned the Company an aggregate of $71,515 subsequent to
September 30, 2005. The interest rate on the loan is 12 % and it is due in full
on December 15, 2005.

NOTE 4 - ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY

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

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


                                      -12-

<PAGE>

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

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

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

The assets acquired and liabilities assumed were as follows:

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

Liabilities Assumed
Accounts payable & accrued expenses                                   $   14,168
Notes payable - related parties                                            2,236
                                                                      ----------
Total Liabilities Assumed                                                 16,404
                                                                      ----------
Net Assets Acquired                                                   $4,603,650
                                                                      ----------

NOTE 5 - ACQUISITION OF TECHSPHERE SYSTEMS INTERNATIONAL, INC. ("TSI")

On September 19, 2005, Cyber Defense Systems, Inc. acquired 100% of the 100,000
common shares of the outstanding stock of TSI in exchange for 23,076,923 shares
of Cyber Class A common stock valued at $5,281,244 and 245,455 shares of Cyber
Class B common stock valued at $58,982 resulting in a total value of $5,340,226.
The value was determined by using average of the previous 30 days closing prices
as discounted for the potential non-marketability of the stock due to the number
of shares and the trading volume. TSI became a wholly owned subsidiary of Cyber.
TSI is a manufacturer of low, medium and high altitude commercial airships and
was acquired to expand the Company's product offerings. The transaction was
accounted for as a purchase business combination in accordance with FAS 141,
"Business Combinations". An independent valuation was obtained for both the
Cyber stock and TSI's exclusive manufacturing license. The valuation obtained
for the consideration given (Cyber stock) was used for valuation purposes of the
transaction. In connection with the acquisition by Cyber, TSI underwent a
reorganization intended to qualify as a reorganization within the meaning of
Section 368(a)(1)(A) and (a)(1)(D) of the Internal Revenue Code of 1986, as
amended resulting in TSI becoming a regular corporation from a limited liability
corporation. The 100,000 shares of TSI stock were then exchanged for the Cyber
stock mentioned above. Negative goodwill was not recognized in connection with
the acquisition of Techsphere. Instead, the excess of the fair value of the net
assets over the purchase price was allocated as a pro rata reduction of the
amounts that otherwise would have been assigned to the long-term assets. The
results of operations of TSI are included in the income statement since the date
of acquisition of September 19, 2005.


                                      -13-

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

At September 19, 2005, the purchase price was allocated to the assets acquired
and the liabilities assumed as follows:

Assets Acquired
Cash                                                                  $  25,010
Accounts receivable                                                     236,028
Miscellaneous receivable                                                  1,750
Inventory                                                                81,521
Prepaid expenses                                                          5,407
Property, plant & equipment                                              82,405
21st Century manufacturing license                                   14,255,649
Liabilities assumed                                                  (6,682,456)
Deferred tax liability                                               (2,665,088)
                                                                     -----------
Net Assets Acquired                                                  $5,340,226
                                                                     -----------

The 21st Century manufacturing license acquired in the transaction has a
contractual life of 18 years, and will be amortized using the straight line
method. Amortization expense related to the license for the period from
September 19, 2005 to September 30, 2005 totaled $32,999. It is anticipated by
the Company that the aggregate value that will be deductible for income tax
purposes will be $2,664,851 amortized over the 18 year life of the license.

The following pro-forma combined condensed statements of operations present what
such results of operations would have been had the acquisition of Techsphere
been consummated on January 1, 2004.


<TABLE>
<CAPTION>
                                      Year ended December 31, 2004
                        -------------------------------------------------------
                        Techsphere    Cyber Defense   Adjustments     Combined
                        -----------   ------------    -----------   -----------
<S>                     <C>           <C>             <C>           <C>
Revenues                $ 2,618,844   $3,026,287(a)    (2,200,000)  $ 3,445,131
Expenses
Cost of Sales             2,036,369    2,200,000(a)    (2,200,000)    2,036,369
General &
   administrative         1,889,959    1,090,153(b)       600,306     3,580,418
Research &
   Development                   --           --               --            --
Impairment of
   Goodwill                      --           --               --            --
                        -----------   ----------      -----------   -----------
Total expenses            3,926,328    3,290,153(a)    (1,599,694)    5,616,787
Loss from
Operations               (1,307,484)    (263,866)        (600,306)   (2,171,656)
Other income
   (expense)               (359,554)    (156,787)              --      (516,341)
Net loss                $(1,667,038)  $ (420,653)     $  (600,306)  $(2,687,997)
                        -----------   ----------      -----------   -----------
Loss per share:
Basic and diluted                                                   $     (0.06)
                                                                    -----------
Weighted average
   shares outstanding                                                44,202,099

<CAPTION>
                                    Nine Months Ended September 30, 2005
                        ----------------------------------------------------------
                         Techsphere   Cyber Defense      Adjustments     Combined
                        ------------  -------------      -----------   -----------
<S>                     <C>           <C>             <C>           <C>
Revenues                $ 1,948,120   $    98,008(c)     $ (128,647)   $ 1,917,661
Expenses
Cost of Sales             1,819,207        49,004                --      1,868,211
General &
   administrative         1,550,717     2,375,925(b)(c)     315,425      4,169,561
Research &
   Development                   --       543,191                --        543,191
Impairment of
   Goodwill                      --     4,577,069                --      4,577,069
                        -----------   -----------        ----------    -----------
Total expenses            3,369,924     7,545,189           315,425     11,230,538
Loss from
Operations               (1,421,804)   (7,447,181)         (443,892)    (9,312,877)
Other income
   (expense)               (250,342)     (195,104)               --       (445,446)
Net loss                $(1,672,146)  $(8,636,225)         (443,892)   $(9,758,323)
                        -----------   -----------        ----------    -----------
Loss per share:
Basic and diluted                                                      $    (0.19)
                                                                       -----------
Weighted average
   shares outstanding                                                   50,568,874
</TABLE>

(a)  - Eliminates intercompany sales and cost of sales for the purchase and sale
     of an airship.

(b)  - Includes the adjustment for amortization of the value of the license with
     21st Century Airships, Inc. as if the transaction had occurred as of
     January 1, 2004

(c)  - eliminate the inter-company transaction related to the sale of the
     license for marketing and integration rights of Airships by Techsphere to
     Cyber


                                      -14-

<PAGE>

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

NOTE 6 - INTANGIBLE ASSETS

As discussed in Note 3, the Company acquired an exclusive, worldwide license for
the manufacture of its airships with 21st Century Airships, Inc. with the
acquisition of TSI. The value recorded for the license was $14,255,649. The cost
is being amortized over the life of the license of 18 years, resulting in
monthly amortization of $65,998. Accumulated amortization and amortization
expense as of September 30, 2005 and 2004 was $32,999 and $0, respectively. The
agreement calls for 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 agreement calls for a minimum royalty payment of $1,000,000 for the period
of January 17, 2005 through January 16, 2006. The Company has accrued $706,397
related to this royalty in the balance sheet as of September 30, 2005.

During 2004, the Company purchased exclusive marketing rights from TSI. These
rights were recorded at their cost of $500,000 because TSI was then a
non-related party. These marketing rights are being amortized over six years,
which is the life of the contract and the monthly amortization expense is
$6,944. The exclusive marketing rights have been eliminated in consolidation due
to the acquisition of TSI on September 19, 2005. In addition, the Company also
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
$2,777. Total amortization expense of the intangible assets was $87,498 for the
nine months ended September 30, 2005.

NOTE 7 - NOTE PAYABLE - QUEBEC

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

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


                                      -15-

<PAGE>

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

NOTE 8 - NOTES PAYABLE

<TABLE>
<CAPTION>
                                                                                       September 30,     December 31,
                                                                                            2005            2004
                                                                                       -----------     --------------
<S>                                                                                     <C>              <C>
Current - Related Parties
Note payable - Jim Alman - interest accrues at 8% per annum due December 31, 2008           50,000               --
Notes payable - Billy Robinson - interest accrues at 12% per annum, due on
      July 31, 2008, unsecured......................................................       282,847               --
Notes payable - Proxity Inc. - bearing interest at 12 % per annum
      unsecured and due July 31, 2008 ..............................................    $  351,600               --
Notes payable - Cherokee Raiders - bearing interest at 12% per annum
      and due July 31, 2008.........................................................       420,739               --
Note payable - Joe Theisman - interest accrues at 18%
      per annum, due April 30 through September 30, 2005,
      in equal monthly installments, unsecured. This note
      was converted to common stock on March 31, 2005 ..............................     $      --       $  110,000
Note payable - Cherokee Raiders - interest accrues at 12%
      per annum, due on demand and is unsecured ....................................            --           58,993
Note payable - Cherokee Raiders - interest accrues at 12%
      per annum, due November 30, 2005 and is unsecured ............................            --          868,775
Note payable - Jim Alman - interest accrues at 8% per
      annum, due December 5, 2005 ..................................................           --          100,000
                                                                                       -----------       ----------
                                                                                        $1,105,186       $1,137,768
                                                                                       -----------       ----------
Current - Other
Note payable - Quebec, Inc. - interest accrued at 24% and the note was due as
      soon as the securities held as collateral could be sold. Sufficient sales of
      the collateral took place by September 30, 2005 to pay the entire total amount
      due for principal and accrued interest........................................            --          242,216
Note payable - 21st Century Airship, Inc. - interest accrues at 12%
      per annum. The Note was due on August 24, 2005 and is in default
      with a remaining balance due of $144,000 as at November 28,2005.... ..........     $  144,844
                                                                                       -----------
Note payable - Biff Hadden - interest accrues at 12 1/2 % per annum
      and is due December 31, 2005..................................................       250,000               --
Note payable - C.M.G. Tech. - interest accrues at 10 % per annum
      and is due December 31, 2005..................................................       800,000               --
Note payable - Charles McClure - interest accrues at 12 1/2 % per annum
      and is due December 31, 2005..................................................       250,000               --
                                                                                       -----------      -----------
                                                                                       $ 1,300,000
                                                                                       -----------
Long-term - Other
Notes payable - AJW Partners, LLP and affiliates, callable secured convertible
      notes bearing interest at 8% per annum, $937,700 due April 4, 2008;
      $1,300,000 due May 25, 2008 and $1,200,000 due August 4, 2008
      less total discount of $3,066,637 ............................................    $  371,063       $       --
                                                                                       -----------       ----------
                                                                                       $   371,063       $       --
                                                                                       -----------      -----------
</TABLE>


                                      -16-

<PAGE>

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

The Notes payable to Mr. Alman, Mr. Robinson, Cherokee and Proxity have
acceleration provisions that provide for prepayments of principal if certain
minimum amounts of financing of more than $1,000,000 are obtained and 73,553 and
25,000 shares of Company common stock were issued to Cherokee and Proxity
respectively as additional consideration for the maturity date extensions (see
Note 12). Cherokee had conversion rights on the entire debt and in September,
2005 converted a $600,000 portion of the debt to Class A common shares at the
rate of $0.20 per share and received 3,000,000 Class A common shares.

During the three months ended September 30, 2005, Mr. Robinson loaned additional
monies to the Company by paying in full all remaining principal, interest and
fees of $161,555 that was due to Quebec and as a result, his Note was amended to
reflect a total due to him of $286,847. As additional consideration, the Company
also agreed to issue stock equal in value to 10% of the outstanding balance of
his Note with 20,465 shares of its Class A common stock (see Note 12).

The Note payable to 21st Century is in payment of the balance of the license fee
for Techsphere. The Company loaned Techsphere $1,000,000 which was paid to 21st
Century and the total license fee was $3,000,000. The Company intends to pay off
the balance of $144,844 from the current expected financing (see Note 14), and
in the absence of such financing, Mr. Robinson has agreed to lend the Company
sufficient funds to pay the balance due in full.

NOTE 9 - STOCKHOLDERS' DEFICIT

Common Stock - At September 30, 2005, the Company had 56,204,893 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 each of Class A,
B and C authorized with a par value of $0.001. In addition, the Company had
100,000,000 shares of Class A Preferred Stock authorized, par value $0.001, with
no shares issued and outstanding. The Company had $14,351,905 in additional paid
in capital and an accumulated deficit of $16,384,532 of which $4,577,069
represented a charge at March 31, 2005 for impairment of goodwill that arose
from the acquisition of the remaining minority interest in Cyber Aerospace and
$7,673,072 represents a derivative valuation loss related to the derivative
securities issued in conjunction with the Notes to AJW Group as discussed below
in Note 10. Class B Common Stock allows for 1000 votes per share. Class C Common
Stock allows for one vote per share and entitles the holder to receive the net
assets of the Company upon dissolution. At December 31, 2004, the Company had
25,921,562 shares of Class A common stock, 150,000 shares of Class B Common
Stock issued and outstanding and 2 shares of Class C common stock issued and
outstanding with 200,000,000 shares of each of Class A, Class B and Class C
Common Stock authorized, par value $.001.

NOTE 10 - INCOME TAXES

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

NOTE 11 - WORKING CAPITAL FINANCINGS

On February 16, 2005 the Company and Commerce Funding Corporation ("CFC")
executed a Working Capital Financing Proposal relative to a potential secured
financing of up to $3,000,000 for a two year term. All borrowings under this
potential financing would be collateralized by a first security UCC-1 filing on
all assets related to accounts receivable and a Cross Corporate Guaranty by
Proxity, Inc., one of the Company's major shareholders. In addition, CFC
requires a Limited Guaranty of certain provisions in the loan agreement by the
Company's Chief Executive Officer. The interest rate on borrowings would be
Prime, as quoted in the Wall Street Journal, plus 1/2 % and there will be a one
time facility fee of 1% of the total credit line payable out of the first
funding. In addition, all borrowings are subject to eligibility as defined and
determined by CFC and the advance rate on eligible receivables, as defined, is
90% for direct Government accounts and 80% for Commercial Accounts. Closing of
this transaction is subject to acceptable documentation, due diligence by CFC
and other terms which are to be negotiated amongst the parties. In late November
2005, the Company and CFC began discussions about lease financing for potential
commercial clients interested in leasing the Techsphere SA 60 Mid Altitude
Airship.


                                      -17-

<PAGE>

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

On April 1, 2005, the Company entered into a Securities Purchase agreement with
AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, and New
Millennium Capital Partners II, LLC ("AJW") to issue up to $4,000,000 of 8%
Callable Secured Convertible Notes (the "Notes") with warrants to purchase
4,000,000 shares of common stock at $4.25 per share (the "Warrants") for a total
offering price of $4 million. Between April and August, 2005, under the terms of
the agreement, the Company issued the Notes and the Warrants. The Company
incurred $1,575,453 in fees as part of the offering which consisted of cash
payments of $270,833, as well as issuing 61,538 shares of common stock valued at
$200,000 and warrants to purchase 400,000 shares of common stock at $4.25 per
share valued at $1,104,620. Each Note entitles the holder to convert the Note
into the number of shares of common stock resulting from dividing the amount of
the Note to be converted by the conversion price. The conversion price is the
lesser of $3.65 or 60% 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 and the exercise price are subject
to equitable adjustment in connection with a stock split, stock dividend or
similar transaction. The Warrants have a term of five years from the date of
issuance. In connection with that 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 described above contain embedded derivatives in the form of the
Warrants and the beneficial conversion feature. The Warrants were valued at
$11,046,200 on the dates of issuance. The beneficial conversion feature was
valued at $7,313,576.

The carrying value of these Notes as of September 30, 2005 was $371,063 net of
discount. The carrying value will be increased each quarter over the three year
period as the accretion related to the embedded derivatives is recorded until
the carrying value equals the face value of $4,000,000. As of September 30,
2005, the derivative instruments had a fair value of $11,602,047.

On August 10, 2005, AJW converted $500,000 of the Notes for 500,000 Shares of
Class A common stock of the Company and through September 30, 2005 an additional
$62,300 was converted into 700,000 shares of class A common stock. On October 4,
2005 an additional $6,867 was converted into 58,000 shares of Class A common
stock and on October 20, 2005 an additional $13,350 was converted into 150,000
shares of Class A Common Stock. Such conversions were made at a 40% discount to
market pursuant to the terms of the Secured Convertible Note agreements.

Affiliated Business Services, Inc. ("ABS") earned a finders fee of $ 200,000 in
cash and 61,538 shares of Class A common stock valued at $200,000, for
introducing the Company to the lending group. The total fee of $400,000 is being
amortized over the three year life of the loan. In addition, ABS was issued
warrants to purchase an aggregate of 400,000 shares of Class A common stock at a
strike price of $4.25 and a life of five years. Warrants to purchase an
aggregate of 400,000 shares of class A common stock were granted with a value of
$1,104,660. The value of the warrants will be amortized over the three year life
of the loan.

The proceeds of the offering will be used to repay certain indebtedness and for
working capital.


                                      -18-

<PAGE>

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

NOTE 12 - COMMITMENTS AND CONTINGENCIES

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

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

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

On September 19, 2005, TSI entered into an employment agreement with Keith
Vierela as Chief Operating Officer effective October 1, 2005. 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 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 September 19, 2005, TSI entered into an employment agreement with John
Youngbeck as Executive Vice President effective October 1, 2005. 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 $135,000. 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 September 19, 2005, TSI entered into an employment agreement with Frank
Lively as Secretary and Chief Financial Officer effective October 1, 2005. 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.
Lively will receive an annual salary of not less than $65,000. 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.
Lively is subject to a non-compete and non-solicitation provision during the
employment term and during a specified Post-Employment Period.


                                      -19-

<PAGE>

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

On September 19, 2005, TSI entered into an employment agreement with Michael
Lawson as President effective October 1, 2005. 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 $150,000. 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.

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

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

NOTE 13 - OTHER EVENTS

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

On August 12, 2005 Cherokee and Proxity agreed to extend the maturity date of
their loans to the Company to July 31, 2008. The new Notes provide for
prepayment in the event of certain amounts of capital or financing being
obtained. As additional consideration for extending the due date of the loans,
the Company will issue shares of its Class A common stock to Cherokee and
Proxity equal in value to 10% of the amounts due. The bid price on August 12,
2005 was $1.40 per share resulting in 73,553 shares to be issued to Cherokee and
25,000 shares to be issued to Proxity. In addition, on August 12, 2005, the Note
payable to Mr. Robinson was amended to $286,512 to reflect additional monies
that he had loaned to the Company by paying the balance of all principal and
interest due to Quebec. The maturity date of Mr. Robinson's loan was also
extended to July 31, 2008. As additional consideration, the Company agreed to
issue to Mr. Robinson 20,465 shares of Class A common stock representing 10% of
the loan amount due at August 12, 2005. The notes due to each of Cherokee,
Proxity and Mr. Robinson provide for acceleration of payment from amounts in
excess of a minimum of $1,000,000 that are raised in any type of financing. Such
prepayments would be in the ratio of the total amounts due.


                                      -20-

<PAGE>

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

NOTE 14 - STOCK OPTIONS AND STOCK COMPENSATION

On September 19, 2005, the Board of Directors approved and adopted the Cyber
Defense Systems, Inc. 2005 Stock Option Plan and also approved the grant of
stock options covering 11,379,900 shares of Class A common stock to 25
individuals. All such options have a ten year term, are subject to a two year
vesting schedule providing for 25 % vesting every six months over the first two
years and have an exercise price of $0.20 per share. Stock option expense of
$10,800 for the eleven day period of September 19 through September 30, 2005
pursuant to Black-Scholes calculations and APB 25 has been recorded for these
options. Were such stock option expense calculated pursuant to FASB 123R, the
amount would have been $82,800 and would not have affected earnings per share.

The Board of Directors also approved the issuance of 390,000 shares as Employee
Restricted Stock Awards to five employees. Such shares were valued at $0.20 per
share and a compensation charge in the aggregate amount of $78,000 has been
recorded.

NOTE 15 - SUBSEQUENT EVENT

The Company has entered into amended agreements with Equipment Depot, Inc., of
Deerfield Beach, Florida, to acquire approximately $5,000,000, fair market
value, as appraised, of aerospace R & D and production equipment to further the
fulfillment of the Company's anticipated contracts and purchase orders. The
transactions are expected to close upon the completion of the financing
institution's due diligence and legal review which is almost completed. The
Company is paying approximately $3.0 million, in a combination of cash and the
issuance of 2,000,000 newly issued registered Class A shares of common stock of
the Company valued at $1.00 per share for the purposes of these transactions, in
order to complete the purchase. The proceeds are to be disbursed in three
closings of $750,000, $750,000 and $1,000,000 respectively and are to occur at
45 day intervals and there will be an origination fee of 3.5% of each amount
funded deducted from proceeds. A portion of the proceeds from these closings
will be used to fund the cash portion of the transaction. The interest rate on
the loan will be 14% and repayment is to be on a 7 year schedule with a balloon
at the end of the fifth year.


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

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

                              RESULTS OF OPERATIONS

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

General and administrative expenses totaled $1,166,739 for the three months
ended September 30, 2005 as compared to $195,877 for the three months ended
September 30, 2004, a net increase of $970,862. The increase is primarily due to
increased payroll, specialized consulting and legal fees and a general increase
in overhead as well as stock award compensation and stock option compensation in
the current three month period.

Other income and expense for the three months ended September 30, 2005 consists
of interest expense of $1,028,259, which includes non-cash interest of $ 460,744
relating to the beneficial conversion feature of converted notes that is
accounted for as interest expense; interest income of $10,386 and other income
of $32,845. Other income and expense for the comparable three month period ended
September 30, 2004 was comprised of interest income of $3,030 and interest
expense of $3,976. Also included in other income and expense is the derivative
valuation loss in the amount of $176,862 relating to the issuance of Notes and
Warrants to AJW treated as derivative securities for which no prior year
comparable amount exists.

The Nine Months Ended September 30, 2005 Compared to the Nine Months Ended
September 30, 2004

General and administrative expenses totaled $2,497,513 for the nine months ended
September 30, 2005 as compared to $929,577 for the nine months ended September
30, 2004, a net increase of $1,567,936. The increase is primarily due to
increased payroll, specialized consulting and legal fees and amortization of
loan origination costs of $318,107 as well as the inclusion of the general and
administrative expenses of Cyber Aerospace for the full nine months in 2005
whereas in the 2004 period such expenses were only from March 15, 2004 (the date
of inception) through September 30, 2004. In addition, Techsphere's General and
Administrative costs of $43,525 for the 11 days of September 19 through
September 30; approximately $197,000 of stock award expense and $10,806 of stock
option compensation is included in the current year's figures.

The impairment of goodwill in the amount of $4,577,069 for the nine months ended
September 30, 2005 pertains to goodwill associated with the acquisition of Cyber
Aerospace for which no prior year comparable amount exists.

Other income and expense for the nine months ended September 30, 2005 consists
of interest income of $20,627, interest expense of $1,889,344 which includes
interest on Notes and debt of $147,406 and $552,451 representing the beneficial
conversion feature of certain debt conversions that has been accounted for as
additional interest, and $136,913 of loan discount amortization resulting from a
beneficial conversion feature related to the conversion to stock at a discount
to market of 40% and the value of warrants that were issued in the transaction.
Such amount has been accounted for as interest expense. Other income and expense
for the nine months ended September 30, 2004 was comprised of interest income of
$8,581 and interest expense of $22,293. Also included in other income and
expense is the derivative valuation loss in the amount of $7,673,072 relating to
the issuance of Notes and Warrants to AJW treated as derivative securities for
which no prior year comparable amount exists.


                                      -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 $62,628 as of September 30, 2005 is
not sufficient to support current levels of operations for the next twelve
months and it is therefore necessary for the Company to seek additional
financing. Such financing has been negotiated as discussed below and in Note 15.
While management anticipates that this financing will be consummated there can
be no assurance that it will in which case the Company would have to curtail
operations.

The Company has entered into amended agreements with Equipment Depot, Inc., of
Deerfield Beach, Florida, to acquire approximately $5,000,000, fair market
value, as appraised, of aerospace R & D and production equipment to further the
fulfillment of the Company's anticipated contracts and purchase orders. The
transactions are expected to close upon the completion of the financing
institution's due diligence and legal review which is almost completed. The
Company is paying approximately $3.0 million, in a combination of cash and the
issuance of 2,000,000 newly issued registered Class A shares of common stock of
the Company, valued at $1.00 per share for the purposes of these transactions,
in order to complete the purchase. The proceeds are to be disbursed in three
closings of $750,000, $750,000 and $1,000,000 respectively and are to occur at
45 day intervals and a 3.5% origination fee will be deducted from each funding.
A portion of the proceeds from these closings will be used to fund the cash
portion of the transaction. The interest rate on the loan will be 14% and
repayment is to be on a 7 year schedule with a balloon at the end of the fifth
year.

On February 16, 2005 the Company and CFC executed a Working Capital Financing
Proposal relative to a potential secured financing of up to $3,000,000 for a two
year term. All borrowings under this potential financing would be collateralized
by a first security UCC-1 filing on all assets related to accounts receivable
and a Cross Corporate Guaranty by Proxity, Inc., the Company's major shareholder
and parent. In addition, CFC requires a Limited Guaranty of certain provisions
in the loan agreement by the Company's Chief Executive Officer. The interest
rate on borrowings would be Prime, as quoted in the Wall Street Journal, plus
1/2 % and there will be a one time facility fee of 1% of the total credit line
payable out of the first funding. In addition, all borrowings are subject to
eligibility of accounts receivable as defined and determined by CFC and the
advance rate on eligible receivables, as defined, is 90% for direct Government
accounts and 80% for Commercial Accounts. Closing of this transaction is subject
to acceptable documentation, due diligence by CFC and other terms which are to
be negotiated amongst the parties in early November 2005 the Company and CFC
began discussions about lease financiang for potential commercial clients
interested in leasing the Techsphere SA 60 Mid Altitude Airship.

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

The notes are convertible into common stock of the Company at a 40% discount to
the average of the three lowest trading prices of the common stock during the 20
trading day period prior to conversion. On August 10, 2005, AJW Partners, LLP
and affiliates converted $500,000 of Secured Convertible Notes for 500,000
Shares of Class A common stock pursuant to terms of the Securities Purchase
Agreement and through September 30, 2005 converted an additional $62,300 for
700,000 shares.


                                      -23-

<PAGE>

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

Mr. Robinson loaned the Company $282,847 through September 30, 2005 and has
advanced an additional $81,060 for working capital subsequent thereto. In
addition, Mr. Lively, an officer and director of Techsphere and a director of
Cyber, has loaned the Company a total of $71,515 subsequent to September 30.
2005.

With the potential financing available from CFC, and the anticipated proceeds
from the Equipment Depot transaction we believe that the Company will be in a
position to fund the anticipated level of operations for at least one year.
However, if the Equipment Depot financing transaction does not close or the CFC
funding does not occur, the Company will have to seek other sources of working
capital or curtail operations.

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.

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.


                                      -24-

<PAGE>

Accounting for Income Taxes.

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

Long Lived Assets

Long-lived assets are reviewed for recoverability whenever events or changes in
circumstances indicate that it may be impaired and its 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.

Recent Accounting Pronouncements

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

This new standard is effective for annual periods beginning after June 15, 2005.
The Company has awarded share-based compensation during the three months ended
September 30, 2005 which has been accounted for pursuant to APB 25. The adoption
of SFAS No. 123 effective January 1, 2006 will have an effect on the Company's
financial position and results of operations dependent upon the amount of shares
awarded subsequent to that date and the fair value as calculated which will be
higher than the equivalent calculation pursuant to APB 25.

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

In May 2005, FASB issued FASB Statement 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("
FAS 154"). FAS 154 changes the requirements for the accounting for and reporting
of a change in accounting principle. The provisions of FAS 154 require, unless
impracticable, retrospective application to prior periods' financial statements
of (1) all voluntary changes in principles and (2) changes required by a new
accounting pronouncement, if a specific transition is not provided. FAS 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate, which requires prospective application of the new method. FAS 154 is
effective for all accounting changes made in fiscal years beginning after
December 15, 2005.


                                      -25-

<PAGE>

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

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

Changes in internal controls

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

                            PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES

During the three months ended September 30, 2005, the Company issued 23,076,923
shares of its class A common stock and 245,455 shares of its Class B common
stock to the former shareholders of TSI in conjunction with the September 19,
2005 acquisition of TSI.

The Company also issued an aggregate of 119,018 shares of Class A common stock
to Mr. Robinson, Cherokee and Proxity collectively as additional compensation
for their respective loans in consideration of extending the maturity dates.

3,000,000 shares of Class A common stock were issued to Cherokee in connection
with the conversion of $600,000 of debt into such common shares at $0.20 per
share..

390,000 shares of Class A common stock were issued to certain officers,
directors and employees as additional compensation and was valued at $0.20 per
share.

250,000 shares of Class A common stock were issued to Mr. James Alman in
connection with the conversion of $50,000 of debt into such common shares at
$0.20 per share.

1,200,000 shares of Class A common stock were issued to AJW et al pursuant to
their exercise of conversion rights at a 40% discount to market of $562,300 of
secured convertible notes.


                                      -26-

<PAGE>

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) EXHIBITS

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

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

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

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

b) REPORTS ON FORM 8-K

The Company filed a Current Report on Form 8-K on August 22, 2005 relative to
the appointment of David M. Barnes as Vice President and Chief Financial Officer
of the Company.

The Company filed a Current Report on Form 8-K on September 19, 2005 regarding
the exercise of the option to acquire Techsphere whereby Techsphere became a
wholly owned subsidiary of the Company.

The Company filed a Current Report on Form 8-K on September 28, 2005 regarding
the Investrend "Spotlight Coverage" analysis of the Company.


                                      -27-

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                             CYBER DEFENSE SYSTEMS, INC.

                             June 22, 2006


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


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


                                      -28-