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

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

                                    FORM 10-QSB

                For the Quarterly Period Ended March 31, 2005

                     Commission File Number: 333-46424

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

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

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

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

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


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


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


       Title of Class                   Number of Shares Outstanding
-----------------------------           -----------------------------
Class A Common Stock
(par value $0.001 per share)            28,019,414 as of May 18, 2005
Class B Common Stock
(Par Value $0.001 per share)               300,000 as of May 18, 2005
Class C Common Stock
Par value $0.001 per share)                      2 as of May 18, 2005
<PAGE>

                                      INDEX
                                                                   Page
                                                                  Number
     PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of
   March 31, 2005 (unaudited) and December 31, 2004................  1
Consolidated Statements of Operations for the
   Three Months Ended March 31, 2005 and 2004 (unaudited)..........  2
Consolidated Statements of Cash Flows for the
   Three Months Ended March 31, 2005 and 2004 (unaudited).......... 3-4
Notes to the Consolidated Financial Statements (Unaudited)......... 5-15

Item 2. Management's Discussion and Analysis of
             Financial Condition or Plan of Operations.............  16

Item 3. Controls and procedures....................................  20


     PART II. OTHER INFORMATION

Item 1. Legal Proceedings .......................................... 20

Item 2. Unregistered Sales of Equity Securities..................... 20

Item 3. Defaults Upon Senior Securities............................. 21

Item 4. Submission of Matters to a Vote of Security Holders......... 21

Item 5. Other Information .......................................... 21

Item 6. Exhibits and Reports on Form 8-K............................ 21

Signatures.......................................................... 22
<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              March 31,2005  December 31, 2004
                                                              -------------  -----------------
                                                               (Unaudited)
<S>                                                            <C>            <C>
                                    ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................   $     1,424    $   206,270
Accounts receivable ........................................       770,205        747,155
Inventory ..................................................       383,679           --
                                                               -----------    -----------
TOTAL CURRENT ASSETS .......................................     1,155,308        953,425

OTHER ASSETS
     Intangible assets, net of accumulated amortization
        of $122,914 and $99,291 respectively ...............       477,086        506,252
Property and equipment, net of accumulated depreciation
  of $2,445 and $29,513 respectively .......................         5,296          5,603
Deposits and costs of equipment ............................       150,976        150,976
Deposits on airships .......................................     1,175,000      1,175,000
Loan Costs, net of accumulated amortization of $9,828
   and $5,292 respectively .................................         8,313         12,849
Security deposits ..........................................         7,156          7,156
                                                               -----------    -----------
TOTAL ASSETS ...............................................   $ 2,979,135    $ 2,811,261
                                                               ===========    ===========

                      LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable and accrued liabilities ...................   $ 1,615,717    $ 1,319,772
Accounts payable related parties ...........................       474,959        468,176
Assumed debt of subsidiary .................................        29,337         33,337
Notes payable - related parties ............................       992,868      1,137,768
Note payable - Quebec, Inc. ................................       242,216        242,216
                                                               -----------    -----------
     TOTAL CURRENT LIABILITIES .............................   $ 3,355,097    $ 3,201,269
                                                               -----------    -----------
     Total liabilities .....................................     3,355,097      3,201,269
                                                               -----------    -----------
Minority interest in Cyber Aerospace, Corp. (6.2%) .........        26,581

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

 SHAREHOLDERS' DEFICIT:

Class A Preferred stock, $0.001 par value; 100,000,000
   Shares authorized; none issued and outstanding ..........          --             --
Common stock:
Class A, $0.001 par value; 200,000,000 shares authorized;
28,019,414 and 25,921,562 shares issued and outstanding
respectively ...............................................        28,019         25,921
Class B, $0.001 par value; 200,000,000 shares authorized;
300,000 and 150,000 shares issued and outstanding
respectively ...............................................           300            150
Class C, $0.001 par value; 200,000,000 shares authorized;
2 shares issued and outstanding ............................          --             --
Additional paid-in capital .................................     6,191,288        461,762
Accumulated other comprehensive loss .......................        (7,064)        (7,064)
Accumulated deficit ........................................    (6,588,505)      (897,358)
                                                               -----------    -----------
Total shareholders' deficit ................................      (375,962)      (416,589)
                                                               -----------    -----------
     TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT ...........   $ 2,979,135    $ 2,811,261
                                                               ===========    ===========
</TABLE>

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


                                       -1-
<PAGE>

                    CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY

                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                                         THREE MONTHS ENDED
                                                              MARCH 31,

                                                      2005             2004
                                                      ----             ----

Revenues ...................................     $       --        $       --

Expenses

General and administrative .................          561,628           113,739
                                                 ------------      ------------
Total expenses .............................          561,628           113,739

Loss from Operations .......................         (561,628)         (113,739)

Other Income (Expense)
Interest income ............................             --               1,850
Interest expense ...........................         (552,450)           (3,540)
Write off of computer software .............             --             (12,205)
Impairment of goodwill .....................       (4,577,069)             --
                                                 ------------      ------------
Other Income (Expense), net ................       (5,129,519)          (13,895)
                                                 ------------      ------------

Net Loss Before Income Tax and
 Minority Interest .........................       (5,691,147)         (127,634)
                                                 ------------      ------------

Provision for income tax ...................             --                --
Minority interest ..........................             --                --
                                                 ------------      ------------

Net loss ...................................     $ (5,691,147)     $   (127,634)

Basic and diluted loss per share ...........     $      (0.22)     $      (0.01)
                                                 ============      ============
Weighted average number of Class A
 common shares outstanding .................       25,921,562        18,750,000
                                                 ============      ============


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


                                       -2-
<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

                                                          THREE MONTHS ENDED
                                                              MARCH 31,

                                                         2005         2004
                                                         ----         ----
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss .....................................   $(5,691,147)   $  (127,634)
   Adjustments to reconcile net loss to net
   cash from operating activities:
     Interest expense on beneficial conversion ..       517,000
     Impairment of goodwill .....................     4,577,069
     Issuance of stock for services .............       244,124
     Depreciation and amortization ..............        34,009         14,863
     Write off of property and equipment ........                       12,205
     Gain on currency adjustment ................                          414
   Changes in assets and liabilities
    Inventory ...................................      (383,679)          --
    Accounts payable and accrued liabilities ....       302,945         (1,184)
                                                    -----------    -----------
NET CASH FROM OPERATING ACTIVITIES ..............      (399,679)      (101,336)
                                                    -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
   Change in related party receivables/payables .       (16,267)       115,809
                                                    -----------    -----------
NET CASH FROM INVESTING ACTIVITIES ..............       (16,267)       115,809
                                                    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES

  Proceeds from notes payable, related parties ..          --            1,050
  Principal payments on notes payable
    related parties .............................       (34,900)          --
  Payments on debt assumed from subsidiary ......        (4,000)       (15,000)
  Issuance of common stock ......................       250,000           --
                                                    -----------    -----------
NET CASH FROM FINANCING ACTIVITIES ..............       211,100        (13,950)
                                                    -----------    -----------
Net (decrease) increase in cash .................      (204,846)           523
Cash and cash equivalents, beginning ............       206,270            319
                                                    -----------    -----------
Cash and cash equivalents, ending ...............   $     1,424    $       842
                                                    ===========    ===========

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


                                    -3-
<PAGE>

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

                                                            THREE MONTHS ENDED
                                                                 MARCH 31,

                                                            2005         2004
                                                            ----         ----

Supplemental disclosure of cash flow information:

Cash paid for interest ...............................   $    7,000   $     --
Cash paid for income taxes ...........................         --           --

Supplemental disclosure of non-cash investing
  and financing information:
Common Stock issued for debt .........................      117,000         --
Common Stock issued for shares of Cyber Aerospace ....    4,603,650
Retirement of fully depreciated assets ...............         --         29,513
                                                         ----------   ----------

   The accompanying notes are an integral part of these financial statements


                                       -4-
<PAGE>

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

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

The  majority and  controlling  shareholders  of the company are  Proxity,  Inc.
("Proxity"),  a  publicly  traded  company  ("PRXT")  and  Cherokee  Raiders,  a
partnership, ("Cherokee") owning 66.9% and 24.1% of the Class A common shares of
the  Registrant  respectively  as at March 31, 2005. In addition,  Cherokee also
owns 150,000 of the issued and outstanding shares of Class B common stock, which
allow for 1,000 votes per share,  and Cherokee and Proxity each own one share of
the two  shares  of Class C common  stock  issued  and  outstanding.  The  Chief
Executive  Officer of both  Proxity  and  Cherokee  is Mr.  Robinson,  the Chief
Executive Officer of the Registrant.

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

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

Condensed Interim Financial  Statements -- The accompanying  unaudited condensed
consolidated financial statements include the accounts of Cyber Defense 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,  2005 and such
financial  statements  should be read in  conjunction  with the  Company's  Form
10-KSB/A for the year ended  December  31, 2004 and other  filings made with the
Securities and Exchange Commission.


                                       -5-
<PAGE>

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

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

Use of Estimates - The  preparation of financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts  of  assets  and  liabilities,   disclosure  of  contingent  assets  and
liabilities  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates.

Business Condition - The accompanying financial statements have been prepared on
a going concern  basis,  which  contemplates  the  realization of assets and the
satisfaction  of liabilities  in the normal course of business.  As shown in the
financial  statements  for the three months  ended March 31,  2005,  the Company
recorded no revenue and incurred a net loss of $5,691,147,including a charge for
impairment  of  goodwill  in the  amount of  $4,577,069,  and for the year ended
December 31, 2004, the Company recorded  revenues of $3,026,287,  but incurred a
net  loss of  $420,653.  The  lack of  sufficient  revenues  and the  loss  from
operations raise  substantial doubt about the Company's ability to continue as a
going concern for a reasonable  period of time. The financial  statements do not
include any adjustments  relating to the  recoverability  and  classification of
recorded assets or the amount and  classification  of liabilities which might be
necessary  should the  Company be unable to  continue  as a going  concern.  The
Company's  continuation  as a going  concern is  dependent  upon its  ability to
generate  sufficient  cash flows to meet its  obligations on a timely basis,  to
obtain  additional  financing  as may be  required,  and  ultimately  to  attain
successful operations (see Notes 9 and 11).

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

Inventory -- At March 31,  2005,  inventory  of $383,679  primarily  consists of
parts for the airships that the Company sells and services.

Property and Equipment -- Property and equipment  consists of computer software.
The  software  is  recorded  at  cost.   Depreciation   is  computed  using  the
straight-line method over the estimated useful lives of the assets. 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  quarterly.  Recoverability  of
assets to be held and used is measured by comparison  of the carrying  amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are  considered  to be  impaired,  the  impairment  to be  recognized  is
measured by


                                       -6-
<PAGE>

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


the amount that the carrying  amount of the assets exceeds the fair value of the
assets.  Assets to be  disposed  of are  reported  at the lower of the  carrying
amount or fair value less costs to sell.  Based on the  evaluation  at March 31,
2004, an impairment of $12,205 for a reduction in the value of certain equipment
was  recorded  for the three month period then ended and based on a valuation at
March 31, 2005, goodwill of $4,577,069 was impaired.

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

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

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

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

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


                                       -7-
<PAGE>

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

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

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

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

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

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

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


                                      -8-
<PAGE>

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


NOTE 2 - RELATED PARTY TRANSACTIONS

Proxity, Inc. ("Proxity") - Proxity owned 100% of the stock of On Alert Systems,
Inc. at December 31, 2003. On Alert purchased the GDS and Traptec  licenses from
Proxity at  Proxity's  cost.  As of December  31,  2003,  On Alert had  accounts
payable and notes payable to Proxity of $184,506 and $107,011,  respectively. As
of March 31, 2005, the Company had accounts payable and notes payable to Proxity
of $474,959 and $-0- respectively.

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

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

Cyber  Aerospace - Prior to the three month period  ended March 31, 2005,  Cyber
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
Cyber Aerospace were  eliminated  during  consolidation.  On March 31, 2005, the
Company  purchased the minority interest so that Aerospace became a wholly owned
subsidiary and was then merged with and into the Company (see Note 3).

Cherokee Raiders - Cherokee's  general partner is William C. Robinson.  Cherokee
and Mr.  Robinson  also own control  positions  with  proxies in Proxity.  As of
December 31, 2004, the Company had a note payable to Cherokee of $21,166.  As of
March 31,  2005,  the  Company  had a note  payable to Cherokee in the amount of
$868,079.

William C.  Robinson - Mr.  Robinson  has  ownership  in  Proxity  and  Cherokee
Raiders. He is also the CEO and CFO of the Company.

NOTE 3 - ACQUISITION OF  MINORITY INTEREST IN SUBSIDIARY

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

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


                                       -9-
<PAGE>

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

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

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

The assets acquired and liabilities assumed were as follows:

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

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

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

NOTE 4 - INTANGIBLE ASSETS

During 2004, the Company  purchased  exclusive  marketing rights from Techsphere
International  ("TSI").  These  rights  were  recorded at their cost of $500,000
because TSI is a non-related  party.  These marketing rights are being amortized
over six years,  which is the life of the contract and the monthly  amortization
expense is $6,944. In 2004, the Company purchased designs and plans for unmanned
air vehicles  (UAVs) which have a useful life of 3 years.  The cost was $100,000
and the monthly amortization is $2,777. Amortization expense was $29,166 for the
three months ended March 31, 2005.


                                      -10-
<PAGE>

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

NOTE 5 - NOTE PAYABLE - QUEBEC

On August  23,  2004,  the  Company  and  Quebec,  Inc.,  ("Quebec")  a Canadian
corporation, executed a Secured Commercial Promissory Note pursuant to the terms
of which the Company borrowed  $242,216 from Quebec.  Prepaid interest of $9,316
for 61 days was  withheld  from the  initial  funding  and  thereafter  interest
accrues at an annual rate of 24%. The Note is secured by securities owned by Mr.
Robinson,  the company's Chief Executive Officer, and will be further secured by
equipment  purchased by the Company which was the subject  Equipment  upon which
deposits were paid from a portion of the loan proceeds.  Prepayment was required
from any  equity or loan funds  raised by the  Company  and full  payment of all
remaining principle and accrued interest is due February 18, 2005. Payment terms
were  amended  on  February  8,  2005 to  provide  for  payment  of one half the
principal  and  all  accrued  interest  through  March  10,  2005,  as  well  as
transaction  costs and  extension  fees,  through  the sale of a portion  of the
securities  owned by Mr.  Robinson.  All  funds  paid to the  lender  from  such
securities  sales  constitute  a loan by Mr.  Robinson  to the  Company.  If the
Company does not raise equity or loan funds  sufficient  to repay the  remaining
balance due within the 45 day period  immediately  following  the payment of the
first half of the loan,  then the  remainder  of the loan will be  repaid,  with
interest,  from continued  sales of securities  pledged by Mr.  Robinson,  which
payments would constitute additional loans by Mr. Robinson to the Company. Costs
incurred in connection  with the loan were  capitalized  and are being amortized
over the life of the loan. For the period ended March 31, 2005, amortization
expense of the loan costs was $4,536.

On April 11,  2005,  the Company and Quebec  executed  another  amendment to the
payment  terms whereby an extension fee of $25,000 was paid and Quebec agreed to
obtain  payment  of a  portion  of the loan by  selling,  at the  earliest  time
available  to it, and by any legal  means  available,  sufficient  shares of the
collateral to re-pay $116,450 of principal and $28,997 for interest  through May
10, 2005. Amounts remaining due after the  aforementioned  shall be payable from
any  equity  or loan  proceeds  obtained  by the  Company  from the date of this
amendment until the repayment of all amounts due under the loan; the proceeds of
the second  traunche of loan proceeds from the Millenium Group et al pursuant to
the SB-2  filing  requirement  or from  corporate  cash  flow and  resources  as
available during the 45 days subsequent to this amendment.


                                      -11-
<PAGE>

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

NOTE 6 - NOTES PAYABLE - RELATED PARTIES

<TABLE>
<CAPTION>
                                                             March 31,   December 31,
                                                                2005        2004
                                                            ----------   ----------
<S>                                                         <C>          <C>
Note payable - Joe Theisman - interest accrues at 18%
     per annum, due April 30 through September 30, 2005,
     in equal monthly installments, unsecured               $     --     $  110,000

Note payable - Cherokee Raiders - interest accrues at 12%
     per annum, due on demand and is unsecured                  24,789       58,993

Note payable - Cherokee Raiders - interest accrues at 12%
     per annum, due November 30, 2005 and is unsecured         868,079      868,775

Note payable - Jim Alman - interest accrues at 8% per
     Annum, due December 5, 2005                               100,000      100,000
                                                            ----------   ----------
                                                            $  992,868   $1,137,768
                                                            ----------   ----------
</TABLE>

NOTE 7 - STOCKHOLDERS' DEFICIT

Common Stock - At March 31, 2005, the Company had  28,019,414  shares of Class A
Common Stock,  300,000  shares of Class B Common Stock,  and 2 shares of Class C
Common Stock issued and outstanding with 200,000,000  shares of each of Class A,
B and C  authorized  with a par value of $0.001.  In  addition,  the Company had
100,000,000 shares of Class A Preferred Stock authorized, par value$0.001,  with
no shares issued and outstanding.  The Company had $6,191,288 in additional paid
in capital and an accumulated  deficit of $6,588,505 of which $4,577,069 was for
impairment  of  goodwill.  Class B Common Stock allows for 1000 votes per share.
Class C Common  Stock  allows for one vote per share and  entitles the holder to
receive the net assets of the Company  upon  dissolution.  At December 31, 2004,
the Company had  25,921,562  shares of Class A Common Stock,  150,000  shares of
Class B Common Stock issued and outstanding and 2 shares of Class C common stock
issued and outstanding with  200,000,000  shares of each of Class A, Class B and
Class C Common Stock authorized, par value $.001.

NOTE 8 - INCOME TAXES

The Company has paid no federal or state income  taxes since its  incorporation.
As of March 31, 2005 and December 31, 2004,  the Company had net operating  loss
carry  forwards  for federal  income tax  reporting  purposes  of  approximately
$6,537,000 and $875,000 respectively, which if unused, will expire through 2025.
Deferred  tax assets are  reduced by a  valuation  allowance  to the extent that
uncertainty  exists as to whether the  deferred  tax assets will  ultimately  be
realized.


                                      -12-
<PAGE>

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

NOTE 9 - Working Capital Financings

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

On February 18, 2005, the Company and Bedlington Securities, Ltd. ("Bedlington")
executed a Convertible Promissory Note (the "Bedlington Note") for the principal
amount of $250,000 was  advanced to the Company on February  25, 2005.  Interest
was to accrue on the Bedlington  Note at the rate of 18% per annum and repayment
terms  required six equal monthly  payments  commencing  April 30, 2005 with the
last payment on September 30, 2005 to include all accrued  interest.  Bedlington
had the right to convert  the  outstanding  amount of the  Bedlington  Note into
Class A common  shares of the Company at any time upon five days notice and such
conversion was to be calculated at 50% of the average closing price of the Class
A common shares for the 30 days preceding the date of conversion. All amounts so
converted  were not to be subject to any accrual of interest.  In addition,  the
Company had the right to pay amounts due under the  Bedlington  Note at any time
with  shares  of its  Class A  common  stock  pursuant  to the same  formula  by
notifying  Bedlington  of  its  intent  to do so  and  requesting  a  Notice  of
Conversion  from  Bedlington.   On  February  22,  2005,  the  Company  informed
Bedlington  that it would make payment in full with common shares and Bedlington
submitted a Notice of Conversion to the Company. As a result, the Company issued
217,391 shares of its Class A common stock pursuant to the calculation described
above.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

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


                                      -13-
<PAGE>

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

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

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

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

The Company has an exclusive  agreement  with Traptec  Corporation  to represent
Traptec  Corporation as a marketing  representative.  The parties have agreed to
divide  equally  the before  tax net  profits  generated  from any such sales as
generated  under the agreement.  However,  the parties have agreed that if their
efforts have not  generated  over $200,000 in net sales  profits,  to be divided
equally, by the end of the 2005, the total license fee for that year shall be at
least $100,000 to Traptec  Corporation.  As of March 31, 2005, no sales have
been made in connection with this license.


                                      -14-
<PAGE>

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

NOTE 11 - SUBSEQUENT EVENTS

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

In connection  with the offering,  the Company  issued an aggregate of 4,000,000
warrants to purchase  common  stock at a price of $4.25 per share.  The warrants
are  exercisable  for a period of five years.  The  conversion  of the notes are
subject to an  effective  Registration  Statement.  The Company has the right to
redeem the notes under certain circumstances and the notes are secured by all of
the  Company's  assets,  except for its  accounts  receivable  and  proceeds  of
inventory.  The  proceeds  of  the  offering  will  be  used  to  repay  certain
indebtedness  and for working  capital.  The initial funding of $1.5 million was
received on April 4, 2005.

Affiliated  Business  Services,  Inc.  earned a finders fee of 75,000 shares for
introducing the Company to the lending group.

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


                                      -15-
<PAGE>

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

      GENERAL

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

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

                              RESULTS OF OPERATIONS

The Three Months  Ended March 31, 2005  Compared to the Three Months Ended March
31, 2004

      General and administrative  expenses totaled $561,628 for the three months
ended March 31, 2005 as compared to $113,739  for the three  months  ended March
31, 2004, a net increase of $447,889. The increase is primarily due to increased
payroll,  specialized  consulting and legal fees as well as the inclusion of the
general and  administrative  expenses of Cyber Aerospace for the full quarter in
the amount of $32,067  whereas in the 2004 period such  expenses were from March
15, 2004 (the date of inception) through March 31, 2004 and totaled $7,200.

      Other  income  and  expense  for the three  months  ended  March 31,  2005
consists of interest  expense of $552,450 which is comprised of interest expense
of $35,450 on notes  payable and  $517,000 of interest  expense  pursuant to the
beneficial  conversion  feature of certain exchanges of debt to common stock. In
addition,  there was a charge of $4,577,069  for impairment of the goodwill that
was recorded as a result of the  acquisition  of the 6.2%  minority  interest in
Cyber Aerospace on March 31, 2005. The Company had previously owned 93.8%. Other
income and expense for the three  months  ended March 31, 2004 was  comprised of
interest  income of  $1,850,  interest  expense  of $3,540  and the write off of
impairment in the value of computer software of $12,205.

                         LIQUIDITY AND CAPITAL RESOURCES

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

      The Company's cash and cash  equivalents of $1,424 as of March 31, 2005 is
not  sufficient  to support  current  levels of  operations  for the next twelve
months  and it is  therefore  necessary  for  the  Company  to  seek  additional
financing.

      The Company has entered into  agreements  with Equipment  Depot,  Inc., of
Deerfield Beach,  Florida, to acquire  approximately  $8,100,000,  as valued, of
aerospace  R & D and  production  equipment  to further the  fulfillment  of the
companies' anticipated contracts and purchase orders. The transactions are


                                      -16-
<PAGE>

expected  to close  upon  the  completion  of the  financing  institution's  due
diligence and legal review. The Company is paying approximately $5.4 million, in
a  combination  of cash and the  exchange of newly  issued  common  stock of the
Company,  valued  at $2.50 a share  for the  purposes  of the  transactions,  to
complete the purchase.

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

      On  February  18,  2005,  the  Company  and  Bedlington  Securities,  Ltd.
("Bedlington")  executed a Convertible  Promissory Note (the "Bedlington  Note")
for the principal amount of $250,000 which amount was advanced to the Company on
February 25, 2005.  Interest was to accrue on the Bedlington Note at the rate of
18% per annum and repayment terms required six equal monthly payments commencing
April 30,  2005 with the last  payment on  September  30,  2005 to  include  all
accrued interest.  Bedlington had the right to convert the outstanding amount of
the  Bedlington  Note into Class A common shares of the Company at any time upon
five days notice and such  conversion  would be calculated at 50% of the average
closing price of the Class A common shares for the 30 days preceding the date of
conversion.  All  amounts so  converted  will not be  subject to any  accrual of
interest.  In  addition,  the Company had the right to pay any amounts due under
the Bedlington Note at any time with shares of its Class A common stock pursuant
to  the  same  formula  by  notifying  Bedlington  of  its  intent  to do so and
requesting a Notice of Conversion  from  Bedlington.  On February 22, 2005,  the
Company notified Bedlington of its intention to make payment in full with common
shares and  Bedlington  submitted a Notice of  Conversion  to the Company.  As a
result,  the Company  issued 217,391 shares of its Class A common stock pursuant
to the calculation described above.

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


                                      -17-
<PAGE>

The notes are convertible  into common stock of the Company at a 40% discount to
the average of the three lowest trading prices of the common stock during the 20
trading day period prior to conversion.

      In  connection  with the  offering,  the Company  issued an  aggregate  of
4,000,000  warrants to purchase common stock at a price of $4.25 per share.  The
warrants are exercisable for a period of five years. The conversion of the notes
are subject to an effective Registration Statement. The Company has the right to
redeem the notes under certain circumstances and the notes are secured by all of
the  Company's  assets,  except for its  accounts  receivable  and  proceeds  of
inventory.  The  proceeds  of  the  offering  will  be  used  to  repay  certain
indebtedness  and for working  capital.  The $1.5  million  initial  funding was
received on April 4, 2005.

      Subject to realization of the balance of the above described financing and
the  financing  available  from CFC,  if we  generate  eligible  receivables  to
finance,  we  anticipate  being in a position to fund the  anticipated  level of
operations for at least one year.

Critical Accounting Policies

      The  Company's  discussion  and analysis of its  financial  condition  and
results of operations are based upon Cyber Defense's financial statements, which
have been prepared in accordance with accounting  principles  generally accepted
in the United States. The preparation of these financial statements requires the
use of estimates  that affect the reported  amounts of assets,  liabilities  and
expenses.  The Company  evaluates its estimates on an ongoing  basis,  including
estimates for Income tax assets and  liabilities and the impairment of the value
of investments.  The Company bases its estimates on historical experience and on
actual  information and assumptions that are believed to be reasonable under the
circumstances at that time. Actual results may differ from these estimates under
different  assumptions  or conditions.  The Company  believes that the following
critical accounting  policies affect its more significant  estimates used in the
preparation of its financial statements.

      Accounting for Income Taxes.

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

      Impairment of Investments.

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

      Recent Accounting Pronouncements

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


                                      -18-
<PAGE>

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

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

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

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

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

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


                                      -19-
<PAGE>

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

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

ITEM 3. CONTROLS AND PROCEDURES

      Evaluation of disclosure controls and procedures.

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

      Changes in internal controls

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

PART II   OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      None

ITEM 2. CHANGES IN SECURITIES

During the  quarter the Company  issued  2,097,852  shares of its class A common
stock  comprising  1,650,000  shares pursuant to the acquisition of the minority
interest of Cyber Aerospace and its merger with and into Cyber Defense;  217,391
shares to Bedlington  Securities as full payment of a Note Payable in the amount
of $250,000;  100,000 shares to an attorney in  consideration of services valued
at $150,000, 100,000 shares to a lender in full payment of a Note Payable in the
amount of $117,000, 25,000 shares to a consultant for services valued at $77,250
and 5,461 shares to another consultant who provided services valued at $16,874.

The Company also issued  150,000  shares of its Class B common stock pursuant to
the  acquisition of the minority  interest in Cyber  Aerospace and the merger of
Cyber Aerospace into Cyber Defense.


                                      -20-
<PAGE>

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

      None

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

      None

ITEM 5. OTHER INFORMATION

      None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

      EXHIBITS

31.1 *    Certification of the Chief Executive Officer / 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.

      REPORTS ON FORM 8-K

      The  Company  filed a Current  Report  on Form 8-K on  February  18,  2005
regarding the change in fiscal year  pursuant to the domicile  merger of E-City,
On Alert and Cyber Defense.

      The  Company  filed a Current  Report  on Form 8-K on  February  23,  2005
regarding the execution of the $250,000 principal amount convertible note issued
to Bedlington Securities, Ltd. (the "Bedlington Note").

      The Company  filed a Current  Report on Form 8-K on March 1, 2005 amending
our  Current  Report  on Form 8-K  filed  on  February  23,  2005,  whereby  the
Bedlington  Note was repaid with the  issuance of 217,391  shares of our Class A
Common Stock.

      The Company filed a Current  Report on Form 8-K on March 3, 2005 regarding
a press release  concerning  the Company's  participation  in the Warfare in Low
Intensity Conflict Conference in Tel Aviv, Israel.

      The Company filed a Current Report on Form 8-K on March 11, 2005 regarding
the  payment  in  full of the  convertible  promissory  note  issued  to  Joseph
Theismann, in the amount of $117,000, with the issuance of 100,000 shares of the
Company's Class A Common Stock.


                                     - 21 -
<PAGE>

                                   SIGNATURES


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


     CYBER DEFENSE SYSTEMS, INC.

     May 19, 2005

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


                      By:   /s/ William C. Robinson
                            -------------------
                            William C. Robinson
                            Chief Financial Officer


                                 -22-