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

                                  FORM 10-KSB/A-2

     [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

   [_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

        FOR THE TRANSITION PERIOD FROM ______________ TO________________

                          COMMISSION FILE NO. 333-46424

                           CYBER DEFENSE SYSTEMS, INC.

                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

       A FLORIDA CORPORATION                           55-0876130
       ---------------------                           ----------
       (STATE OR OTHER JURISDICTION                    (IRS EMPLOYER
       OF INCORPORATION OR ORGANIZATION)               IDENTIFICATION NUMBER)


                            10901 ROOSEVELT BOULEVARD
                          ST. PETERSBURG, FLORIDA 33716
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (727) 577-0878
                           (ISSUER'S TELEPHONE NUMBER)

      Securities  registered under Section 12(b) of the Securities  Exchange Act
of 1934, as amended ("Exchange Act"): NONE.

      Title of each class name of each exchange on which  registered  Securities
registered  under Section 12(g) of the Exchange Act:

               CLASS A COMMON STOCK, PAR VALUE $0.001 PER SHARE.
               CLASS B COMMON STOCK, PAR VALUE $0.001 PER SHARE.
               CLASS C COMMON STOCK, PAR VALUE $0.001 PER SHARE.

      Check whether the issuer (1) filed all reports  required to be filed under
Section 13 or 15(d) of the Exchange Act,  during the past 12 months (or for such
shorter period that the Issuer was required to file such  reports),  and (2) has
been subject to such filing requirements for the past 90 days. [X] Yes [__] No

      Check if there is no disclosure  of delinquent  filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure  will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X] Yes [ ] No

      The  Issuer's  revenues  for the fiscal year ended  December 31, 2004 were
$3,503,250.   The   aggregate   market   value  of  the  voting  stock  held  by
non-affiliates  of the Issuer  computed by  reference  to the price at which the
stock was sold,  or the average bid and ask prices of such stock as of April 14,
2005,  was  approximately  $3.25 per share.  Shares of common stock held by each
executive  officer and director and by certain persons who own 5% or more of the
outstanding  common stock have been  excluded in that such persons may be deemed
to be affiliates.  This  determination  of affiliate status is not necessarily a
conclusive determination for other purposes.

<PAGE>

      Number of shares  outstanding of Issuer's common stock,  $0.001 par value,
outstanding on April 14, 2005: 28,023,747.


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

                    Documents Incorporated by Reference: NONE

   Transitional Small Business Disclosure Format (Check one): Yes [_]; No [X]

The Registrant,  by this Form 10-KSB/A-2 amends the Form 10-KSB/A filed on April
26, 2005 including changes to the audited financial statements,  signature pages
and the  certifications  made by our CEO and CFO. The remaining  information  in
this Form  10-KSB/A-2  has not been changed or updated to reflect any changes in
information  that  may have  occurred  subsequent  to the date of the  reporting
period that this Form 10-KSB/A relates.

<PAGE>


                                TABLE OF CONTENTS


                                     PART I

Item 1. Business ........................................................... 01
Item 2. Description of Property ............................................ 08
Item 3. Legal Proceedings .................................................. 08
Item 4. Submission of Matters to a Vote of Security Holders ................ 08

                                     PART II

Item 5. Market for Common Equity and Related Stockholder
        Matters............................................................. 08
Item 6. Management's Discussion and Analysis of Financial Condition or Plan
        of Operations....................................................... 14
Item 7. Financial Statements ............................................... 19
Item 8. Changes in and Disagreements With Accountants on
        Accounting and Financial Disclosure ................................ 20
Item 8A. Controls and Procedures ........................................... 20

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
        Compliance With Section 16(a) of the Exchange Act ...................21
Item 10. Executive Compensation ............................................ 24
Item 11. Security Ownership of Certain Beneficial Owners and
         Management and Related Stockholder Matters ........................ 25
Item 12. Certain Relationships and Related Transactions .................... 26
Item 13. Exhibits and Reports on Form 8-K .................................. 28
Item 14. Principal Accountant Fees and Services ............................ 32

Signatures ................................................................. 33

<PAGE>

                                     PART I

ITEM 1. BUSINESS

Organization and Background

      Cyber Defense Systems,  Inc. ("Cyber Defense",  the "Company",  "we", "us"
and "our") was  incorporated  in the State of Florida on August 19,  2004 and is
the successor Company to E-City Software, Inc. ("E-City"), a Nevada corporation,
pursuant to a change of domicile  merger which became  effective on September 1,
2004.  The change of domicile  merger was preceded by another merger by means of
which an entity  known as On Alert  Systems,  Inc.  ("On Alert") was also merged
into Cyber Defense.  On Alert was incorporated on March 17, 2003 in the State of
Nevada  and  subsequently  acquired  a control  position  in our  majority-owned
subsidiary,  Cyber Aerospace Corp.  ("Cyber Aero") in March 2004. As a result of
the  foregoing,  we became  the  successor  to E-City  and our shares of Class A
common stock began trading on the OTC Bulletin Board under the symbol, "CYDF" on
September 7, 2004. On March 31, 2005, our majority owned subsidiary, Cyber Aero,
was merged into the Company in order to consolidate operations into one company,
with one name, and one group of shareholders.

Overview

      Cyber  Defense was formed from a  consolidation  of several  companies  in
September of 2004. On Alert Systems,  Inc., a security systems company,  and its
subsidiary,  Cyber  Aerospace  Corp.,  were both merged into the publicly traded
E-City Software,  Inc.  Following a financial  restructuring  and a name change,
Cyber Defense was born.

      Cyber  Defense's  main  focus  is  the  design  and  development  of a new
generation of Unmanned Air Vehicles  ("UAV's").  Cyber Defense has assembled and
continues to build on its team of military experts and aerospace (and composite)
engineers to accomplish  this goal. In addition,  Cyber Defense has acquired the
global- government marketing rights from Techsphere Systems  International,  LLC
("TSI"), for its semi-spherical  manned and unmanned,  high-atmosphere  airships
(the  "Airships").  Cyber  Defense  plans to market  these  Airships  to various
branches  of  the  U.S.  government  initially,   and  then  to  other  friendly
governments worldwide,  as a means of reducing dependence on expensive satellite
technologies for  communications and surveillance  activities.  The TSI Airships
have flown up to an altitude of  approximately  20,000 feet;  it is  anticipated
that they will reach up to 65,000 feet, an altitude sufficient for communication
and surveillance technologies.

      The mission of Cyber Defense is to acquire  and/or  develop  offensive and
defensive  security  technologies  that  support  a full  line of  interoperable
protection  disciplines.  By acquiring a homogeneous  suite of security products
through teamed and licensed marketing and distribution agreements, Cyber Defense
plans  to  introduce  its new  product  line to  multiple  markets.  Prospective
government  and  commercial  clients  that Cyber  Defense  is seeking  all share
similar needs: enhanced security,  mobile communication  platforms and increased
surveillance capabilities.

      Cyber Defense is currently  engaged in final testing programs for both its
CyberScout(TM)  and  CyberBug(TM)  UAV's,  and  has  recently  secured  an  ITAR
agreement  allowing the Company to export its UAV's to countries approved by the
U.S. Department of State. In addition,  multiple  arrangements and relationships
have been formed  with  companies  and  individual  representatives  to identify
potential buyers of the UAV's in Europe, the Pacific Rim, and Israel. As part of
the Company's  efforts to make the UAV's  available for sale,  multiple  patents
protecting the many unique features of both the  CyberScout(TM) and CyberBug(TM)
have been recently filed with the U.S. Patent and Trademark Office.

      The  CyberScout(TM)  is the first in a series of planned vehicles by Cyber
Defense that employ a vertical  take-off and landing technique  ("VTOL").  Cyber
Defense has  recently  completed a series of  controlled  flight  tests with the
CyberScout,  and its propulsion  technology is evolving from utilizing gas power
to a planned  three-turbine,  jet-fueled  aircraft-less  than 10 feet in overall
dimensions and weighing in at under 80 pounds fully fueled with payload-which is
considered unique among its peers in the industry.


                                       1
<PAGE>

      The  CyberBug(TM)  UAV is the first  scalable,  unmanned  aircraft that is
available  (from  approximately  2.6  pounds to 6 pounds)  and can carry up to a
6-pound  payload.  The  CyberBug(TM)  can be customized  with high-power day and
night vision,  and with the ability to carry an additional payload of explosives
for military use. The  CyberBug(TM)  may be hand launched in remote areas by one
person,  within an  approximate  30 second  time  frame and it can be  recovered
easily in winds of up to 20 MPH or more.  It  includes an  autopilot  and a data
link with GPS overlay.

      The unique design of the Cyberbug allows it to fly for up to approximately
eight  hours  using  sophisticated  cameras and  sensors,  in day or  night-time
situations and fly either via autopilot or controlled  individually by joystick.
We believe that the  relatively  low product cost and end-user  price will allow
UAV's of this nature to be used by municipal police and other smaller,  regional
security organizations throughout the world.

      Our initial focus was to market our existing products to the Department of
Defense  ("DoD"),   homeland  defense  and  intelligence  agencies.  Our  senior
management  team  believes  that it has  established  viable  contacts  with the
decision  makers in these  market  segments.  As this is a  substantial  market,
understanding its future technology needs requires on-going analysis,  and Cyber
Defense is poised to address those initiatives. We intend to further expand into
other market  segments  that require  enhanced  security,  mobile  communication
platforms and increased surveillance  capabilities.  Examples of market segments
include,  but are not limited to: industrial  plants,  chemical plants,  nuclear
sites, oil rigs, oil pipelines, and ports.

      Cyber Defense intends to provide a suite of integrated  security  products
that can be deployed quickly,  cost effectively and securely.  The global war on
terror has redefined this country's  need for security  protection  both at home
and abroad.  Since the  increased  awareness  of  terrorist  attacks,  an entire
industry  has  emerged  to  provide   solutions  to  support  homeland  defense.
Furthermore,  most of the civilized  world is confronted with ongoing threats of
terrorism.

      Management  anticipates,  but cannot guarantee,  that existing  technology
developed by Cyber Defense, along with future planned innovations,  will be able
to meet these security challenges with cost effective solutions.

      Nevertheless,  our products  represent new technology being developed by a
new enterprise  with limited  resources,  and like any such new  technology,  no
assurance can be given that it will function in a cost-conscious  manner,  if at
all, in the uses for which it is designed.  In that regard, none of our products
have been tested in either simulated or real combat conditions.

      Furthermore,  we face  competition from entities with far more substantial
financial and manpower  resources,  together with far more access to procurement
personnel in the military and the security industries.

      In  addition,  our  auditors,  Hansen,  Barnett & Maxwell,  the  Company's
Independent  Registered Public Accounting Firm raise substantial doubt about our
ability to continue as a going concern.

Operations of Cyber Aero

      Since March of 2004, Cyber Aero has been engaged in two projects:

      (a)  designing  and  building a new  generation  of UAV's for security and
military applications; and

      (b)  sales  and   marketing   of  Airships   for   security  and  military
applications.


                                       2
<PAGE>

The Use of Unmanned Aerial Vehicles

      UAV's  have  been  referred  to in  many  ways:  RPV's  (remotely  piloted
vehicle),  drones, robot planes, and pilot-less aircraft.  The DoD defines UAV's
as  powered,  aerial  vehicles  that  do not  carry  to a  human  operator,  use
aerodynamic  forces to provide vehicle lift, are able to fly  autonomously or be
piloted remotely, can be expendable or recoverable,  with the ability to carry a
lethal or non-lethal  payload.  Ballistic or  semi-ballistic  vehicles,  such as
cruise missiles, and artillery projectiles are not considered UAV's by the DoD.

      UAV's differ from RPV's in that some UAV's can fly autonomously. UAV's are
either described as a single air vehicle (with associated surveillance sensors),
or a UAV System,  which usually consists of three to six air vehicles,  a ground
control station, and support equipment.

      UAV's are thought to offer two main advantages over manned aircraft:  they
are arguably cheaper to procure,  and they eliminate the risk to a pilot's life.
UAV's protect the lives of pilots by performing  the "3-D" missions - those that
are "dull,  dirty,  or  dangerous"  and do not  require a pilot in the  cockpit.
Furthermore,  for those certain  missions  which require a very small  aircraft,
only a UAV can be deployed  because there is no  equivalent  manned system small
enough for the task.

Design and Development of the Company's UAV's

      In March of 2004, Cyber Aero began assembling a team of military  experts,
aeronautical,  and composite  engineers to design and build a new  generation of
UAV's.  Cyber Aero engaged Mr. James Alman,  an  Aeronautical  Engineer  with an
extensive background in experimental aerial vehicles and airline operations,  to
design  what  came  to be  known  as the  CyberBugTM,  a  lightweight  low-cost,
micro-mini UAV, and the CyberScoutTM, a heavier, more sophisticated UAV.

      To provide the technology and know-how for the venture, we determined that
it would be in the  best  interests  of  Cyber  Aero for it to  acquire  certain
designs,  technology, and equipment owned by Mr. Alman. Accordingly, in March of
2004,  Cyber Aero entered into an agreement (the "Original  Alman Asset Purchase
Agreement")  pursuant to which Cyber Aero  purchased from Mr. Alman the right to
manufacture  and  sell  UAV's  designed  by Mr.  Alman,  in  consideration  of a
promissory  note from Cyber Aero to Mr. Alman for $100,000.00 due on December 5,
2005, the issuance of 1,000,000  shares of Cyber Aero's common stock,  par value
$0.0001 per share, to Mr. Alman,  and the undertaking to pay as a royalty to Mr.
Alman a sum of money  equal to 5% of the gross  invoiced  selling  price of each
CyberBugTM and CyberScoutTM unit sold, less sales tax and commissions.

      On January 11,  2005,  the Original  Alman Asset  Purchase  Agreement  was
modified (the "Amended Alman Asset Purchase Agreement"), so that Mr. Alman would
receive as a  royalty,  a sum of money  equal to 5% of the gross  profit of each
CyberBugTM  and  CyberScoutTM  sold during the life of any patent  covering  the
intellectual  property,  provided,  however, it did not exceed twenty (20) years
from January 11, 2005, less sales taxes, shipping and commissions.

      Cyber Aero has  recently  completed  the  following  two flying  prototype
UAV's:

      o     The low-cost CyberBugTM.

      This scalable, unmanned aircraft is available in two versions. The smaller
CyberBugTM  weighs 2.6 pounds or more  depending on type of mission.  The larger
CyberBugTM weighs  approximately  five pounds and is capable of lifting a larger
payload depending on each type of mission. On board options include, but are not
limited  to high  power day and  night  vision  capable  of  carrying  explosive
payloads for defense and  military  use.  In-house  testing  indicates  that the
CyberBugTM  can be assembled  and launched in remote areas in  approximately  30
seconds by an individual and are easily recoverable in winds up to approximately
20 MPH. We intend to include in future  models an autopilot  function as well as
datalink with GPS overlay.

      The CyberBugTM has two basic uses: (i) short flight, which is intended for
surveillance  in areas of concern when troops are in dangerous  situations;  and
(ii) long-term  flight for the  surveillance of patrol areas up to approximately
four hours.  The smaller  CyberBugTM is encased in a cylindrical tube which will
allow  easy  transport.  The  basic  smaller  CyberBugTM  has a  base  price  of
approximately $8,500.00.

                                       3
<PAGE>

      o     The CyberScoutTM

      The  CyberScout(TM)  is the first in a series of planned vehicles by Cyber
Defense that employ a VTOL  technique.  Cyber  Defense has recently  completed a
series of  controlled  flight  tests  with the  CyberScout,  and its  propulsion
technology  is evolving  from  utilizing  gas power to a planned  three-turbine,
jet-fueled  aircraft-less  than 10 feet in overall dimensions and weighing in at
under 80 pounds fully fueled with  payload-which is considered  unique among its
peers in the industry.

      The CyberBugTM and  CyberScoutTM  will be marketed by Cyber Defense and we
have filed patents with the United States Patent and Trademark Office to protect
their unique features.

      A  competitor  of Cyber  Defense  is  attempting  to  develop  a UAV which
replicates/copies the CyberBug(TM),  and we served this organization with notice
requesting such competitor ceases and desists from its activities.

Use of Airships

      The use of Airships to provide  high  altitude  surveillance  is not a new
concept.  For over one hundred  years,  balloons  have been used by  battlefield
commanders to get a "big picture" perspective. However, it is anticipated that a
new generation of airship  design will bring an enhanced  potential to the field
by integrating  advanced  communications  with mobile  platform  stability.  The
physical  configuration  of these  Airships  will  allow  the  system  to remain
airborne in a set location  longer than  previously  possible.  Furthermore,  in
addition to providing  "hovering" ability,  the engines of the new generation of
Airships are designed to rotate,  allowing the ship to fly, versus float, to its
station.  This  design also  permits the Airship to spin on its axis  permitting
greater mobility.

      Airships have significant potential military and security applications:

      o     Surveillance  (the military,  Drug Enforcement  Agency/Customs,  the
            Coast Guard, etc.) of movements 24 hours a day/ seven days a week in
            multiple environments.

      o     Quick replacement of  obscure/destroyed  technology  infrastructures
            with on-board wireless communication capability.

      o     Command and control of ground and airborne communications.

      In  addition,  Airships  have  civilian  applications,  such as  providing
wireless  solutions in the growing U.S. broadband market. We believe a byproduct
of this  technology  will be the  formation of mobile  "Cell  Towers" for remote
locations or overloaded systems. Used both for planned and unplanned occurrences
(Super Bowl, New Year's,  and other major events),  we believe that  positioning
one of these  Airships  above a city or area of interest  could provide a mobile
communications  platform  which would allow for cell,  microwave,  broadband and
video technology. High above the area of concern or service, this platform could
be put into  place  within  three  hours of an event and  maintained  for a long
period of time to support core systems.  Although we have had  discussions  with
several large telecoms, no firm agreements to purchase an Airship materialized.

Competition

      A number of UAV's presently exist, both domestically and  internationally.
Their  payload  weight  carrying  capability,   accommodations   (i.e.,  volume,
environment,  etc.), mission profile (i.e., altitude, range, duration, etc.) and
their command, control and data acquisition capabilities vary significantly.

      A buildup of domestic UAV configurations,  promoted by the DoD occurred in
the late 1980s and well into the 1990s.  During this time,  the DoD sought UAV's
to satisfy  their mission  unique  surveillance  requirements  in either a Close
Range, Short Range or Endurance category of vehicle.  Close Range was defined to
be  within  approximately  50  kilometers;  Short  Range was  defined  as within
approximately  200 kilometers and Endurance was anything  beyond 200 kilometers.


                                       4
<PAGE>

With the advent of newer  technology,  and with the demonstrated  performance of
the UAV's provided to the DoD by industry,  the Close and Short Range categories
have since been combined and a later separate Shipboard category has been added.
The current classes or combinations of these type vehicles are presently  called
Tactical UAV followed by the Endurance category.

      Within  these  three   categories  of  vehicles  (LOCAL,   REGIONAL,   and
ENDURANCE),  approximately twenty-two companies within the U.S. are or have been
involved and represent  approximately 45 different UAV  configurations.  See UAV
characteristics chart for base platforms.  Ttheir known performance capabilities
and  payload  accommodations  are  presented  below.  They  range  in size  from
hand-held to much larger vehicles with payload weight capabilities  ranging from
a few pounds to approximately 2000 pounds.

UAV CHARACTERISTICS AVAILABLE

UNMANNED AERIAL     ENDURANCE        PAYLOAD WEIGHT          ALTITUDE CAPABILITY
VEHICLE             (HOURS)          (POUNDS)                FEET
Aerosonde           40 hrs.          2.2 lbs.                20,000 ft.
Altus2              24 hrs.          330 lbs.                65,000 ft.
BQM-34              1.25 hrs.        470 lbs.                60,000 ft.
Exdrone             2.5 hr.          25 lbs                  10,000 ft.
Global Hawk         42 hrs.          1,960 lbs.              65,000 ft.
Gnat 750            48 hrs.          140 lbs.                25,000 ft.
Pioneer             5.5 hrs.         75 lbs.                 12,000 ft.
Shadow 200          4 hrs.           50 lbs.                 15,000 ft.

      Principal competitors include, but are not limited to: AAI Corporation and
its Shadow System (developed) and Lockheed Martin, which has recently instituted
a Skunk Works project with the Jet Propulsion  Laboratory  (JPL).  Raytheon also
recently announced a UAV Program named Bike Shop.

      We do not believe either CyberBugTM and CyberScoutTM will face competition
in the near future.  Large multinational  companies require a substantial return
on investment prior to commencing any development  efforts - both CyberBugTM and
CyberScoutTM are inexpensive units - and will likely not be able to generate the
types of returns necessary for competitors to even consider entering the market.

Design and Development of the Airships

      TSI has the exclusive worldwide right and license to manufacture  Airships
which it acquired  from 21st  Century  Airships,  Inc.,  a Canadian  corporation
("C-21"). TSI, in turn, is under contract with C-21 to purchase one Airship from
C-21 pursuant to an Agreement of Purchase and Sale of Airship, dated December 4,
2003, between TSI and C-21 (the "TSI/ C-21 Purchase Agreement").

      As of March 10, 2004,  Cyber Aero entered into an agreement (the "Original
TSI Asset Purchase  Agreement")  pursuant to which Cyber Aero agreed to purchase
from TSI one (or more) prototype Airships from TSI. Under the Original TSI Asset
Purchase Agreement,  TSI will transfer,  assign, and deliver to Cyber Aero TSI's
right, title and interest in and to the TSI/ C-21 Purchase Agreement.

      In  addition,  Cyber Aero  acquired  from TSI the right to  market,  on an
exclusive global basis, the military and governmental  rights to TSI's Airships,
subject,  however,  to a prior  agreement  (which  prior  agreement is no longer
applicable)  with a third-party,  for the exclusive  world-wide  right to market
Airships for governmental  applications and the non-exclusive  world-wide rights
to market Airships for telecommunication applications. Under the agreement, once
we market and sell an Airship  to a third  party,  such party is deemed to be an
exclusive customer of the Company.

                                       5
<PAGE>

      Pursuant to the Original TSI Asset Purchase  Agreement,  Cyber Aero agreed
to pay a total of $2,700,000,

      (a) of which,  $1,200,000.00 would be paid to TSI to acquire and implement
the Airship itself (i.e., the AeroSphere SA-60); and

      (b) of which  $500,000.00  would be paid to TSI for  exclusive  world-wide
marketing rights to military and governmental business; and

      (c) of which  $1,000.000.00  would be paid to the  Georgia  Tech  Research
Institute  ("GTRI")  to  integrate  surveillance,  communication,  and  advanced
technical  and  ground  crew  solutions  pursuant  to the terms of an  agreement
between TSI and GTRI (the "TSI/GTRI Research Project Agreement").

      As part of the  Original  TSI Asset  Purchase  Agreement,  On Alert issued
convertible  debentures to TSI. However,  as set forth below, by mutual consent,
the Original TSI Asset Purchase Agreement was subsequently modified, the Georgia
Tech Research Institute initiative was abandoned, and the convertible debentures
were never issued.

      In addition,  under the Original TSI Asset Purchase Agreement,  Cyber Aero
was required to pay  $500,000.00  in cash; the balance of the purchase price was
represented by debt obligations of Cyber Aero to the other parties.

      In June of 2004, the Original TSI Asset Purchase Agreement was amended.

      Prior to the execution of the amendment to the Original TSI Asset Purchase
Agreement, TSI executed an agreement with the Sierra Nevada Corporation ("Sierra
Nevada")  providing  Sierra Nevada with the exclusive  integration  contract for
government  end users of TSI's  Airships.  The  principals of Sierra Nevada have
substantial  experience in DoD procurement,  and it is anticipated by management
that they will be of great assistance in marketing Airships.

      Accordingly,  the  amendment  was  undertaken  to adjust  the price of the
AeroSphere SA-60 which Cyber Aero had agreed to purchase, as follows: Cyber Aero
allowed TSI to sell the Airship to Sierra  Nevada,  and in turn,  Cyber Aero was
the designated seller of the Airship.  The purchase price was $2,700,000.00.  We
further agreed to order a new 76' Airship  conditioned  upon the  specifications
being approved by both parties.  The sale of the AeroSphere SA-60 was completed;
however,  the  specifications  of the new Airship are still under  negotiations,
because,  as at this date,  the future  needs of  potential  clients  call for a
larger Airship to be built.  TSI is currently  building the new generation SA 90
which is designed to fly up to approximately  25,000 feet and stay on station up
to 2 days.

      The balance due TSI by Sierra  Nevada was credited to the original  amount
owed of $2,200,000 with the difference  credited to the new Airship. On July 15,
2004, an additional  $675,000 was paid to TSI as a security  deposit for the new
Airship.  In addition,  as a result of this resale by Cyber Aero, Cyber Aero was
relieved of its debt  obligations to each of TSI and GTRI under the Original TSI
Asset  Purchase   Agreement  and  the  TSI/GTRI   Research  Project   Agreement,
respectively.

      One  Airship  (the  AeroSphere  SA-60)  has been  field-tested  on various
occasions.  Although  representatives of DoD were present and expressed interest
in utilizing the Airships,  no purchase order has yet been received,  and we are
unable to  predict if one will ever be issued by DoD.  There has been  continued
interest in the use of Airships and we are currently in negotiations with one of
our prospects to purchase one or more Airships by year-end.

      Notwithstanding the foregoing, in October and December of 2004, Cyber Aero
received  the sum of  $803,250  from  Integrated  Solutions  Technology,  Inc, a
contractor agent for NAVAIR,  as reimbursement  and compensation for its efforts
in participating in these field tests.

                                       6
<PAGE>

      The Airships  represent new technology being developed by a new enterprise
with limited  resources,  and like any such new technology,  no assurance can be
given  that it will  function  in a  cost-conscious  manner.  In  addition,  our
existing  airship  has not  been  tested  in  either  simulated  or real  combat
conditions.   Moreover,   we  face  competition  from  entities  with  far  more
substantial  financial and manpower resources,  together with far more access to
procurement personnel in the military and the security industries.

      On May 1, 2004,  Cyber Aero and TSI  entered  into a  Marketing  and Sales
Agreement, in which the parties agreed that in consideration of $500,000.00 paid
by Cyber Aero to TSI, Cyber Aero would receive exclusive global governmental and
military  marketing  rights to TSI's line of Airships.  Cyber Aero would receive
compensation for its marketing efforts by receiving up to 15% of the gross sales
price of each Airship  sold,  less a 4%  commission  obligation  of TSI to Sales
Resources  Consulting,  Inc., a company owned by Gay Nelsen.  Mrs. Nelsen is the
wife of Barry Nelsen, who is Vice-President, Government Sales, of Cyber Defense.

      In addition,  Cyber Defense has filed a patent application for new Airship
designs,  which Cyber Defense  plans to have built under the current  agreements
existing between TSI and Sierra Nevada.

Business Operations of Cyber Defense - Distributorships

      In addition to direct  sales,  Cyber  Defense plans on selling its line of
UAV's through agreements with exclusive and non-exclusive  distributorships both
in the  United  States  and  internationally.  We seek to  include in our annual
distributorship  agreements commitments by the dealers to purchase 10 units (two
upfront) for  non-exclusive  territories  to purchasing as many as 100 units for
exclusive  territories.  Cyber  Defense will provide  protection  for  territory
owners as well as  product  marketing/sales  training.  Exclusive  international
dealerships and reseller agreements will also be available.

Business Operations of Cyber Defense - Reseller Arena

      At the time of the acquisition by On Alert of its controlling  position in
E-City,  it was  contemplated  by the  management  of On Alert  that the  E-City
computer  mapping  technology  could be put to a  different  use.  On Alert  was
originally  organized  in March of 2003 to  engage in the  marketing  of the "On
Alert  Gunshot   Detection   System"TM   ("GDS")  being  developed  by  Synchros
Technologies, Inc. ("Synchros").

      As a  result  of the  merger  with On Alert  into  Cyber  Defense,  we are
presently the sub-licensee  (from Proxity,  Inc., a public company listed on the
Pink Sheets,  LLC under the symbol,  "PRXT"  ("Proxity"),  a beneficial owner of
approximately  70% of our capital stock.  Our Chief Executive  Officer and Chief
Financial Officer is also the Chief Executive Officer of Proxity and owns or has
voting control approximately 73% of the outstanding and issued shares of capital
stock of Proxity.

      The original  exclusive  marketing and  distribution  rights were obtained
from Synchros by Proxity. Proxity paid $40,000.00 to obtain the gun shot license
for a period of 15 years from  Synchros,  and  Proxity was to receive 50% of the
profits  from  sales.  After  organizing  On  Alert,  Proxity  sub-licensed  the
technology to On Alert. In consideration,  (i) On Alert agreed to pay $13,900 to
Proxity  and to assume  all  costs  relating  to the  research  and  development
completed to date, and (ii) Proxity purchased 16,000,000 (and, subsequently,  an
additional  2,750,000)  shares  of the  common  stock of On Alert  for par value
(i.e., for a total of $18,750.00).

      In September of 2003, the  arrangement  between  Synchros and On Alert was
modified to reduce the terms and conditions.  We do not deem the modification of
this license to be a material event.  Synchros is a dormant company, and it does
not have the funds,  nor any  concrete  plans to  actively  pursue  the  matter.
Commercial  development of the GDS technology would also require a commitment of
significant  resources not presently available to us. Accordingly,  we wrote off
the GDS technology since it was materially impaired.

                                       7
<PAGE>

      Cyber Defense has re-seller  arrangements  with Traptec Security  Systems,
Inc.  ("Traptec").  Traptec  develops systems that use acoustical and ultrasonic
means to sense and evaluate activity pertinent to law enforcement, security, and
defense  industries.  These  systems are  specifically  tailored to identify the
acoustical and ultrasonic  signatures of weapons discharge,  bombs,  explosions,
spray cans, tire leaks,  intrusion  sounds,  and  voice-initiated  alarms.  Once
identified, it is the intent that the system will promptly reports event details
to  appropriate  personnel  through  dynamic  links  to  the  Internet,   global
positioning   systems,   pagers,   cell  phones,   or  other   surveillance  and
communications equipment.

      On November 10,  2003,  On Alert  entered in to an agreement  with Traptec
(the "Original Traptec Licensing Agreement") pursuant to which On Alert licensed
to Traptec the right to market certain  technology related to gunshot detection.
The parties  modified the Original  Traptec  Licensing  Agreement to grant Cyber
Defense the right to represent Traptec as a marketing  representative of Traptec
to market certain products under Traptec's  distributorship agreement with World
Wide Eyes,  LLC.  Subsequently,  the Original  Traptec  Licensing  Agreement was
amended to extend its term and to modify the fees  required  to be paid by us to
Traptec.

      The gun-shot technology represents new technology being developed by a new
enterprise  with  limited  resources,  and  like any  such  new  technology,  no
assurance can be given that it will function in a cost-conscious  manner,  if at
all, in the uses for which it is designed. None of our products have been tested
in either simulated or real combat conditions.

Recent Developments

      On April  25,  2005,  we  entered  into an  agreement  with TSI (the  "TSI
Agreement")  pursuant to which we agreed to form a joint venture to acquire four
non-remote (manned) Airships to lease for commercial purposes. The TSI Agreement
also  provides for a  modification  of certain  provisions  of the Marketing and
Sales Agreement that we entered into with TSI on May 1, 2004.

      Pursuant to the TSI  Agreement,  we agreed to form a new  entity,  Airship
Leasing  Col.,  LLC ("ALC") to acquire four Airships from TSI for the purpose of
leasing the  Airships to  commercial  end users.  We will be the sole manager of
ALC.  We  expect  to bring in  outside  investors  to fund  100% of the  Airship
purchase price, which will be paid back to the investors out of ALC profits. The
investors will also receive 50% of the ALC profits going forward.

      The Marketing and Sales Agreement has been amended to provide that we have
an  exclusive  right to market,  sell and lease  Airships  on a global  basis to
governmental  and military end users and to receive a commission  of 6.5% on all
sales and leases. Further, with respect to commercial and telecommunications end
users, we will receive a commission of 9.0% on all sales and leases.

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


ITEM 2. DESCRIPTION OF PROPERTY

      Cyber Defense Systems, Inc. owns no real property. We are located at 10901
Roosevelt Boulevard Suite 100D in St. Petersburg, Florida. This facility is over
3,500 square feet and houses our corporate  headquarters,  R&D facilities and is
being readied for final assembly of our CyberBugTM  product.  Our lease is a one
year lease ending in September,  but has been renewed until  September 30, 2006.
We currently  pay rent of $3,375.67  per month which will increase in October to
$3,510.69  per month.

      We believe the premises  leased are adequate for our current and near term
requirements.

      We do not have any investment  policies with respect to investments in (i)
real  estate or  interests  in real  estate,  (ii)  investments  in real  estate
mortgages and (iii) securities of or interests in persons  primarily  engaged in
real estate activities.

ITEM 3. LEGAL PROCEEDINGS

      We are not currently involved in any real or threatened legal proceedings.

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

      There were no matters submitted for  stockholders'  vote during the fourth
quarter of the fiscal year 2004.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      As of April 14, 2005,  there were  approximately  72 record  owners of our
common stock, which is traded on the OTC Bulletin Board under the symbol "CYDF".
Set forth  below are the range of high and low bid  quotations  for the  periods
indicated as reported by the OTC Bulletin Board. The market  quotations  reflect
interdealer prices, without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions.

                                       8
<PAGE>

            Quarter Ending        High                   Low

            3/31/02               $3.30                  $0.35
            6/30/02               $0.35                  $0.04
            9/30/02               $0.10                  $0.01
            12/31/02              $0.01                  $0.01
            3/31/03               $0.01                  $0.00
            6/30/03               $0.04                  $0.01
            9/30/03               $0.20                  $0.01
            12/31/03              $0.15                  $0.06
            3/31/04               $0.10                  $0.04
            6/30/04               $0.06                  $0.02
            9/30/04*              $0.01                  $1.81
            12/31/04              $2.50                  $1.50
            3/30/05               $4.00                  $1.50

---------
* Reverse stock split 1:30 effected on September 1, 2004.

      Holders  of common  stock are  entitled  to  receive  dividends  as may be
declared by our Board of Directors  and, in the event of  liquidation,  to share
pro rata in any  distribution of assets after payment of liabilities.  The Board
of  Directors  has sole  discretion  to  determine:  (i)  whether  to  declare a
dividend;  (ii) the dividend  rate, if any, on the shares of any class of series
of our  capital  stock,  and if so,  from  which  date or  dates;  and (iii) the
relative rights of priority of payment of dividends, if any, between the various
classes and series of our capital  stock.  We have not paid any dividends and do
not have any current plans to pay any dividends.

      The Company currently has no compensation plans or employee benefit plans.

Recent Sales of Unregistered Securities

      Pursuant to Rule 12g-3 of the  Exchange Act and as set forth in a Form 8-K
filed on  September  16,  2004,  the Company,  became the  successor  Company to
E-City.  Accordingly,  all unregistered  sales of securities in this Report will
include all sales of  unregistered  securities  by Cyber  Defense's  predecessor
Company, E-City.

      We made the following unregistered sales of securities in 2000:

      Between May 12, 2000, and August 1, 2000,  E-City sold 9,830,000 shares of
its common stock.  There was no public  offering of the shares.  The duration of
the offering period was May 12, 2000, to August 1, 2000, at a price per share of
par value of  $0.0001  per  share,  for  total  offering  proceeds  to E-City of
$491.50.  These issuances were exempt from registration under the Securities Act
of 1933,  as amended (the  "Securities  Act") in accordance  with  Regulation D,
promulgated  under Rule 505 of the  Securities  Act. These shares were issued to
officers,  directors and  affiliates of E-City,  as well as a limited  number of
donees of Officer and Director Anis Jessa.  A total of 51 offers  concerning the
securities  were made  during the period of the  offering.  There was no general
solicitation,  public  announcement,  advertisement  or general  offering of the
securities. All of the offers were made to acquaintances and business associates
of the officers and directors of E-City. These 51 offers resulted in total sales
of  9,830,000  shares to 50  shareholders  of record.  Of the 50 sales that took
place,  30  sales  were  made to  unaccredited,  non-affiliate  investors.  Each
individual   investor,   whether   accredited,   unaccredited,   affiliated   or
unaffiliated  was provided with the following  information:  (i) the information
required  to be  furnished  in Part I of Form SB-2 under the  Securities  Act of
1933, as amended;  (ii) the information  required by Item 310 of Regulation S-B;
(iii) the opportunity to ask questions and receive answers  concerning the terms
and  conditions of the offering and to obtain any additional  information  which
the issuer possesses or can acquire without  unreasonable effort or expense that
is necessary to verify the accuracy of any  information  furnished in connection
with the offering;  and (iv) written  disclosure  regarding the  limitations and
restrictions on resale of the securities.

                                       9
<PAGE>

      E-City  Officer and Director  Robin  Moulder  purchased  40,000  shares of
Common  Stock at  $0.0001  per share on August 1, 2000,  in the  above-mentioned
private  placement.  E-City  Officer and  Director Sal Devji  purchased  400,000
shares of Common  Stock at  $0.0001  per share on August 1,  2000,  in the above
mentioned private placement. E-City Officer Susan Polmar purchased 10,000 shares
of Common Stock at $0.0001 per share on August 1, 2000,  in the above  mentioned
private placement.

      On February  1, 2001,  Salim Devji  resigned as an officer,  director  and
employee of E-City. As part of his settlement and severance  package,  Mr. Devji
agreed to transfer 350,000 of his common shares of E-City to Anis Jessa.

      On August 15, 2000, E-City issued to Butterfly  Software,  a related party
and accredited investor who had access to information regarding E-City,  100,000
shares of its common  stock in exchange  for the  purchase of 100% of the issued
and  outstanding  stock of  Butterfly  Software.  This  issuance was exempt from
registration  under  the  Securities  Act,  in  accordance  with  Regulation  D,
promulgated under Rule 505 of the Securities Act.

      We made the following unregistered sales of securities in 2002:

      E-City sold 130,000  shares of its common  stock on January 25, 2002,  and
70,000  shares of its common stock on January 31,  2002,  to a total number of 9
investors.  The duration of the offering period was January 25, 2002, to January
31,  2002.  The sales price for the shares was  determined  by the then  current
trading price of E-City at the time the shares were purchased of $2.00 and $0.86
per share  respectively,  for total offering  proceeds to E-City of $323,505.00.
The issuance of these shares removed  advances and notes  totaling  $320,000.00,
and accrued interest of $3,505.00 owing to various shareholders. These issuances
were  exempt from  registration  under the  Securities  Act in  accordance  with
Regulation D, promulgated under Rule 505 of the Securities Act.

      These shares were issued to existing  shareholders of E-City. A total of 9
offers  concerning the  securities  were made during the period of the offering.
There was no general solicitation, public announcement, advertisement or general
offering of the securities.  All of the offers were made to current shareholders
of  E-City.  These 9 offers  resulted  in total  sales of  200,000  shares  to 9
shareholders  of record.  Of the 9 sales that took  place,  5 sales were made to
unaccredited,   non-affiliate  investors.  Each  individual  investor,   whether
accredited,  unaccredited,  affiliated  or  unaffiliated  was provided  with the
following information: (i) the information required to be furnished in Part I of
Form SB-2 under the Securities Act; (ii) the information required by Item 310 of
Regulation  S-B;  (iii) the  opportunity  to ask questions  and receive  answers
concerning the terms and conditions of the offering and to obtain any additional
information  which the issuer  possesses  or can  acquire  without  unreasonable
effort or expense that is  necessary  to verify the accuracy of any  information
furnished in connection with the offering; and (iv) written disclosure regarding
the limitations and restrictions on resale of the securities.

      We made the following unregistered sales of securities in 2003:

      On May 23, 2003, E-City entered into a settlement agreement with Cityscape
to release and absolve all parties from any  commitments  generated from a prior
software license agreement.  As consideration for this agreement,  E-City agreed
to pay Cityscape $40,000.00.

      On May 23, 2003, E-City entered into a strategic  alliance  agreement with
On Alert.  E-City  and On Alert  also  agreed to  cooperate  with each  other to
enhance  the mutual  possibilities  of sales  relating  to On Alert's  exclusive
marketing  and  distribution  agreement  for the On  Alert  GDS  technology  and
E-City's computer mapping markets.  As part of this agreement,  E-City agreed to
sell On Alert  35,000,000  shares of its  common  stock for the  payment  of the
$40,000.00 liability discussed above to Cityscape.

      E-City  has  relied on  Regulation  D,  promulgated  under Rule 505 of the
Securities Act, for its private placement exemption,  such that the sales of the
securities were transactions by an issuer not involving any public offering. All
of these securities have been appropriately  marked with a restricted legend and


                                       10
<PAGE>

are  "restricted  securities"  as  defined  in  Rule  144 of the  rules  and the
regulations of the Securities and Exchange  Commission.  All of these securities
were issued for investment  purposes only and not with a view to redistribution,
absent  registration.  All of the  purchasers  have been  granted  access to the
complete books,  financial records,  contracts,  and other business documents of
E-City.  Each has also had the  opportunity to ask questions of the  management,
employees, advisors, attorneys and accountants for E-City. In addition, each was
granted physical access to E-City's  facilities for inspection.  Transactions by
E-City involving the sales of these securities set forth above were issued under
the "private  placement"  exemptions under the Securities Act as transactions by
an issuer not involving any public offering. E-City has made its own independent
determination, based on its own investigation as to whether each person is (i) a
sophisticated  investor  capable of  assessing  the risks  inherent in a private
offering,  (ii) able to bear the economic risk of his investment and (iii) aware
that the securities  were not registered  under the Securities Act and cannot be
re-offered  or  re-sold  until  they  have  been  so  registered  or  until  the
availability  of an exemption  therefrom.  The transfer  agent and  registrar of
E-City has been instructed to mark "stop transfer" on its ledgers to assure that
these  securities  will not be  transferred  absent  registration  or until  the
availability of an applicable exemption is determined.

      We made the following unregistered sales of securities in 2004:

      On August 23, 2004,  the Company  issued a Secured  Commercial  Promissory
Note to  Quebec,  Inc.,  a  Canadian  corporation  ("Quebec")  in the  amount of
$242,216.  Prepaid  interest of $9,316 for 61 days was withheld from the initial
funding and  thereafter  interest  accrues at an annual rate of 24%. The Note is
secured by securities owned by Mr. Robinson,  our Chief Executive  Officer,  and
will be further  secured by equipment  purchased  by the Company  (which was the
subject  equipment  upon  which  deposits  were paid from a portion  of the loan
proceeds).  This sale was  non-public  in  nature,  and it was  exempt  from the
registration  provisions  of the  Securities  Act,  by  virtue of  Section  4(2)
thereof.

      In  August  of 2004,  in  partial  satisfaction  of debt in the  amount of
$128,795.00 (not including  interest) owed by E-City to On Alert,  E-City issued
and  delivered  4,870,000  shares of its  common  stock to and in the name of On
Alert,  and the debt was  reduced by  $48,700.00.  This sale was  non-public  in
nature,  and it was exempt from the  registration  provisions of the  Securities
Act, by virtue of Section  4(2)  thereof.  On Alert was an  affiliate of E-City,
with  intimate  knowledge of the affairs of E-City,  so that On Alert had actual
knowledge of all material information concerning E-City. The securities received
by On Alert  were  restricted,  and the  certificate  evidencing  the shares was
marked with a restrictive legend.

      Therefore,  at this point in time,  On Alert owned at total of  39,870,000
shares of Common Stock of E-City.

      Thereafter,  On Alert  acquired an additional  130,001 shares of E-City on
the open market, bringing its holding of E-City to 40,000,001 shares.

      Subsequently,  On Alert was merged into its parent,  i.e.,  Cyber Defense,
the Company.  The result of this merger was that the assets and  liabilities and
rights  and  obligations  of On Alert,  as matter of law,  became the assets and
liabilities and rights and obligations of Cyber Defense. More specifically,  the
40,000,001  shares of E-City previously owned by On Alert became an asset of the
Company.

      Subsequently,  on September 1, 2004,  pursuant to a merger  between E-City
and the  Company,  (a)  40,000,001  shares of E-City  owned by the Company  were
canceled, and (b) for each 30 shares of the common stock of E-City owned by them
before the merger, the remaining  shareholders of E-City received 1 share of the
Class A Common  Stock of the  Company  after the merger.  Thus,  pursuant to and
after the merger,  those persons received a total of 333,562 shares of the Class
A Common Stock, Par Value $0.001 per share, of the Company.

      Inasmuch  as the  Company  owned  in  excess  of 80%  of  the  issued  and
outstanding  Common Stock of E-City before the merger,  this was a  "short-form"
merger and did not require the consent of the  shareholders  of either E-City or
of the Company, and this issuance was exempt from the registration provisions of
the  Securities Act of 1933, as amended,  by virtue of Section  3(a)(9) and Rule
12g-3 of the Exchange Act.

                                       11
<PAGE>

      In March of 2004,  Proxity lent $100,000.00 to On Alert, and Cherokee lent
$400,000.00  to On Alert.  On Alert  thereupon  lent  $500,000.00 to Cyber Aero.
Certain of these instruments were convertible promissory notes.

      To evidence its  $100,000.00  obligation  to Proxity,  On Alert issued its
$100,000.00 convertible promissory note to Proxity dated March 13, 2004, and due
on or before  November  30,  2004.  This On  Alert-to-Proxity  Convertible  Note
allowed  the  holder  (Proxity)  to  convert  debt  into  equity  of On Alert by
receiving  1,686,340 shares of Class A Common Stock  (Restricted) of On Alert at
the rate of $0.0593 per share.

      As a result of, and following  the merger of On Alert into Cyber  Defense,
the right of the holder  (Proxity)  to convert  debt into equity of the original
maker (On Alert) by receiving  shares of Class A Common Stock of On Alert became
the right of Proxity to receive,  and the  obligation of Cyber Defense to issue,
shares of Class A Common  Stock of Cyber  Defense,  upon  service of a Notice Of
Conversion by Proxity upon Cyber Defense.

      As a result of, and following  the merger of On Alert into Cyber  Defense,
the right of the holder  (Proxity)  to convert  debt into equity of the original
maker (On Alert) by receiving  shares of Class A Common Stock of On Alert is now
the right of Proxity to receive,  and the  obligation of Cyber Defense to issue,
shares of Class A Common  Stock of Cyber  Defense,  upon  service of a Notice Of
Conversion by Proxity upon Cyber Defense.

      However, Proxity has not served a Notice of Conversion upon Cyber Defense,
as successor maker to On Alert, the original maker.

      To evidence its  $400,000.00  obligation to Cherokee,  On Alert issued its
$400,000.00  Convertible  Promissory  Note to Cherokee dated March 13, 2004, and
due on or before November 30, 2004.

      This On  Alert-to-Cherokee  Convertible Note allowed the holder (Cherokee)
to  convert  debt into  equity of the maker (On  Alert) by  receiving  6,750,000
shares of Class A Common Stock  (Restricted)  of On Alert at the rate of $0.0593
per share.

      As a result of, and following  the merger of On Alert into Cyber  Defense,
the right of the holder  (Cherokee)  to convert debt into equity of the original
maker (On Alert) by receiving  shares of Class A Common Stock of On Alert became
the right of Cherokee to receive,  and the obligation of Cyber Defense to issue,
shares of Class A Common  Stock of Cyber  Defense,  upon  service of a Notice Of
Conversion by Cherokee upon Cyber Defense. On September 1, 2004, Cherokee served
a Notice of Conversion upon Cyber Defense, and shortly thereafter,  Cherokee was
issued   6,750,000  shares  of  the  Class  A  Common  Stock  of  Cyber  Defense
(Restricted).

      These  issuances of securities of Cyber Defense were non-public in nature,
and were exempt  from the  registration  provisions  of the  Securities  Act, by
virtue of Section 4(2)  thereof.  Proxity and Cherokee  were  affiliates  of the
Company,  with intimate  knowledge of the affairs of the Company,  so that these
affiliates  had actual  knowledge of all material  information  concerning  each
others affairs. The securities received by these affiliates were restricted, and
the certificate evidencing the shares was marked with a restrictive legend.

                                       12
<PAGE>

      The Company has entered into a series of agreements with various  entities
to acquire certain  equipment.  In that connection,  Cyber Defense has agreed to
register  up to  1,535,000  shares of its Class A Common  Stock for  re-sale  by
Equipment Depot. These shares have not yet been issued.

      Prior to the merger of On Alert into Cyber Defense,  On Alert had received
an advance of $5,218.40 from Allstars  Marketing,  Inc.  ("Allstars") to acquire
production  equipment,  and,  in that  connection,  On Alert had agreed to issue
88,000 shares of its Class A Common Stock at a value of $0.0593 per share, which
price the parties  determined  was fair to both of them,  the then  current fair
market value of  unregistered  shares of On Alert,  in  connection  therewith to
Allstars. Thus, prior to the merger of On Alert into Cyber Defense, Allstars was
the holder of 88,000 shares of the Class A Common Stock of On Alert. As a result
of the merger of On Alert into Cyber Defense, shares of the Class A Common Stock
of On Alert were  cancelled and were  exchanged for an equal number of shares of
the Class A Common Stock of Cyber  Defense.  Therefore,  Allstars is to exchange
the 88,000 shares of On Alert it was issued for 88,000 shares the Class A Common
Stock of Cyber  Defense  (Restricted),  subject to  registration  rights.  These
shares are  registrable  by Cyber Defense  pursuant to its addendum of the Stock
Purchase   Agreement  of  August  19,  2004,  by  the  most  expedient  form  of
registration available to Cyber Defense. In that connection, Cyber Defense plans
to file a Registration Statement including such shares.

      Allstars also has an option to acquire  another 88,000 shares of the Class
A Common Stock of Cyber  Defense on or before  August 9, 2005, at the same price
of $0.0593  per share as the first  88,000  shares.  Cyber  Defense  has granted
registration  rights to Allstars in  relation  to these  shares  pursuant to the
Registration Rights Agreement it executed August 19, 2004.

      These shares are registrable by Cyber Defense  pursuant to its addendum of
the Stock  Purchase  Agreement of August 19, 2004, by the most expedient form of
registration available to Cyber Defense.

      These  issuances of securities of Cyber Defense were non-public in nature,
and were exempt from the registration  provisions of the Securities Act of 1933,
as amended,  by virtue of Section 4(2)  thereof.  The  Principal of Allstars has
substantial  investment  knowledge  and  experience;  he was  provided  with all
material  information  concerning the affairs of On Alert and Cyber Defense;  he
was  given  the  opportunity  to ask  questions  of the  management,  employees,
advisors,  attorneys and accountants  for the two companies;  and he was granted
physical access to their facilities for inspection.

      We made the following unregistered sales of securities in 2005:

      During January of 2005,  the Company  entered into  employment  agreements
with the following persons pursuant to which each has the right, under terms and
conditions set forth in the agreements, to be issued the following amount of the
Class A Common Stock, Par Value $0.001 per share:

              Name                                           Number of Shares
              ----                                           ----------------
              James Alman                                    50,000
              Andrea Facchinetti                             25,000
              Barry Nelsen                                   40,000
              William C. Robinson                            250,000
              Jaffrey Stephens                               25,000


                                       13
<PAGE>

      These  issuances of securities of Cyber Defense are  non-public in nature,
and were exempt from the registration  provisions of the Securities Act of 1933,
as amended,  by virtue of Section 4(2) thereof.  The recipients are employees of
the Company,  each was given the opportunity to ask questions of the management,
employees,  advisors,  attorneys and accountants for the two companies, and each
had physical  access to the  facilities  for  inspection.  The securities of the
Company to be received by these employees are restricted,  and the  certificates
evidencing the shares will be marked with a restrictive legend.

      Beginning  February  1,  2005,  the  Company  will  pay each  Director  an
Attendance  Fee  of  $1,000.00,   plus  reasonable  travel  expenses,  for  each
Director's Meeting attended. In addition, the Company, will, at the end of 2005,
and yearly thereafter,  begin paying each then-incumbent  Director an additional
yearly honorarium of 25,000 shares of the Company's Class A Common Stock.

      These  issuances of  securities  of Cyber  Defense will be  non-public  in
nature,  and will be exempt from the  registration  provisions of the Securities
Act, by virtue of Section 4(2)  thereof.  The  recipients  are  Directors of the
Company,  with intimate  knowledge of the affairs of the Company of the Company;
each  has  the  opportunity  to  ask  questions  of the  management,  employees,
advisors, attorneys and accountants for the two companies, and each has physical
access to the  facilities  for  inspection.  The securities of the Company to be
received by these Directors are restricted,  and the Certificates evidencing the
shares will be marked with a restrictive legend.

      On February 18, 2005,  Cyber Defense issued a Convertible  Promissory Note
to Bedlington  Securities,  Ltd.  ("Bedlington"),  for the  principal  amount of
$250,000 for operating capital.  Interest will accrue on the note at the rate of
18% per annum and repayment terms require six equal monthly payments  commencing
April 30,  2005,  with the last payment on  September  30, 2005,  to include all
accrued interest.  Bedlington has the right to convert the outstanding amount of
its note  into  shares  of the  Class A Common  Stock at any time upon five days
notice,  and such  conversion  will be calculated at 50% of the average  closing
price  of the  Class  A  Common  Stock  for the 30 days  preceding  the  date of
conversion.  On March 1, 2005,  we informed  Bedlington of our intention to make
payment  in full  with  shares  of our  common  stock.  Accordingly,  Bedlington
submitted  a Notice of  Conversion  to us. As a result,  we will  issue  217,391
shares of our Class A Common Stock to  Bedlington in  satisfaction  of the note.
The sale of the note was made pursuant to Section 4(2) of the Securities Act and
is exempt from registration.

      On February 28, 2005,  Cyber Defense issued a Convertible  Promissory Note
to Joseph Theismann, for the principal amount of $117,000 for operating capital.
Interest  will  accrue on the note at the rate of 18% per  annum  and  repayment
terms require six equal monthly  payments  commencing  April 30, 2005,  with the
last  payment on  September  30,  2005,  to include  all accrued  interest.  Mr.
Theismann  has the  right to  convert  the  outstanding  amount of his note into
shares of the Class A Common Stock at any time upon five days  notice,  and such
conversion will be calculated at 50% of the average closing price of the Class A
Common Stock for the 30 days preceding the date of conversion. On March 1, 2005,
we informed Mr.  Theismann of our  intention to make payment in full with shares
of our common stock. Accordingly, Mr. Theismann submitted a Notice of Conversion
to us. As a result,  we will issue 100,000 shares of our Class A Common Stock to
him in  satisfaction  of the  note.  The sale of the note was made  pursuant  to
Section 4(2) of the Securities Act and is exempt from registration.

      On March 24, 2005,  Cyber Defense issued a Convertible  Promissory Note to
Guy K. Stewart,  Jr., its former  corporate  counsel for the principal amount of
$150,000.  The note  evidences a portion of the funds owed by us to Mr.  Stewart
for unpaid legal fees. We will pay the balance in cash.  Interest will accrue on
the note at the rate of 18% per  annum and  repayment  terms  require  six equal
monthly  payments  commencing April 30, 2005, with the last payment on September
30, 2005, to include all accrued interest.  Mr. Stewart has the right to convert
the  outstanding  amount of his note into shares of the Class A Common  Stock at
any time upon five days notice, and such conversion will be calculated at 50% of
the average  closing price of the Class A Common Stock for the 30 days preceding
the date of  conversion.  On March 29,  2005,  we  informed  Mr.  Stewart of our
intention to make payment in full with shares of our common stock.  Accordingly,
Mr. Stewart  submitted a Notice of Conversion to us. As a result,  we will issue
100,000 shares of our Class A Common Stock to Mr. Stewart in satisfaction of his
note.  The sale of the note was made pursuant to Section 4(2) of the  Securities
Act and is exempt from registration.

      On March 31, 2005, as compensation for services, the Company issued 5,461,
25,000  and 75,000  shares,  respectively,  of its Class A Common  Stock to Blue
Marlin,  Inc.,  Mr. Jerry Beaulac and  Affiliated  Business  Services,  Inc. The
issuance of stock was made pursuant to Section 4(2) of the Securities Act and is
exempt from registration.

      On April  1,  2005,  Cyber  Defense  entered  into a  Securities  Purchase
Agreement with AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners and
New Millenium Capital Partners II, LLC, whereby the Company  authorized the sale
of a secured  convertible  term note in the aggregate  principal  amount of $4.0
million (the "AJW Notes").  The AJW Notes bear interest at 8% per annum,  unless
our common  stock is  greater  than  $4.25 per share for each  trading  day of a
month,  in which no event,  no  interest is payable  during such month.  The AJW
Notes are convertible  into common stock of the Company at a 40% discount to the
average of the three  lowest  trading  prices of our common  stock during the 20
trading day period prior to  conversion.  In connection  with the offering,  the
Company  issued an aggregate of 4,000,000  warrants to purchase our common stock
at a price of $4.25 per share. The warrants are exercisable for a period of five
years.  The offering was made pursuant to Section 4(2) of the Securities Act and
is exempt from registration.

ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION OR PLAN OF
OPERATIONS

General

      The following  discussion and analysis should be read in conjunction  with
the Consolidated  Financial  Statements and notes thereto appearing elsewhere in
this Report. In addition, at December 31, 2004, our auditors,  Hansen, Barnett &
Maxwell,  the Company's  Independent  Registered  Public Accounting Firm, raised
substantial   doubt  about  our   ability  to  continue  as  a  going   concern.
Notwithstanding  the  foregoing,   subject  to  realization  of  the  Millennium
financing and the financing available from Commerce Funding  Corporation,  if we
generate eligible  receivables to finance,  we will be in a position to fund the
anticipated level of operations for at least one year.


                                       14
<PAGE>

Results of Operations

      The Year Ended  December  31,  2004 as compared to the period of March 17,
2003 (Date of Inception) through December 31, 2003

      General and administrative  expenses totaled $1,090,153 for the year ended
December 31, 2004 as compared to $372,609 for the nine and one half months ended
December 31, 2003, a net increase of $717,544. The net increase is primarily due
to an increase in specialized consulting and testing relative to Airships in the
amount of  approximately  $470,663 as well as increases in legal and  accounting
fees  of   approximately   $306,000  and  the   inclusion  of  the  general  and
administrative  expenses of Cyber Aero in the amount of  $121,587.  In addition,
stock option  compensation of $63,440 was recorded in 2004 for which there is no
comparable figure in 2003.

      Revenues in 2004 were  $3,026,287 as compared to no revenues in 2003.  The
revenue in the  current  year is the result of period of March 17, 2003 (Date of
Inception)  through  December  31,  2003 Cyber  Aerospace  commencing  marketing
efforts  relative to its airship  products.  Cyber Aerospace began operations in
March 2004.

      Other expenses for the year ended December 31, 2004 of $130,206  consisted
of interest expense of $98,809;  a charge for impairment in the value of certain
equipment  of $ 12,205  and a charge for  impairment  in the  carrying  value of
licenses of $19,192.  Other  income and expense for the year ended  December 31,
2003 of $104,096 was comprised of a gain of $22,807 on  forgiveness  of debt due
to  negotiation  and eventual  satisfaction  of an E-city debt for less than its
recorded  value;  interest  income of $3,692,  interest  expense of $9,292 and a
charge  for  impairment  of the  carrying  value of  goodwill  in the  amount of
$121,303.



Legal Contingencies

      We may be subject to  proceedings,  lawsuits and other  claims,  including
proceedings  under laws and government  regulations  related to the environment,
labor,  product and other  matters.  We are required to assess the likelihood of
any adverse judgments or outcomes to these matters,  as well as potential ranges
of probable losses. A determination of the amount of reserves required,  if any,
for these  contingencies is based on a careful analysis of each individual issue
with the assistance of outside legal counsel.  The required  reserves may change
in the future due to new developments in each matter or changes in approach such
as a change in settlement  strategy in dealing with these  matters.  At December
31, 2004, there are no outstanding legal proceedings, nor are there any reserves
established.

Liquidity and Capital Resources

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

      The  Company's  cash and cash  equivalents  of $206,270 as of December 31,
2004 are not  sufficient to support  current  levels of operations  for the next
twelve  months  and it will be  necessary  for the  Company  to seek  additional
financing.

      The Company has entered into  agreements  with Equipment  Depot,  Inc., of
Deerfield Beach,  Florida, to acquire  approximately  $8,100,000,  as valued, of
aerospace  R & D and  production  equipment  to further the  fulfillment  of the
Company's  anticipated  contracts  and purchase  orders.  The  transactions  are
expected  to close  upon the  completion  of the  financing,  institution's  due
diligence and legal review. The Company is paying approximately $5.4 million, in
a  combination  of cash and the  exchange of newly  issued  common  stock of the
Company,  valued  at $3.00 a share  for the  purposes  of the  transactions,  to
complete the purchase.

      This agreement has been amended and is still currently under  negotiation.
Certain  production  equipment  to be used  in the  manufacturing  of  composite
materials and R & D and aerospace machining tools are being located.  Additional
funding is also being sought using the targeted equipment as collateral. At this
time there are no firm  commitments  to provide  funding  in  connection  to the
aforementioned  transaction.  In the event that  conventional debt financing can
not be obtained it is probable that the equipment transaction will be canceled.

                                       15
<PAGE>

      On February 16, 2005 the Company and Commerce  Funding  Corporation  (CFC)
executed a Working Capital  Financing  Proposal  relative to a potential secured
financing of up to $3,000,000  for a two year term.  All  borrowings  under this
potential  financing would be collateralized by a first security UCC-1 filing on
all assets  related to accounts  receivable  and a Cross  Corporate  Guaranty by
Proxity,  Inc., the Company's  major  shareholder and parent.  In addition,  CFC
requires a Limited  Guaranty of certain  provisions in the loan agreement by the
Company's  Chief  Executive  Officer.  The interest rate on borrowings  would be
Prime, as quoted in the Wall Street Journal,  plus 1/2 % and there will be a one
time  facility  fee of 1% of the  total  credit  line  payable  out of the first
funding.  In addition,  all  borrowings  are subject to  eligibility of accounts
receivable  as defined and  determined  by CFC and the advance  rate on eligible
receivables,  as  defined,  is 90% for direct  Government  accounts  and 80% for
Commercial  Accounts.  Closing of this  transaction  is  subject  to  acceptable
documentation,  due  diligence by CFC and other terms which are to be negotiated
amongst the parties.  Effective March 10,  the Company was informed by CFC that
it  could  begin  to  use  the  credit  line  by  submitting  all  the  required
documentation  relative to the  receivables  to be financed and upon approval of
eligibility,  funds  would be  transferred  in  accordance  with the  applicable
advance rate.

      On February 18, 2005, the Company and  Bedlington  executed the Bedlington
Note for the principal  amount of $250,000  which amount will be advanced to the
Company no later than February 25, 2005.  Interest will accrue on the Bedlington
Note at the rate of 18% per annum and repayment  terms require six equal monthly
payments  commencing  April 30, 2005 with the last payment on September 30, 2005
to  include  all  accrued  interest.  Bedlington  has the right to  convert  the
outstanding  amount of the  Bedlington  Note into  Class A common  shares of the
Company  at any  time  upon  five  days  notice  and  such  conversion  shall be
calculated at 50% of the average  closing price of the Class A common shares for
the 30 days preceding the date of conversion.  All amounts so converted will not
be subject to any accrual of interest. In addition, the Company has the right to
pay any  amounts  due under the  Bedlington  Note at any time with shares of its
Class A common stock pursuant to the same formula by notifying Bedlington of its
intent  to do so and  requesting  a Notice of  Conversion  from  Bedlington.  On
February  22, 2005,  the Company  informed  Bedlington  that it intended to make
payment  in full  with  common  shares  and  Bedlington  submitted  a Notice  of
Conversion to the Company.  As a result,  upon receipt of the funds, the Company
issued 217,391 shares of its Class A common stock as required by the calculation
described above.

      On February 28, 2005,  Cyber Defense issued a Convertible  Promissory Note
to Joseph Theismann, for the principal amount of $117,000 for operating capital.
Interest  will  accrue on the note at the rate of 18% per  annum  and  repayment
terms require six equal monthly  payments  commencing  April 30, 2005,  with the
last  payment on  September  30,  2005,  to include  all accrued  interest.  Mr.
Theismann  has the  right to  convert  the  outstanding  amount of his note into
shares of the Class A Common Stock at any time upon five days  notice,  and such
conversion will be calculated at 50% of the average closing price of the Class A
Common Stock for the 30 days preceding the date of conversion. On March 1, 2005,
we informed Mr.  Theismann of our  intention to make payment in full with shares
of our common stock. Accordingly, Mr. Theismann submitted a Notice of Conversion
to us. As a result,  we will issue 100,000 shares of our Class A Common Stock to
him in  satisfaction  of the  note.  The sale of the note was made  pursuant  to
Section 4(2) of the Securities Act and is exempt from registration.

      On March 24, 2005,  Cyber Defense issued a Convertible  Promissory Note to
Guy K. Stewart,  Jr., its former corporate counsel,  for the principal amount of
$150,000.  The note  evidences a portion of the funds owed by us to Mr.  Stewart
for unpaid legal fees. We will pay the balance in cash.  Interest will accrue on
the note at the rate of 18% per  annum and  repayment  terms  require  six equal
monthly  payments  commencing April 30, 2005, with the last payment on September
30, 2005, to include all accrued interest.  Mr. Stewart has the right to convert
the  outstanding  amount of his note into shares of the Class A Common  Stock at
any time upon five days notice, and such conversion will be calculated at 50% of
the average  closing price of the Class A Common Stock for the 30 days preceding
the date of  conversion.  On March 29,  2005,  we  informed  Mr.  Stewart of our
intention to make payment in full with shares of our common stock.  Accordingly,
Mr. Stewart  submitted a Notice of Conversion to us. As a result,  we will issue
100,000 shares of our Class A Common Stock to Mr. Stewart in satisfaction of his
note.  The sale of the note was made pursuant to Section 4(2) of the  Securities
Act and is exempt from registration.

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

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

      Subject to realization of this financing and the financing  available from
Commerce Funding Corporation, if we generate eligible receivables to finance, we
should be in a position to fund the anticipated level of operations for at least
one year.

Critical Accounting Policies

      Our  discussion  and analysis of its  financial  condition  and results of
operations are based upon Cyber Defense's financial statements,  which have been
prepared in accordance  with  accounting  principles  generally  accepted in the


                                       16
<PAGE>

United States. The preparation of these financial statements requires the use of
estimates that affect the reported amounts of assets,  liabilities and expenses.
We evaluate our estimates on an ongoing  basis,  including  estimates for income
tax assets and liabilities  and the impairment of the value of  investments.  We
base our  estimates  on  historical  experience  and on actual  information  and
assumptions that are believed to be reasonable  under the  circumstances at that
time. Actual results may differ from these estimates under different assumptions
or conditions. We believe that the following critical accounting policies affect
its  more  significant  estimates  used  in the  preparation  of  its  financial
statements.

Accounting for Income Taxes

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

Impairment of Investments

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

      The Company  purchased  the rights to two  licensing  agreements - the GDS
license on April 7, 2003 and the  Traptec  license  on  November  10,  2003 from
Proxity  Digital  Networks,  a related  party.  The GDS license is an  exclusive
license for the Company to sell licensed  equipment  throughout  the world.  The
Traptec license gives the Company the right to represent Traptec  Corporation as
a marketing  representative  on the  exclusive  basis to sell  surveillance  and
security  equipment  and other such  products to the military and other  federal
agencies.  The licensing agreements have been recorded at the historical cost to
Proxity.  As of December 31, 2004,  the Company  determined  that the effort and
resources required to be spent in order to utilize these licenses were more than
the Company was able to spend and, therefore,  the future cash flows relating to
the ownership of the licenses would be negligible. As a result, the licenses are
considered  impaired in full. The  impairment  loss recorded in the December 31,
2004 financial statements is $19,192.

Recent Accounting Pronouncements

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

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

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

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

                                       17
<PAGE>

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

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

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

Forward Looking Statements

      The Company is including the following cautionary statement in this Annual
Report of Form 10-KSB to make  applicable  and take advantage of the safe harbor
provisions  of the  Private  Securities  Litigation  Reform  Act of 1995 for any
forward-looking   statements   made  by,  or  on   behalf   of,   the   Company.
Forward-looking  statements  include  statements  concerning plans,  objectives,
goals,  strategies,  future events or performance and underlying assumptions and
other  statements which are other than statements of historical  facts.  Certain
statements  contained  herein are  forward-looking  statements  and  accordingly
involve risks and uncertainties  which could cause actual results or outcomes to
differ materially from those expressed in the  forward-looking  statements.  The
Company's expectations,  beliefs and projections are expressed in good faith and
are  believed  by the  Company to have a  reasonable  basis,  including  without
limitation,  management's  examination  of  historical  operating  trends,  data
contained in the Company's  records and other data available from third parties,
but  there  can  be no  assurance  that  management's  expectation,  beliefs  or
projections  will result or be achieved  or  accomplished.  In addition to other
factors and matters  discussed  elsewhere  herein,  the  following are important
factors that, in the view of the Company,  could cause actual  results to differ
materially from those discussed in the forward-looking statements: technological
advances  by the  Company's  competitors,  changes  to  regulatory  requirements
relating to DoD  approvals,  capital  needs to fund any delays or  extensions of
development programs,  delays in the manufacture of new and existing products by
the  Company or third  party  contractors,  the loss of any key  employees,  the
outcome of existing  litigations,  delays in obtaining  federal,  state or local
regulatory   clearance  for  new  installations   and  operations,   changes  in
governmental  regulations,  and availability of capital on terms satisfactory to
the Company.  The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.


                                       18
<PAGE>

Item 7. Financial Statements.

      The  Consolidated  Financial  Statements  are  included  after the Exhibit
Index.

                           CYBER DEFENSE SYSTEMS, INC.

                                      INDEX

                                                                           Page
                                                                          Number
                                                                          ------

Report of Independent Registered Public Accounting Firm...............       F-1

Consolidated Balance Sheets as of
December 31, 2004 and 2003............................................       F-2

Consolidated Statements of Operations for the Year Ended
December 31, 2004 and for the Period from March 17, 2003
(Date of Inception) Through December 31, 2003.........................       F-3

Consolidated Statements of Stockholders' Deficit for the Year Ended
December 31, 2004 and for the Period of March 17, 2003
(Date of Inception) Through December 31, 2003.........................       F-4

Consolidated Statements of Cash Flows for the Year Ended
December 31, 2004 and for the Period from March 17, 2003
(Date of Inception) Through December 31, 2003.........................    F-5-6

Notes to the Consolidated Financial Statements........................    F-7-15

                                       19

<PAGE>

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

      None.

ITEM 8A. CONTROLS AND PROCEDURES

      The Company's principal executive officer and principal financial officer,
based on his evaluation of the Company's  disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934,
as amended) as of December 31, 2004 have concluded that the Company's disclosure
controls  and  procedures  are adequate  and  effective to ensure that  material
information  relating to the Company are  recorded,  processed,  summarized  and
reported within the time periods in which this Annual Report has been prepared.

      The  Company's  principal  executive  officer,  who is also our  principal
financial officer,  has concluded that there were no significant  changes in the
Company's internal controls or in other factors that could significantly  affect
these controls for the year ended December 31, 2004, the date of his most recent
evaluation of such controls, and that there were no significant  deficiencies or
material weaknesses in the Company's internal controls.


                                       20
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

Directors and Executive Officers

      As of April 14, 2005, the Directors and executive  officers of the Company
are presented below.

   NAME                                 AGE    TITLE

   William C. Robinson                  49     Chairman, CEO and CFO
   James Alman                          44     President and Director
   Barry Nelsen                         57     Vice-President, Government Sales
   Joseph A. Grace, Jr.                 46     Director
   Marinko Vekovic                      51     Director
   Stephen I. Johnson RADM USN (ret.)   57     Director

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

      The  principal  occupations  and brief  summary of the  background of each
Director and executive officer of Cyber Defense during the past five years is as
follows:

William C. Robinson - Founder/CEO/CFO, and Chairman of the Board of Directors

      Mr.  Robinson  has more  than 20 years  experience  in the  public  equity
markets,   including  management  positions  at  Paine  Webber,  and  Prudential
Securities.  Mr. Robinson has performed as a successful  start-up  entrepreneur,
and as a corporate  officer and  director of eight public  companies.  He brings
seasoned  operational,  fund-raising,  and merger and acquisition  skills to the
Cyber Defense team. As a principal,  he has been  responsible for initiating and
negotiating more than $100,000,000 worth of merger and acquisition  transactions
and has developed,  bought, and sold more than 20 companies, eight of which were
from  inception to full public  company  status.  From April 2000 until  October
2003, Mr. Robinson was  CEO/CFO/President  of Trivia Group, Inc. From April 2001
until October  2003,  Mr.  Robinson was  CEO/CFO/President  of Computer  Support
Associates,  Inc. From March 2003 until April 2005, Mr.  Robinson was CEO/CFO of
Cyber Aero, our former subsidiary.

      In addition,  prior to its merger into Cyber Defense, Mr. Robinson was the
CEO/CFO and sole Director of On Alert.

      Mr. Robinson is also the CEO/CFO and Chairman of the Board of Directors of
Proxity.  Proxity  specializes  in the  deployment  and  integration of security
protection technology and government contract fulfillment. Trading in the Common
Stock of Proxity is reported in the inter-dealer  quotation system maintained by
the National Quotation Bureau, Inc. and the Pink Sheets under the symbol "PRXT."
Mr.  Robinson is also the General  Partner of Cherokee  Raiders,  L.P., a family
limited partnership.

      Both Proxity and Cherokee are affiliates of the Company.

James Alman - President and Director

      Mr. Alman has a Bachelor of Science degree in Aerospace  Engineering  from
Boston  University.  Before  joining Cyber  Defense,  from November 1999 to July
2004,  Mr. Alman served as the Director of Engineering  for AirTran  Airways and
led a group of  engineers  in the  technical  support of AirTran.  Mr. Alman has
worked on the Electromagnetic  Interference (EMI) project,  Secure Cockpit Doors
project, the Autoland project, and various new aircraft  introduction  projects.
As a test  engineer for the NASA Langley  Research  Center,  Mr. Alman  designed
various  types of wind  tunnel  research  hardware.  He was a team member on the
Daedalus Project, a MIT-based group that designed, built and flew three 114-foot
span composite  human powered  aircraft that holds three world records for human
powered distance flying.

                                       21
<PAGE>

Barry Nelsen - Vice-President - Government Sales

      Mr. Nelsen has been  influential in the sales and marketing of information
products and services since 1970. As President of Sales  Resources  Consultants,
he is a leader in the design and sales of information  products used in the U.S.
Military.  In the late 1980's,  Mr. Nelsen sold  scanning,  storage and printing
technologies  to the DoD.  These  technologies  replaced the offset presses that
were  delivering six million pages of DoD  specifications  monthly.  His systems
replaced the microfilm  technologies that were used to reproduce drawings by the
DoD and its vendors.  Mr. Nelsen was the agent for Beyond.com  selling the first
enterprise-wide  EC downloaded  software to the DoD,  approximately  $50 million
worth of desktop software that was used by the Defense  Logistics Agency and all
DoD purchasing agents. Before joining Cyber Defense in November 1994, Mr. Nelsen
was a consultant.

Joseph A. Grace, Jr. - Director

      Mr.  Grace is a 1980  graduate  of the United  States  Naval  Academy.  He
received his MBA from the  University of New Orleans.  After serving almost nine
years as a nuclear  submarine  officer,  he left the active  duty Navy to take a
position  with a  Fortune  500  Electronics  firm in  California,  where he held
various  positions  in sales and sales  management.  He returned to Louisiana in
November of 1994 to become the founding  President of the LTC, a technical trade
association  committed to transforming the Louisiana  Technology  Industry.  Mr.
Grace has remained  active as a Captain in the United States Naval  Reserve.  In
2001 Captain Grace assumed the Reserve  position of Special Projects officer and
spokesperson  for the Navy's $8 Billion  enterprise  rollout of the Navy  Marine
Corps  Intranet.  He has since been fully  recalled to Active Duty in support of
Operation Enduring Freedom,  as the Chief Information Officer for Navy Medicine.
His  responsibilities   include  all  operational   Information  Management  and
Information  Technology in support of the Bureau of Medicine and Surgery for the
Surgeon General.  He is active on many Boards and Committees and is a recognized
leader of the business community of Louisiana.

      Mr. Grace has been President and a Director of Proxity since May 2001.

Marinko Vekovic - Director

      Mr.  Vekovic is the President of a management  consulting  company,  Alpha
Medicals, located in Irvine, California. From 1999 to 2002, he was the Senior VP
Marketing and Sales at ICN  Pharmaceuticals  (NYSE: VRX) He is also President of
MVC  Consulting,  and had over ten years with Eli Lilly  (NYSE:  LLY) from US to
Latin America and Europe as Director of Operations: Europe, Middle -East, Africa
Region.  Since 2002, Mr. Vekovic has been the owner of a consulting  firm, Alpha
Medical Consulting. Mr. Vekovic has over 25 years of multidimensional expertise,
both domestic and international,  in general management,  business  development,
strategic planning, marketing and sales, and experience with Global and start up
companies. He has managed $3 million to $850 million businesses, and has started
Companies on the London Stock Exchange, the NYSE, and NASDAQ. Mr. Vekovic has an
MBA in General Management from IMD -Lausanne Switzerland and a B.S. in Economics
from London University UK.

      Mr. Vekovic is a Director of Proxity since October 2003.

Stephen I. Johnson, RADM U.S. Navy (Retired) - Director

      Rear Admiral Johnson's 30-year Navy career included command of the Nuclear
Fast Attack  Submarine U.S. CITY OF CORPUS CHRISTI  (SSN-705);  service as Major
Acquisition  Program Manager for Submarine  Electronic Systems (PMS-401),  Naval
Sea Systems Command  (NAVSEA);  Program  Director,  Information  Support Systems
(PD-15), Space and Naval Warfare Systems Command (SPAWAR); and Project Director,
Navy Year 2000 Project (CNO-N6Y).  From June 1999 until April 2001, Rear Admiral
Johnson  has been a  Vice-President  of  Business  Development  for  Integration
Partners,  Inc.  Since  January 2001,  January 2002 and June 2003,  Rear Admiral
Johnson has acted as a consultant to SBS Consulting, Inc., UCSD Jacobs School of
Engineering and Asher Training, Inc., respectively.

                                       22
<PAGE>

      Subsequent to his Naval  service,  Admiral  Johnson has served  commercial
industry,  government program offices, and educational  institutions as a senior
management  consultant.  Admiral  Johnson  is  a  Managing  Director  of  Source
Companies  LLC,  an  investment  banking  and value  growth  consulting  company
providing debt  capitalization  and growth  advisory  services to  medium-sized,
closely-held  businesses.  He is the founder of SBS Consulting,  Inc., providing
strategic planning, senior program management,  subject matter expert, and sales
and  marketing   consulting   services  to  commercial   customers,   government
organizations,  and educational  institutions.  Admiral Johnson also serves as a
Technology  and  Business  Advisor  to the  William  J. von  Liebig  Center  for
Entrepreneurism and Technology  Advancement at the Jacobs School of Engineering,
University of California, San Diego.

      Admiral Johnson is a graduate of Duke  University  (Physics) and the Major
Program Managers Course, Defense Systems Management College. He is certified and
served as a Department of Defense Major Acquisition Program Manager (Level III).
He resides in San Diego, California.

Compensation of Directors

      Other  than  the  $1,000  attendance  fee paid to each  Director  for each
meeting attended and an annual honorarium of 25,000 shares of our Class A Common
Stock granted to each  Director,  Directors who are employees of the Company are
not paid any other fees or  additional  compensation  for services as members of
the Company's Board of Directors or any committee thereof.  Notwithstanding  the
foregoing,   our  President  and   Director,   James  Alman  earned   additional
compensation of $65,000 and one of our Directors,  Joseph Grace earned $5,000 in
2004.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section  16(a)  of the  Securities  Exchange  Act  of  1934  requires  our
directors,  executive  officers  and any  person  who owns  more than 10% of our
common stock (the "Reporting  Persons") to file with the Securities and Exchange
Commission  reports of  ownership  and  reports of changes in  ownership  of our
common stock. Under Securities and Exchange  Commission rules, we receive copies
of all Section 16(a) forms that these  Reporting  Persons file. We have reviewed
copies of these reports and written  representations from the Reporting Persons.
We believe all Reporting  Persons  complied  with their Section 16(a)  reporting
obligations during 2004.

CODE OF ETHICS

      We have  adopted a Code of Ethics  within the  meaning  of Item  406(b) of
Regulation S-B. This Code of Ethics applies to our principal  executive officer,
our principal financial officer and principal accounting officer, as well as all
other employees,  and is filed herewith.  If we make  substantive  amendments to
this Code of Ethics or grant any waiver,  including any implicit waiver, we will
disclose the nature of such amendment or waiver on our website or in a report on
Form 8-K within five days of such amendment or waiver.


                                       23
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

      The following table sets forth the aggregate cash compensation paid by the
Company  to:  (i) its Chief  Executive  Officer,  Chairman  and Chief  Financial
Officer;  and (ii) its most highly compensated  officers whose cash compensation
exceeded  $100,000 for  services  performed  during the year ended  December 31,
2004.

<TABLE>
<CAPTION>

                         ANNUAL COMPENSATION                                              LONG TERM COMPENSATION
                         -------------------                                              ----------------------
                                                                                    Awards                           Payouts
                                                                                    ------                           -------
                                                                           Restricted    Securities
                                                            Other Annual      Stock      Underlying
Name and Principal                                          Compensation     Award(s)      Options        LTIP        All Other
Position              Year         Salary ($)     Bonus ($)     ($)             ($)        SARs(#)     Payouts ($)  Compensation ($)
------------------    ----         ----------     --------- ------------     --------      -------     -----------  ----------------
<S>                  <C>           <C>           <C>       <C>             <C>           <C>          <C>          <C>
William Robinson      2004             0             0             0             0             0             0             0
CEO and CFO           2003             0             0             0             0             0             0             0
                      2002             0             0             0             0             0             0             0

James Alman           2004             0             0      $ 65,000             0             0             0             0
President             2003             0             0             0             0             0             0             0
                      2002             0             0             0             0             0             0             0

Barry Nelsen          2004             0             0      $129,000             0             0             0             0
Vice-President        2003             0             0             0             0             0             0             0
                      2002             0             0             0             0             0             0             0

</TABLE>


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

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

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

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

                                       24
<PAGE>

      On January 1, 2005, Cyber Defense and Andrea  Facchinetti  entered into an
employment  agreement.  The term of this  agreement is for a period of one year,
subject to renewal for successive one year periods, unless 14 days prior written
notice is provided by either party.  Executive  will receive an annual salary of
not less than $78,000. In addition,  we will issue Ms. Facchinetti 25,000 shares
of our Class A Common Stock on the first  anniversary  of the effective  date of
the agreement and every anniversary thereafter.  The Agreement may be terminated
for due cause, upon death, upon disability,  voluntary termination by her, or us
without due cause by providing 14 days prior written notice.  Ms. Facchinetti is
subject to a non-compete and  non-solicitation  provision  during the employment
term and during a specified Post-Employment Period.

      The Company  does not have any  annuity,  retirement,  pension or deferred
compensation  plan or other  arrangements  under which an  executive  officer is
entitled to participate without similar participation by other employees.

      The Company does not currently have a stock option plan.

ITEM 11.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

      As of April 14,  2005,  there  were (i)  28,023,747  shares of our Class A
Common Stock issued and  outstanding;  (ii) 150,000 shares of our Class B Common
Stock  issued and  outstanding;  and (iii) 2 shares of our Class C Common  Stock
issued and outstanding.

      The  following  table sets forth  certain  information  as of December 31,
2004,  regarding (i) each person known by the Company to be the beneficial owner
of more  than 5% of the  outstanding  shares  of our  common  stock,  (ii)  each
director, and named executive officer of the Company, and (iii) all officers and
directors as a group:

<TABLE>
<CAPTION>

                                                                                     Amount and Nature
                                                                                     of Beneficial             Percentage of
                                                      Position with                  Ownership of Class        Securities(1)
Name/Address of Beneficial                            Company                        A Common Stock
Owner*                                                                               (1)(2)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                            <C>                       <C>
William C. Robinson(3)(4)                             Chairman, CEO                  6,750,000                     24.1%
                                                      and CFO

James Alman                                           President and                  1,000,000                      3.6%
                                                      Director

Barry Nelsen                                          Vice-President                 300,000                        1.1%

Stephen I.                                            Director                       0                                0%
Johnson RADM USN (ret.)

Joseph A. Grace, Jr.                                  Director                       0                                0%

Marinko Vekovic                                       Director                       0                                0%

Cherokee Raiders, L.P.                                                               6,750,000                     24.1%
5146 South Harvard Ave.
Suite 138
Tulsa, OK 74135

Proxity Digital Networks, Inc.(4)                                                    18,750,000                    66.9%
1600 Canal St., Suite 1418
New Orleans, LA 70112

All executive officers and Directors as a                                             8,050,000                    28.7%
group (5 persons)

</TABLE>


                                       25
<PAGE>

---------

*     Address of all holders is c/o Cyber Defense Systems, Inc., 10901 Roosevelt
      Boulevard, St. Petersburg, Florida 33716.

**    Less than one percent (1%).

(1)   Pursuant to the rules of the Securities and Exchange Commission,  a person
      is deemed to  "beneficially  own"  shares of common  stock  over which the
      person  has or  shares  investment  or voting  power,  or has the right to
      acquire such power within 60 days. The percentage of common stock owned is
      calculated based on the number of shares of common stock outstanding, plus
      in the case of each person the number of shares of common  stock  issuable
      only to such  person  upon the  exercise  of options or  warrants  and the
      conversion of convertible debt securities.

(2)   100% of the Class B Common Stock is held by Cherokee Raiders,  LP (150,000
      shares) and 50% of the issued and outstanding shares of our Class C Common
      Stock are held by Cherokee Raiders,  LP (1 share) and the balance are held
      by Proxity.

(3)   Includes  all of the  shares  held by  Cherokee  Raiders,  L.P.,  a family
      limited  parthnership,  as to which Mr. Robinson  disclaims any beneficial
      ownership.

(4)   Mr. Robinson,  the CEO and CFO of Proxity,  and his family  affiliates own
      and have voting control of approximately 33% of the outstanding  shares of
      capital stock of Proxity.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      As of December 31, 2003,  Proxity owned 100% of the stock of On Alert.  On
Alert also  purchased the GDS  technology  and Traptec  licenses from Proxity at
Proxity's cost. In addition,  On Alert has accounts and notes payable to Proxity
of $184,506 and $107,011, respectively. As of December 31, 2004, the Company has
accounts payable to Proxity of $468,176, respectively.

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

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

      Cyber Aero has been  consolidated  with the Company as it is a 98.8% owned
subsidiary.  All transactions and account balances between the Company and Cyber
Aero were eliminated during consolidation.

      Cherokee's  general  partner  is  William C.  Robinson.  Cherokee  and Mr.
Robinson also own control positions with proxies in Proxity.  As of December 31,
2003, the Company had a note payable to Cherokee of $21,166.  As of December 31,
2004, the Company had notes payable to Cherokee in the amount of $927,768.

      William C. Robinson has a controlling interest in Proxity and Cherokee. He
is also the CEO and CFO of the Company.

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


                                       26
<PAGE>

      On May 1, 2004,  Cyber Aero and TSI  entered  into a  Marketing  and Sales
Agreement, in which the parties agreed that in consideration of $500,000.00 paid
by Cyber Aero to TSI, Cyber Aero would receive exclusive global governmental and
military  marketing  rights to TSI's line of Airships.  Cyber Aero would receive
compensation for its marketing efforts by receiving up to 15% of the gross sales
price of each Airship  sold,  less a 4%  commission  obligation  of TSI to Sales
Resources  Consulting,  Inc., a company owned by Gay Nelsen.  Mrs. Nelsen is the
wife of Barry Nelsen, who is Vice-President, Government Sales, of Cyber Defense.


                                       27
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

All  references  to the Company's  Forms 8-K,  10-K,  10-QSB and 10-KSB  include
reference to File No. 333-46424.

(a) Exhibits

Exhibit No.             Document
-----------             --------
3.1                     Articles of Incorporation of Cyber Defense Systems, Inc.
                        (incorporated  by  reference  to Exhibit  3.1 filed with
                        Company's Form 8-K on February 23, 2005  ("February 2005
                        Form 8-K")).

4.1(a)                  $242,216.00  Corporate  Promissory Note from On Alert to
                        9145-6442  Quebec,  Inc  (incorporated  by  reference to
                        Exhibit 10.8(a) filed with the February 2005 Form 8-K).

4.1(a)(1)               Addendum  dated  February  9,  2005,  to the Note  dated
                        August 23, 2004  (incorporated  by  reference to Exhibit
                        10.8(a)(1) filed with the February 2005 Form 8-K).

4.2                     Intercreditor  Agreement  between  On  Alert,  Equipment
                        Depot, Inc. and 9145-6442 Quebec,  Inc., dated September
                        21, 2004  (incorporated  by reference to Exhibit 10.8(d)
                        filed with the February 2005 Form 8-K).

4.3(a)                  $100,000.00  Corporate  Promissory  Note  from On  Alert
                        (Maker) to Proxity (Holder) dated March 13, 2004; due on
                        or before November 30, 2004  (incorporated  by reference
                        to Exhibit  10.11(a)  filed with the February  2005 Form
                        8-K).

4.3(b)                  Re-stated  $100,000.00 Corporate Promissory Note from On
                        Alert (Maker) to Proxity (Holder) Originally dated March
                        13, 2004 due on or before  November 30, 2004 - Now dated
                        February   1,   2005,   and  due   November   30,   2005
                        (incorporated  by  reference to Exhibit  10.11(b)  filed
                        with the February 2005 Form 8-K).

4.4                     $500,000.00  Corporate  Promissory  Note from Cyber Aero
                        (Maker) to On Alert  (Holder)  dated March 10, 2004; due
                        on  or  before  November  30,  2005   (incorporated   by
                        reference to Exhibit  10.12 filed with the February 2005
                        Form 8-K).

4.5                     Notice of  Conversion  dated  September 1, 2004 Cherokee
                        (Holder) elects to be issued  6,750,000 shares of Common
                        Stock of On Alert (Maker) in satisfaction of $400.000.00
                        in debt  evidenced by Convertible  Corporate  Promissory
                        Note  from  On  Alert  in  the  amount  of   $400,425.00
                        (incorporated  by reference to Exhibit  10.13 filed with
                        the February 2005 Form 8-K).

4.6                     $400,000.00  Corporate  Promissory  Note  from On  Alert
                        (Maker) to Cherokee (Holder) dated March 13, 2004 due on
                        or before November 30, 2004  (incorporated  by reference
                        to Exhibit 10.14 filed with the February 2005 Form 8-K).

4.7                     $675,000.00  Corporate  Promissory  Note  from On  Alert
                        (Maker) to Cherokee  (Holder) dated July 15, 2004 due on
                        or before November 30, 2005  (incorporated  by reference
                        to Exhibit 10.15 filed with the February 2005 Form 8-K).

                                       28
<PAGE>

4.8                     $675,000.00  Corporate  Promissory  Note from Cyber Aero
                        (Maker) to On Alert  (Holder) dated July 15, 2004 due on
                        or before November 30, 2005  (incorporated  by reference
                        to Exhibit 10.16 filed with the February 2005 Form 8-K).

4.9                     $374,169.30  Corporate  Promissory  Note  from On  Alert
                        (Maker) to Proxity  (Holder) dated March 13, 2004 due on
                        or before November 30, 2004  (incorporated  by reference
                        to Exhibit 10.17 filed with the February 2005 Form 8-K).

4.10                    Notice  of  Conversion  dated  April  12,  2003  Proxity
                        (Holder) elects to be issued 18,750,000 shares of Common
                        Stock of On Alert (Maker) in  satisfaction of $18,750.00
                        in debt  evidenced by Convertible  Corporate  Promissory
                        Note  from  On  Alert  in  the   amount  of   $18,750.00
                        (incorporated  by reference to Exhibit  10.18 filed with
                        the February 2005 Form 8-K).

4.11                    $194,200.00  Corporate  Promissory  Note  from On  Alert
                        (Maker) to Cherokee  (Holder)  dated  September 28, 2004
                        due on or before  November  30,  2005  (incorporated  by
                        reference to Exhibit  10.19 filed with the February 2005
                        Form 8-K).

4.12                    Form of  Secured  Convertible  Term  Note  issued to AJW
                        Partners,  LLC, dated as of April 1, 2005  (incorporated
                        by reference  to Exhibit  10.1 filed with the  Company's
                        Form 8-K on April 6, 2005 (the "April 2005 Form 8-K")).

4.13                    Security Agreement in favor of AJW Partners,  LLC, dated
                        as of  April  1,  2005  (incorporated  by  reference  to
                        Exhibit 10.3 filed with the April 2005 Form 8-K).

4.14                    Intellectual   Property  Security   Agreement  with  AJW
                        Partners,  LLC, dated as of April 1, 2005  (incorporated
                        by  reference  to Exhibit 10.4 filed with the April 2005
                        Form 8-K).

4.15                    Guaranty and Pledge  Agreement in favor of AJW Partners,
                        LLC,  dated  as  of  April  1,  2005   (incorporated  by
                        reference to Exhibit 10.5 filed with the April 2005 Form
                        8-K).

4.16                    Amended  Convertible  Promissory  Note Issued  to Joseph
                        Theismann  in  the  Amount of $117,000 due September 30,
                        2005.

10.1(a)                 Original Traptec  Licensing  Agreement  between On Alert
                        and the Traptec  Corporation,  dated  November 10, 2003,
                        with subsequent modifications (incorporated by reference
                        to Exhibit  10.1(a)  filed with the  February  2005 Form
                        8-K).

10.1(b)                 First   Modification  to  Traptec  Licensing   Agreement
                        (incorporated by reference to Exhibit 10.1(b) filed with
                        the February 2005 Form 8-K).

10.1(c)                 Second   Modification    Traptec   Licensing   Agreement
                        (incorporated by reference to Exhibit 10.1(c) filed with
                        the February 2005 Form 8-K).

10.2(a)                 Asset  Purchase  Agreement  Between Cyber Aero And James
                        Alman, dated March 5, 2004 (incorporated by reference to
                        Exhibit 10.2(a) filed with the February 2005 Form 8-K).

10.2(b)                 Amendment dated January 11, 2005 to Alman Asset Purchase
                        Agreement dated March 5, 2004 (incorporated by reference
                        to Exhibit  10.2(b)  filed with the  February  2005 Form
                        8-K).

                                       29
<PAGE>

10.3                    Original TSI Asset Purchase Agreement between Cyber Aero
                        and Techsphere Systems  International,  LLC, dated as of
                        March 10, 2004 with addendum  (incorporated by reference
                        to Exhibit 10.3 filed with the February 2005 Form 8-K).

10.4                    Marketing  and  Sales  Agreement  between  On Alert  and
                        Techsphere Systems International, LLC, dated May 1, 2004
                        (incorporated  by  reference  to Exhibit 10.4 filed with
                        the February 2005 Form 8-K).

10.5                    Modification   of  the  Original   TSI  Asset   Purchase
                        Agreement  between  Cyber  Aero and  Techsphere  Systems
                        International, LLC, Dated June 15, 2004 (incorporated by
                        reference to Exhibit  10.5 filed with the February  2005
                        Form 8-K).

10.6(a)                 Equipment  Purchase  Agreement between On Alert Systems,
                        Inc,  and  Equipment  Depot,  Inc.,  dated as of May 31,
                        2004,   with  Addendums  And   Subordination   Agreement
                        (incorporated by reference to Exhibit 10.6(a) filed with
                        the February 2005 Form 8-K).

10.6(a)(1)              Addendum dated June 30, 2004, to the Equipment  Purchase
                        Agreement  between On Alert Systems,  Inc, and Equipment
                        Depot,  Inc., dated as of May 31, 2004  (incorporated by
                        reference to Exhibit  10.6(a)(1) filed with the February
                        2005 Form 8-K).

10.6(a)(2)              Amendment  #1 of August 6,  2004 to the  Addendum  dated
                        June 30,  2004  (incorporated  by  reference  to Exhibit
                        10.6(a)(2) filed with the February 2005 Form 8-K).

10.6(a)(3)              Addendum  dated  September  28, 2004,  to the  Equipment
                        Purchase  Agreement  between On Alert Systems,  Inc, and
                        Equipment  Depot,   Inc.,  dated  as  of  May  31,  2004
                        (incorporated  by reference to Exhibit  10.6(a)(3) filed
                        with the February 2005 Form 8-K).

10.6(a)(4)              Amendment  dated  February  8,  2005,  to the  Equipment
                        Purchase  Agreement  between On Alert Systems,  Inc, and
                        Equipment  Depot,   Inc.,  dated  as  of  May  31,  2004
                        (incorporated  by reference to Exhibit  10.6(a)(4) filed
                        with the February 2005 Form 8-K).

10.6(b)                 Money Purchase  Contract between On Alert Systems,  Inc,
                        and  Equipment  Depot,  Inc.,  dated as of May 31,  2004
                        (incorporated by reference to Exhibit 10.6(b) filed with
                        the February 2005 Form 8-K).

10.6(b)(1)              Addendum dated July 28, 2004, to Money Purchase Contract
                        dated May 31, 2004 (incorporated by reference to Exhibit
                        10.6(b)(1) filed with the February 2005 Form 8-K).

10.6(c)                 Registration  Rights Agreement between On Alert Systems,
                        Inc, and Equipment Depot, Inc., dated as of May 31, 2004
                        (incorporated by reference to Exhibit 10.6(c) filed with
                        the February 2005 Form 8-K).

10.7(a)                 Stock Purchase Agreement between On Alert Systems.  Inc.
                        and  Allstars  Marketing,  Inc.,  dated as of August 19,
                        2004 (incorporated by reference to Exhibit 10.7(a) filed
                        with the February 2005 Form 8-K).

                                       30
<PAGE>

10.7(a)(1)              Amendment #1 dated August 30, 2004 to the Stock Purchase
                        Agreement between On Alert and Allstars Marketing, Inc.,
                        dated  August 19, 2004  (incorporated  by  reference  to
                        Exhibit  10.7(a)(1)  filed with the  February  2005 Form
                        8-K).

10.7(a)(2)              Amendment  #2  dated  September  28,  2004 to the  Stock
                        Purchase  Agreement  between On Alert and Cyber  Defense
                        and Allstars,  dated as of August 19, 2004 (incorporated
                        by  reference  to  Exhibit  10.7(a)(2)  filed  with  the
                        February 2005 Form 8-K).

10.7(a)(3)              Amendment  #3  dated  February  8,  2005,  to the  Stock
                        Purchase  Agreement  between On Alert and Cyber  Defense
                        and Allstars,  dated as of August 19, 2004 (incorporated
                        by  reference  to  Exhibit  10.7(a)(3)  filed  with  the
                        February 2005 Form 8-K).

10.7(b)                 Registration  Rights Agreement between On Alert Systems.
                        Inc. and Allstars  Marketing,  Inc.,  dated as of August
                        19, 2004  (incorporated  by reference to Exhibit 10.7(b)
                        filed with the February 2005 Form 8-K).

10.8(a)                 Assignment of Loan Proceeds  (incorporated  by reference
                        to Exhibit  10.8(a)  filed with the  February  2005 Form
                        8-K).

10.8(b)                 Assignment   of   Funding   Proceeds   to   Repay   Loan
                        (incorporated by reference to Exhibit 10.8(b) filed with
                        the February 2005 Form 8-K).

10.9                    Plan of  Merger  between  On  Alert  and  Cyber  Defense
                        Systems,   dated  August  24,  2004   (incorporated   by
                        reference to Exhibit  10.9 filed with the February  2005
                        Form 8-K).

10.10                   Plan  of  Merger  between  On  Alert  Cyber  and  E-City
                        Software,  Inc., dated August 24, 2004  (incorporated by
                        reference to Exhibit  10.10 filed with the February 2005
                        Form 8-K).

10.20(a)                Employment  Agreement  between  Cyber  Defense and James
                        Alman  (incorporated  by reference  to Exhibit  10.20(a)
                        filed with the February 2005 Form 8-K).

10.20(b)                Employment  Agreement  between  Cyber Defense and Andrea
                        Facchinetti   (incorporated   by  reference  to  Exhibit
                        10.20(b) filed with the February 2005 Form 8-K).

10.20(c)                Employment  Agreement  between  Cyber  Defense and Barry
                        Nelsen  (incorporated  by reference to Exhibit  10.20(c)
                        filed with the February 2005 Form 8-K).

10.20(d)                Employment  Agreement  between Cyber Defense and William
                        C.  Robinson   (incorporated  by  reference  to  Exhibit
                        10.20(d) filed with the February 2005 Form 8-K).

10.20(e)                Employment  Agreement  between Cyber Defense and Jaffray
                        Stephens  (incorporated by reference to Exhibit 10.20(e)
                        filed with the February 2005 Form 8-K).

10.21                   $110,000.00 Corporate Promissory Note from Cyber Defense
                        to Joseph  Theismann  dated December 10, 2004; due on or
                        before February 28, 2005  (incorporated  by reference to
                        Exhibit 10.21 filed with the February 2005 Form 8-K).

                                       31
<PAGE>

10.22                   Agreement  between  Cyber  Defense  and  Cyber  Aero and
                        Brayton   Energy,   LLC,   dated   September   27,  2004
                        (incorporated  by reference to Exhibit  10.22 filed with
                        the February 2005 Form 8-K).

21                      List of Company's subsidiaries

31.1*                   Rule 13a-14(a)/15d-14(a) Certification

32.1*                   Section 1350 - Certification

---------------------
* Filed herewith.

      (b) Reports on Form 8-K:

      The  Company  filed a Current  Report on Form 8-K on  September  15,  2004
regarding the mergers with E-City and On Alert.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

                                                             DECEMBER 31, 2004
                                     2004                          2003
                                     ----                          ----

Audit Fees                           $31,000                       $600
Tax Fees                             $1,000                        $0
Audit Related Fees                   $0                            $0
Total Fees                           $32,000                       $600



                                       32
<PAGE>

                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange  Act of 1934,  as amended,  the  Company  has duly caused this  amended
report to be signed on its behalf by the undersigned,  thereunto duly authorized
on the 19th day of May 2005.

                           CYBER DEFENSE SYSTEMS, INC.

                                  By: /s/ William C. Robinson
                                      ------------------------------------------
                                      William C. Robinson, Chairman, CFO
                                      CFO and Principal Executive, Financial and
                                      Accounting Officer

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended,  this amended  report has been signed by the  following  persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>

            Signature                                            Title                                                 Date
<S>                                         <C>                                                                  <C>
 /s/ William C. Robinson                     Chairman, Chief Executive Officer, Chief                             May 19, 2005
 -----------------------                     Financial Officer, Principal Executive, Financial
 William C. Robinson                         and Accounting Officer


 /s/ James Alman                             President and Director                                               May 19, 2005
 ---------------
 James Alman

                                             Vice-President                                                       May 19, 2005
 ----------------
 Barry Nelsen


 /s/ Stephen I. Johnson RADM USN (ret.)      Director                                                             May 19, 2005
 ------------------------------------
 Stephen I. Johnson RADM USN (ret.)

                                             Director                                                             May 19, 2005
 ------------------------
 Joseph A. Grace, Jr.


 /s/ Marinko Vekovic                         Director                                                             May 19, 2005
 -------------------
 Marinko Vekovic

</TABLE>


                                       33

<PAGE>
                           CYBER DEFENSE SYSTEMS, INC.


                                      INDEX
                                                                           Page
                                                                          Number
                                                                          ------

PART II.

Report of Independent Registered Public Accounting Firm...............       F-1

Consolidated Balance Sheets as of
December 31, 2004 and 2003............................................       F-2

Consolidated Statements of Operations for the Year Ended
December 31, 2004 and for the Period from March 17, 2003
(Date of Inception) Through December 31, 2003.........................       F-3

Consolidated Statements of Stockholders' Deficit for the Year Ended
December 31, 2004 and for the Period of March 17, 2003
(Date of Inception) Through December 31, 2003.........................       F-4

Consolidated Statements of Cash Flows for the Year Ended
December 31, 2004 and for the Period from March 17, 2003
(Date of Inception) Through December 31, 2003.........................       F-5

Notes to the Consolidated Financial Statements........................    F-7-15

<PAGE>


  HANSEN, BARNETT & MAXWELL
  A Professional Corporation
 CERTIFIED PUBLIC ACCOUNTANTS
   5 Triad Center, Suite 750                    [BAKER TILLY INTERNATIONAL LOGO]
 Salt Lake City, UT 84180-1128
     Phone: (801) 532-2200
      Fax: (801) 532-7944
        www.hbmcpas.com


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Cyber Defense Systems, Inc.
St. Petersburg, Florida

We have audited the consolidated  balance sheets of Cyber Defense Systems,  Inc.
and  Subsidiary as of December 31, 2004 and 2003,  and the related  consolidated
statements  of  operations,  stockholders'  deficit  and cash flows for the year
ended December 31, 2004 and for the period March 17, 2003 (date of inception) to
December 31, 2003.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion the financial statements referred to above present fairly, in all
material  respects,  the financial  position of Cyber Defense Systems,  Inc. and
Subsidiary as of December 31, 2004 and 2003,  and the results of its  operations
and its cash flows for the year ended December 31, 2004 and for the period March
17, 2003 (date of  inception)  to  December  31,  2003 in  conformity  with U.S.
generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern. The Company has had losses and current
ratio  deficits  since  inception.  As  discussed  in  Note 1 to  the  financial
statements,  there is substantial  doubt about the Company's ability to continue
as a going  concern.  Management's  plans  concerning  these  matters  are  also
described in Note 1. The  financial  statements  do not include any  adjustments
that might result from the outcome of this uncertainty.



                                                       HANSEN, BARNETT & MAXWELL

Salt Lake City, Utah
April 8, 2005, except the items discussed in Note 12,
as to which the date is May 18, 2005.


                                      F-1
<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                  DECEMBER 31,   DECEMBER 31,
                                                                      2004           2003
                                                                  -----------    -----------
<S>                                                               <C>            <C>
                                         ASSETS

CURRENT ASSETS:

 CASH AND CASH EQUIVALENTS ....................................   $   206,270    $       319
 ACCOUNT RECEVABLE ............................................       747,155             --
                                                                  -----------    -----------
 TOTAL CURRENT ASSETS .........................................       953,425            319
                                                                  -----------    -----------
OTHER ASSETS

DISTRIBUTION LICENSES, NET OF ACCUMULATED AMORTIZATION OF
         $-0- AND $14,494 RESPECTIVELY ........................            --         39,406
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
          OF $2,138 AND $29,513 RESPECTIVELY ..................         5,603         14,278
DEPOSITS ON EQUIPMENT .........................................       150,976             --
DEPOSITS ON AIRSHIPS ..........................................     1,175,000             --
LOAN COSTS, NET OF ACCUMULATED AMORTIZATION OF $5,292..........        12,849
SECURITY DEPOSITS .............................................         7,156             --
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $93,748         506,252
                                                                  -----------    -----------
TOTAL ASSETS ..................................................   $ 2,811,261    $    54,003
                                                                  ===========    ===========

                         LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES.......................   $ 1,319,772    $   106,843
ACCOUNTS PAYABLE - RELATED PARTIES ............................       468,176        184,506
ASSUMED DEBT OF SUBSIDIARY ....................................        33,337         98,972
NOTES PAYABLE - RELATED PARTIES ...............................     1,137,768        128,177
NOTES PAYABLE - QUEBEC, INC ...................................       242,216             --
                                                                  -----------    -----------
TOTAL CURRENT LIABILITIES .....................................   $ 3,201,269    $   518,498
                                                                  -----------    -----------
LONG-TERM NOTES PAYABLE - RELATED PARTIES .....................            --             --
                                                                  -----------    -----------
TOTAL LIABILITIES .............................................     3,201,269        518,498
                                                                  -----------    -----------
MINORITY INTEREST IN CYBER AEROSPACE, CORP. (6.2%) ............        26,581             --

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT:

CLASS A PREFERRED STOCK, $0.001 PAR VALUE; 100,000,000 SHARES
AUTHORIZED; NONE ISSUED AND OUTSTANDING .......................            --             --
COMMON STOCK:
CLASS A, $0.001 PAR VALUE; 200,000,000 SHARES AUTHORIZED;
25,921,562 AND 18,750,000 SHARES ISSUED AND
OUTSTANDING RESPECTIVELY ......................................        25,921         18,750
CLASS B, $0.001 PAR VALUE; 200,000,000 SHARES AUTHORIZED;
150,000 AND -0- SHARES ISSUED AND OUTSTANDING RESPECTIVELY ....           150             --
CLASS C, $0.001 PAR VALUE; 200,000,000 SHARES AUTHORIZED;
2 SHARES AND -0- SHARES ISSUED AND OUTSTANDING, RESPECTIVELY ..            --             --
ADDITIONAL PAID-IN CAPITAL ....................................       461,762            --
ACCUMULATED OTHER COMPREHENSIVE LOSS ..........................        (7,064)        (6,540)
ACCUMULATED DEFICIT ...........................................      (897,358)      (476,705)
                                                                  -----------    -----------
TOTAL SHAREHOLDERS' DEFICIT ...................................      (416,589)      (464,495)
                                                                  -----------    -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT ...................   $ 2,811,261    $    54,003
                                                                  ===========    ===========
</TABLE>


              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS


                                      F-2
<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   MARCH 17, 2003
                                                     FOR THE         (DATE OF
                                                    YEAR ENDED       INCEPTION)
                                                   ------------       THROUGH
                                                   DECEMBER 31,     DECEMBER 31,
                                                       2004             2003
                                                   ------------    ------------
<S>                                                <C>             <C>
Revenues:

Airship sales ..................................   $  2,700,000              --
Other revenues .................................        326,287              --
                                                   ------------    ------------
Total Revenues .................................      3,026,287              --


Cost of product sold ...........................      2,200,000
Research and development .......................             --
General and administrative expenses ............      1,090,153         372,609
                                                   ------------    ------------
Total Expenses .................................      3,290,153         372,609
                                                   ------------    ------------
Loss from Operations ...........................       (263,866)       (372,609)

Other Income (expense)

Interest income ................................             --           3,692
Interest expense ...............................        (98,809)         (9,292)
Gain on forgiveness of debt ....................             --          22,807
Write off of equipment .........................        (12,205)             --
Impairment of goodwill and licenses ............        (19,192)       (121,303)
                                                   ------------    ------------
Other Income (Expense), Net ....................       (130,206)       (104,096)
                                                   ------------    ------------
Net Loss Before Income Tax and Minority Interest       (394,072)       (476,705)

Provision for income tax .......................             --              --
Minority interest ..............................        (26,581)             --
                                                   ------------    ------------
Net loss .......................................   $   (420,653)   $   (476,705)
                                                   ============    ============

Basic and diluted loss per share ...............   $      (0.02)   $      (0.03)
                                                   ============    ============

Weighted average number of Class A
  common shares outstanding ....................     21,125,176      18,750,000
                                                   ============    ============
</TABLE>



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


                                      F-3
<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

                   MARCH 17, 2003 (DATE OF INCEPTION) THROUGH
                                DECEMBER 31,2004


<TABLE>
<CAPTION>
                                                                                              Deficit
                              Class A              Class B         Class C     Accumulated  Accumulated
                           Common Stock         Common Stock    Common Stock   During the      Other        Additional     Total
                       --------------------   ---------------  --------------  Development  Comprehensive    Paid-in   Stockholders'
                         Shares     Amount     Shares  Amount  Shares  Amount     Stage         Loss         Capital      Deficit
                       ----------  --------   -------  ------  ------  ------  -----------  -------------   ----------  ------------
<S>                    <C>         <C>        <C>      <C>     <C>     <C>     <C>          <C>             <C>         <C>
Balance March 17,
  2003 (Date of
  Inception)                   --  $     --        --  $   --      --  $   --  $        --  $          --   $       --  $       --


Sale of Class A
common stock for
cash - $0.001
per share              18,750,000    18,750                                                                                 18,750


Net loss for the
  period                                                                          (476,705)                               (476,705)


Currency translation
  adjustments                                                                                      (6,540)                  (6,540)
                                                                                                                        ----------

Comprehensive loss                                                                                                        (483,245)
                                                                                                                        ----------

Balance at             ----------  --------   -------  ------  ------  ------  -----------  -------------   ----------  ----------
December 31, 2003      18,750,000  $ 18,750        --      --      --      --  $  (476,705) $      (6,540)             $  (464,495)


Issuance of 2 Class
C Common Shares in
 exchange for on
 Alert Shares                                                       2      --

Issuance of 150,000
Class B Common shares
 in exchange for note
 payable conversion                           150,000     150                                                                  150

Issuance of 6,750,000
Class A common shares
 Conversion of
 Note payable           6,750,000     6,750                                                                    398,322     405,072

Stock Option
  Compensation                                                                                                  63,440      63,440

Issuance of 421,562
 Class A common
 shares pursuant to
 the acquisition of
 E-City Software          421,562       421                                                                                    421

 Net loss for the year                                                              (420,653)                             (420,653)

Currency translation
adjustments                                                                                          (524)                    (524)
                                                                                            -------------               ----------

Comprehensive loss                                                                                                        (421,177)
                                                                                                                        ----------

Balance at             ----------  --------   -------  ------  ------  ------  ------------ -------------   ----------  ----------
December 31, 2004      25,921,562  $ 25,921   150,000  $  150       2  $   --  $  (897,358) $      (7,064)  $461,762    $ (416,589)
                       ==========  ========   =======  ======  ======  ======  ============ =============   ==========  ==========
</TABLE>

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


                                      F-4
<PAGE>

                   CYBER DEFENSE SYSTEMS, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              FOR THE
                                                                              PERIOD
                                                                               FROM
                                                                             MARCH 17,
                                                                             2003 (DATE
                                                              YEAR ENDED    OF INCEPTION)
                                                             ------------     THROUGH
                                                             DECEMBER 31,   DECEMBER 31,
                                                                 2004           2003
                                                             ------------   ------------
<S>                                                          <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss ...............................................  $ (420,653)     $ (476,705)
   Adjustments to reconcile net loss to net
   cash from operating activities:
     Stock Option Compensation.............................      63,440              --
     Minority interest ....................................      26,581              --
     Depreciation and amortization ........................     121,392          17,845
     Impairment of goodwill ...............................          --         121,303
     Impairment of value of licenses ......................      19,192
     Gain on forgiveness of debt ..........................          --         (22,807)
     Loss on currency adjustment ..........................        (524)         (6,540)
     Write off of property and equipment ..................      12,205              --
     Gain on sale of airship ..............................    (500,000)             --
     Changes in assets and liabilities:
       Accounts receivable ................................    (747,155)
       Security deposits ..................................      (7,156)
       Income tax receivable ..............................          --          53,391
       Accounts payable ...................................   1,039,653          19,529
       Accrued liabilities ................................     197,931         (62,609)
                                                              ---------      ----------
NET CASH FROM OPERATING ACTIVITIES ........................    (195,094)       (356,593)
                                                              ---------      ----------
CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of licenses ..................................          --         (53,900)
    Deposits on equipment .................................    (150,976)             --
    Purchase of equipment .................................      (5,668)
    Change in related party receivables/payables ..........     283,670         184,506
    Increase in investment in E-City ......................          --         (40,000)
                                                              ---------      ----------
NET CASH FROM INVESTING ACTIVITIES ........................     127,026          90,606
                                                              ---------      ----------

CASH FLOWS FROM FINANCING ACTIVITIES
    Payments on loan costs ................................     (18,141)             --
    Proceeds from notes payable ...........................     543,330         167,379
    Proceeds from notes payable - related parties .........     638,166         128,177
    Principal payments on notes payable ...................    (389,008)        (48,000)
    Principal payments on notes payable - related parties .    (439,911)             --
    Payments on debt assumed from subsidiary ..............     (65,635)             --
    Issuance of common stock ..............................       5,218          18,750
                                                              ---------      ----------
NET CASH FROM FINANCING ACTIVITIES ........................     274,019         266,306
                                                              ---------      ----------
Net increase in cash and cash equivalents .................     205,951             319
Cash and cash equivalents, beginning ......................         319              --
                                                              ---------      ----------
Cash and cash equivalents, ending .........................   $ 206,270      $      319
                                                              =========      ==========
</TABLE>

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


                                      F-5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                              FOR THE
                                                                               PERIOD
                                                                                FROM
                                                                              MARCH 17,
                                                                              2003 (DATE
                                                              YEAR ENDED     OF INCEPTION)
                                                             -------------     THROUGH
                                                             DECEMBER 31,    DECEMBER 31,
                                                                 2004            2003
                                                             ------------    -------------
<S>                                                          <C>             <C>
Supplemental disclosure of cash flow information:

Cash paid for interest                                       $    9,316      $          --
Cash paid for income taxes                                           --                 --

Supplemental disclosure of non-cash investing
  and financing information:

Issued stock for debt                                         $ 400,425                 --
Accounts payable paid by related party                           24,655                 --
Retirement of fully depreciated assets                           29,513                 --
Deposits for purchase of airship                                675,000                 --
Subsidiary minority shareholders' stock issued for
  subscriptions receivable                                          166                 --
Licenses purchased with debt                                    500,000                 --
Plans and designs purchased with debt                           100,000                 --
Capital restructuring                                               335                 --
Debt assumed in acquisition of E-City                                --            126,972
</TABLE>

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


                                      F-6
<PAGE>

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

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

The majority and controlling shareholders of the company are Proxity, Inc.
("Proxity"), a publicly traded company ("PRXT") and Cherokee Raiders, a
partnership, ("Cherokee") owning 72.3% and 26.0% of the Class A common shares of
the Registrant respectively. In addition, Cherokee also owns all 150,000 of the
issued and outstanding shares of Class B common stock, which allow for 1,000
votes per share, and Cherokee and Proxity each own one share of the two shares
of Class C common stock issued and outstanding. The Chief Executive Officer of
both Proxity and Cherokee is Mr. Robinson, the Chief Executive Officer of the
Registrant.

CONSOLIDATION - The accompanying consolidated financial statements include the
accounts and transactions of Cyber Defense Systems, Inc. for all periods
presented and the accounts and transactions of its subsidiary from the date of
its acquisition. Intercompany accounts and transactions have been eliminated in
consolidation. At December 31, 2003, no minority interest is shown on the
balance sheet as the former subsidiary, E-City, had generated losses that had
been borne by the Company. At December 31, 2004, minority interest was recorded
for the applicable portion of net income of Cyber Aerospace.

On May 23, 2003, the Company paid $40,000 for 35,000,000 shares of common stock
of E-city Software, Inc. ("E-city"), representing 77.6% of the total shares
outstanding. The accompanying consolidated financial statements include the
accounts and transactions of On Alert Systems, Inc. for all periods presented
and the accounts and transactions of E-City from the date of its acquisition
until it was merged into Cyber on September 1, 2004. Intercompany accounts and
transactions have been eliminated in consolidation. No minority interest is
shown on the balance sheet as of December 31, 2003 because E-City generated
losses which were borne by the Company.

The purchase of E-city for $40,000 included current assets of $71,020 and
current liabilities of $152,323, resulting in goodwill of $121,303. Management
determined that the value of the goodwill was impaired and the total amount was
written off. Subsequent to the purchase and before the year end, management was
successful in negotiating a settlement of certain debt that had been acquired
which resulted in forgiveness of debt of $20,407.

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

BUSINESS CONDITION - The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements for the period ended December 31, 2003, the Company earned
no revenue and incurred a net loss of $476,705. For the year ended December 31,
2004, the Company had revenues, but incurred a net loss of $420,653. The lack of
sufficient operations and the loss from operations raise substantial doubt about
the Company's ability to continue as a going concern for a reasonable period of
time. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or the amount and
classification of liabilities which might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flows to meet
its obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain successful operations (see Note 9).

CASH AND CASH EQUIVALENTS -- Cash equivalents include highly liquid short-term
investments with original maturities of three months or less, readily
convertible to known amounts of cash. At December 31, 2004 and December 31, 2003
the Company had $106,270 and zero cash, respectively, in excess of federally
insured limits.


                                      F-7
<PAGE>

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

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

Long-lived assets are reviewed for impairment quarterly. Recoverability of
assets to be held and used is measured by comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount that the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Based on the evaluation, an
impairment of $12,205 for a reduction in the value of certain equipment and an
impairment in the value of licenses of $19,192 were recorded in fiscal 2004 and
$121,303 for a reduction in the value of goodwill was recorded in the period
ended December 31, 2003.

REVENUE RECOGNITION - Service revenues are recognized when the services are
performed and the customer is billed. Airship sales are recognized when
substantially all contract specifications have been met and title passes to the
customer.

CONCENTRATIONS OF RISK-- During the year ended December 31, 2004, there was one
airship sale to one customer. During 2004, the Company had one supplier of
airships. The loss of this supplier could have a material effect on the
Company's financial statements.

INCOME TAXES -- No income taxes have been paid or accrued because the Company
had no net income for the fiscal year ended December 31, 2004 or for the period
ended December 31, 2003. The Company recognizes the amount of income taxes
payable or refundable for the current year and recognizes deferred tax assets
and liabilities for the future tax consequences attributable to differences
between the financial statement amounts of certain assets and liabilities and
their respective tax bases. Deferred tax assets and deferred liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years those temporary differences are expected to be recovered or settled.
Deferred tax assets are reduced by a valuation allowance to the extent that
uncertainty exists as to whether the deferred tax assets will ultimately be
realized.

LOSS PER SHARE --Basic loss per share is calculated by dividing loss available
to Class A common shareholders by the weighted-average number of Class A common
shares outstanding during each period. Diluted loss per share anti-dilutive and
the calculation would include 88,000 shares subject to a stock option held by
All- Stars Marketing since August 9, 2004. Thus 34,716 shares would be added to
the weighted average shares used to calculate basic earnings per share.

FAIR VALUES OF FINANCIAL INSTRUMENTS -- The carrying amounts reported in the
balance sheet for notes payable approximate their fair values because the
interest rates approximate current interest rates to be charged on similar
borrowings.

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

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


                                      F-8
<PAGE>

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

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

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

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

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

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


                                      F-9
<PAGE>

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

NOTE 2 - RELATED PARTY TRANSACTIONS

Proxity, Inc. ("Proxity") - Proxity owned 100% of the stock of On Alert Systems,
Inc. at December 31, 2003. On Alert purchased the GDS and Traptec licenses from
Proxity at Proxity's cost. As of December 31, 2003, On Alert had accounts
payable and notes payable to Proxity of $184,506 and $107,011, respectively. As
of December 31, 2004, the Company has accounts payable and notes payable to
Proxity of $ 468,176 and $ -0- respectively.

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

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

Cyber Aerospace - Cyber Aerospace has been consolidated with the Company as it
is a 93.8% owned subsidiary. All transactions and account balances between the
Company and Cyber Aerospace were eliminated during consolidation.

Cherokee Raiders - Cherokee's general partner is William C. Robinson. Cherokee
and Mr. Robinson also own control positions with proxies in Proxity. As of
December 31, 2003, the Company had a note payable to Cherokee of $21,166. As of
December 31, 2004, the Company had a note payable to Cherokee in the amount of
$868775.

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

NOTE 3 - INTANGIBLE ASSETS

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

The Company purchased the rights to two licensing agreements - the GDS license
on April 7, 2003 and the Traptec license on November 10, 2003 from Proxity
Digital Networks, a related party. The GDS license is an exclusive license for
the Company to sell licensed equipment throughout the world. The Traptec license
gives the Company the right to represent Traptec Corporation as a marketing
representative on the exclusive basis to sell surveillance and security
equipment and other such products to the military and other federal agencies.
The licensing agreements have been recorded at the historical cost to Proxity.
As of December 31, 2004, the Company determined that the effort and resources
required to be spent in order to utilize these licenses were more than the
Company was able to spend and, therefore, the future cash flows relating to the
ownership of the licenses would be negligible. As a result, the licenses are
considered impaired in full. The impairment loss recorded in the December 31,
2004 financial statements is $19,192.

NOTE 4 - PROPERTY AND EQUIPMENT

At December 31, 2003, property and equipment consisted of computer software
recorded at a cost of $43,791 and accumulated depreciation of $29,513; the net
balance was $14,278. In 2004, computer software of $12,205 was written off,
leaving a net balance of $148 and purchases of computers and office equipment
and furnishings were made in the amount of $5,668. Depreciation expense for the
year ended December 31, 2004 and the period ended December 31, 2003 was $2,138
and $3,351 respectively.


                                      F-10
<PAGE>

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

NOTE 5 - NOTE PAYABLE - QUEBEC

On August 23, 2004, the Company and Quebec, inc., ("Quebec") a Canadian
corporation, executed a secured commercial promissory note pursuant to the terms
of which the Company borrowed $242,216 from Quebec. Prepaid interest of $9,316
for 61 days was withheld from the initial funding and thereafter interest
accrues at an annual rate of 24%. The note is secured by securities owned by Mr.
Robinson, the Company's Chief Executive Officer, and will be further secured by
equipment purchased by the Company which was the subject equipment upon which
deposits were paid from a portion of the loan proceeds. Prepayment was required
from any equity or loan funds raised by the Company and full payment of all
remaining principle and accrued interest was due February 18, 2005. Payment
terms were amended on February 8, 2005 to provide for payment of one half the
principal and all accrued interest through March 10, 2005, as well as
transaction costs and extension fees, through the sale of a portion of the
securities owned by Mr. Robinson. All funds paid to the lender from such
securities sales constitute a loan by Mr. Robinson to the company. If the
Company does not raise equity or loan funds sufficient to repay the remaining
balance due within the 45 day period immediately following the payment of the
first half of the loan, then the remainder of the loan was to be repaid, with
interest, from continued sales of securities pledged by Mr. Robinson, which
payments would constitute additional loans by Mr. Robinson to the Company. Costs
incurred in connection with the loan were capitalized and are being amortized
over the life of the loan. For the year ended December 31, 2004, amortization
expense of the loan costs was $5,292.

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


NOTE 6 - NOTES PAYABLE - RELATED PARTIES

Current

<TABLE>
<CAPTION>
                                                                                December 31,      December 31,
                                                                                    2004              2003
                                                                                ------------      ------------
<S>                                                                             <C>               <C>
Note payable - Proxity Inc.- interest accrues at 12% per annum and
   principal and accrued interest are due on  December 5, 2005 ,  unsecured     $         --      $     91,562

Note Payable - Proxity, Inc. -interest accrues at 10% - due on demand
   and is unsecured                                                                       --            15,448

Note payable - Joe  Theisman - interest  accrues at 18% per annum,
   due February 28, 2005 and is unsecured                                            110,000                --

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

Note Payable -  Cherokee  Raiders -  interest  accrued at 12% per annum
    Due on demand and is unsecured                                                    58,993            21,166

Note Payable - Jim Alman - interest accrued at 8% per annum, Due
    December 5, 2005                                                                 100,000                --
                                                                                ------------      ------------
                                                                                $  1,137,768      $    128,177
                                                                                ============      ============
</TABLE>


                                      F-11
<PAGE>

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

NOTE 7 - STOCKHOLDERS' DEFICIT

COMMON STOCK - At December 31, 2004, the Company had 25,921,562 shares of Class
A Common Stock, 150,000 shares of Class B Common Stock, and 2 shares of Class C
Common Stock issued and outstanding with 200,000,000 shares of Class A and Class
B Common Stock authorized, par value $.001, and 2 shares of Class C Common Stock
authorized, par value $.001. In addition, the Company had 100,000,000 shares of
Class A Preferred Stock authorized, par value $.001, with no shares issued and
outstanding and $461,762 in additional paid in capital. Class B Common Stock
allows for 1000 votes per share. Class C Common Stock allows for one vote per
share and entitles the holder to receive the net assets of the Company upon
dissolution. At December 31, 2003, the Company had 18,750,000 shares of Class A
Common Stock and zero shares of Class B Common Stock, issued and outstanding
with 200,000,000 shares of Class A and Class B Common Stock authorized, par
value $.001. The accumulated deficit as at December 31, 2004 and 2003 was
$897,358 and $ 476,705 respectively.

NOTE 8 - INCOME TAXES

The Company has paid no federal or state income taxes since its incorporation.
As of December 31, 2004 and December 31, 2003, the Company had net operating
loss carry forwards for federal income tax reporting purposes of $874,546 and
$463,791, respectively, which if unused, will expire in 2024 and 2023
respectively. Deferred tax assets are reduced by a valuation allowance to the
extent that uncertainty exists as to whether the deferred tax assets will
ultimately be realized. The net deferred tax asset consists of the following:


                                                 December 31,      December 31,
                                                     2004              2003
                                                 ------------      ------------
Deferred tax assets -
        operating loss carryforwards             $    302,079      $    177,680
Valuation allowance                                  (302,079)         (177,680)
                                                 ------------      ------------
Total Deferred Income Tax Asset                  $         --      $         --
                                                 ------------      ------------


The following is a reconciliation of the income tax computed using the federal
statutory rate to the provision for income taxes:


                                                 December 31,      December 31,
                                                     2004              2003
                                                 ------------      ------------
Tax at Federal statutory rate (34%)              $   (143,022)     $   (162,080)
Non-deductible expenses                                    --               130
Change in valuation allowance                         156,904           177,680
State taxes, net of federal benefit                   (17,882)          (15,730)
                                                 ------------      ------------
Provision for Income Taxes                       $         --      $         --
                                                 ==========        ==========


                                      F-12
<PAGE>

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

NOTE 9 - SUBSEQUENT EVENTS

The Company has entered into agreements with Equipment Depot, Inc., of Deerfield
Beach, Florida, to acquire approximately $8,100,000, as valued, of aerospace R &
D and production equipment to further the fulfillment of the Company's
anticipated contracts and purchase orders. The transactions are expected to
close upon the completion of the financing, institution's due diligence and
legal review. The Company is paying approximately $5.4 million, in a combination
of cash and the exchange of newly issued common stock of the Company, valued at
$3.00 a share for the purposes of the transactions, to complete the purchase.

This agreement has been amended and is still currently under negotiation.
Certain production equipment to be used in the manufacturing of composite
materials and R & D and aerospace machining tools are being located. Additional
funding is also being sought using the targeted equipment as collateral. At this
time there are no firm commitments to provide funding in connection to the
aforementioned transaction. In the event that conventional debt financing can
not be obtained it is probable that the equipment transaction will be canceled.

On December 10, 2004 the Company entered into a loan transaction for $110,000
pursuant to which a promissory note was issued to Joe Theisman, a shareholder
and a Company spokesperson. Interest accrues on the note at the rate of 18% per
annum and the note was originally due on or before February 28, 2005. On
February 5, 2005, the repayment terms were amended to provide for six equal
monthly payments beginning on March 15, 2005 and adding unpaid accrued interest
of $6,000 to the note and a beneficial conversion feature, allowing Mr.
Theismann to convert the principal into common stock at $1.17 per share. The
proceeds of the note were allocated between the fair value of the beneficial
conversion feature and to the note payable based upon their relative fair
values. This resulted in a discount on the note of $117,000 which was credited
to additional paid-in capital. The discount will be amortized as additional
interest expense over the maturity of the note unless the conversion option is
exercised, at which time the remaining discount will be recognized as interest
expense. On March 9, 2005, such note was converted into 100,000 common shares
and the discount of $117,000 was recorded as interest expense.

On February 16, 2005 the Company and Commerce Funding Corporation (CFC) executed
a Working Capital Financing Proposal relative to a potential secured financing
of up to $3,000,000 for a two year term. All borrowings under this potential
financing would be collateralized by a first security UCC-1 filing on all assets
related to accounts receivable and a Cross Corporate Guaranty by Proxity, Inc.,
the Company's major shareholder and parent. In addition, CFC requires a Limited
Guaranty of certain provisions in the loan agreement by the Company's Chief
Executive Officer. The interest rate on borrowings would be Prime, as quoted in
the Wall Street Journal, plus 1/2 % and there will be a one time facility fee of
1% of the total credit line payable out of the first funding. In addition, all
borrowings are subject to eligibility as defined and determined by CFC and the
advance rate on eligible receivables, as defined, is 90% for direct Government
accounts and 80% for Commercial Accounts. Closing of this transaction is subject
to acceptable documentation, due diligence by CFC and other terms which are to
be negotiated amongst the parties. Effective March 10, 2005 the Company was
informed by CFC that it could begin to use the credit line by submitting all the
required documentation relative to the receivables to be financed and upon
approval of eligibility, funds would be transferred in accordance with the
applicable advance rate.

On February 18, 2005, the Company and Bedlington Securities, Ltd. ("Bedlington")
executed a Convertible Promissory Note (the "Bedlington Note") for the principal
amount of $250,000 which amount will be advanced to the Company no later than
February 25, 2005. Interest will accrue on the Bedlington Note at the rate of
18% per annum and repayment terms require six equal monthly payments commencing
April 30, 2005 with the last payment on September 30, 2005 to include all
accrued interest. Bedlington has the right to convert the outstanding amount of
the Bedlington Note into Class A common shares of the Company at any time upon
five days notice and such conversion shall be calculated at 50% of the average
closing price of the Class A common shares for the 30 days preceding the date of
conversion. All amounts so converted will not be subject to any accrual of
interest. In addition, the Company has the right to pay amounts due under the
Bedlington Note at any time with shares of its Class A common stock pursuant to
the same formula by notifying Bedlington of its intent to do so and requesting a
Notice of Conversion from Bedlington. The proceeds of the notes were allocated
between the fair value of the beneficial conversion feature and to the note
payable based upon their relative fair values. This resulted in a discount on
the note of $250,000 which was credited to additional paid-in capital. The
discount will be amortized as additional interest expense over the maturity of
the notes unless the conversion option is exercised, at which time the remaining
discount will be recognized as interest expense. On February 22, 2005, the
Company informed Bedlington that it would make payment in full with common
shares and Bedlington submitted a Notice of Conversion to the Company. As a
result, upon receipt of the funds, the Company issued 217,391 shares of its
Class A common stock as required by the calculation described above, and the
discount of $250,000 was recorded as interest expense.

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

Under the terms of the agreement, the Company issued the first $1,500,000 in
Notes and warrants to purchase 1,500,000 shares of common stock for a total
offering price of $1.5 million on April 1, 2005. The Company incurred $677,495
of offering costs, including the issuance to the placement agent of 20,833
shares of common stock (valued at $3.60 per share) and warrants to purchase
150,000 shares of common stock exercisable at $4.25 per share which are
exercisable for a period of five years. The Company valued these warrants at
$3.1833 per share using a Black Scholes option pricing model with the following
assumptions: risk free rate 3.90%, volatility of 187% and an expected life of
five years.

Each Note entitles the holder to convert the outstanding principal balance into
the number of shares of common stock resulting from dividing the principal by
the conversion price. The conversion price is the lesser of $3.65 or 60% of the
average of the lowest three intra-day trading prices for the Company's common
stock during the 20 trading days immediately preceding the conversion date. The
warrants are subject to equitable adjustment in connection with a stock split,
stock dividend or similar transaction. The warrants entitle the holder to
purchase up to 1,500,000 shares of common stock of the Company on or before the
fifth anniversary of the issuance date of the warrants at $4.25 per share.

The Company has allocated the proceeds from the issuance of the Notes and
warrants, based on their relative fair values on the date of issuance which are
as follows: $1,500,000 to the Notes and $5,182,500 to the warrants. The warrants
were valued using the Black Scholes Pricing model using the following
assumptions: volatility of 187%, risk-free interest rate of 3.90% and a term of
five years. The allocation of the net proceeds resulted in $184,625 being
allocated to the Notes and $637,880 being allocated to the warrants. The Company
recognized a beneficial conversion dividend of $336,700 on the date of issuance
equal to the value allocated to the Notes (before offering costs). The actual
amount of the beneficial conversion was $2,432,305, but the dividend is limited
to the amount of gross proceeds allocated to the Notes.

The number of shares of common stock subject to the warrants and the conversion
of the Notes are subject to equitable adjustment in connection with a stock
split, stock dividend or similar transaction. The Notes are secured by all of
the Company's assets, except for its accounts receivable and proceeds of
inventory. The proceeds of the offering will be used to repay certain
indebtedness and for working capital.


                                      F-13
<PAGE>

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

On March 24, 2005, Cyber Defense issued a Convertible Promissory Note to Guy K.
Stewart, Jr., its former corporate counsel for the principal amount of $150,000.
The note evidences a portion of the funds owed by us to Mr. Stewart for unpaid
legal fees. We will pay the balance in cash. Interest will accrue on the note at
the rate of 18% per annum and repayment terms require six equal monthly payments
commencing April 30, 2005, with the last payment on September 30, 2005, to
include all accrued interest. Mr. Stewart has the right to convert the
outstanding amount of his note into shares of the Class A Common Stock at any
time upon five days notice, and such conversion will be calculated at $1.50 per
share. The proceeds of the notes were allocated between the fair value of the
beneficial conversion feature and to the note payable based upon their relative
fair values. This resulted in a discount on the note of $150,000 which was
credited to additional paid-in capital. The discount will be amortized as
additional interest expense over the maturity of the notes unless the conversion
option is exercised, at which time the remaining discount will be recognized as
interest expense. On March 29, 2005, we informed Mr. Stewart of our intention to
make payment in full with shares of our common stock. Accordingly, Mr. Stewart
submitted a Notice of Conversion to us. As a result, we will issue 100,000
shares of our Class A Common Stock to Mr. Stewart in satisfaction of his note
and the discount of $150,000 will be recorded as interest expense. The sale of
the note was made pursuant to Section 4(2) of the Securities Act and is exempt
from registration.

On March 31, 2005, the Company's subsidiary, Cyber Aerospace, was merged into
the Company. The merger was taken in order to consolidate operations into one
company, with one name, and one group of shareholders, as well as to avoid what
had become unnecessary bookkeeping expenses associated with maintaining Cyber
Aero as a separate entity. This merger was taken pursuant to the "short-form"
merger laws of Florida which allow a parent, such as the Registrant, to merge a
subsidiary (such as Cyber Aero) into itself without having to obtain shareholder
consent. As a result of the merger, for each one share of each of the following
classes of the Capital Stock of Cyber Aerospace, the Beneficial Owner thereof
received one share of each of the following classes of the Capital Stock of
Cyber Defense:


        Class of Capital Stock                 Class of Capital Stock
                 of                                      of
           Cyber Aerospace                        Cyber Defense
        ----------------------                 ----------------------
         Class A Common Stock                   Class A Common Stock
         Class B Common Stock                   Class B Common Stock


Further pursuant to the merger, the shares of Class A Common Stock of Cyber
Aerospace held by Cyber Defense were surrendered and cancelled, as were the
shares of Class C Common Stock of Cyber Aerospace held by the sole holders
thereof, to wit: Cherokee Raiders, LP, and Proxity, Inc., who are Affiliates of
the Registrant.

NOTE 10 - STOCK OPTIONS

In connection with their purchase of 88,000 shares of Class A common stock prior
to the merger of On Alert into Cyber Defense, All Stars Marketing, Inc. was
granted an option to acquire up to an additional 88,000 shares for the same
purchase price of $0.0593 per share through August 8, 2005. Stock option
compensation has been calculated at $63,440 and has been recorded as a charge to
earnings in the fiscal year ended December 31, 2004. Registration rights were
also granted for such shares.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

The Company had commitments with independent contractors for services such as
president of Cyber Aerospace, UAV specialist, vice president, vice president of
business development, controller, security consultant, and other consulting
services. Several of the contracts state that payment was to be made in Proxity
capital stock. Most of the contracts had a six month term that was renewable by
the consent of both parties. At December 31, 2004 all such contracts were
cancelled with no further liability to the Company.

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

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

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

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

The Company has an exclusive agreement with Traptec Corporation to represent
Traptec Corporation as a marketing representative. The parties have agreed to
divide equally the before tax net profits generated from any such sales as
generated under the agreement. However, the parties have agreed that if their
efforts have not generated over $200,000 in net sales profits, to be divided
equally, by the end of the 2005, the total license fee for that year shall be at
least $100,000 to Traptec Corporation. As of December 31, 2004, no sales have
been made in connection with this license.


                                      F-14
<PAGE>

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

The Company has leases for its main facilities in Florida. These leases expire
from September 2004 to September 2006. Rent expense for the year ended December
31, 2004 and the period from March 17, 2003 through December 31, 2003 was
$18,594 and $3,799 respectively.

The following is a schedule by years of future minimum rental payments required
under the operating leases described above as of December 31, 2004.


        Year Ending December 31                  Required Rental Payments
        ------------------------                -------------------------

                 2005                                  $ 48,286
                 2006                                    31,596


In connection with the Marketing and Sales agreement between the Company and
Techsphere, the Company is to receive commissions from the sale of airships up
to 15% of gross sales less a 4% commission obligation of Techsphere to Sales
Resources Consulting, Inc., a company owned by the spouse of a Company
vice-president.

NOTE 12 -- RESTATEMENT

During November 2004, the Company performed testing on an airship at the request
of a third party. During this testing, additional procedures that were not part
of the original agreement were requested and performed. Although no contract
amendment was executed for the additional procedures, the Company has determined
that these additional procedures should be recorded during the year ended
December 31, 2004 and invoiced for the services. Accordingly, an adjustment was
made to record the receivable and related revenue. In addition, expenses related
to the testing were accrued and are reflected in accounts payable on the
accompanying balance sheet. The net loss for the year ended December 31, 2004
increased as a result of the adjustment.

The Company has also  determined  that amounts  received for testing of airships
are  reimbursement  of  expenses.  As a result,  the  receipts  have been netted
against the related research and development  expenses on the line titled "Other
Revenues" in the accompanying statement of operations. In addition, research and
development  expenses included in general and administrative  expenses have been
reclassified to "Other Revenues."

The changes to the financial statements resulting from the restatement are shown
below:

<TABLE>
<CAPTION>
                                                      As Originally       Effect of
                                                         Reported        Restatement       As Restated
---------------------------------------------------------------------------------------------------------
<S>                                                    <C>               <C>               <C>
For the Year Ended December 31, 2004
Balance Sheet
 Accounts receivable                                   $        --       $   747,155       $   747,155
 Current Assets                                            206,270           747,155           953,425
 Total Assets                                            2,064,106           747,155         2,811,261
 Accounts payable and accrued liabilities                  440,987           878,785         1,319,772
 Total Current Liablities                                2,421,269           780,000         3,201,269
 Total Liabilities                                       2,421,269           780,000         3,201,269
 Accumulated Deficit                                      (803,110)          (94,248)         (897,358)
 Total Shareholder's Deficit                              (385,781)          (30,808)         (416,589)
 Total Liabilities and Shareholder's Deficit             2,064,106           747,155         2,811,261

Statement of Operations
 Service revenues                                          803,250          (803,250)               --
 Other revenues                                                 --           326,287           326,287
 Total Revenues                                          3,503,250          (476,963)        3,026,287
 Research and development                                  188,824          (188,824)               --
 General and administrative                              1,282,007          (191,854)        1,090,153
 Total Expenses                                          3,670,831          (380,678)        3,290,153
 Net Loss Before Income Tax and Minority Interest         (297,787)          (96,285)         (394,072)
 Minority interest                                         (28,618)            2,037           (26,581)
 Net Loss                                                 (326,405)          (94,248)         (420,653)
 Basic loss per share                                        (0.02)               --             (0.02)
---------------------------------------------------------------------------------------------------------
</TABLE>



                                      F-15