**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**




**x
      Quarterly Report
      Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934**




**For
      the Quarterly Period Ended March 31, 2007**




**o
      Transition Report
      Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934**




For
      the
      transition period from ____________ to ____________




**Commission
      File Number 0-31136**




**CYBER
      DEFENSE SYSTEMS, INC.**




(Exact
      name of registrant as specified in its charter)





**Florida**
            **45-058387****(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            **(I.R.S.
                Employer Identification
                No.)**











**10901
      ROOSEVELT BOULEVARD, SUITE 100D ST. PETERSBURG, FLORIDA
      33716**


(Address
      of principal executive offices)





**727-577-0878**


Issuer's
      telephone number







Check
      whether the issuer (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
o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o 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 OutstandingClass
                A Common Stock(par
                value $0.001 per share)
            71,705,872
                as of May 21, 2007Class
                B Common Stock(Par
                Value $0.001 per share)
            545,455
                as of May 21, 2007Class
                C Common StockPar
                value $0.001 per share)
            2
                as
                of May 21, 2007




Transitional
      Small Business Disclosure Format: Yes o No x







**Page
                  Number****PART
                  I**ITEM
                  1.  Condensed Consolidated Financial Statements
                  (unaudited)Balance
                  Sheets as of March 31, 2007 and December 31, 2006
              1Statements
                  of Operations for the Three Months Ended March 31, 2007 and
                  2006
              2Statements
                  of Cash Flows for the Three Months Ended March 31, 2007 and
                  2006
              3Notes
                  to Condensed Consolidated Financial Statements
              4-16ITEM
                  2. Management’s Discussion and Analysis or Plan of
                  Operation.
              17ITEM
                  3. Controls and Procedures.
              20**PART
                  II**ITEM
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds.
              21ITEM
                  6. Exhibits.
              21Signatures
              22
  
 **CYBER
        DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (Unaudited)
 
 **March
                    31,**
                
                **December
                    31,****2007**
                
                **2006****ASSETS****Current
                    assets**Cash
                    and cash equivalents
                
                
                
                
                $
                5,537
                
                $
                86,703Accounts
                    receivable
                
                
                
                
                
                -
                
                
                35,870Inventories
                
                
                
                
                
                1,311,402
                
                
                1,170,557Prepaid
                    expenses
                
                
                
                
                
                60,880
                
                
                60,000**Total
                    current assets**
                
                
                
                
                
                1,377,819
                
                
                1,353,130**Non-current
                    assets**Property
                    and equipment, net of accumulated depreciationof
                    $31,048 and $26,426, respectively
                
                
                
                
                
                61,735
                
                
                66,357Loan
                    costs, net of accumulated amortization of $1,091,980and
                    $940,909, respectively
                
                
                
                
                
                748,802
                
                
                900,683Security
                    deposits
                
                
                
                
                
                7,371
                
                
                7,371Airship
                    manufacturing licenses, net of accumulatedamortization
                    of $150,000 and $75,000, respectively
                
                
                
                
                
                1,950,000
                
                
                2,025,000Intangible
                    assets, net of accumulated amortization of$100,000
                    and $94,449, respectively
                
                
                
                
                
                -
                
                
                5,551**TOTAL
                    ASSETS**
                $
                4,145,727
                
                $
                4,358,092**LIABILITIES
                    AND STOCKHOLDERS' DEFICIT****Current
                    liabilities**Accounts
                    payable and accrued liabilities
                
                
                
                
                $
                1,760,937
                
                $
                1,506,139Accrued
                    royalties
                
                
                
                
                
                1,000,000
                
                
                1,150,000Accrued
                    interest
                
                
                
                
                
                1,092,438
                
                
                912,910Refundable
                    customer deposit
                
                
                
                
                
                2,760,000
                
                
                2,760,000Deferred
                    revenue
                
                
                
                
                
                408,333
                
                
                416,667Notes
                    payable - related parties
                
                
                
                
                
                1,156,672
                
                
                744,916Notes
                    payable - third parties
                
                
                
                
                
                1,572,875
                
                
                1,572,875Embedded
                    derivative liability
                
                
                
                
                
                10,775,306
                
                
                11,291,671**Total
                    current liabilities**
                
                
                
                
                
                20,526,561
                
                
                20,355,178Long
                    term notes payable, net of discounts of $2,729,737and
                    $3,160,382, respectively
                
                
                
                
                
                2,510,043
                
                
                2,079,398Deferred
                    taxes
                
                
                
                
                
                -
                
                
                -**TOTAL
                    LIABILITIES**
                
                23,036,604
                
                
                22,434,576Minority
                    interest in net assets of subsidiary
                
                
                
                
                
                447,746
                
                
                -**Stockholders'
                    deficit:**Class
                    A Preferred stock, $0.001 par value 10,000,000shares
                    authorized, none issued and outstandingClass
                    A, $0.001 par value, 200,000,000 sharesauthorized,
                    67,631,027 and 66,657,316 shares issuedand
                    outstanding, respectively
                
                
                
                
                
                67,631
                
                
                66,657Class
                    B, $0.001 par value, 200,000,000 sharesauthorized,
                    545,455 shares issued and outstanding
                
                
                
                
                
                545
                
                
                545Class
                    C, $0.001 par value, 200,000,000 sharesauthorized,
                    2 shares issued and outstanding
                
                
                
                
                
                -
                
                
                -Additional
                    paid in capital
                
                
                
                
                
                20,489,491
                
                
                20,372,513Accumulated
                    deficit
                
                
                
                
                
                (39,896,290
                )
                
                (38,516,199
                )**TOTAL
                    STOCKHOLDERS' DEFICIT**
                
                (19,338,623
                )
                
                (18,076,484
                )**TOTAL
                    LIABILITIES AND STOCKHOLDERS' DEFICIT**
                $
                4,145,727
                
                $
                4,358,092
  The
        accompanying notes are an integral part of these unaudited condensed
        consolidated financial statements
  1
  **CYBER
        DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 (Unaudited)
 
 **THREE
                    MONTHS ENDED MARCH 31,****2007**
                
                **2006**Revenues
                
                $
                42,798
                
                $
                165,671Cost
                    of revenues
                
                
                34,465
                
                
                80,541Gross
                    profit
                
                
                8,333
                
                
                85,130Expenses:Research
                    and development
                
                
                195,833
                
                
                28,386General
                    and administrative
                
                
                1,119,444
                
                
                1,320,057Stock
                    option compensation
                
                
                -
                
                
                633,695Total
                    expenses
                
                
                1,315,277
                
                
                1,348,443Loss
                    from operations
                
                
                (1,306,944
                )
                
                (1,263,313
                )Other
                    income (expense)Interest
                    expense
                
                
                (676,609
                )
                
                (522,901
                )Derivative
                    valuation gain (loss)
                
                
                601,208
                
                
                (990,471
                )Minority
                    interest in loss of subsidiary
                
                
                2,254Total
                    other income (expense)
                
                
                (73,147
                )
                
                (1,513,372
                )Net
                    loss before income tax
                
                
                (1,380,091
                )
                
                (2,776,685
                )Income
                    tax benefit
                
                
                -
                
                
                217,325Net
                    loss
                
                $
                (1,380,091
                )
                $
                (2,559,360
                )Basic
                    and diluted loss per share
                
                $
                (0.02
                )
                $
                (0.04
                )Weighted
                    average number of Class Acommon
                    shares outstanding
                
                
                67,217,671
                
                
                56,912,893
 
  The
        accompanying notes are an integral part of these unaudited condensed
        consolidated financial statements
 
 2
  **CYBER
        DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (Unaudited)
  **THREE
                    MONTHS ENDED MARCH 31****2007**
                
                **2006****CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    loss
                
                
                
                
                $
                (1,380,091
                )
                $
                (3,193,055
                )Adjustments
                    to reconcile net loss to netcash
                    from operating activities:Loan
                    discount accretion
                
                
                
                
                
                497,081
                
                
                313,915Derivative
                    valuation (gain) loss
                
                
                
                
                
                (601,208
                )
                
                990,471Depreciation
                    and amortization
                
                
                
                
                
                237,053
                
                
                345,806Stock
                    option compensation
                
                
                
                
                
                -
                
                
                633,695Income
                    tax benefit
                
                
                
                
                
                -
                
                
                (217,325
                )Issuance
                    of warrant for services
                
                
                
                
                
                -
                
                
                66,144Issuance
                    of stock for services
                
                
                
                
                
                43,200
                
                
                -Minority
                    interest in loss of subsidiary
                
                
                
                
                
                (2,254
                )
                
                -Changes
                    in assets and liabilities:Accounts
                    receivable
                
                
                
                
                
                35,870
                
                
                154,246Inventories
                
                
                
                
                
                (140,845
                )
                
                (19,367
                )Prepaid
                    expenses
                
                
                
                
                
                (880
                )
                
                32,580Accounts
                    payable and accrued liabilities
                
                
                
                
                
                329,550
                
                
                81,927Accrued
                    royalty
                
                
                
                
                
                (150,000
                )
                
                -Accrued
                    interest
                
                
                
                
                
                179,528
                
                
                138,648Deferred
                    revenue
                
                
                
                
                
                (8,333
                )
                
                (8,333
                )**NET
                    CASH FROM OPERATING ACTIVITIES**
                
                
                
                
                
                (961,329
                )
                
                (680,648
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Purchase
                    of equipment
                
                
                
                
                
                -
                
                
                (1,635
                )**NET
                    CASH FROM INVESTING ACTIVITIES**
                
                
                
                
                
                -
                
                
                (1,635
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Net
                    proceeds from notes payable, related parties .
                
                
                
                
                
                430,163
                
                
                87,466Proceeds
                    from units sold in subsidiary
                
                
                
                
                
                450,000
                
                
                -Proceeds
                    from notes payable
                
                
                
                
                
                -
                
                
                1,082,000Principal
                    payments on notes payable
                
                
                
                
                
                -
                
                
                (193,566
                )Payments
                    on loan costs
                
                
                
                
                
                -
                
                
                (85,000
                )**NET
                    CASH FROM FINANCING ACTIVITIES**
                
                
                
                
                
                870,163
                
                
                890,900Net
                    (decrease) increase in cash
                
                
                
                
                
                (81,166
                )
                
                208,617Cash
                    and cash equivalents, beginning
                
                
                
                
                
                86,703
                
                
                476Cash
                    and cash equivalents, ending
                
                
                
                
                $
                5,537
                
                $
                209,093Supplemental
                    disclosure of cash flow information:Cash
                    paid for interest
                
                
                
                
                
                -
                
                $
                19,235Cash
                    paid for income taxes
                
                
                
                
                
                -
                
                
                -
  The
        accompanying notes are an integral part of these unaudited condensed
        consolidated financial statements
  3
  **CYBER
        DEFENSE SYSTEMS, INC. AND SUBSIDIAR** **IES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (unaudited)
  **NOTE
        1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES**
  ORGANIZATION,
        ACQUISITIONS AND MERGERS AND CONTROLLING SHAREHOLDERS -- Cyber Defense Systems,
        Inc. ("the Registrant" or "Cyber Defense" or "the Company") was incorporated
        on
        August 19, 2004 in Florida. E-City Software, Inc. ("E-City") was organized
        in
        Nevada on May 12, 2000. On Alert Systems, Inc. ("On Alert") was incorporated
        on
        March 17, 2003 in Nevada and acquired a control position in E-City in May
        of
        2003 and in Cyber Aerospace Corp. ("Cyber Aerospace") in March 2004. On Alert
        was merged with and into Cyber Defense on September 1, 2004. On September
        1,
        2004 E-City was also merged with and into Cyber Defense following the On
        Alert
        merger. As a result of the aforementioned, Cyber Defense became the successor
        to
        E-City and its shares of class A common stock began trading on the Over the
        Counter Bulletin Board ("OTC:BB") under the symbol CYDF on September 7, 2004.
        Due to the nature of the mergers, the fiscal year end of the Company was
        changed
        to December 31 effective for Fiscal 2003 and the historical financial statements
        of the Company are now those of On Alert and include results of operations
        for
        Cyber Aerospace from its date of inception in March 2004, as it was previously
        a
        subsidiary of On Alert, and includes the results of operations of E-City
        from
        it's date of merger, September 1, 2004. Cyber Aerospace was merged with and
        into
        Cyber Defense effective March 31, 2005 with the acquisition of the 6.19%
        minority interest in Cyber Aerospace for 1,650,000 shares of class A common
        stock and 150,000 shares of class B common stock. In addition, on September
        19,
        2005, the Company acquired its wholly owned subsidiary Techsphere Systems
        International, Inc. ("TSI") for 23,076,923 Class A common shares and 245,455
        Class B common shares. On January 30, 2007, TSI Holdings Co., LLC (“TSI LLC”)
        was reactivated by TSI, which at March 31, 2007 owns a 95.5% in TSI,
        LLC.
 
 The
        controlling shareholders of the company are Proxity, Inc. ("Proxity"), a
        publicly traded company ("PRXT") and Cherokee Raiders, a partnership,
        ("Cherokee") owning approximately 21.6% and 12.8% of the Class A common shares
        of the Company, respectively. In addition, the former shareholders of TSI
        also
        own 21,219,111 shares or 31.4% of the Class A common stock and 245,455 or
        45%,
        of the issued and outstanding shares of Class B common stock as of March
        31,
        2007. Cherokee owns 300,000 or 55% of such class B shares which allow for
        1,000
        votes per share and as a result, Cherokee is the controlling shareholder
        of the
        Company. Cherokee and Proxity each own one share of the two shares of Class
        C
        common stock issued and outstanding which have certain liquidation preference
        rights. The Chief Executive Officer of both Proxity and Cherokee is Mr.
        Robinson, the Chief Executive Officer of the Company.
 
 CONSOLIDATION
        - The accompanying condensed consolidated financial statements include the
        accounts and transactions of Cyber Defense Systems, Inc. for all periods
        presented and the accounts and transactions of Cyber Defense and TSI, its
        wholly
        owned subsidiary from its date of acquisition on September 19, 2005. On January
        30, 2007, TSI Holdings Co., LLC (“TSI LLC”) was reactivated by TSI, which at
        March 31, 2007 owns a 95.5% in TSI, LLC. (collectively the "Company").
        Intercompany accounts and transactions have been eliminated in
        consolidation.
  Basis
        of
        Presentation -- The unaudited financial statements included in this Form
        10-QSB
        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 and Exchange Act of 1934,
        as
        amended. The financial information furnished herein reflects all adjustments,
        which, in the opinion of management, are necessary for a fair presentation
        of
        the Company's financial position, the results of operations and cash flows
        for
        the periods presented.
  Certain
        information and footnote disclosures normally contained in financial statements
        prepared in accordance with generally accepted accounting principles have
        been
        omitted, pursuant to such rules and regulations.
  Condensed
        Interim Financial Statements -- The accompanying unaudited condensed
        consolidated financial statements include the accounts of Cyber Defense Systems,
        Inc. and its subsidiary, collectively ("Cyber" or the "Company"). These
        financial statements are condensed and, therefore, do not include all
        disclosures normally required by accounting principles generally accepted
        in the
        United States of America. In the opinion of management, all adjustments
        necessary for a fair presentation have been included in the accompanying
        condensed consolidated financial statements and consist of only normal recurring
        adjustments. The results of operations presented in the accompanying condensed
        consolidated financial statements are not necessarily indicative of the results
        that may be expected for the full year ending December 31, 2007 and such
        financial statements should be read in conjunction with the Company's Form
        10-KSB for the year ended December 31, 2006 and other filings made with the
        Securities and Exchange Commission.
  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.
  Management's
        Intentions - The accompanying financial statements have been prepared on
        a going
        concern basis, which contemplates the realization of assets and the satisfaction
        of liabilities in the normal course of business. For the quarter ended March
        31,
        2007 the Company recorded revenues of $42,798 and incurred a net loss of
        $1,380,091. For the year ended December 31, 2006, the Company recorded revenues
        of $494,220 and incurred a net loss of $22,039,817. As of March 31, 2007
        and
        December 31, 2006 the net working capital deficit was $19,148,742 and
        $19,002,048, respectively. The lack of sufficient revenues and the loss from
        operations raise substantial doubt about the Company's ability to continue
        as a
        going concern for a reasonable period of time. The financial statements do
        not
        include any adjustments relating to the recoverability and classification
        of
        recorded assets or the amount and classification of liabilities which might
        be
        necessary should the Company be unable to continue as a going concern. The
        Company's continuation as a going concern is dependent upon its ability to
        generate sufficient cash flows to meet its obligations on a timely basis,
        to
        obtain additional financing as further discussed in Note 4, 5 and 9 as may
        be
        required, and ultimately to attain successful operations.
  Cash
        and
        Cash Equivalents - Cash equivalents include highly liquid short-term investments
        with original maturities of three months or less, readily convertible to
        known
        amounts of cash. At March 31, 2007 and December 31, 2006 the Company had
        no cash
        in excess of federally insured limits.
  Inventory
        - At March 31, 2007 and December 31, 2006, inventory of $1,311,402 and
        $1,170,557, respectively primarily consists of parts for the Unmanned Aerial
        Vehicles ("UAV's") and airships that the Company sells and
        services.
  Property
        and Equipment - Property and equipment is recorded at cost. Depreciation
        is
        computed using the straight-line method over the estimated useful lives of
        the
        assets ranging from 3 to 5 years. Expenditures for maintenance, repairs,
        and
        renewals are charged to expense as incurred. Expenditures for major renewals
        and
        betterments that extend the useful lives of existing equipment are capitalized
        and depreciated. On retirement or disposition of property and equipment,
        the
        cost and accumulated depreciation are removed and any resulting gain or loss
        is
        recognized in the statement of operations.
  Long-lived
        assets are reviewed for impairment when events or changes in circumstances
        indicate that the carrying amount may not be recoverable. Recoverability
        of
        assets to be held and used is measured by comparison of the carrying amount
        of
        an asset to future net cash flows expected to be generated by the asset.
        If such
        assets are considered to be impaired, the impairment to be recognized is
        measured by the amount that the carrying amount of the assets exceeds the
        fair
        value of the assets. Assets to be disposed of are reported at the lower of
        the
        carrying amount or fair value less costs to sell. For the quarter ended March
        31, 2007, management has determined that no impairment of its long lived
        assets
        was required.
  Manufacturing
        License -- The Company acquired an exclusive manufacturing license for the
        manufacture and sale of its airships with the acquisition of TSI in September,
        2005. Amortization expense relating to the license was $75,000 and $197,994
        for
        the quarterly periods ended March 31, 2007 and 2006, respectively. The Company
        evaluated the carrying value of the license to determine if the carrying
        amount
        warranted revision or may not be recoverable. In management's opinion, an
        adjustment is not required at March 31, 2007.
  Fair
        Values of Financial Instruments -- The carrying amounts reported in the balance
        sheet for notes payable approximate their fair values because the interest
        rates
        approximate current interest rates to be charged on similar
        borrowings.
  Revenue
        Recognition - The Company recognizes service revenues when the services,
        as
        specified by the customer and agreed to by the Company, have been performed
        and
        the customer accepts the services, and the services are billed. Airship and
        UAV
        sales are recognized when contract specifications are met, the price is
        determined, title passes to the customer and the customer is billed.
        Reasonableness of collectibility of all revenue transactions is a key element
        before the transactions are recorded.
 
  5
  Share
        Based Payments - The
        Company accounts for stock-based compensation expense in accordance with
        Statement of Financial Accounting Standards (SFAS) No. 123(R),
“Share-Based Payment” (SFAS 123R). Under SFAS 123R, stock-based compensation
        expense reflects the fair value of stock-based awards measured at the grant
        date, is recognized over the requisite service period, and is adjusted each
        period for anticipated forfeitures. The Company estimates the fair value
        of each
        stock-based award on the date of grant using the Black-Scholes option valuation
        model. The Black-Scholes option valuation model incorporates assumptions
        as to
        stock price volatility, the expected life of options, a risk-free interest
        rate
        and dividend yield. There were no stock options issued under the Company’s 2005
        option plan during the quarter ended March 31, 2007.
  Derivative
        Instruments - The Company does not hold or issue derivative instruments for
        trading purposes. However, the Company has convertible notes payable that
        contain embedded derivatives that require separate valuation from the
        convertible notes under Emerging Issues Task Force Abstract (EITF) 00-19,
        "Accounting for Derivative Financial Instruments Indexed to, and Potentially
        Settled in, a Company's Own Stock". The Company recognizes these derivatives
        as
        liabilities in the accompanying balance sheet and measures them at estimated
        fair value each quarter, and recognizes changes in estimated fair value in
        the
        statement of operations in the respective period. The Company has estimated
        the
        fair value of these embedded derivatives using the Black-Scholes
        model.
  Income
        Taxes -- No income taxes have been paid or accrued because the Company has
        had
        no net taxable income since inception. The Company recognizes the amount
        of
        income taxes payable or refundable for the current year and recognizes deferred
        tax assets and liabilities for the future tax consequences attributable to
        differences between the financial statement amounts of certain assets and
        liabilities and their respective tax bases. Deferred tax assets and deferred
        liabilities are measured using enacted tax rates expected to apply to taxable
        income in the years those temporary differences are expected to be recovered
        or
        settled. Deferred tax assets are reduced by a valuation allowance to the
        extent
        that uncertainty exists as to whether the deferred tax assets will ultimately
        be
        realized.
 
 Earnings
        (Loss) Per Share --Basic earnings (loss) per share is calculated by dividing
        earnings (loss) available to Class A common shareholders by the weighted-average
        number of Class A common shares outstanding during each period. Fully diluted
        income (loss) per share for the three months ended March 31, 2007 and 2006
        is
        the same as basic due to losses sustained by the Company for those
        periods.
  The
        following potentially dilutive common shares are excluded from the computation
        of diluted net loss per share for all periods presented because the effect
        is
        anti-dilutive:
  **Three
                    months ended March 31,****2007**
                
                **2006**Shares
                    underlying warrants
                7,200,000
                
                6,100,000Shares
                    underlying options
                7,990,405
                
                11,379,900Shares
                    underlying convertible debt
                126,117,669
                
                16,483,923Shares
                    underlying convertible debt - related parties
                3,855,573
                
                9,626,342Total
                    potentially dilutive securities
                145,163,647
                
                43,590,165
  Recent
        Accounting Pronouncements - In September 2006, the FASB issued SFAS No. 157,
        "Fair Value Measures" ("SFAS 157"). SFAS 157 defines fair value, establishes
        a
        framework for measuring fair value, and expands disclosures about fair value
        measurements. This statement applies under other accounting pronouncements
        that
        require or permit fair value measurements. However, it does not apply to
        SFAS
        123(R). This statement shall be effective for financial statements issued
        for
        fiscal years beginning after November 15, 2007, and interim periods within
        those
        fiscal years. Earlier application is encouraged, provided that the reporting
        entity has not issued financial statements for that fiscal year, including
        any
        financial statements for an interim period within that fiscal year. The
        provisions of this statement should be applied prospectively as of the beginning
        of the fiscal year in which this Statement is initially applied, except in
        some
        circumstances where the statement shall be applied retrospectively. The Company
        is currently evaluating the effect, if any, of SFAS 157 on its financial
        statements.
 
  6
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities”, including an amendment of FASB
        Statement No. 115 (“SFAS 159”). This pronouncement permits entities to choose to
        measure many financial instruments and certain other items at fair value
        that
        are not currently required to be measured at fair value and to recognize
        the
        resulting gains and losses in the results of operations. SFAS 159 is effective
        as of the beginning of an entity’s first fiscal year that begins after November
        15, 2007. The impact of adopting SFAS 159 on the Company’s consolidated
        financial statements, if any, has not yet been determined.
 
  **NOTE
        2 - RELATED PARTY TRANSACTIONS**
  Cyber
        Aerospace - Prior to March 31, 2005, Cyber Aerospace ("Aerospace") had
        previously been consolidated with the Company as it was a 93.8% owned
        subsidiary. All transactions and account balances between the Company and
        Aerospace were eliminated during consolidation. On March 31, 2005, the Company
        purchased the minority interest so that Aerospace became a wholly owned
        subsidiary and was then merged with and into the Company.
  Cherokee
        Raiders - Cherokee's general partner is William C. Robinson. Cherokee also
        owns
        300,000 Class B common shares, each of which entitles the holder to 1,000
        votes.
        As a result, Cherokee is the controlling shareholder of the
        Company.
  William
        C. Robinson - Mr. Robinson is President, CEO and Chairman of the Company
        and has
        significant ownership and control in Proxity and Cherokee Raiders.
  During
        the quarter ended March 31, 2007, Mr. Robinson advanced an additional $430,163
        to the Company.
  See
        Note
        5 - Related Party Notes for additional related party disclosure.
  **NOTE
        3- INTANGIBLE ASSETS AND MANUFACTURING LICENSE**
  With
        the
        acquisition of TSI in September, 2005 the Company acquired an exclusive,
        worldwide license with 21st Century Airships, Inc. for the manufacture of
        its
        airships. The license agreement stipulates royalty payments relating to the
        sales of airships ranging from $450,000 for a low altitude airship, $600,000
        for
        a medium altitude airship, 10% of the gross sales price of a high altitude
        airship and $400,000 for the manufacture of a low altitude airship used for
        commercial advertising purposes. Payments are to be made on any royalties
        due
        upon receipt of payment from the customer on a proportionate basis as defined
        in
        the agreement and in full within 120 days of completion of the manufacturing
        process.
 
 The
        license agreement calls for a minimum annual royalty payment of $1,000,000
        for
        the period of January 17, 2005 through January 16, 2006 and each annual period
        thereafter ending January 16. If payments under this license should come
        into
        default, it is the intent of 21st Century to terminate the License Agreement
        and, as a result, TSI may be unable to manufacture its spherical airship
        products. TSI has paid an aggregate of $400,000 through April 30,
        2007.
  In
        2004,
        the Company purchased designs and plans for unmanned air vehicles (UAV's)
        which
        have a useful life of 3 years. The cost was $100,000 and the monthly
        amortization is $2,778. Amortization expense was $5,551 and $8,334 for the
        three
        months ended March 31, 2007 and 2006, respectively.
  **NOTE
        4- NOTES PAYABLE**
 
 The
        Company has outstanding a series of Notes and warrants issued to AJW under
        Agreements dated April 1, 2005 and March 14, 2006. The Notes are secured
        by all
        of the Company's assets, except for its accounts receivable and proceeds
        of
        inventory. The Notes contain embedded derivatives in the form of the Warrants
        and the beneficial conversion feature. The Company revalues the embedded
        derivatives and the beneficial conversion feature and recognizes a gain or
        loss
        based on the changes in the fair values between reporting dates. As of March
        31,
        2007, the derivative instruments had a fair value of $10,652,903. The carrying
        value of the AJW notes issued under the March 14, 2006 Securities Purchase
        Agreement, as well as the notes issued in 2005 to AJW as of March 31, 2007
        and
        December 31, 2006 was $2,510,043 and $2,079,398 net of discount, respectively.
        The carrying value will be increased each quarter over the respective three
        year
        lives of the notes as the accretion of the discount related to the embedded
        derivatives is recorded until the carrying value equals the face value of
        the
        notes.
  7
  
 An
        analysis of the valuation of the individual tranches issued under the above
        mentioned notes and warrants as of March 31, 2007 and the significant
        assumptions used to value the warrants and the beneficial conversion feature
        are
        contained in the following table:
 
 April
                    1, 2005 Agreement
                
                March
                    14, 2006 AgreementTranche
                    1
                
                Tranche
                    2
                
                Tranche
                    3
                
                Tranche
                    1
                
                Tranche
                    2
                
                Tranche
                    3
                
                Tranche
                    4Valuation
                    date
                
                3/31/2007
                
                3/31/2007
                
                3/31/2007
                
                3/31/2007
                
                3/31/2007
                
                3/31/2007
                
                3/31/2007
                
                TotalAggregate
                    note amounts
                
                $
                739,780
                
                $
                1,300,000
                
                $
                1,200,000
                
                $
                1,000,000
                
                $
                500,000
                
                $
                200,000
                
                $
                300,000
                
                $
                5,239,780Conversion
                    price at March 31, 2007
                
                $
                0.0462
                
                $
                0.0462
                
                $
                0.0462
                
                $
                0.0424
                
                $
                0.0424
                
                $
                0.0424
                
                $
                0.0424Term
                    of notes at March 31, 2007
                
                
                1.0
                    years
                
                
                1.15
                    years
                
                
                1.35
                    years
                
                
                1.95
                    years
                
                
                2.25
                    years
                
                
                2.45
                    years
                
                
                2.55
                    yearsShares
                    issuable upon conversion
                
                
                17,609,692
                
                
                30,815,774
                
                
                28,032,971
                
                
                25,095,502
                
                
                12,326,503
                
                
                4,878,588
                
                
                7,358,639Warrants
                    outstanding
                
                
                1,650,000
                
                
                1,430,000
                
                
                1,320,000
                
                
                1,100,000
                
                
                550,000
                
                
                220,000
                
                
                330,000
                
                
                6,600,000Exercise
                    price of warrants
                
                $
                0.45
                
                $
                0.45
                
                $
                0.45
                
                $
                1.25
                
                $
                1.25
                
                $
                1.25
                
                $
                1.25Term
                    of warrants at March 31, 2007
                
                
                5.0
                    years
                
                
                5.15
                    years
                
                
                5.35
                    years
                
                
                3.95
                    years
                
                
                4.25
                    years
                
                
                4.45
                    years
                
                
                4.25
                    yearsMarket
                    Price on March 31, 2007
                
                $
                0.090
                
                $
                0.090
                
                $
                0.090
                
                $
                0.090
                
                $
                0.090
                
                $
                0.090
                
                $
                0.090Risk
                    free interest rate at March 31, 2007
                
                
                4.65
                %
                
                4.65
                %
                
                4.65
                %
                
                4.65
                %
                
                4.65
                %
                
                4.65
                %
                
                4.65
                %Volatility
                    at March 31, 2007
                
                
                228.83
                %
                
                228.83
                %
                
                228.83
                %
                
                228.83
                %
                
                228.83
                %
                
                228.83
                %
                
                228.83
                %Fair
                    value per share of conversion shares
                
                $
                0.0745
                
                $
                0.0765
                
                $
                0.0787
                
                $
                0.0837
                
                $
                0.0851
                
                $
                0.0858
                
                $
                0.0862Beneficial
                    conversion feature fair value
                
                $
                1,311,922
                
                $
                2,357,407
                
                $
                2,206,195
                
                $
                2,100,494
                
                $
                1,048,985
                
                $
                418,583
                
                $
                634,315
                
                $
                10,077,900Warrant
                    fair value per share at year end
                
                $
                0.0882
                
                $
                0.0884
                
                $
                0.0886
                
                $
                0.0837
                
                $
                0.0851
                
                $
                0.0857
                
                $
                0.0860Fair
                    value of derivative related to warrants
                
                $
                145,530
                
                $
                126,412
                
                $
                116,952
                
                $
                92,070
                
                $
                46,805
                
                $
                18,854
                
                $
                28,380
                
                $
                575,003Fair
                    value of derivative related tobeneficial
                    conversion feature
                
                $
                1,311,922
                
                $
                2,357,407
                
                $
                2,206,195
                
                $
                2,100,494
                
                $
                1,048,985
                
                $
                418,583
                
                $
                634,315
                
                $
                10,077,900Aggregate
                    fair value of derivative instruments
                
                $
                1,457,452
                
                $
                2,483,819
                
                $
                2,323,147
                
                $
                2,192,564
                
                $
                1,095,790
                
                $
                437,437
                
                $
                662,695
                
                $
                10,652,903
   The
        derivative liability is comprised of the following as of March 31, 2007 and
        December 31, 2006:
  March
                    31, 2007
                
                December
                    31, 2006AJW
                    Notes
                
                $
                10,077,900
                
                $
                10,142,448AJW
                    Warrants
                
                
                575,003
                
                
                1,004,608William
                    Robinson Note
                
                
                122,403
                
                
                144,615Total
                    derivative liability
                
                $
                10,775,306
                
                $
                11,291,671
  
  8
   
  As
        of
        December 31, 2006, the derivative instruments had a fair value of $11,147,056.
        An analysis of the valuation of the individual tranches as of December 31,
        2006
        and the significant assumptions used to value the warrants and the beneficial
        conversion feature are contained in the following table:
 
 April
                    1, 2005 Agreement
                
                March
                    14, 2006 AgreementTranche
                    1
                
                Tranche
                    2
                
                Tranche
                    3
                
                Tranche
                    1
                
                Tranche
                    2
                
                Tranche
                    3
                
                Tranche
                    4
                
                TotalValuation
                    date
                
                12/31/2006
                
                12/31/2006
                
                12/31/2006
                
                12/31/2006
                
                12/31/2006
                
                12/31/2006
                
                12/31/2006Aggregate
                    note amounts
                
                $
                739,780
                
                $
                1,300,000
                
                $
                1,200,000
                
                $
                1,000,000
                
                $
                500,000
                
                $
                200,000
                
                $
                300,000
                
                $
                5,239,780Conversion
                    price at December 31, 2006
                
                $
                0.0800
                
                $
                0.0800
                
                $
                0.0800
                
                $
                0.0733
                
                $
                0.0733
                
                $
                0.0733
                
                $
                0.0733Term
                    of notes at December 31, 2006
                
                
                1.25
                    years
                
                
                1.40
                    years
                
                
                1.60
                    years
                
                
                2.2
                    years
                
                
                2.50
                    years
                
                
                2.70
                    years
                
                
                2.80
                    yearsShares
                    issuable upon conversion
                
                
                9,987,192
                
                
                17,475,562
                
                
                15,893,151
                
                
                14,290,909
                
                
                7,017,684
                
                
                2,777,036
                
                
                4,140,000Warrants
                    outstanding
                
                
                1,650,000
                
                
                1,430,000
                
                
                1,320,000
                
                
                1,100,000
                
                
                550,000
                
                
                220,000
                
                
                330,000
                
                
                6,600,000Exercise
                    price of warrants
                
                $
                0.45
                
                $
                0.45
                
                $
                0.45
                
                $
                1.25
                
                $
                1.25
                
                $
                1.25
                
                $
                1.25Term
                    of warrants at December 31, 2006
                
                
                5.25
                    years
                
                
                5.4
                    years
                
                
                5.6
                    years
                
                
                4.2
                    years
                
                
                4.5
                    years
                
                
                4.7
                    years
                
                
                4.5
                    yearsMarket
                    Price on December 31, 2006
                
                $
                0.155
                
                $
                0.155
                
                $
                0.155
                
                $
                0.155
                
                $
                0.155
                
                $
                0.155
                
                $
                0.155Risk
                    free interest rate at December 31, 2006
                
                
                4.80
                %
                
                4.80
                %
                
                4.80
                %
                
                4.80
                %
                
                4.80
                %
                
                4.80
                %
                
                4.80
                %Volatility
                    at year end
                
                
                233.53
                %
                
                233.53
                %
                
                233.53
                %
                
                233.53
                %
                
                233.53
                %
                
                233.53
                %
                
                233.53
                %Fair
                    value per share of conversion shares
                
                $
                0.1347
                
                $
                0.1373
                
                $
                0.1401
                
                $
                0.1463
                
                $
                0.1487
                
                $
                0.1496
                
                $
                0.1501Beneficial
                    conversion feature fair value
                
                $
                1,345,275
                
                $
                2,399,395
                
                $
                2,226,630
                
                $
                2,090,760
                
                $
                1,043,530
                
                $
                415,445
                
                $
                621,414
                
                $
                10,142,448Warrant
                    fair value per share at year end
                
                $
                0.1533
                
                $
                0.1535
                
                $
                0.1537
                
                $
                0.1488
                
                $
                0.1501
                
                $
                0.1508
                
                $
                0.1511Fair
                    value of derivative related to warrants
                
                $
                252,945
                
                $
                219,505
                
                $
                202,884
                
                $
                163,680
                
                $
                82,555
                
                $
                33,176
                
                $
                49,863
                
                $
                1,004,608Fair
                    value of derivative related tobeneficial
                    conversion feature
                
                $
                1,345,275
                
                $
                2,399,395
                
                $
                2,226,630
                
                $
                2,090,760
                
                $
                1,043,530
                
                $
                415,445
                
                $
                621,414
                
                $
                10,142,448Aggregate
                    fair value of derivative instruments
                
                $
                1,598,220
                
                $
                2,618,900
                
                $
                2,429,514
                
                $
                2,254,440
                
                $
                1,126,085
                
                $
                448,621
                
                $
                671,277
                
                $
                11,147,056
  The
        derivative valuation gain (loss) reported in the accompanying condensed
        consolidated statements of operations results from the issuance, revaluation
        to
        fair value of the beneficial conversion feature and attached warrants associated
        with the above referenced notes to AJW and the derivative valuation loss
        related
        to the change in valuation of the beneficial conversion features related
        to
        notes issued to James Gardiner, William Robinson and Frank Lively and changes
        in
        value recognized upon conversion of the notes. As the fair value of the
        derivatives change, a gain or a loss is recognized. The components of the
        derivative valuation gain (loss) for the three months ended March 31, 2007
        and
        2006 consists of the following:
 
 Three
                    months ended March 31,2007
                
                2006Derivative
                    valuation gain - beneficial conversion revaluation - AJW
                
                
                64,548
                
                
                2,366,234Derivative
                    valuation gain (loss) - warrant revaluation AJW
                
                
                429,605
                
                
                (786,742
                )Derivative
                    valuation gain - beneficial conversion revaluation -
                    Robinson
                
                
                107,055
                
                
                -Derivative
                    valuation (loss) on issuance of notes - AJW
                
                
                
                
                
                (1,599,655
                )Derivative
                    valuation (loss) on issuance of warrants -AJW
                
                
                
                
                
                (492,900
                )Derivative
                    valuation (loss) on issuance of note - Gardiner
                
                
                
                
                
                (37,050
                )Derivative
                    valuation (loss) on issuance of note- Robinson
                
                
                
                
                
                (361,532
                )Derivative
                    valuation (loss) on issuance of notes - Lively
                
                
                
                
                
                (58,306
                )Derivative
                    valuation (loss) - beneficial conversion revaluation -
                    Gardiner
                
                
                
                
                
                (20,520
                )Total
                    Derivative valuation gain (loss)
                
                
                601,208
                
                
                (990,471
                )
  On
        April
        11, 2007, AJW converted $156,438 of the Notes for 3,563,483 Shares of Class
        A
        common stock of the Company The conversion was made at a 40% discount to
        market
        pursuant to the terms of the Secured Convertible Note agreements. As a result
        of
        the conversion, $149,666 of the derivative liability was reclassified to
        additional paid-in capital.
  
 
  9
  
 The
        transaction will be recorded in the second quarter of fiscal 2007. An analysis
        of the 2007 conversion of the AJW Notes and the significant assumptions used
        to
        value the beneficial conversion feature recognized upon conversion are contained
        in the following table:
  Conversion
                      date
                  
                  April
                      11, 2007Original
                      proceeds from note
                  
                  $
                  1,500,000Note
                      amount converted
                  
                  $
                  156,438Principal
                      remaining after conversion
                  
                  $
                  583,165Conversion
                      price
                  
                  $
                  0.044Term
                      of notes at conversion
                  
                  
                  1
                      yearShares
                      issued on conversion
                  
                  
                  3,563,483Potential
                      remaining conversion shares
                  
                  
                  12,148,637Common
                      Stock Price on conversion date
                  
                  $
                  0.055Risk
                      free interest rate at conversion date
                  
                  
                  4.97
                  %Volatility
                      on conversion dates
                  
                  
                  228.21
                  %Fair
                      value per share of conversion shares
                  
                  
                  0.0420Fair
                      value of derivative
                  
                  $
                  510,243Derivative
                      liability reclassified to additional paid-incapital
                      upon conversion
                  
                  $
                  149,666Derivative
                      valuation gain recognizedon
                      conversion
                  
                  $
                  115,381
 On
        May 8,
        2007, the Company received $335,000 pursuant to a Securities Purchase Agreement
        dated May 8, 2007 with AJW in exchange for 6% Callable Secured Convertible
        Notes
        and issued five year warrants to purchase 20,033,500 shares of common stock
        at
        an exercise price of $0.07 valued at $1,788,992 on the date of issuance which
        was recorded as a derivative liability. An aggregate of $2,992 was recognized
        as
        loan costs and $1,786,000 was recognized as a derivative valuation loss on
        issuance of the warrants. The beneficial conversion feature was valued at
        $687,873 and was recorded as a derivative liability. An aggregate of $335,000
        was allocated to discounts on the individual notes, representing 100% of
        the
        face value of the notes which will accrete over the three year life of the
        notes, with the remaining $387,873 recognized as a derivative valuation loss.
        The Company incurred loan costs totaling $71,492 which consists of fees of
        $68,500 paid in cash, and a five year warrant to purchase 33,500 shares of
        common stock priced at $0.07 valued at $2,992 using the Black Scholes method
        on
        the date of issuance which will be amortized over the three year term of
        the
        notes.
   10
  
 An
        analysis of the issuance under the May 8, 2007 Securities Purchase Agreement
        with AJW and the significant assumptions used to value the warrants and
        beneficial conversion feature are contained in the following table:
  
 Issue
                    date
                
                5/8/2007Aggregate
                    note amounts
                
                $
                335,000Conversion
                    price on issue dates
                
                $
                0.0219Term
                    of notes at issuance
                
                
                3
                    yearsShares
                    issuable upon conversion
                
                
                15,320,122Warrants
                    issued
                
                
                20,033,500Exercise
                    price of warrants
                
                $
                0.07Term
                    of warrants at issuance
                
                
                5
                    yearsMarket
                    Price on issue dates
                
                $
                0.047Risk
                    free interest rate on issuance date
                
                
                4.54
                %Volatility
                    on date of issuance
                
                
                231.77
                %Fair
                    value per share of conversion shares
                
                
                0.0449Beneficial
                    conversion feature fair value
                
                $
                687,873Note
                    discount amount
                
                $
                335,000Warrant
                    fair value per share at issuance
                
                $
                0.0893Fair
                    values of warrants at issuance dates
                
                $
                1,788,992Value
                    of warrants allocable to loan costs
                
                $
                2,992Fair
                    value of derivative related to warrants
                
                $
                1,786,000Fair
                    value of derivative allocated to benficialconversion
                    fearure
                
                $
                352,873Aggregate
                    fair value allocated to derivative instruments
                
                $
                2,141,865
  The
        Company is currently in discussions with Charles McClure to amend his note
        agreement.
   11
   The
        following table details the Notes payable - third parties and Long term notes
        payable outstanding as of March 31, 2007 and December 31, 2006.
  **March
                    31,**
                
                **December
                    31,****2007**
                
                **2006****Current
                    - Unrelated parties**Convertible
                    Notes payable C.M.G. Tech., interest accrues at 10% perannum
                    due February 25, 2007 currently in default
                
                
                822,094
                
                
                822,094Note
                    payable Charles McClure, secured by an airship, interest
                    accruesat
                    25.0% per annum and is due December 31, 2005, currently in
                    default
                
                
                250,000
                
                
                250,000Demand
                    Notes to Vendors - unsecured, interest accrues at 12% perannum
                    currently in default
                
                
                781
                
                
                781Note
                    payable - Sierra Nevada Corporation - non interest bearing secured
                    bycertain
                    inventory due August 25, 2006
                
                
                500,000
                
                
                500,000$
                1,572,875
                
                $
                1,572,875**Long-term
                    - unrelated parties**Notes
                    payable - AJW Partners, LLP and affiliates, callable
                    securedconvertible
                    notes bearing interest at 8% per annum, $739,573due
                    April 4, 2008; $1,300,000 due May 25, 2008 and$1,200,000
                    due August 4, 2008 less total discount of$1,282,795
                    and $1,549,058, respectively
                
                
                1,956,984
                
                
                1,690,721Notes
                    payable - AJW Partners, LLP and affiliates, callable
                    securedconvertible
                    notes bearing interest at 6% per annum, $1,000,000due
                    April 14, 2009; $500,000 due July 5, 2009, 200,000 due$200,000
                    due September 11, 2009 and $300,000 due October19,
                    2006 less total discount of $1,446,941 and $1,611,323,
                    respectively
                
                
                553,059
                
                
                388,677Total
                    long term notes payable
                
                $
                2,510,043
                
                $
                2,079,398
  **NOTE
        5 - NOTES PAYABLE - RELATED PARTIES**
  On
        April
        19th, 2006, the Board approved a $1,000,000 line of credit with Mr. Robinson.
        On
        April 19, 2006 pursuant to the line of Credit, the Company entered into a
        convertible variable promissory note in the principal amount as of March
        31,
        2006 of $565,188 including all related accrued interest. The note bears interest
        at the rate of 12% per annum, is unsecured and is convertible into Class
        A
        common stock at $0.30 per share. The note is due on December 31, 2007. The
        note
        contains a beneficial conversion due to the conversion price of $0.30 being
        lower than the market price of $0.53 on the date of issuance. The carrying
        value
        of the note in the accompanying balance sheet as of March 31, 2007 and December
        31, 2006 was $592,817 and $181,061, respectively and is recorded in Notes
        Payable - related parties.
 
   12
  
 Mr.
        Robinson advanced certain amounts from time to time to the Company under
        the
        line of credit during the quarter ended March 31, 2007 resulting in the
        recognition of additional discounts upon issuance. The derivative analysis
        of
        the valuation upon issuance and the revaluation as of March 31, 2007 and
        December 31, 2006 of the beneficial conversion feature related to Mr. Robinson's
        note and the significant assumptions used are contained in the following
        table:
  IssuancesReport
                    date
                
                from
                    January 1 to
                
                Report
                    dateDecember
                    31, 2006
                
                March
                    31, 2007
                
                March
                    31, 2007Aggregate
                    note amounts
                
                $
                362,412
                
                $
                430,163
                
                $
                792,575Conversion
                    price
                
                $
                0.30
                
                $
                0.30
                
                $
                0.30Term
                    of notes
                
                
                1.0
                    year
                
                
                .80
                    - .95 years
                
                
                .75
                    yearShares
                    issuable upon conversion
                
                
                1,375,974
                
                
                1,433,876
                
                
                2,859,893Market
                    Price
                
                $
                0.16
                
                $
                0.085
                    - $0.135
                
                $
                0.09Risk
                    free interest rate
                
                
                5.00
                %
                
                4.93%
                    - 5.07
                %
                
                4.90
                %Volatility
                
                
                233.53
                %
                
                231.76%
                    - 233.53
                %
                
                228.83
                %Fair
                    value per share of conversion shares
                
                $
                0.1051
                
                $
                0.042
                    - $0.083
                
                $
                0.0428Beneficial
                    conversion feature fair value
                
                $
                144,615
                
                $
                78,843
                
                $
                122,403Note
                    discount amount
                
                
                
                
                $
                78,843Fair
                    value of derivative related tobeneficial
                    conversion feature
                
                $
                144,615
                
                $
                -
                
                $
                122,403
 
  The
        following table details the Notes payable - related parties outstanding as
        of
        March 31, 2007 and December 31, 2006.
  **March
                    31,**
                
                **December
                    31,****2007**
                
                **2006**Convertible
                    Promissory Note - Cherokee Raiders, interest at 12%per
                    annum, due December 31, 2007, unsecured
                
                $
                262,255
                
                $
                262,255Convertible
                    Promissory Note - Proxity Inc., interest at 12% per annum,due
                    July 31, 2007, unsecured
                
                
                301,600
                
                
                301,600Convertible
                    Promissory Note - Billy Robinson, interest at 12%per
                    annum, due December 31, 2007, unsecured, net of discount
                    of$199,752
                    and $181,350, respectively
                
                
                592,817
                
                
                181,061$
                1,156,672
                
                $
                744,916
 **NOTE
        6- STOCKHOLDERS' DEFICIT**
  COMMON
        STOCK - At March 31 2007 and December 31, 2006 the Company had 67,017,316
        and
        66,657,316 shares of Class A Common Stock outstanding, respectively, 545,455
        shares of Class B Common Stock, and 2 shares of Class C Common Stock issued
        and
        outstanding with 200,000,000 shares of Class A and Class B Common Stock
        authorized, par value $.001, and 200,000,000 shares of Class C Common Stock
        authorized, par value $.001. In addition, the Company had 100,000,000 shares
        of
        Class A Preferred Stock authorized, par value $.001, with no shares issued
        and
        outstanding. Class B Common Stock allows for 1,000 votes per share. Class
        C
        Common Stock allows for one vote per share and entitles the holder to receive
        the net assets of the Company upon dissolution. Additional paid in capital
        at
        March 31, 2007 and December 31, 2006 was $20,415,353 and $20,372,513,
        respectively. The accumulated deficit as at March 31, 2007 and December 31,
        2006
        was $39,904,166 and $38,516,199 respectively.
  13
   The
        Company issued the following shares of Class A Common Stock during the quarter
        ended March 31, 2007.
  On
        January 19, 2007 the Company issued a total of 5,114 shares valued at $0.13
        per
        share to a vendor for services based on the closing market price as of that
        date. The Company recorded an expense of $665 as general and administrative
        expenses in the accompanying statement of operations for the quarter ended
        March
        31, 2007.
  On
        January 19, 2007 the Company issued a total of 357,059 shares valued at $0.13
        per share to a vendor for services rendered in partial settlement of accounts
        payable based on the closing market price as of that date. The Company recorded
        a reduction of accounts payable of $46,418 in the accompanying balance sheet
        at
        March 31, 2007.
  On
        February 12, 2007 the Company issued 360,000 shares valued at $0.12 per share
        to
        a vendor for services based on the closing market price as of that date.
        The
        Company recorded an expense of $43,200 as general and administrative expenses
        in
        the accompanying statement of operations for the quarter ended March 31,
        2007.
  On
        February 28, 2007 the Company issued a total of 251,538 shares valued at
        $0.11
        per share to a vendor for services rendered in settlement of accounts payable
        based on the closing market price as of that date. The Company recorded a
        reduction of accounts payable of $27,669 in the accompanying balance sheet
        at
        March 31, 2007 and a reduction of general and administrative expenses of
        $8,541
        for the quarter ended March 31, 2007.
 
 Subsequent
        to March 31, 2007 the Company issued the following shares of Class A Common
        Stock.
 
 On
        April
        11, 2007 the Company issued 3,563,483 shares of Class A Common Stock to AJW
        et
        al upon the conversion of notes in the aggregate principal amount of $156,438
        at
        a price of $0.044 per share.
 
 On
        April
        17, 2007 the Company issued 100,000 shares of Class A Common Stock to a vendor
        for services valued at $0.065 per share based on the closing market price
        as of
        that date. The Company will record an expense of $6,500 relative to this
        stock
        issuance in the second quarter of 2007.
  **NOTE
        7- INCOME TAXES**
  The
        Company has paid no federal or state income taxes since its incorporation.
        As of
        March 31, 2007 and December 31, 2006, the Company had net operating loss
        carry
        forwards for federal income tax reporting purposes of approximately $15,300,000
        and $15,019,484 respectively, which if unused, will expire through 2027.
        Deferred tax assets are reduced by a valuation allowance to the extent that
        uncertainty exists as to whether the deferred tax assets will ultimately
        be
        realized.
  **NOTE
        8- COMMITMENTS AND CONTINGENCIES**
  On
        January 1, 2006 we entered into a new employment agreement with Mr. Robinson,
        the CEO, Chairman and President of the Company. The term of this agreement
        is
        for a period of one year subject to renewal for successive one year periods,
        unless 14 days prior written notice is provided by either party. Mr. Robinson
        will receive an annual salary of not less than $250,000. The agreement provides
        for standard benefits, vacation and participation in the Company's bonus
        pool as
        defined in the agreement. In addition, the Company shall issue to Employee
        options to purchase shares of Company stock (Shares) in accordance with the
        Company's Stock Option Plan. The agreement may be terminated for due cause,
        upon
        death, upon disability, voluntary termination by him, or us, without due
        cause
        by providing 14 days prior written notice. Mr. Robinson is subject to a
        non-compete and non-solicitation provision during the employment term and
        during
        a specified Post-Employment Period (as defined in the employment
        agreement).
  On
        April
        1, 2006, TSI entered into a new employment agreement with John Youngbeck
        as
        Executive Vice President. The term of this agreement is one year, subject
        to
        renewal for successive one year periods, unless 14 days prior written notice
        is
        provided by either party. Mr. Youngbeck will receive an annual salary of
        not
        less than $100,000. The agreement provides for standard benefits, vacation
        and
        participation in the Company's bonus pool as defined in the agreement. In
        addition, the Company shall issue to Employee options to purchase shares
        of
        Company stock (Shares) in accordance with the Company's Stock Option Plan.
        The
        Agreement may be terminated for due cause, upon death, upon disability,
        voluntary termination by him, or us without due cause by providing 14 days
        prior
        written notice. Mr. Youngbeck is subject to a non-compete and non-solicitation
        provision during the employment term and during a specified Post-Employment
        Period.
  14
   On
        April
        1, 2006, TSI entered into a new employment agreement with Michael Lawson
        as
        Corporate Marketing Officer. The term of this agreement is one year, subject
        to
        renewal for successive one year periods, unless 14 days prior written notice
        is
        provided by either party. Mr. Lawson will receive an annual salary of not
        less
        than $100,000. The agreement provides for standard benefits, commissions
        of 2%
        of all gross sales less costs registered by the employee, vacation and
        participation in the Company's bonus pool as defined in the agreement. In
        addition, the Company shall issue to Employee options to purchase shares
        of
        Company stock (Shares) in accordance with the Company's Stock Option Plan.
        The
        Agreement may be terminated for due cause, upon death, upon disability,
        voluntary termination by him, or us without due cause by providing 14 days
        prior
        written notice. Mr. Lawson is subject to a non-compete and non-solicitation
        provision during the employment term and during a specified Post-Employment
        Period.
 
 On
        January 1, 2006, the Company entered into an hourly consulting agreement
        for
        with Steve Johnson. Fees due under the consulting agreement are convertible
        into
        Class A common shares of the Company by Mr. Johnson at the lesser of $0.30
        per
        share or the closing price on the date of conversion.
  In
        February, 2006, the Company entered into an Investor Relations Agreement
        for a
        term of one year to provide investor and shareholder relations services to
        the
        Company. The agreement calls for a monthly retainer of $6,000 and the issuance
        of warrants to purchase 600,000 shares of the Company's Class A common stock
        at
        a strike price of $0.45 per share and are fully vested. The warrants expire
        7
        years after the anniversary date. The value of these warrants was recorded
        in
        fiscal 2006.
 In
        March,
        2006 the Company executed a Due Diligence Agreement with GreenHills Ventures,
        LLC. ("GreenHills"). Under the agreement, the Company paid GreenHills $10,750
        plus expenses for GreenHills to perform due diligence on behalf of potential
        investors as a due diligence fee. In addition, the Company agreed to compensate
        GreenHills for any financing transaction (debt, equity, hybrid security,
        merger
        and acquisition or other similar arrangement financing) with any qualified
        purchaser as defined in the agreement. The compensation consists of the payment
        of cash of 10% of the aggregate value of any equity or non-loan financing
        and 7%
        of the value to be paid in Class A common stock of the Company. In the event
        of
        a non-equity financing, the compensation consists of payment of cash of 3%
        of
        the aggregate value of the transaction and 7% of the value to be paid in
        Class A
        common stock of the Company. The agreement calls for the payment of a breakup
        fee to be paid under certain conditions as defined in the agreement of 2.5%
        of
        the first $5,000,000 of a financing plus 1% of any amount greater than
        $5,000,000. There are no transactions proposed or pending at this time under
        this agreement.
 
 On
        April
        27, 2006 the Company entered into an Agreement, (the "Agreement") dated as
        of
        April 25, 2006, by and among the Company, Sierra Nevada Corporation "Sierra"
        and
        TSI. The Agreement is intended to clarify the relationship and obligations
        of
        the parties, which arise from three prior agreements (the Exclusive Agreement
        to
        Provide Integration Services, dated June 30, 2004, the Memorandum of Agreement
        dated November 4, 2004 and the Subcontract Agreement dated May 11, 2005)
        which
        were entered into prior to Techsphere becoming a wholly-owned subsidiary
        of the
        Company. The Agreement provides that SNC will serve as the prime contractor
        to
        Government End-Users for all Techsphere Airships and provided that Sierra
        will
        give Techsphere the right of first refusal to lease or sell other non-Techsphere
        manufactured airships to Sierra on competitive terms. The Agreement also
        is
        intended to arrive at an understanding with respect to amounts claimed by
        Sierra
        as owed, which arose from certain expenditures made by Sierra for which they
        are
        seeking reimbursement. The Agreement provides that if all other conditions
        of
        the Agreement are fulfilled that (i) Sierra will reduce its claim from $780,000
        to $500,000; (ii) the Company will within 90 days deliver four MAA-90 airship
        pods to Techsphere free and clear of any liens and encumbrances and (iii)
        if a
        delivery order is awarded and Techsphere delivers the completed MAA-90 airship
        to Sierra, Sierra will set-off the $500,000 payment due from the Company.
        The
        Company has delivered the four MAA-90 airship pods and has received the delivery
        order from Sierra in February, 2007 in excess of $1,000,000 calling for the
        completion of the MAA-90 airship as well as certain additional operating
        features and accessories. Final terms include a $500,000 credit against the
        note
        provided that a completed airship is delivered upon a mutually agreed upon
        milestone schedule.
 
 During
        the year ended December 31, 2006, the Company executed an Airship Advertising
        Agreement with a fortune 100 publicly traded company for the lease and operation
        of two of its SA-68A spherical airships. The Company received an aggregate
        of
        $2,760,000 under the terms of the contract as amended for the construction
        of
        the airship. The construction process was halted and the Airship Advertising
        Agreement was cancelled in the first quarter of 2007. The Company is in the
        process of negotiating a repayment schedule for the $2,760,000 which is
        categorized as “Refundable Deposits to Customer” in the accompanying balance
        sheet as of March 31, 2007 and December 31, 2006.
 
  15
  On
        December 10, 2006, the Company entered into a Licensing and Technical Assistance
        Agreement with Global Skyship Industries, Inc. (“Global”) for the use of certain
        patented technology and know how in the manufacture of TSI’s airships. The
        license agreement called for a term of 6 years ending December 10, 2012 and
        minimum royalty payments under the agreement of $240,000 for 2007 and 2008,
        $300,000 for 2009 and 2010 and $360,000 for 2011 and 2012.
  In
        February, 2007 the Company’s Columbus, GA lease expired and the facility is
        presently being leased on a month to month basis. The Company anticipates
        that
        it will allow Mr. Robinson’s lease for his apartment to expire at the end of its
        term on May 31, 2007.
 
 Certain
        trade vendors in the ordinary course of business have not been paid. There
        is
        currently no litigation pending for said vendors and the amounts owed have
        been
        accrued in the accompanying financial statements as of March 31, 2007 and
        December 31, 2006.
 
 The
        Company has granted certain registration rights with respect to the Securities
        Purchase Agreements with AJW dated April 1, 2005 and March 14, 2006 and May
        8,
        2007. These registration rights agreements call for penalties for failure
        to
        have an effective registration statement covering the securities under these
        agreements of 2.0% per month of the outstanding principal balance of the
        notes
        under said agreements. As part of the September 8, 2006 Letter Agreement
        discussed in the previous paragraph, AJW waived any deficiencies in the above
        mentioned Securities Purchase Agreements dated April 1, 2005 and March 14,
        2006
        including the penalties for failure to have the registration statement declared
        effective. If AJW chooses to assess these penalties, the Company would have
        a
        liability for said penalty as of March 31, 2007 of approximately $704,000.
        No
        amount has been accrued for these penalties as of March 31, 2007.
  **NOTE
        9 - TSI HOLDINGS CO. LLC**
 
 In
        2005,
        TSI formed TSI Holdings Co., LLC ("TSI, LLC") a Georgia limited liability
        company. On January 30, 2007, TSI reactivated TSI, LLC, in order to raise
        funds in order deploy two (2) SA-60 Airships. The Company’s intent is to sell an
        aggregate of twenty-five (25%) percent membership interest in TSI, LLC. During
        the quarter ending March 31, 2007 the Company sold units representing 4.5%
        of TSI,LLC  for $100,000 per unit for aggregate proceeds of $450,000.
  The
        aggregate amount of the value of the membership units issued has been recorded
        as “Minority interest in consolidated subsidiary” in the accompanying condensed
        consolidated statement of operations as of March 31, 2007, net of the 4.5%
        proportionate share of the losses of TSI LLC applicable to the
        minority  interest. Cyber Defense Systems, Inc has an aggregate 
membership interest of 95.5% in TSI, LLC at March 31, 2007.
 
 The
        minority interest investors have certain rights to be entitled to twenty-five
        percent (25%) of future available net income for distribution of TSI, LLC
        as
        defined in the agreements relative to their investment.
  **NOTE
        10- SUBSEQUENT EVENTS**
  On
        May 3,
        2007 the Company entered in an agreement with Affiliated Business Services,
        Inc.
        (“Affiliated”) to assist the Company with introducing the Company to potential
        sources of debt or equity financing. As part of the agreement, Affiliated
        agreed
        to settle the remaining balance owed by the Company to Affiliated related
        to its
        fees due under the financings related to AJW of $40,882 for a cash payment
        of
        $20,000. The Company will record this transaction in the second quarter of
        2007.
        In addition, the agreement calls for the payment of cash of 10% of the gross
        proceeds as a result of any investment transaction resulting from Affiliated
        having made such introduction as well a grant of an equal number of any warrants
        granted to any investor in any successful transaction. No transactions have
        closed relative to this agreement.
  
  16
  **ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY
        AND CAPITAL RESOURCES**
  **GENERAL**
  The
        following discussion and analysis should be read in conjunction with the
        Condensed Consolidated Financial Statements and Notes thereto appearing
        elsewhere in this Form 10-QSB.
  This
        management's discussion and analysis of financial conditions and results
        of
        operations contains certain "forward-looking statements" as defined in the
        Private Securities Litigation Reform Act of 1995. Such statements relating
        to
        future events and financial performance are forward-looking statements that
        involve risks and uncertainties, detailed from time to time in the Company's
        various SEC filings. No assurance can be given that any such matters will
        be
        realized.
  **RESULTS
        OF OPERATIONS**
  The
        Three
        Months Ended March 31, 2007 Compared to the Three Months Ended March 31,
        2006
  Revenues
        for the quarter ended March 31, 2007 were $42,798 as compared to $165,671
        for
        the quarter ended March 31, 2006, a decrease of $122,873. The decrease is
        due to
        lower sales of UAV’s from Cyber and reduced sales by TSI.
  Research
        and development costs relative to the development of the Company's airships
        and
        UAV's totaled $195,833 for the quarter ended March 31, 2007, an increase
        of
        $167,447 from the quarter ended March 31, 2006 amount of $28,386. The increase
        is primarily due to increased research and development efforts related to
        TSI’s
        airships in the quarter ended March 31, 2007.
  General
        and administrative expenses totaled $1,119,444 for the quarter ended March
        31,
        2007 as compared to 1,320,057 for the quarter ended March 31, 2006, a net
        decrease of $200,613. The decrease is primarily due to decreased amortization
        expense of approximately $123,000 and decreases in salaries and general
        overheads due to lower levels of operations in the quarter ended March 31,
        2007.
  The
        quarter ended March 31, 2006 included Stock option compensation expense of
        $633,695 for which no amount exists for the quarter ended March 31,
        2007.
 
 Other
        income (expense) for the quarter ended March 31, 2007 and 2006 was comprised
        of
        interest expense and derivative valuation gains or losses. Interest expense
        for
        the quarter ended March 31, 2007 was $676,609, of which $497,081 represents
        amortization of discounts on notes to AJW and Mr. Robinson. Interest expense
        for
        the quarter ended March 31, 2006 was $522,901 of which $313,915 represents
        amortization of discounts on notes to AJW. The remainder of the increase
        is
        primarily due to increased levels of debt related to AJW.
  Also
        included in other income (expense) is the derivative valuation gain for the
        quarter ended March 31, 2007 in the amount of $601,208 relates to the issuance
        of Notes and Warrants to AJW and Mr. Robinson treated as derivative securities.
        The derivative valuation loss for quarter ended March 31, 2006 in the amount
        of
        $990,471 relates to the issuance of Notes and Warrants to AJW Mr. Robinson,
        Mr.
        Lively and James Gardiner treated as derivative securities.
   17
  
 
 The
        components of the derivative valuation gains (losses) for the quarters ended
        March 31, 2007 and 2006 are presented in the following table:
  Three
                    months ended March 31,2007
                
                2006Derivative
                    valuation gain - beneficial conversion revaluation - AJW
                
                
                64,548
                
                
                2,366,234Derivative
                    valuation gain (loss) - warrant revaluation AJW
                
                
                429,605
                
                
                (786,742
                )Derivative
                    valuation gain - beneficial conversion revaluation -
                    Robinson
                
                
                107,055
                
                
                -Derivative
                    valuation (loss) on issuance of notes - AJW
                
                
                
                
                
                (1,599,655
                )Derivative
                    valuation (loss) on issuance of warrants -AJW
                
                
                
                
                
                (492,900
                )Derivative
                    valuation (loss) on issuance of note - Gardiner
                
                
                
                
                
                (37,050
                )Derivative
                    valuation (loss) on issuance of note- Robinson
                
                
                
                
                
                (361,532
                )Derivative
                    valuation (loss) on issuance of notes - Lively
                
                
                
                
                
                (58,306
                )Derivative
                    valuation (loss) - beneficial conversion revaluation -
                    Gardiner
                
                
                
                
                
                (20,520
                )Total
                    Derivative valuation gain (loss)
                
                
                601,208
                
                
                (990,471
                )
 The
        derivative gain for the quarter ended March 31, 2007 relates primarily to
        the
        decrease in the value of the common stock for the year ended December 31,
        2006.
        The stock price was $0.09 as of March 31, 2007 as compared to $0.155 as of
        December 31, 2006. As a result of the decrease of the stock price, the valuation
        of the underlying derivatives decreased significantly. As a result, since
        the
        Company recognizes a gain due to the change in valuation at each reporting
        date.
 
 The
        derivative loss for the quarter ended March 31, 2006 relates primarily to
        the
        issuances of $1,000,000 notes and 1,100,000 warrants to AJW on March 14,
        2006 as
        well as the losses on issuance to Mr. Gardiner, Mr. Lively and Mr. Robinson
        as
        well as losses in the revaluation of the warrants somewhat offset by gains
        in
        the revaluation of the note issued to AJW.
  
 **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 $5,537 as of March 31, 2007 are not
        sufficient to support current levels of operations for the next twelve months
        and it will be necessary for the Company to seek additional
        financing.
  On
        May 8,
        2007, the Company received $335,000 pursuant to a Securities Purchase Agreement
        dated May 8, 2007 with AJW in exchange for 6% Callable Secured Convertible
        Notes
        and issued five year warrants to purchase 20,033,500 shares of common stock
        priced at $0.07. The Notes are convertible into common stock of the Company
        at a
        60% discount to market pursuant to the terms of the Secured Convertible Note
        agreements. The conversion of the Notes is subject to an effective Registration
        Statement. The Notes are secured by all of the Company's assets, except for
        its
        accounts receivable and proceeds of inventory. This financing is not considered
        adequate to sustain the Company’s operations.
  The
        Company is in negotiations with a potential lending source, but there can
        be no
        assurance that these negotiations will be successful or that the Company
        will
        obtain sufficient financing or that financing will be structured on agreeable
        terms.
  Subject
        to the realization of certain financings as described above we should be
        in a
        position to fund the anticipated level of operations for at least one year.
        However, there can be no assurances that this will be the case. If we are
        unable
        to obtain sufficient financing, the Company will be forced to severely curtail
        or even cease operations.
   18
  **Critical
        Accounting Policies**
  Our
        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. We evaluate
        our
        estimates on an ongoing basis, including estimates for income tax assets
        and
        liabilities and the impairment of the value of investments. We base our
        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. We believe that the following critical accounting policies affect
        its more significant estimates used in the preparation of its financial
        statements.
  **Accounting
        for Income Taxes**
  No
        income
        taxes have been paid or accrued because the Company had no net income since
        inception. The Company recognizes the amount of income taxes payable or
        refundable for the current year and recognizes deferred tax assets and
        liabilities for the future tax consequences attributable to differences between
        the financial statement amounts of certain assets and liabilities and their
        respective tax bases. Deferred tax assets and deferred tax liabilities are
        measured using enacted tax rates expected to apply to taxable income in the
        years those temporary differences are expected to be recovered or settled.
        Deferred tax assets are reduced by a valuation allowance to the extent that
        uncertainty exists as to whether the deferred tax assets will ultimately
        be
        realized.
  **Impairment
        of Investments**
  Long-lived
        assets are reviewed for impairment quarterly or when events or changes in
        circumstances indicate that the carrying amount may not be recoverable.
        Recoverability of assets to be held and used is measured by comparison of
        the
        carrying amount of an asset to future net cash flows expected to be generated
        by
        the asset. If such assets are considered to be impaired, the impairment to
        be
        recognized is measured by the amount that the carrying amount of the assets
        exceeds the fair value of the assets.
   **Derivative
        Securities**
  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.
 
 **Recent
        Accounting Pronouncements**
 
 In
        September 2006, the FASB issued SFAS No. 157, "Fair Value Measures" ("SFAS
        157"). SFAS 157 defines fair value, establishes a framework for measuring
        fair
        value, and expands disclosures about fair value measurements. This statement
        applies under other accounting pronouncements that require or permit fair
        value
        measurements. However, it does not apply to SFAS 123(R). This statement shall
        be
        effective for financial statements issued for fiscal years beginning after
        November 15, 2007, and interim periods within those fiscal years. Earlier
        application is encouraged, provided that the reporting entity has not issued
        financial statements for that fiscal year, including any financial statements
        for an interim period within that fiscal year. The provisions of this statement
        should be applied prospectively as of the beginning of the fiscal year in
        which
        this Statement is initially applied, except in some circumstances where the
        statement shall be applied retrospectively. The Company is currently evaluating
        the effect, if any, of SFAS 157 on its financial statements.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities”, including an amendment of FASB
        Statement No. 115 (“SFAS 159”). This pronouncement permits entities to choose to
        measure many financial instruments and certain other items at fair value
        that
        are not currently required to be measured at fair value and to recognize
        the
        resulting gains and losses in the results of operations. SFAS 159 is effective
        as of the beginning of an entity’s first fiscal year that begins after November
        15, 2007. The impact of adopting SFAS 159 on the Company’s consolidated
        financial statements, if any, has not yet been determined.
  19
  
  **ITEM
        3. CONTROLS AND PROCEDURES**
  As
        required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal
        period covered by this report, we have carried out an evaluation of the
        effectiveness of the design and operation of our disclosure controls and
        procedures. This evaluation was carried out under the supervision and with
        the
        participation of our company's management, including our chief executive
        officer
        and chief financial officer. Based upon that evaluation, our chief executive
        officer and chief financial officer concluded that our disclosure controls
        and
        procedures are effective at March 31, 2007. There have been no changes in
        our
        internal controls over financial reporting in connection with this evaluation
        that occurred during the first quarter of fiscal 2007 that has materially
        affected, or is reasonably likely to materially affect, our internal control
        over financial reporting.
 
 Disclosure
        controls and procedures are controls and other procedures that are designed
        to
        ensure that information required to be disclosed in our reports filed or
        submitted under the Exchange Act (a) is recorded, processed, summarized and
        reported, within the time periods specified in the Securities and Exchange
        Commission's rules and forms and (b) is accumulated and communicated to
        management, including our chief executive officer and chief financial officer,
        as appropriate, to allow timely decisions regarding required
        disclosure.
 
  20
  **PART
        II OTHER INFORMATION**
  **ITEM
        2. CHANGES IN SECURITIES**
  On
        January 19, 2007 the Company issued a total of 5114 shares valued at $0.13
        per
        share to a vendor for services based on the closing market price as of that
        date.
  On
        January 19, 2007 the Company issued a total of 357,059 shares valued at $0.13
        per share to a vendor for services rendered in partial settlement of accounts
        payable based on the closing market price as of that date.
  On
        February 12, 2007 the Company issued 360,000 shares valued at $0.12 per share
        to
        a vendor for services based on the closing market price as of that
        date.
  On
        February 28, 2007 the Company issued a total of 251,538 shares valued at
        $0.11
        per share to a vendor for services rendered in settlement of accounts payable
        based on the closing market price as of that date.
 
 On
        April
        17, 2007 the Company issued 100,000 shares of Class A Common Stock to a vendor
        for services valued at $0.065 per share based on the closing market price
        as of
        that date.
 On
        April
        11, 2007 the Company issued 3,563,483 shares of Class A Common Stock to AJW
        et
        al upon the conversion of notes in the aggregate principal amount of $156,438
        at
        a price of $0.044 per share.
 
 **ITEM
        6. 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.
  21
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities and Exchange Act of 1934, the registrant
        has duly caused this report to be signed on its behalf by the undersigned
        thereunto duly authorized.
  **CYBER
        DEFENSE SYSTEMS, INC.**
  May
        21,
        2007
 
 By:
        /s/ William C. Robinson
 William
        C. Robinson
 Chief
        Executive Officer,
 President
        and Chairman
 
 By:
        /s/ David M. Barnes
 David
        M.
        Barnes
 Chief
        Financial Officer
 
    22