**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D. C. 20549**




**FORM
      10-QSB**




S QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
      the quarterly period ended June 30, 2007





£ TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
      the transition period from


Commission
      file number 333-79405





**Tactical
      Air Defense Services, Inc.**


(Exact
      name of small business issuer as specified in its charter)





Nevada
            **88-0455809**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                No.)




**5501
      Airport Drive**


**Denison,
      TX 75020**


(Address
      of principal executive offices)





**(903)
      786-5300**


(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 Exchange Act during the past 12 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 S  No £





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act): Yes £ No S





The
      number of shares of the issuer's outstanding common stock on August 9, 2007
      was 38,482,084 .





Transitional
      Small Business Disclosure Format (check one): Yes £ No S










**INDEX**





Page
                No.Part
                IItem
                1.  Financial Statements.
            F-1Item
                2.  Management's Discussion and Analysis or Plan of Operations.
            3Item
                3.  Controls and Procedures.
            8Part
                IIItem
                1.  Legal Proceedings.
            9Item
                2.  Unregistered Sale of Equity Securities and Use of Proceeds
            9Item
                3.  Defaults Upon Senior Securities
            11Item
                4.  Submission of Matters to a Vote of Security Holders.
            11Item
                5.  Other Information
            11Item
                6. Exhibits.
            11Signatures.
            12










**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**


**TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company, Commencing January 1, 2006)**
 **CONDENSED
        CONSOLIDATED BALANCE SHEET**
 **June
        30, 2007**
 **(Unaudited)**
  ASSETSCurrent
                  Assets:Cash
              
              $
              1,474Property
                  and Equipment, net
              
              
              7,154,985TOTAL
                  ASSETS
              
              
              7,156,459LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  Liabilities:Accounts
                  payable
              
              
              7,762Accrued
                  liabilities including related party of $40,000
              
              
              1,206,546Convertible
                  Debentures including accrued interest net of debt discount of
                  $2,224,812
              
              
              4,414,710Total
                  Current Liabilities
              
              
              5,629,018Convertible
                  Notes Payable net of discount of $2,377,357 includes related party
                  of
                  $1,330,729
              
              
              1,483,899TOTAL
                  LIABILITIES
              
              
              7,112,917COMMITMENTSSTOCKHOLDERS'
                  EQUITY:Series
                  A Preferred stock-$.001 par value; 50,000,000 shares authorized;
                  - shares
                  issued and
                outstanding
                  - 6,400,000
              
              
              6,400Common
                  stock-$.001 par value; 300,000,000 shares authorized; - 32,688,198
                  shares
                  issued and
                outstanding
              
              
              32,688Additional
                  paid-in-capital
              
              
              22,680,798Deficit
                  accumulated during the development stage
              
              
              (22,676,344
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              43,542TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              7,156,459
 
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  F-1
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company, Commencing January 1, 2006)**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **For
        the Three and Six Months Ended June 30, 2007 and 2006**
 **(Unaudited)**
 Three
                    Months Ended
                  June
                    30,
                
                Six
                    Months Ended
                  June
                    30,
                
                For
                    the Period
                  From
                    January 1,
                  2006
                  (Commencement
                    as a Development
                  Stage
                    Company)
                  To
                    June 30,2007
                
                2006
                
                2007
                
                2006
                
                2007REVENUES
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -Operating
                    costs
                
                
                60,540
                
                
                55,853
                
                
                169,262
                
                
                127,195
                
                
                506,608General
                    and administrative, including compensatory element of stock issuance
                    of
                    $2,339,397, $-, $18,867,439, $144,773 for the three and six months
                    ended
                    June 30, 2007 and 2006, respectively, and $18,999,015 for the
                    period
                    January 1, 2006 to June 30, 2007
                
                
                2,944,959
                
                
                485,367
                
                
                19,799,050
                
                
                672,280
                
                
                21,457,678TOTAL
                    COSTS
                
                
                3,005,499
                
                
                541,220
                
                
                19,968,312
                
                
                799,475
                
                
                21,964,286OPERATING
                    LOSS
                
                
                (3,005,499
                )
                
                (541,220
                )
                
                (19,968,312
                )
                
                (799,475
                )
                
                (21,964,286
                )OTHER
                    (EXPENSE) INCOME:Derivative
                    loss on derivative liabilities
                
                
                -
                
                
                (5,160,336
                )
                
                -
                
                
                (6,963,004
                )
                
                (27,599,597
                )Forgiveness
                    of liquidated damages
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,074,188Interest
                    expense
                
                
                (1,252,797
                )
                
                (432,641
                )
                
                (2,444,525
                )
                
                (813,054
                )
                
                (3,911,115
                )Other
                
                
                -
                
                
                19
                
                
                -
                
                
                (2,387
                )
                
                (2,386
                )TOTAL
                    EXPENSES
                
                
                (1,252,797
                )
                
                (5,592,958
                )
                
                (2,444,525
                )
                
                (7,778,445
                )
                
                (30,438,910
                )NET
                    LOSS
                
                $
                (4,258,296
                )
                $
                (6,134,178
                )
                $
                (22,412,837
                )
                $
                (8,577,920
                )
                $
                (52,403,196
                )Preferred
                    stock dividend
                
                
                (111,693
                )
                
                -
                
                
                (119,134
                )
                
                -NET
                    LOSS APPLICABLE TO COMMON STOCKHOLDERS
                
                $
                (4,369,989
                )
                $
                (6,134,178
                )
                $
                (22,531,971
                )
                $
                (8,577,920
                )Loss
                    per common share - basic and diluted
                
                $
                (0.15
                )
                $
                (0.41
                )
                $
                (0.96
                )
                $
                (0.58
                )Weighted
                    average number of shares outstanding - basic and diluted
                
                
                29,600,840
                
                
                15,132,473
                
                
                23,427,182
                
                
                14,910,355
  The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  F-2
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company, Commencing January 1, 2006)**
 **CONDENSED
        CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY**
 **For
        the Six Months Ended June 30, 2007**
  Common
                  Stock
              Series
                  A Preferred Stock
              
              Additional
                Paid-in
              
              
              Deficit
                Accumulated
                During
                Development
              
              
              Total
                Stockholders’Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Stage
              
              
              EquityBALANCE- January 1, 2007
              
              
              18,915,655
              
              $
              18,916
              
              
              -
              
              $
              -
              
              $
              2,563,950
              
              $
              (144,373
              )
              $
              2,438,493Stock-based
                  compensation issued to employees-$0.72 - $1.05 per share
              
              
              4,265,000
              
              
              4,265
              
              
              6,400,000
              
              
              6,400
              
              
              16,711,135
              
              
              -
              
              
              16,721,800Stock
                  - based compensation issued to consultants- $.072- $2.40 per
                  share
              
              
              1,820,000
              
              
              1,820
              
              
              -
              
              
              -
              
              
              1,820,622
              
              
              -
              
              
              1,822,442Stock
                  issued for services-$1.05 per share
              
              
              320,000
              
              
              320
              
              
              -
              
              
              -
              
              
              335,680
              
              
              -
              
              
              336,000Issuance
                  of common stock upon conversion of debentures
              
              
              503,394
              
              
              503
              
              
              -
              
              
              -
              
              
              72,100
              
              
              -
              
              
              72,603Issuance
                  of common stock under private placement
              
              
              629,911
              
              
              630
              
              
              -
              
              
              -
              
              
              345,821
              
              
              -
              
              
              346,451Exercise
                  of warrants for common stock
              
              
              6,234,238
              
              
              6,234
              
              
              -
              
              
              -
              
              
              (6,234
              )
              
              -
              
              
              -Fair
                  value of warrants issued with convertible debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              630,909
              
              
              -
              
              
              630,909Beneficial
                  conversion feature under convertible debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              206,815
              
              
              -
              
              
              206,815Dividend
                  to preferred Stockholders
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              (119,134
              )
              
              (119,134
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (22,412,837
              )
              
              (22,412,837
              )Balance
                  -June 30, 2007 (Unaudited)
              
              
              32,688,198
              
              $
              32,688
              
              
              6,400,000
              
              $
              6,400
              
              $
              22,680,798
              
              $
              (22,676,344
              )
              $
              43,542
 
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  F-3
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company, Commencing January 1, 2006)**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 **For
                    the Six Months**
                  **Ended
                    June 30,**
                
                **For
                    the Period From**
                  **January
                    1, 2006**
                  **(Commencement
                    as****a
                    Development Stage****Company)
                    to****June
                    30,****2007**
                
                
                **2006**
                
                
                **2007**CASH
                    FLOWS FROM OPERATING ACTIVITIESNet
                    (loss)
                
                $
                (22,412,837
                )
                $
                (8,577,920
                )
                $
                (
                    52,403,196
                )Adjustments
                    to reconcile net loss to net cash used in
                  operating
                    activities:Loss
                    on derivative liabilities
                
                
                -
                
                
                6,963,004
                
                
                27,599,597(Forgiveness)
                    provision of liquidated damages
                
                
                -
                
                
                -
                
                
                (1,074,188
                )Stock-based
                    compensation
                
                
                18,867,439
                
                
                390,000
                
                
                19,012,212Excess
                    of initial derivative liability over debt
                  Discount
                
                
                -
                
                
                100,815
                
                
                -Debt
                    discount amortization
                
                
                1,992,450
                
                
                245,120
                
                
                2,631,238Changes
                    in operating assets and liabilities:Accounts
                    payable
                
                
                -
                
                
                -
                
                
                7,762Accrued
                    liabilities
                
                
                606,640
                
                
                440,442
                
                
                2,123,416Net
                    Cash Used in Operating Activities
                
                
                (946,308
                )
                
                (438,539
                )
                
                (2,103,159
                )CASH
                    USED IN INVESTING ACTIVITIESPurchase
                    of property and equipment
                
                
                (26,000
                )
                
                (189,385
                )
                
                (326,985
                )Cash
                    received from the reverse acquisition
                
                
                -
                
                
                -
                
                
                150,744Net
                    Cash Used in Investing Activities
                
                
                (26,000
                )
                
                (189,385
                )
                
                (176,241
                )CASH
                    FLOWS FROM FINANCING ACTIVITIESDue
                    to related parties, net
                
                
                -
                
                
                -
                
                
                (67,484
                )Proceeds
                    from convertible debentures
                
                
                837,724
                
                
                643,515
                
                
                2,348,358Net
                    Cash Provided by Financing Activities
                
                
                837,724
                
                
                643,515
                
                
                2,280,874Increase
                    (Decrease) in cash
                
                
                (134,584
                )
                
                15,591
                
                
                1,474Cash
                    - Beginning of period
                
                
                136,058
                
                
                719
                
                
                -Cash
                    - End of period
                
                $
                1,474
                
                $
                16,310
                
                $
                1,474Interest
                    paid
                
                $
                -
                
                $
                -Taxes
                    paid
                
                $
                -
                
                $
                -Non-cash
                    Transactions:Stock
                    issued to settle accrued compensation
                
                $
                -
                
                $
                -
                
                $
                390,000Liabilities
                    not assumed in reverse acquisition
                
                $
                -
                
                $
                -
                
                $
                4,505,560Reclassification
                    of derivative liability
                
                $
                -
                
                $
                -
                
                $
                29,930,094Conversion
                    of debt plus accrued interest to equity
                
                $
                72,643
                
                $
                -
                
                $
                72,643Common
                    stock issued for leasehold improvements
                
                $
                26,000
                
                $
                -
                
                $
                26,000Acquisition
                    of assets for issuance of debt
                
                $
                -
                
                $
                3,156,210
                
                $
                6,740,000Beneficial
                    conversion feature under convertible debt
                
                $
                206,815
                
                $
                -
                
                $
                4,259,940Fair
                    value of warrants issued with convertible debt
                
                $
                630,909
                
                $
                -
                
                $
                1,307,438Distribution
                    to stockholder
                
                $
                -
                
                $
                -
                
                $
                311,525
  The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  F-4
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        1 - COMPANY AND BASIS OF PRESENTATION**
 
 **General**
 
 Tactical
        Air Defense Services, Inc. (“TADS” and the “Company”), a development stage
        company ,which was incorporated in Nevada in 1998 under the name Natalma
        Industries, Inc. Originally, TADS operated as a junior mining company with
        minimal operations. In 2005, the former management of TADS commenced seeking
        potential operating businesses and business opportunities with the intent
        to
        complete a merger with an operating business.
 
 On
        December 15, 2006 (the “Closing Date”), TADS and three of its wholly-owned
        subsidiaries, Resource Financial Aviation Holdings Inc., OneSource Aviation
        Acquisition Inc. and Genesis Aviation Acquisition Inc., each a Nevada
        corporation (the “TADS Subsidiaries” and, collectively with TADS,”) acquired
        substantially all of the assets of AeroGroup Incorporated (“Aero or AeroGroup”),
        a Utah corporation, and its three whollyowned subsidiaries, OneSource
        Acquisition, Inc., Genesis Acquisition, Inc. and Resource Financial Holding
        Acquisition, Inc., each a Delaware corporation (the “AeroGroup Subsidiaries”
and, collectively with AeroGroup Incorporated, “AeroGroup”), pursuant to an
        Asset Purchase Agreement dated July 14, 2006, as amended (the “Asset Purchase
        Agreement”) and in consideration of the acquisition issued stock and assumed
        certain indebtedness and other obligations under various warrants, a real
        property sublease, government and non-government aviation contracts and certain
        other contracts of AeroGroup (the “AeroGroup Acquisition”). As a result of the
        asset purchase, the Company intends to be a provider of outsourced military
        fighter jet pilot training to military personnel, including certain flight
        support services.
 
 Since
        the AeroGroup Acquisition was settled through the issuance of a controlling
        interest in TADS common stock, AeroGroup is deemed to be the acquirer for
        accounting purposes. Furthermore, since TADS is deemed to be a shell company
        prior to the acquisition, purchase accounting was not applied. Therefore,
        the
        transaction was accounted for as a reverse acquisition and recapitalization
        of
        AeroGroup. Accordingly, the historical financial statements presented in
        the
        financial statements are those of AeroGroup as adjusted to reflect the
        recapitalization and elimination of certain assets and liabilities that were
        not
        assumed by TADS. The net liabilities not assumed by TADS was recorded as
        a
        contribution to capital totaling $4,505,560. These liabilities substantially
        consisted of indebtedness due to Aero’s controlling stockholder, Mark Daniels
        (“Daniels”).
 
 The
        accompanying share information for AERO has been retroactively restated to
        reflect the recapitalization transactions, including the exchange of common
        stock and common stock equivalents of AERO for common stock and common stock
        equivalents of TADS based on the exchange ratio of 50 to 1.
  F-5
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        1 - COMPANY AND BASIS OF PRESENTATION -Continued**
 
 In
        connection with the reverse acquisition, the consideration paid to Aero Group
        for the assets consisted of:
 
 ·
            14,989,900
                shares of restricted common stock of TADS, constituting a majority
                of the
                then outstanding common stock of TADS. 
 ·
            Assumption
                by TADS of Aero’s' obligations under its convertible debentures totaling
                approximately $5.6 million, inclusive of accrued interest, all convertible
                into shares of TADS common stock at prices ranging $0.15 to $1.00
                per
                share. 
 ·
            Assumption
                by TADS of Aero’s' obligation under a convertible note issued in
                connection with a settlement agreement in the principal amount of
                $250,000, with an interest rate of 12%, payable in 36 equal monthly
                installments of principal, plus interest. The note has a maturity
                date of
                April 13, 2011. The note is convertible into shares of common stock
                at a
                rate of $.50 per share. 
 ·
            Assumption
                by TADS of Aero’s obligation under an assumed secured note payable to
                Daniels in the principal amount of $1,100,000, plus interest, at
                the rate
                of 12% per annum. The outstanding principal and interest is convertible
                into shares of TADS common stock at a conversion price of $.0.50
                per
                share. 
 ·
            Assumption
                by TADS of Aero’s' obligation under a note assumed by the Company in
                connection with its June 2006 asset purchase (Note 3) in the principal
                amount of $2.2 million, plus interest at the rate of 8% per annum.
                The
                outstanding principal and interest is convertible into shares of
                TADS
                common stock at a conversion price of $0.50 per
                share. 
 ·
            Assumption
                by TADS of Aero’s obligations under certain outstanding warrants to
                purchase 23,968,315 shares of common stock exercisable at $0.15 per
                share. 
 ·
            Assumption
                by TADS of Aero’s obligations under government contracts and subcontracts
                and of leases relating to its Grayson Airport facilities, a $300,000
                consulting contract and property leases. 
 ·
            Assumption
                by TADS of Aero’s obligations for accrued expenses totaling
                $136,000. 
 Effective
        January 1, 2006, the Company is in the development stage and its operations
        principally involve research and development, market analysis, and other
        business planning activities, and minimal revenue has been generated to
        date.
 
 Aero
        is a Utah corporation, which was incorporated on July 31, 1984 under the
        name
        Diversified Resources Group, Inc. Aero was a provider of outsourced military
        fighter jet pilot training to military personnel, including certain flight
        support services. Effective January 1, 2006, Aero became a development stage
        company as it was devoting all of its present efforts to securing and
        establishing a new business.
  F-6
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        1 - COMPANY AND BASIS OF PRESENTATION - Continued**
 
 **Basis
        of Presentation**
 
 The
        results for the six months of 2007 are not necessarily indicative of the
        results
        to be expected for the full fiscal year and have not been audited. In the
        opinion of management, the accompanying unaudited condensed consolidated
        financial statements contain all adjustments, consisting of normal recurring
        accruals, necessary for a fair statement of the results of operations and
        cash
        flows for the periods presented and the condensed consolidated balance sheet
        at
        June 30, 2007. Certain information and footnote disclosures normally included
        in
        financial statements prepared in accordance with accounting principles generally
        accepted in the United States of America have been condensed or omitted pursuant
        to the SEC rules and regulations. These condensed consolidated financial
        statements should be read in conjunction with the financial statements and
        notes
        thereto that were included in the Company’s latest annual report within its Form
        10-KSB for the year ended December 31, 2006.
 
 **Going
        Concern and Management's Plan**
 
 The
        accompanying condensed consolidated financial statements have been prepared
        in
        conformity with accounting principles generally accepted in the United States
        of
        America, which contemplate the continuation of the Company as a going concern.
        However, as shown in the accompanying condensed consolidated financial
        statements, the Company has incurred losses from operations since inception
        and
        has a significant working capital deficiency as of June 30, 2007 of
        $5,627,544.
 
 As
        discussed above, on December 15, 2006, TADS acquired all of the assets of
        Aero
        and assumed certain contracts in exchange for the assumption by TADS of certain
        liabilities of Aero. Management believes the Company can raise adequate capital
        for the Company’s required working capital needs for 2007 including additional
        modifications to its aircrafts necessary to make them operational. Management
        also believes that it still needs substantial capital in order to carry out
        its
        business plan, which is to become a civilian provider of outsourced military
        aviation services which includes fighter jet pilot training, operational
        deployment training, aviator combat support and close air support for “Forward
        Controllers,”.
 
 No
        assurance can be given that the Company can obtain the required estimated
        additional working capital, or if obtained, that such funding will not cause
        substantial dilution to stockholders of the Company. Being a development
        stage
        company, the Company is subject to all the risks inherent in the establishment
        of a new enterprise and the marketing of a new product, many of which risks
        are
        beyond the control of the Company. All of the factors discussed above raise
        substantial doubt about the Company's ability to continue as a going
        concern.
 
 These
        condensed consolidated financial statements do not include any adjustments
        relating to the recoverability of recorded asset amounts that might be necessary
        as a result of the above uncertainty.
  F-7
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Principals
        of Consolidation**
 
 The
        condensed consolidated financial statements include the accounts of the Company
        and its wholly-owned subsidiaries, Genesis Acquisition, Inc., Resource Financial
        Holding Acquisition, Inc. and OneSource Acquisition, Inc. All significant
        intercompany transactions have been eliminated.
 
 **Use
        of Estimates**
 
 The
        preparation of the condensed consolidated 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 and disclosure of contingent assets and
        liabilities in the condensed consolidated financial statements and accompanying
        notes. The most significant estimates relate to the estimated useful lives
        and
        assessment for impairment of the Company’s property and equipment,
        contingencies, revenue recognition and valuation of derivative instruments.
        Actual results could differ from those estimates.
 
 **Property
        and Equipment**
  Property
        and equipment are recorded at cost. Property and equipment acquired by Aero
        pursuant to the June 2006 Asset Purchase Agreement (Note 3) was recorded
        at its
        then net carrying value due to the entities being controlled by Aero's majority
        stockholder. The provision for depreciation of operating equipment is computed
        on the straight line method applied to each unit of property over the estimated
        useful lives, generally five to ten years, commencing when the assets are
        placed
        into service.
 
 Leasehold
        improvements shall be amortized over the shorter of their useful life or
        the
        remaining lease term. Upon retirement or other disposition of these assets,
        the
        cost and related accumulated depreciation of these assets are removed from
        the
        accounts and the resulting gains or losses are reflected in the results of
        operations.
 
 As
        of June 30, 2007 and 2006, the Company did not have any assets placed into
        service. As a result, there was no depreciation expense for the three and
        six
        months ended June 30, 2007 and 2006.
 
 The
        Aircraft acquired pursuant to the June 2006 Asset Purchase Agreement (Note
        3)
        are stationed in the Ukraine awaiting for disassembly and shipment to the
        United
        States of America. Additional modifications are necessary to make them
        operational for use within the United States of America. The Company estimates
        that it will cost approximately $200,000 to ship the MIGs to the United States
        of America, and approximately $420,000 to get the MIGs fully
        operational.
 
 Maintenance
        and repair costs for owned and leased flight equipment are charged to operating
        expense as incurred.
  F-8
  **TACTICAL
        AIR DEFENSE SYSTEMS, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**
 
 **Revenue
        Recognition**
 
 Revenue
        is recognized once four criteria are met: (1) the Company must have persuasive
        evidence that an arrangement exists; (2) services have been performed and
        accepted by the Customer, (3) the price must be fixed and determinable; and
        (4)
        collectibility must be reasonably assured.
 
 **Convertible
        Notes and Warrants**
 
 The
        Company accounts for conversion options embedded in convertible notes in
        accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging
        Activities" (" **SFAS
        133** ")
        and Emerging Issues Task Force (" **EITF** ")
        00-19, "Accounting for Derivative Financial Instruments Indexed to, and
        Potentially Settled in, a Company's Own Stock" (" **EITF
        00-19** ").
        SFAS 133 generally requires companies to bifurcate conversion options embedded
        in convertible notes from their host instruments and to account for them
        as free
        standing derivative financial instruments in accordance with EITF 00-19.
        SFAS
        133 provides for an exception to this rule when convertible notes, as host
        instruments, are deemed to be conventional as that term is described in the
        implementation guidance under Appendix A to SFAS 133 and further clarified
        in
        EITF 05-2 "The Meaning of "Conventional Convertible Debt Instrument" in Issue
        No. 00-19.”
 
 The
        Company accounts for convertible notes deemed conventional and conversion
        options embedded in non-convertible notes which qualify as equity under EITF
        00-19, in accordance with the provisions of Emerging Issues Task Force Issue
        (" **EITF** ")
        98-5 "Accounting for Convertible Securities with Beneficial Conversion
        Features," and EITF 00-27 "Application of EITF 98-5 to Certain Convertible
        Instruments". Accordingly, the Company records, as a discount to convertible
        notes, the intrinsic value of such conversion options based upon the differences
        between the fair value of the underlying common stock at the commitment date
        of
        the note transaction and the effective conversion price embedded in the note.
        Debt discounts under these arrangements are amortized over the term of the
        related debt.
 
 As
        of June 30, 2007, the Company had no derivative financial
        instruments.
 
 The
        Company accounts for embedded conversion options in non-conventional convertible
        notes which do not qualify as equity under EITF 00-19, as derivative
        liabilities. Accordingly, the Company determines the fair value (as determined
        through a lattice model) of these embedded derivatives (usually conversion
        options and redemption rights). Such fair value is recorded as a debt discount
        up to the proceeds of the debt and any amount in excess of the proceeds of
        the
        debt is charged to operations at the security issuance date.
  F-9
  **TACTICAL
        AIR DEFENSE SYSTEMS, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**
 
 The
        Company accounts for the issuance of common stock purchase warrants issued
        and
        other free standing derivative financial instruments in accordance with the
        provisions of EITF 00-19. Based on the provisions of EITF 00-19, the Company
        classifies as equity any contracts that (i) require physical settlement or
        net-share settlement or (ii) gives the Company a choice of net-cash settlement
        or settlement in its own shares (physical settlement or net-share settlement).
        The Company classifies as assets or liabilities any contracts that (i) require
        net-cash settlement (including a requirement to net cash settle the contract
        if
        an event occurs and if that event is outside the control of the Company)
        and
        (ii) give the counterparty a choice of net-cash settlement or settlement
        in
        shares (physical settlement or net-share settlement). The Company determines
        the
        fair value of these free standing instruments under the Black-Scholes Pricing
        Model using the following range of assumptions:
 
 ·
            expected
                volatility - 350%-450% ·
            expected
                dividend - none ·
            risk-free
                interest rate - 4.75%-5.00% ·
            contractual
                term - 3-5 years 
 **Non-Employee
        Stock Based Compensation**
 
 The
        Company accounts for stock based compensation awards issued to non-employees
        for
        services, as prescribed by SFAS No. 123R, at either the fair value of the
        services rendered or the instruments issued in exchange for such services,
        whichever is more readily determinable, using the measurement date guidelines
        enumerated in EITF 96-18, "Accounting for Equity Instruments That Are Issued
        to
        Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
        or
        Services."
 
 **Recently
        Adopted Accounting Policies**
 
 Effective
        January 1, 2007, the Company adopted Financial Accounting Standards Board
        (“FASB”) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
        interpretation of FASB Statement No. 109" ("FIN48"). FIN 48 prescribes a
        single,
        comprehensive model for how a company should recognize, measure, present
        and
        disclose in its financial statements uncertain tax positions that the Company
        has taken or expects to take on its tax returns. Differences between tax
        positions taken or expected to be taken in a tax return and the benefit
        recognized and measured pursuant to the interpretation are referred to as
        "unrecognized benefits". A liability is recognized (or amount of net operating
        loss carry forward or amount of tax refundable is reduced) for an unrecognized
        tax benefit because it represents an enterprise's potential future obligation
        to
        the taxing authority for a tax position that was not recognized as a result
        of
        applying the provisions of FIN 48.
 
 In
        accordance with FIN 48, interest costs related to unrecognized tax benefits
        are
        required to be calculated (if applicable) and would be classified as "Interest
        Expense, net" in the condensed consolidated statements of operations. Penalties
        would be recognized as a component of "General and administrative expenses".
        No
        interest or penalties were required to be recorded during the period ended
        June
        30, 2007.
 
 The
        Company files income tax returns in the United States of America (federal)
        and
        in various state and local jurisdictions. The Company is delinquent in its
        filings of its 2004 and 2005 tax returns. The Company is subject to federal,
        state and local income tax examinations by tax authorities for years after
        December 31, 2003.
  F-10
  **TACTICAL
        AIR DEFENSE SYSTEMS, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**
 
 The
        adoption of the provisions of FIN 48 did not have a material impact on the
        Company's condensed consolidated financial position and results of operations.
        As of January 1, 2007 and June 30, 2007, no liability for unrecognized tax
        benefits was required to be recorded.
 
 Effective
        in the first quarter of 2007 the Company adopted FASB Staff Position No EITF
        00-19-2 "Accounting for Registration Payment Arrangements" issued on December
        21, 2006 ("FSP 00-19-2"). FSP 00-19-2 specifies that the contingent obligation
        to make future payments or otherwise transfer consideration under a registration
        payment, whether issued as a separate agreement or included as a provision
        of a
        financial instrument or other agreement, should be separately recognized
        and
        measured in accordance with FASB Statement No. 5, "Accounting for Contingencies.
        For registration payment arrangements and financial instruments subject to
        those
        arrangements that were entered into prior to the
 issuance
        of FSP 00-19-2, this guidance is effective for financial statements issued
        for
        fiscal years beginning after December 15, 2006 and interim periods within
        those
        fiscal years. The adoption of FSP 00-19-2 did not have a material impact
        on the
        Company’s condensed consolidated financial position and results of
        operations.
 
 **Net
        Loss Per Share of Common Stock**
 
 Basic
        net loss per share of common stock is computed by dividing net loss available
        to
        common stockholders by the weighted average number of shares of common stock
        outstanding during the periods presented.
 
 Diluted
        net loss per share reflects per share amounts that result if dilutive common
        stock equivalents are converted to common stock. Common stock equivalents,
        consisting of convertible debt, options and warrants were not included in
        the
        calculation of diluted loss per share for the three and six months ended
        June
        30, 2007 and 2006 because their inclusion would have had been
        anti-dilutive.
 
 **NOTE
        3- ASSETS PURCHASED BY AERO**
 
 **Assets
        Purchased By Aero**
 
 In
        June of 2006, Aero, through its subsidiaries, acquired certain assets from
        three
        entities (“the Selling Entities”) owned 100% by Aero's controlling stockholder,
        Mark Daniels. The Selling Entities acquired these assets on December 29,
        2005
        from an unrelated entity in exchange for assets with a fair value of $4,540,000
        and a promissory note of $2,200,000. The assets acquired included two MIG29
        Aircrafts and four flight simulators and certain intellectual assets. The
        Selling Entities obtained appraisals from certified independent appraisers
        dated
        December 2005, which valued the aircrafts and simulators at
        $6,740,000.
 
 As
        consideration for the purchase of these assets, Aero (i) assumed indebtedness
        of
        $1.1 million owed to Daniels by the Selling Entities, (ii) assumed obligations
        under a promissory note in the principal amount of $2.2 million, with interest
        at 8% per annum, which was originally issued in December 2005, in connection
        with the acquisition of aircraft and simulators by the Selling Entities,
        and
        (iii) issued a $3,440,000 unsecured promissory note to Daniels. The $1.1
        million
        due to Daniels is collateralized by TADS assets and is guaranteed by its
        subsidiaries.
  F-11
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        3- ASSETS PURCHASED BY AERO - Continued**
 
 In
        reviewing the above transaction, Management determined that it had purchased
        a
        group of assets, rather than acquiring a business. Since Aero and the Selling
        Entities are commonly controlled, the recorded value of the assets purchased
        for
        accounting purposes is limited to the Selling Entities carrying value of
        the
        assets, which totaled $6,740,000 in June of 2006. The difference between
        the
        considerations provided to the Selling Entities of $7,051,255, inclusive
        of
        accrued interest assumed of $311,255, and the carrying value of the assets
        sold
        of $6,740,000 was $311,255. This amount was recorded as a distribution in
        June
        of 2006. Prior to this asset purchase, Aero did not have any business
        transactions with the Selling Entities.
 
 In
        connection with the reverse acquisition, TADS assumed the notes payable of
        $2.2
        million and $1.1 million and did not assume the note payable to Daniels of
        $3,440,000.
 
 **NOTE
        4 - CONVERTIBLE DEBENTURES**
 
 As
        part of the reverse acquisition, the Company assumed Convertible Debentures
        issued by Aero. During the period May 2002 through December 31, 2006, Aero
        sold
        4,715,895 Convertible Debentures (“Debentures”), along with Debenture Warrants
        to purchase 23,968,315 shares of common stock of Aero which were assumed
        by the
        Company at exercise prices ranging from $.15 to $1.00.
 
 Debentures
        and Debenture Warrants as of June 30, 2007 consist of the
        following:
 
 
 **Year
                  Ended**
              
              
              **Debentures**
              
              
              **Debenture**
                **Warrants**2002
              
              $
              250,000
              
              
              1,666,6672003
              
              
              1,091,199
              
              
              7,141,3292004
              
              
              487,265
              
              
              3,248,4332005
              
              
              1,376,797
              
              
              9,645,311Total
                  principal at December 31, 2005
              
              
              3,205,261
              
              
              21,701,7402006
              
              
              1,510,634
              
              
              2,266,575Total
                  principal at December 31, 2006
              
              
              4,715,895
              
              
              23,968,315First
                  six months of 2007 - Issued
              
              
              837,724
              
              
              2,988,485First
                  six months of 2007 - Converted
              
              
              (50,000
              )
              
              (7,187,301
              )Total
                  principal at June 30, 2007
              
              
              5,503,619
              
              
              19,769,499Accrued
                  interest
              
              
              1,135,903Unamortized
                  debt discount
              
              
              (2,224,812
              )Net
                  Carrying Value at June 30, 2007
              
              $
              4,414,710
 
 Included
        in principal at June 30, 2007 is $366,602 due to the Company's majority
        stockholder which was converted in 2005 from shareholder loans to Convertible
        Debentures.
  F-12
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        4 - CONVERTIBLE DEBENTURES -
        Continued**
  **First
        Quarter of 2007**
 
 Between
        January 1, 2007 and March 31, 2007, the Company received proceeds of loans
        totaling $343,873. The Debentures are convertible into TADS common stock
        at
        conversion prices ranging from $.25 to $1.00 per share and provide for warrants
        to purchase 1,013,999 shares of TADS common stock at exercise prices ranging
        from $.25 to $1.00. The Debentures bear interest of 12% and are due three
        years
        from the date of issuance. The Debenture Warrants are exercisable at per
        share
        exercise prices of $.25 to $1.00 per share of common stock, are exercisable
        immediately up until the fifth anniversary of the initial warrant date, and
        such
        exercise price is subject to adjustment for subsequent lower price issuances
        by
        the Company and other customary events including stock splits, reverse stock
        splits, issuance of convertible securities, sale of common stock and
        spin-offs.
 
 The
        gross proceeds of the $343,873 were allocated 25% or $86,084 to the Debentures
        and 75% or $257,789 to the Warrants. The effective conversion price of the
        Debentures was below the market price of TADS common stock at the date the
        various notes were issued, which resulted in a beneficial conversion feature
        of
        $86,084. In accordance with EITF 00-27 the amount allocated to the beneficial
        conversion feature was limited to the net proceeds of the offering.
 
 **Second
        Quarter of 2007**
 
 Between
        April 1, 2007 and June 30, 2007, the Company received proceeds of loans totaling
        $493,851. The Debentures are convertible into TADS common stock at a conversion
        price of $.25 per share and provide for warrants to purchase 1,974,486 shares
        of
        TADS common stock at an exercise price of $.25. The Debentures bear interest
        of
        12% and are due three years from the date of issuance. The Debenture Warrants
        are exercisable at a per share exercise prices of $.25 per share of common
        stock, are exercisable immediately up until the fifth anniversary of the
        initial
        warrant date, and such exercise price is subject to adjustment for subsequent
        lower price issuances by the Company and other customary events including
        stock
        splits, reverse stock splits, issuance of convertible securities, sale of
        common
        stock and spin-offs.
 
 The
        gross proceeds of the $493,851 were allocated 24.2% or $120,731 to the
        Debentures and 75.8% or $373,120 to the Warrants. The effective conversion
        price
        of the Debentures was below the market price of TADS common stock at the
        date
        the various notes were issued, which resulted in a beneficial conversion
        feature
        of $120,731. In accordance with EITF 00-27 the amount allocated to the
        beneficial conversion feature was limited to the net proceeds of the
        offering.
 
 As
        of June 30, 2007, all of the principal and accrued interest related to the
        Debentures has been classified as a current liability as they are either
        in
        default or due within one year.
 
 **Registration
        Rights**
 
 In
        connection with the issuance of the Debentures, the Company is required to
        file
        a Registration Statement to register the shares of common stock issuable
        upon
        the conversion of the Debentures and the exercise of the Debenture Warrants.
        The
        Company will be obligated to the pay the holders of the Debentures certain
        liquidated damages in the event the shares are not registered within sixty
        days
        of the date of issuance. The Company has not filed the Registration Statement
        and therefore must pay the holders of the Debentures liquidated damages in
        the
        aggregate amount equal to two percent (2%) for each (thirty) days (or part
        thereof) per month until such Registration Statement is filed and declared
        effective. In June of 2007 Debenture holders agreed to postpone the registration
        requirement through August 31, 2007. The Company is in the process of obtaining
        another waiver from debenture holders.
  F-13
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        5 - INCOME TAXES**
 
 There
        is no provision for income taxes for the three and six months ended June
        30,
        2007 and 2006. The Company has minimal net operating loss carry forwards
        for
        income tax purposes at June 30, 2007. The deferred tax asset primarily
        attributable to the Company’s net operating loss carryforwards has been offset
        by a full valuation allowance.
 
 **NOTE
        6 - STOCKHOLDERS' EQUITY**
 
 **Preferred
        Stock**
 
 On
        March 21, 2007, the Company filed a Certificate of Designation of Series
        A
        Preferred Stock (the “Series A Certificate of Designation”) with the Secretary
        of State of the State of Nevada, designating a series of 50,000,000 shares
        of
        Preferred Stock of the Company, $.001 par value (the “Series A Preferred
        Stock”). Pursuant to the Series A Certificate of Designation, holders are
        entitled to:
 
 ·
            elect
                one director to the Company’s board of
                directors 
 ·
            vote
                on all other matters on a 25 votes per share common stock
                basis. 
 ·
            The
                Series A Preferred Stock shall, with respect to dividend rights,
                rights on
                redemption, rights on conversion and rights on liquidation, winding
                up and
                dissolution, rank senior to all common stock, warrants and options
                to
                purchase common stock established by the Board or the Stockholders
                (all of
                such equity securities of the Corporation to which the Series A Preferred
                Stock ranks senior are collectively referred to herein as “JUNIOR
                STOCK”). 
 ·
            Each
                share of Series A Preferred Stock is initially convertible into 2
                shares
                of the Common Stock of the Company, subject to adjustment for stock
                splits, recapitalization or other
                reorganizations. 
 In
        addition, the Series A Preferred Stock:
 
 ·
            have
                broad-based weighted average antidilution protection that will cause
                the
                conversion price to adjust downward in the event that the Company
                issues
                shares of common stock or securities convertible into common stock
                at a
                price of less than the conversion price of the Series A Preferred
                Stock
                then in effect. ·
            The
                shares of Series A Preferred Stock may be converted into common stock
                at
                the option of the holder. In addition, at any time after the closing
                bid
                price for the Company’s common stock on the NASDAQ OTCBB or the primary
                United States exchange on which the common stock is then traded exceeds
                $5.00 during any five consecutive trading days, the Company may,
                at its
                sole option, convert the Series A Preferred and any accrued but unpaid
                dividends into common shares at the then-applicable conversion price
                by
                providing written notice of such conversion to the holders of the
                Series A
                Preferred; provided that there is an effective registration statement
                under the Securities Act registering the resale of the common stock
                to be
                issued upon such conversion.  F-14
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 **NOTE
        6 - STOCKHOLDERS' EQUITY - Continued**
 
 Each
        share of Series A Preferred Stock is entitled to receive a per share dividend
        of
        $.07 per annum ($7,441 for the 1st quarter of 2007). The dividend begins
        to
        accrue on January 1, 2007 and will be payable quarterly thereafter. The dividend
        is cumulative. In the event of a liquidation or acquisition of the Company,
        the
        holders of the Series A Preferred Stock will be entitled to receive an amount
        equal to any accrued and unpaid dividend prior and in preference to any
        distributions to the holders of the common stock. Thereafter, the holders
        of the
        Series A Preferred Stock will be entitled to participate in distributions
        on an
        as converted to common stock basis.
 
 ·
            Shares
                of Series A Preferred may be redeemed, in whole or in part, by the
                Company
                out of funds lawfully available therefore from the holders of then
                outstanding shares of Series A Preferred on a pro rata basis, at
                any time
                by providing written notice to the holders of the Series A Preferred
                owned
                by each holder, that number of outstanding shares of Series A Preferred
                owned by each holder, that number of outstanding shares of Series
                A
                Preferred that the Company has elected to purchase for the following
                consideration: (i) an amount equal to a price per share equal to
                the $4.00
                plus any accrued and unpaid dividends multiplied by the number of
                shares
                of Series A Preferred being redeemed from such holder and (ii) the
                issuance of the number of shares of common stock equal to seventeen
                and
                one-half percent (17.5%) of the shares of common stock then issuable
                upon
                conversion of the shares of Series A Preferred being redeemed from
                such
                holder. A cash payment will be provided in lieu of any fractional
                shares
                of common stock. 
 **Stock
        Issuances**
 
 In
        the first quarter of 2007, a holder of Debentures converted $50,000 plus
        accrued
        interest of $22,603 into 503,394 shares of common stock in accordance with
        the
        Debentures agreement.
 
 During
        the six month period ended June 30, 2006, the Company issued 1,820,000 shares
        of
        common stock to various consultants and recorded a charge of $1,822,442
        representing the fair value of the issued capital stock on the date of
        issuance.
 
 In
        the first quarter of 2007, the Company issued 320,000 of shares of common
        stock
        for services valued at $336,000 of which $26,000 was charged to lease hold
        improvements and the remaining $310,000 was charged as non-employee stock-based
        compensation.
 
 During
        the six month period ended June 30, 2007, the Company issued 4,265,000 shares
        of
        common stock and 6,400,000 shares of its Series A Preferred Stock to various
        officers and directors for compensation due under various employment agreements.
        The Company recorded a charge of approximately $16,721,800.
  During
        the six month period ended June 30, 2006, 7,187,301 of warrants were exercised
        to purchase 6,234,238 shares of common stock under the terms of cash-less
        exercise provision.
 
 **Sale
        of Units**
 
 Pursuant
        to a 2006 Private Placement, on March 2, 2007, TADS sold to eleven investors
        an
        aggregate 629,911 units, each a “unit” at a purchase price of $0.55 per unit.
        Each unit is comprised of (i) one share of common stock, (ii) a Class A Warrant
        to purchase one share of common stock at $1.00 per share and expiring on
        March
        2, 2008 and (iii) a Class B Warrant to purchase one share of common stock
        at
        $1.50 per share and expiring on March 2, 2010. The gross proceeds of this
        offering totaled $346,451. During 2006, TADS received the full advance from
        this
        financing.
  F-15
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        6 - STOCKHOLDERS' EQUITY - Continued**
 
 **Warrants**
 
 At
        June 30, 2007 the Company has outstanding warrants to purchase common stock
        as
        follows:
 
 **No.
                  of**
                **Warrants**
              
              
              **Weighted**
                **Average
                  Price**Balance
                  at January 1, 2005
              
              
              12,056,428
              
              $
              0.15Issued
                  - 2005
              
              
              9,645,312
              
              $
              0.15Balance
                  - December 31, 2005
              
              
              21,701,740
              
              $
              0.15Issued
                  - 2006
              
              
              2,266,575
              
              $
              0.67Balance
                  - December 31, 2006
              
              
              23,968,315
              
              $
              0.20Issued
                  - First quarter of 2007
              
              
              1,013,999
              
              $
              0.34Issued
                  - Second quarter of 2007
              
              
              1,974,486
              
              $
              0.25Exercised
                  - Second quarter of 2007
              
              
              (7,187,301
              )
              $
              (0.15
              )Balance
                  at June 30, 2007
              
              
              19,769,499
              
              $
              0.23Potential
                  Proceeds Assuming all Exercised at
                June
                  30, 2007
              
              $
              4,450,880
 
 **Earnings
        per Share**
 
 Securities
        that could potentially dilute basic earnings per share (" **EPS** ")
        in the future that were not included in the computation of diluted EPS because
        to do so would have been anti-dilutive for the periods presented consist
        of the
        following at June 30, 2007 and 2006:
 
 June
        30, 2007:
  **Principal
                  and**
                **Interest**
              
              
              **Additional
                  Number**
                **of
                  Potential**
                **Common
                  Shares if**
                **Converted/Exercised**Debentures
              
              $
              6,639,522
              
              
              33,849,770Convertible
                  notes
              
              $
              4,217,481
              
              
              8,434,961Warrants
                  to purchase common stock
              
              
              N/A
              
              
              19,769,499Preferred
                  stock convertible into common stock
              
              
              N/A
              
              
              12,800,000Accrued
                  consulting fees
              
              $
              300,000
              
              
              600,000Total
                  at June 30, 2007
              
              
              
              
              
              75,454,230
  F-16
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        6 - STOCKHOLDERS' EQUITY - Continued**
 
 June
        30, 2006:
  **Principal
                  and**
                **Interest**
              
              **Additional
                  Number**
                **of
                  Potential**
                **Common
                  Shares if**
                **Converted/Exercised**Debentures
              
              $4,148,184
              
              
              27,596,855Warrants
                  to purchase common stock
              
              
              N/A
              
              
              23,566,646Accrued
                  consulting fees
              
              $300,000
              
              
              600,000Total
                  at June 30, 2006
              
              
              
              
              
              51,763,501
 
 Issuances
        after June 30, 2007:
 New
                    convertible debt
                
                310,195Warrants
                    issued with new convertible debt
                
                310,195Common
                    Stock issued to a consultant
                
                2,800,000Common
                    Stock issued to settle accrued interest
                
                
                500,000Conversion
                    of convertible debentures
                
                
                1,733,193Exercise
                    of warrants
                
                
                760,693
  **NOTE
        7- COMMITMENTS**
 
 **Periodic
        Filings**
 
 Under
        a 2005 rule change, OTC Bulletin Board ("OTCBB") issuers that are cited for
        filing delinquent three times in a 24-month period and those removed for
        failure
        to file two times in a 24-month period will be ineligible for quotation by
        an
        NASD member. Following removal under this new rule, an issuer's securities
        would
        again become eligible for quotation on the OTCBB when the issuer has filed
        periodic reports for one year in a timely manner.
 
 The
        Company has been late with two filings during the last six months. If the
        Company is late in its future filings over the next two years, TADS common
        stock may be ineligible to remain quoted on the OTCBB and will become
        listed on the pink sheets.
  F-17
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **NOTE
        8 - SUBSEQUENT EVENTS**
 
 **Resignation
        of Executive Officer and Director**
 
 On
        August
        3, 2007 Mr. Mark Daniels, a director and executive officer of the Company
        and
        Mr. Victor Miller, a director and officer of the Company each resigned from
        all
        positions with the Company to pursue other ventures. Mr. Mark Daniels will
        continue to assist the Company as an independent consultant at terms to be
        negotiated after termination.
 
 **Appointment
        of New Directors and Principal Accounting Officer**
 
 Additionally,
        as of August 3, 2007, Mr. Donald Goldstein was appointed as a director of
        the
        Company, joining Fred Daniels on the Board of Directors (the “Board”).
        Additionally, Mr. Farley, our Vice President at the time of resignation of
        the
        above individuals, was also appointed as Principal Accounting Officer.
 
 **Debt
        Issuances Subsequent to June 30, 2007**
 
 During
        the period July 1, 2007 through August 8, 2007, the Company received loan
        proceeds of $77,549 from one unrelated party. The loans provide for interest
        at
        an annual rate of 12%. The loans are due within three years of issuance.
        The
        loans are convertible into common stock at a conversion rate of $0.25 per
        share
        and provide for warrants to purchase 310,195 shares of common stock at an
        exercise price $0.25 per share.
 
 **Common
        Stock Issuances Subsequent to June 30, 2007**
 
 During
        the period July 1, 2007 through August 8, 2007, various holders of warrants
        exercised its warrants to purchase 760,693 shares of the Company’s
        stock.
 
 During
        the period July 1, 2007 through August 8, 2007, various holders of debentures
        converted $224,060 plus accrued interest of $35,918 into 1,733,193 shares
        of
        common stock.
 
 During
        the period July 1, 2007 through August 8, 2007, the Company issued 2,800,000
        shares of common stock to a consultant.
 
 During
        the period July 1, 2007 through August 8, 2007, the Company issued 500,000
        shares of common stock to settle accrued interest under a note
        payable.
 
 **Recent
        Share Pledges**
  The
        company has been exploring various secured and unsecured indebtedness and
        equity
        financing opportunities as well as joint ventures.
 During
          the six months ended June 30, 2007, the Company has conditionally placed
          into
          escrow 45,000,000 shares in the name of International Tactical Training
          Center, Inc., an entity affiliated with Mr. Daniels, our former executive
          officer and director , in contemplation of a proposed joint venture,
          30,000,000 of which shares were deposited for purposes of negotiating
          and collateralizing a possible secured financing transaction.  As the
          company has not received any proceeds from financing or a financing commitment
          yet from any prospective investors, or otherwise entered into definitive
          transaction documents that require such a pledge, the Company intends on
          rescinding this issuance.  No definitive agreement has been entered into
          with respect to this transaction and no assurance can be made that one
          will be
          entered into.
  In
          addition, we have issued 10,000,000 shares into escrow with Pegasus
          Defense Corporation in anticipation of, among other things, an acquisition
          of a partial ownership interest in Pegasus Defense Corporation, and to
          facilitate a possible financing transaction and joint venture with them
          which was also conditioned on consummation of a financing.  No
          definitive agreement has been entered into with respect to this transaction
          and
          no assurance can be made that one will be entered into.
  All
          of the foregoing issuances will be approved by the board only upon
          consummation of a financing transaction and joint venture and fulfillment
          of all conditions required by the board.


F-18




**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation**





**CAUTIONARY
      STATEMENT REGARDING FORWARD LOOKING STATEMENTS**





This
      Quarterly Report on Form 10-QSB, and, specifically the Management's Discussion
      and Analysis may contain "forward-looking statements." The terms "believe,"
      "anticipate," "intend," "goal," "expect," and similar expressions may identify
      forward-looking statements. These forward-looking statements represent the
      Company's current expectations or beliefs concerning future events. The matters
      covered by these statements are subject to certain risks and uncertainties
      that
      could cause actual results to differ materially from those set forth in the
      forward-looking statements. The Company disclaims any obligation subsequently
      to
      revise any forward-looking statements to reflect events or circumstances after
      the date of such statements, or to reflect the occurrence of anticipated or
      unanticipated events. In light of the significant uncertainties inherent in
      the
      forward-looking information included herein, the inclusion of such information
      should not be regarded as a representation that the strategy, objectives or
      other plans of the Company will be achieved. The Company wishes to caution
      readers not to place undue reliance on any such forward-looking statements,
      which speak only as of the date made. We undertake no duty to update this
      information. More information about potential factors that could affect our
      business and financial results is included in the section entitled "Risk
      Factors" of our Annual Report on Form 10-KSB for the year ended December 31,
      2006 filed with the Securities and Exchange Commission on June 14, 2007. The
      following discussion should be read in conjunction with our consolidated
      financial statements provided in this quarterly report on Form
      10-QSB.





**Recent
      Developments**





**Acquisition
      of AeroGroup Assets and Change of Control in December of
      2006**





On
      December 15, 2006, TADS and three of its wholly-owned subsidiaries, Resource
      Financial Aviation Holdings Inc., OneSource Aviation Acquisition Inc. and
      Genesis Aviation Acquisition Inc., each a Nevada corporation acquired
      substantially all of the assets (the “AeroGroup Assets”) of AeroGroup
      Incorporated, a Utah corporation, and of its three wholly-owned subsidiaries,
      OneSource Acquisition, Inc., Genesis Acquisition, Inc. and Resource Financial
      Holding Acquisition, Inc., each a Delaware corporation (the “AeroGroup
      Subsidiaries” and, collectively with AeroGroup Incorporated, “AeroGroup”),
      pursuant to an Asset Purchase Agreement dated July 14, 2006, as amended (the
      “Asset Purchase Agreement”) and in consideration of the acquisition issued stock
      and assumed certain indebtedness and other obligations under various
      warrants, a real property sublease, government and non-government
      aviation contracts and certain other contracts of AeroGroup (the
“AeroGroup Acquisition”).





As
      a
      result of this transaction there was a change of control of TADS effective
      as of
      December 15, 2006 and, we are deemed to be the legal surviving acquirer in
      the
      AeroGroup Acquisition and therefore, the assets and liabilities and historical
      operations of AeroGroup prior to the Closing Date of the acquisition is
      reflected in our financial statements and will be recorded at the historical
      cost basis of AeroGroup.





Prior
      to
      the acquisition we were a development stage company without any material
      revenues from operations. The business of AeroGroup acquired by us has not
      had
      any material revenues in 2006 or 2005 and for most of 2004. The business we
      acquired from AeroGroup was commenced in 2002 by Mark Daniels, our Chief
      Executive Officer and a director, with the intention of becoming an outsourced
      provider of military flight training, research and flight support services.
      We
      will require substantial additional capital in order to implement our business
      plan and commence operations.





As
      a
      result of the AeroGroup Acquisition, on December 15, 2006 TADS ceased to be
      a
      shell corporation as such term is defined in Rule 12b-2 of the Security and
      Exchange Act of 1934, as amended, resulting in a change of control. A
      description of our business after the acquisition follows in the “Business”
section below.





Pursuant
      to the terms of the AeroGroup Acquisition, AeroGroup acquired a majority of
      our
      issued and outstanding Common Stock as constituted at the time of the
      transaction. A majority of AeroGroup’s common stock is beneficially owned by
      Mark Daniels. In addition, on August 22, 2006 Messrs. Daniels was appointed
      as a
      board member and Lt. Gen. (Ret) Charles Searock was appointed as President
      and
      Mr. John R. Farley was appointed as Vice President to facilitate the process
      of
      obtaining the government licenses described in this report. General (Ret)
      Searock has resigned from all positions with the Company as of December 31,
      2006
      and Mr. Fred Daniels and Mr. Victor Miller were appointed as directors as of
      January 8, 2007. Information relating to current and previous management is
      set
      forth under the “Management” section of our annual report on Form 10-KSB.




3




*Change
      in Board of Directors and Officer On August 9, 2007*





Effective
      August 3, 2007, Mr. Mark Daniels, our former director and Mr. Victor Miller,
      a
      director, resigned from all positions with the Company for personal reasons.
      Mr.
      Donald Goldstein was appointed as a director of the Company, joining Mr. Fred
      Daniels and Mr. John Farley was appointed as Vice President and Principal
      Accounting Officer. Additional information about Mr. Goldstein and these
      resignations have been filed as part of a Current Report on Form 8-K dated
      August 3, 2007, as amended. Our two resigning directors, Mark Daniels and Victor
      Miller were provided with copies of our Current Report on Form 8-K and did
      not
      disagree with the any of the statements therein.





**Series
      A Preferred Stock**





On
      March
      21, 2007, the Company filed a Certificate of Designation of Series A Preferred
      Stock (the “Series A Certificate of Designation”) with the Secretary of State of
      the State of Nevada, designating a series of 50,000,000 shares of Preferred
      Stock of the Company, $.001 par value (the “Series A Preferred Stock”). The
      Series A Preferred Stock provisions provide for a $.07 per share preferred
      dividend per annum and are granted super voting rights of 25 votes for each
      share of common stock voting at a meeting and contain liquidation preference
      rights. Additionally, the holders of the Series A Preferred Stock are entitled
      to appoint a director by vote of a majority of the Series A Preferred Stock
      holders. An aggregate of 6,400,000 shares of Series A Preferred Stock have
      been
      issued to certain officers and directors and a consultant in lieu of cash
      compensation under their respective employment or consulting agreements,
      resulting in control of the Company by Mr. Mark Daniels.





**Private
      Placements**





On
      March
      2, 2007, pursuant to binding Unit Purchase Agreements (the “Purchase Agreement”)
      with 11 accredited investors submitted by such investors in 2006, we accepted
      subscriptions for, and sold to such Investors, an aggregate of 629,911 Units
      (each, a “Unit”) at a purchase price of $.55 per Unit. Each Unit is comprised of
      (i) one share of our common stock, par value $.001 per share (the “Common
      Stock”), (ii) a Class A Warrant to purchase one share of Common Stock at $1.00
      per share and expiring on March 2, 2008 (the “Class A Warrant”) and (iii) a
      Class B Warrant to purchase one share of Common Stock at $1.50 per share and
      expiring on March 2, 2010 (the “Class B Warrant”). The gross proceeds to the
      Company of the offering was $346,451.





Additionally,
      between January 1, 2007 and June 30, 2007 we borrowed $837,724 represented
      by
      12% debentures due three years from issuance which are convertible into our
      common stock at prices ranging between $.25 per share and $1.00 per share and
      issued warrants to purchase 2,988,485 shares of our common stock at prices
      between $.25 and $1.00 per share. (see “Financing Activities Since March 31,
      2007” below and “Notes to Condensed Financial Statements”).





Thereafter
      and July 1, 2007 and August 8, 2007 we issued $77,549 of 12% convertible notes
      and 310,195 warrants in exchange for loan proceeds of an additional $77,549
      from
      a single investor. The loans accrue interest at 12% per annum and become due
      three years from issuance and the warrants are exercisable at $.25 per share
      and
      the notes and warrants are identical in all material respects to the notes
      and
      warrants issued earlier in the year (see also “Unregistered Sales of Equity
      Securities- Issuance of Convertible Debt.”





Finally,
      between January and August 2007, there have been many note conversions and
      warrant exercises resulting in the issuance of restricted stock. See
“Unregistered Sales of Equity Securities”, below.





4




**Recent
      Share Pledges**




The company has been exploring various secured and unsecured indebtedness
        and
        equity financing opportunities as well as joint ventures.
  During the six months ended June 30, 2007, the Company has conditionally
        placed
        into escrow 45,000,000 shares in the name of International Tactical
        Training Center, Inc., an entity affiliated with Mr. Daniels, our former
        executive officer and director , in contemplation of a proposed joint
        venture, 30,000,000 of which shares were deposited for purposes of
        negotiating and collateralizing a possible secured financing
        transaction.  As the company has not received any proceeds from financing
        or financing commitment yet from any prospective investors, or otherwise
        entered
        into definitive transaction documents that require such a pledge, the
        Company intends on rescinding this issuance.  No definitive agreement
        has been entered into with respect to this transaction and no assurance can
        be
        made that one will be entered into.
  In addition, we have issued 10,000,000 shares into escrow with Pegasus
        Defense Corporation in anticipation of an acquisition of a partial ownership
        interest in Pegasus Defense Corporation, and to facilitate a possible
        financing transaction and joint venture with them which was also
        conditioned on consummation of a financing.  No definitive agreement
        has been entered into with respect to this transaction and no assurance can
        be
        made that one will be entered into.
  All of the foregoing issuances will be approved by the board only upon
        consummation of a financing transaction and joint venture and fulfillment
        of all conditions required by the board.


**Results
      of Operations and**  **Plan
      of Operation**





For
      the
      three and six months ended June 30, 2007, our operating costs were $60,540
      and
      $169,292 as compared with $55,853 and $127,195 for the same periods in 2006.
      The
      increase in costs related primarily to increased employment staff and costs
      relating to development of our maintenance and other programs.





Interest
      expenses for the six months ended June 30,2007 was $2,444,525 as compared to
      $813,054 for the same period in 2006, which increase was caused by our increase
      in outstanding debt used to fund our operations.





**Liquidity
      and Capital Resources**





Our
      business involves the ownership, operation and maintenance of jet aircraft,
      which typically require significant amounts of capital. Some of our anticipated
      one time and ongoing expenses are discussed below.





Our
      predecessor, AeroGroup, has had no revenues during 2006. We had no revenues
      during the first six months of 2007. We anticipate that our current
      cash on hand of $7,560 as of July 1, 2007 is sufficient to satisfy our cash
      requirements only through the end of August of 2007. We do not have
      any financing commitments and no assurance can be made that we will be obtaining
      financing at the times and terms needed. Therefore, there is substantial doubt
      that we will be able to continue as a going concern. In addition, we will need
      substantial additional capital during the next 12 months in order to complete
      our business plan.





We
      have
      funded our operations and met our capital expenditures requirements primarily
      from the issuance of convertible debt securities and warrants.





As
      of
      December 31, 2006, AeroGroup (our predecessor in interest) had a negative
      working capital deficiency in the amount of $4,621,385. Cash used by
      operating activities were $1,157,571 for the year ended December 31, 2006
      compared to cash used by operating activities for the year ended December 31,
      2005 of $967,573.




As
      of June 30, 2007, we had negative
      working capital deficiency in the amount of $5,627,545 with cash used in
      operating activities of $946,308 for the six months ended June 30, 2007 as
      compared to $438,539 during the six month period ended June 30,
      2006.





Net
      cash
      provided by financing activities for the six months ended June 30, 2007 was
      $837,724 compared to $643,515 for the six months ended June 30, 2006
      primarily as a result of continued capital raising efforts of the Company.




5




The
      factors that predominantly impact working capital and therefore cash flows
      from
      operations are operating expenses.




During
      the year ended December 2007, the Company believes that it will expend funds
      on
      the following:





·
            Completion
                of development of the safety, parts and maintenance programs which
                we
                anticipate will cost a minimum of another $1,000,000 to complete,·
            Import
                and modification of the MiG 29 Aircraft, currently in the Ukraine,
                which
                we anticipate will cost approximately $620,000,·
            Acquisition
                or leasing of new fourth generation military aircraft and/or tanker
                aircraft.·
            Hiring
                of a Chief Financial Officer and dispatch and other personnel with
                military aviation experience.





**Financing
      Activities Since March 31, 2007**





During
      the period April 1, 2007 through
      June 30, 2007, the Company received loan proceeds of $493,851 from two
      unrelated parties. The loans provide for interest at an annual rate of 12%
      and
      are due within three years of issuance. The loans are convertible into common
      stock at a conversion rate of $0.25 per share and were issued in conjunction
      with warrants to purchase 1,974,486 shares of common stock at an exercise price
      $0.25 per share.





In
      connection with the issuance of the Debentures, the Company is required to
      file
      a Registration Statement to register the shares of common stock issuable upon
      the conversion of the Debentures and the exercise of the warrants. The Company
      will be obligated to the pay the holders of the Debentures certain liquidated
      damages in the event the shares are not registered within sixty days of the
      date
      of issuance. The Company has not filed the Registration Statement and therefore
      must pay the holders of the Debentures liquidated damages in the aggregate
      amount equal to two percent (2%) for each (thirty) days (or part thereof) per
      month until such Registration Statement is filed and declared effective. In
      June
      of 2007 Debenture holders agreed to postpone the registration requirement
      through August 31, 2007.





We
      anticipate that if we are able to raise sufficient capital that we will be
      able
      to complete our programs and import our MiG 29 aircraft by fourth quarter of
      2007. If we are not able to do so, we will not be able to perform under the
      F-16
      Training Contract or to bid under newer contracts.





**Immediate
      Need for Additional Capital**





We
      will
      be required to make significant additional expenditures to acquire F-16, F-15,
      SU-27 or additional MiG 29 fighter jet aircraft in order to perform our
      contracts. Alternatively, we may lease these aircraft if sufficient financing
      alternatives are not available. Additionally, we will be required to allocated
      capital towards completion of our parts, maintenance and safety programs. We
      do
      not have any commitments for capital. Our near term anticipated costs are listed
      below.





*Cost
      of Importing our Existing Aircraft*





Our
      MiG
      29 aircraft are located in the Ukraine and must be disassembled for delivery
      to
      the United States, where they will be reassembled and modified to an airworthy
      condition suitable for use in our business. We intend to use these aircraft
      in
      connection with our air-to-air training of pilots who fly NATO aircraft, such
      as
      the F-16.




6




We
      estimate that it will cost $200,000 to import our MiG 29 aircraft that are
      in the Ukraine and $420,000 to modify these aircraft for use in military
      training. Presuming that we are able to finance this shipment promptly, we
      anticipate that these two aircraft will become fully operational in the United
      States no sooner then September of 2007. We estimate that it will take no less
      than 50 days from the closing of a financing, if any, to ship such aircraft
      to
      the United States.




*Cost
      of Developing Parts, Maintenance and Safety Programs*





Our
      F-16
      Training Contract and most of our existing subcontracts, as well as those we
      may
      bid for in the future, will require us to develop and maintain a formal safety
      program, a formal maintenance program and a formal parts program. We anticipate
      that it will cost us approximately $1,000,000 through December of 2007 to
      complete these programs.





*Cost
      of Acquisition or Lease of Fourth Generation Military
      Aircraft*





In
      order
      to for us to be eligible to be called upon to do work under our contracts,
      we
      must acquire at least two F-16 fighter jet aircraft with no less then seven
      of
      such aircraft being the optimum number of F-16 fighter jet aircraft. We do
      not
      have formal agreements to acquire or lease these aircraft, but based on recent
      negotiations, we anticipate that these aircraft will cost at least $5,500,000
      each, or a total of $11 Million to $38.5 Million in order to be fully
      operational. We may also utilize other fourth generation military aircraft
      for
      our F-16 Training Contract which we anticipate will cost less then the F-16
      aircraft based on the purchase price paid for the MiG 29 aircraft in December
      of
      2005. Alternatively, if we do not have the capital to acquire or finance these
      aircraft we will have to lease these aircraft. We have not yet entered into
      any
      formal arrangements to lease these or any other aircraft and are not aware
      if
      these aircraft are available for lease from third parties. Even if we are able
      to identify leasing agents, we anticipate that a lease arrangement will also
      entail a capital commitment.





We
      do not
      have adequate capital to purchase or lease these aircraft at this time or any
      financing commitments for the foregoing. If traditional acquisition financing
      cannot be found we will seek alternatives including a possible sale of debt
      or
      equity securities.





**Employees**





We
      currently have nine full time and
      six part time employees. From time to time we have retained a number of
      independent consultants to assist us in developing our safety, maintenance
      and
      parts programs and to develop our curricula. We do not anticipate the hiring
      of
      new employees until we complete the acquisition of the F-16 aircraft and we
      are
      prepared to accept tasking orders under our contracts. However, we anticipate
      retaining consultants from time to time in order to complete development of
      our
      parts, maintenance and safety programs. We anticipate that after such time
      in
      order to operate our business of providing flight training and aircraft services
      relating to F-16 fighter jet aircraft, we will need to hire new employees and
      members of management. These new management personnel will include a director
      of
      logistics, a chief of maintenance, a director of administration, and a security
      director. We will also need certified flight instructors, maintenance and line
      personnel sufficient to manage our aircraft flight operations and program
      managers with military experience.





While
      we
      have interviewed and met with multiple candidates for the these positions,
      we do
      not intend to hire anyone until the needs of our operations require such
      expenditures. We believe that the annual number of retiring military flight
      instructors and mechanics is sufficient to enable us to find qualified training
      and maintenance personnel.





**Off
      Balance Sheet Arrangements**





As
      of July 1, 2007, we do not have any
      off balance sheet arrangements, as defined in Section 303(c) of Regulation
      S-B,
      other then as specifically disclosed in this report. Off balance sheet
      arrangements include, without limitation, contractual arrangements with any
      entity whose financial information is not consolidated with our own, under
      which
      we have:




·
            Guaranteed
                any obligation of such other entity;·
            A
                retained or contingent interest in assets transferred to such
                unconsolidated entity or similar arrangement that serves as credit,
                liquidity or market risk support to that entity for such
                assets;·
            Any
                obligation under certain derivative instruments;·
            Any
                obligation under a material variable interest held by the registrant
                in an
                unconsolidated entity that provides financing, liquidity, market
                risk or
                credit risk support to the registrant, or engages in leasing, hedging
                or
                research and development services with the registrant.




7




Additionally,
      we do not have any relationships or transactions with persons or entities that
      derive benefits from any non-independent relationships other than related party
      transactions discussed herein.





**Item
      3. Controls and Procedures**





(a) **Evaluation
      of Disclosure Controls and Procedures**





As
      of
      August 9, 2007, we do not have a full time internal chief financial officer
      or
      accounting compliance staff. Based on an evaluation of our disclosure controls
      and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
      the Securities Exchange Act of 1934, as amended) required by paragraph
      (b) of Rule 13a-15 or Rule 15d-15, as of March 31, 2007, our
      Principal Executive Officer and Principal Financial Officer believe that, our
      disclosure controls and procedures were not effective in ensuring that
      information required to be disclosed by us in the reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported. Our
      auditors, Marcum & Kliegman, LLP in performing their audit for the years
      ended December 31, 2006 and 2005, discovered conditions which they deemed to
      be
      a material weakness in the Company’s internal control related to financial
      reporting. Specifically, they noted a lack in timeliness in financial statement
      reporting as well as deficiencies related to disclosures in the notes to
      financial statements (2006 and 2005) and adjusting journal entries in accounting
      for derivative instruments (2005). Our Principal Executive Officer and Principal
      Financial Officer believe that the lack of a full time chief financial officer
      has been instrumental in leading to delays in the company’s filings and in the
      prompt gathering and analysis of financial information. Management believes
      that
      hiring a full time chief financial officer is crucial to maintaining the
      integrity of its financial information and reports and intends to do so as
      funds
      permit.





(b) **Changes
      in Internal Controls**





During
      the period ended June 30, 2007, there were no changes in our internal
      control over financial reporting identified in connection with the evaluation
      required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting. ****


8


**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





Mr.
      Jeffrey Peer, a former executive officer of AeroGroup, has threatened litigation
      in Florida as a result of AeroGroup’s failure to pay his salary and other
      expenses under his employment terms, which terms are at dispute. We believe
      that
      this claim is without merit and are working towards resolution of the same.





TADS
      is
      not a party to any pending litigation or legal proceeding that is not in the
      ordinary course of business. To our knowledge, no such proceedings are
      threatened other than a threat of a lawsuit from Mr. Peer, as described above.





**Item
      2. Unregistered Sales of Equity Securities and Use of Proceeds**





*Conversion
      of Notes and Exercise of Warrants*





During
      the period January 1, 2007 through June 30, 2007 the issuances of unregistered
      securities were made as a result of various warrant exercises and note
      conversions. In all, during this period, various holders of warrants exercised
      7,187,301 warrants at $.15 per share by cashless exercise, resulting in the
      net
      issuance of  6,234,238 **** shares
      of
      the Company’s Common Stock. In addition, during this period, various holders of
      the convertible debentures converted $72,603 of debentures (of which $50,000
      was
      principal with the remaining $22,603 of interest) at conversion price of $.15
      per share, resulting in the issuance of 503,394 shares of Common Stock.





Between
      July 1, 2007 through August 8, 2007 the issuances of unregistered securities
      were made as a result of various
      warrant exercises and note conversions. In all, during this period, various
      holders of warrants exercised 895,000  warrants
      at $.15 per share by cashless exercise, resulting in the net issuance of
 760,693 shares of the Company’s Common Stock. In addition, during this
      period, various holders of the convertible debentures converted $259,978 of
      debentures (of which $224,060 was principal with the remaining $35,918 of
      accrued interest) at conversion price of $.15 per share, resulting in the
      issuance of 1,733,193 shares of Common Stock.





*Issuance
      of Convertible Debt*





Between
      January 1, 2007 and March 31, 2007, the Company received proceeds of loans
      totaling $343,873. The loans are reflected by promissory notes convertible
      into
      TADS common stock at conversion prices ranging from $.25 to $1.00 per share
      and
      provide for warrants to purchase 1,013,999 shares of TADS common stock at
      exercise prices ranging from $.25 to $1.00. The loans bear interest of 12%
      and
      are due three years from the date of issuance. The warrants issued in
      conjunction with these loans are exercisable at per share exercise prices of
      $.25 to $1.00 per share of common stock, are exercisable immediately up until
      the fifth anniversary of the initial warrant date, and such exercise price
      is
      subject to adjustment for subsequent lower price issuances by the Company and
      other customary events including stock splits, reverse stock splits, issuance
      of
      convertible securities, sale of common stock and spin-offs.





Between
      April 1, 2007 and June 30, 2007, the Company received proceeds of loans totaling
      $493,851. The loans are convertible into TADS common stock at a conversion
      price
      of $.25 per share and provide for warrants to purchase 1,974,486 shares of
      TADS
      common stock at an exercise price of $.25. The notes bear interest of 12% and
      are due three years from the date of issuance. The warrants are exercisable
      at a
      per share exercise prices of $.25 per share of common stock, are exercisable
      immediately up until the fifth anniversary of the initial warrant date, and
      such
      exercise price is subject to adjustment for subsequent lower price issuances
      by
      the Company and other customary events including stock splits, reverse stock
      splits, issuance of convertible securities, sale of common stock and
      spin-offs.





Between
      July 1, 2007 and August 8, 2007 we issued $77,549 of 12% convertible notes
      and
      310,195 warrants in exchange for loan proceeds of an additional $77,549 from
      a
      single investor. The loans accrue interest at 12% per annum and become due
      three
      years from issuance and the warrants are exercisable at $.25 per share and
      the
      notes and warrants are identical in all material respects to the notes and
      warrants issued earlier in the year as disclosed above.




9




*Issuance
      of Common Stock to ZA Consulting*





The
      Company issued an aggregate of 250,000 restricted shares of Common Stock to
      ZA
      Consulting Group in the first quarter of 2007, as compensation for investor
      relations services and related consulting services. No registration rights
      were
      issued in connection with these shares.




*Issuance
      of Shares of Common Stock for Services*




Between
      March and May of 2007, the Company issued an aggregate of 2,140,000 shares
      in satisfaction of invoices to various services providers. These shares are
      restricted and no registration rights were granted in connection with these
      issuances.




*Series
      A Preferred Stock Issuances*





On
      March
      21, 2007, the Company filed a Certificate of Designation of Series A Preferred
      Stock (the “Series A Certificate of Designation”) with the Secretary of State of
      the State of Nevada, designating a series of 50,000,000 shares of Preferred
      Stock of the Company, $.001 par value (the “Series A Preferred Stock”). Pursuant
      to the Series A Certificate of Designation, holders of the Company’s Series A
      Preferred Stock are entitled to:





·
            elect
                one director to the Company’s board of directors·
            vote
                on all other matters on a 25 votes per share Common Stock
                basis.·
            with
                respect to dividend rights, rights on redemption, rights on conversion
                and
                rights on liquidation, winding up and dissolution, rank senior to
                all
                Common Stock, warrants and options to purchase Common Stock established
                by
                the Board or the Stockholders (all of such equity securities of the
                Corporation to which the Series A Preferred Stock ranks senior are
                collectively referred to herein as “Junior Stock”).·
            Each
                share of Series A Preferred Stock is initially convertible into 2
                shares
                of the Common Stock of the Company, subject to adjustment for stock
                splits, recapitalization or other
                reorganizations.





In
      addition, the Series A Preferred Stock:





·
            has
                weighted average antidilution protection that will cause the conversion
                price to adjust downward in the event that the Company issues shares
                of
                Common Stock or securities convertible into Common Stock at a price
                of
                less than the conversion price of the Series A Preferred Stock then
                in
                effect.·
            may
                be converted into Common Stock at the option of the holder.





In
      addition, at any time after the closing bid price for the Company’s Common Stock
      on the NASDAQ OTCBB or the primary United States exchange on which the Common
      Stock is then traded exceeds $5.00 during any five consecutive trading days,
      the
      Company may, at its sole option, convert the Series A Preferred and any accrued
      but unpaid dividends into common shares at the then-applicable conversion price
      by providing written notice of such conversion to the holders of the Series
      A
      Preferred; provided that there is an effective registration statement under
      the
      Securities Act registering the resale of the Common Stock to be issued upon
      such
      conversion.





Each
      share of Series A Preferred Stock is entitled to receive a dividend of 7% per
      annum. The dividend begins to accrue on January 1, 2007 and will be payable
      quarterly thereafter. The dividend is cumulative. In the event of a liquidation
      or acquisition of the Company, the holders of the Series A Preferred Stock
      will
      be entitled to receive an amount equal to any accrued and unpaid dividend prior
      and in preference to any distributions to the holders of the Common Stock.
      Thereafter, the holders of the Series A Preferred Stock will be entitled to
      participate in distributions on an as converted to common stock
      basis.




10




Shares
      of
      Series A Preferred may be redeemed, in whole or in part, by the Company out
      of
      funds lawfully available therefore from the holders of then outstanding shares
      of Series A Preferred on a pro rata basis, at any time by providing written
      notice to the holders of the Series A Preferred owned by each holder, that
      number of outstanding shares of Series A Preferred owned by each holder, that
      number of outstanding shares of Series A Preferred that the Company has elected
      to purchase for the following consideration: (i) an amount equal to a price
      per
      share equal to the $4.00 plus any accrued and unpaid dividends multiplied by
      the
      number of shares of Series A Preferred being redeemed from such holder and
      (ii)
      the issuance of the number of shares of Common Stock equal to seventeen and
      one-half percent (17.5%) of the shares of Common Stock then issuable upon
      conversion of the shares of Series A Preferred being redeemed from such holder.
      A cash payment will be provided in lieu of any fractional shares of Common
      Stock.





*Issuance
      of Preferred Securities*




During
      the period January 1, 2007
      through June 30, 2007, the Company issued 4,265,000 shares of Common Stock
      and 6,400,000 shares of its Series A Preferred Stock to various officers
      and directors for compensation due under various employment agreements. (See
      “Series A Preferred Stock Issuances” above).





**Item
      3. Defaults Upon Senior Securities**




None.




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





None.





**Item
      5. Other Information**





None.





**Item
      6. Exhibits**





a.
      Exhibit Index


3.2
              Certificate
                  of Designation, with Respect to Series A Preferred Stock, dated
                  March 21,
                  2007.*
 
 10.1
              Employment
                  Agreement, dated as of January 3, 2007, between the Company and
                  Mark
                  Daniels.*
 
 10.2
              Employment
                  Agreement, dated as of January 3, 2007, between the Company and
                  Victor
                  Miller.*
 
 31.1
              Certification
                  by Chief Executive Officer and Principal Financial Officer, required
                  by
                  Rule 13a- 14(a) or Rule 15d-14(a) of the Exchange Act, promulgated
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1
              Certification
                  by Chief Executive Officer and Principal Financial Officer, required
                  by
                  Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
                  1350 of
                  Chapter 63 of Title 18 of the United States Code, promulgated pursuant
                  to
                  Section 906 of the Sarbanes-Oxley Act of 2002.




*
      Incorporated by reference to the Issuer’s Form 10-KSB filed on June 14,
      2007.





11




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly authorized.





**TACTICAL
                AIR DEFENSE SERVICES,**
              **INC.**August
                14, 2007By:
            s/
                John
                FarleyName:
                John FarleyTitle:
                Vice
                President and Principal Accounting
              Officer





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