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

                                 FORM 10-KSB/A-3

     |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.

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-3 amends the Form 10-KSB/A-2 filed on May
19, 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-3 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-3 relates.


<PAGE>

                                TABLE OF CONTENTS

                                     PART I

Item 1.    Business .....................................................     01
Item 2.    Description of Property ......................................     09
Item 3.    Legal Proceedings ............................................     09
Item 4.    Submission of Matters to a Vote of Security Holders ..........     09

                                     PART II

Item 5.    Market for Common Equity and Related Stockholder Matters......     10
Item 6.    Management's Discussion and Analysis of Financial Condition
             or Plan of Operations.......................................     17
Item 7.    Financial Statements .........................................     23
Item 8.    Changes in and Disagreements With Accountants on
             Accounting and Financial Disclosure ........................     24
Item 8A.   Controls and Procedures ......................................     24

                                    PART III

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
             Compliance With Section 16(a) of the Exchange Act ..........     25
Item 10.   Executive Compensation .......................................     28
Item 11.   Security Ownership of Certain Beneficial Owners and
             Management and Related Stockholder Matters .................     30
Item 12.   Certain Relationships and Related Transactions ...............     31
Item 13.   Exhibits and Reports on Form 8-K .............................     32
Item 14.   Principal Accountant Fees and Services .......................     38
Signatures ..............................................................     39


<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. Their 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.


                                        8

<PAGE>

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.


                                        9

<PAGE>

                                     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.

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.


                                       10

<PAGE>

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.

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.


                                       11

<PAGE>

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 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.


                                       12

<PAGE>

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.

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.


                                       13

<PAGE>

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.

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.


                                       14

<PAGE>

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

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.


                                       15

<PAGE>

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.


                                       16

<PAGE>

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.

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

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.

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.

Expenses for the year ended December 31, 2004 include the write off of certain
equipment of $12,205 and the charge for the impairment of the carrying value of
licenses of $19,192 for which no prior year comparable expenses exist. Expenses
for the period of March 17, 2003 (Date of Inception) through December 31, 2003
include an impairment of goodwill in the amount of $121,303 for which no
comparable expense exists in the current year.

Other expenses for the year ended December 31, 2004 consists of interest expense
of $98,809. The increase in interest expense is due to the general increase in
debt levels to Quebec, Inc. and to related parties. Other income and expense for
the period of March 17, 2003 (Date of Inception) through December 31, 2003 of
$17,207 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 and interest expense of $9,292.

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.


                                       17

<PAGE>

Liquidity and Capital Resources

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

The Company's cash and cash equivalents of $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.

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.


                                       18

<PAGE>

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.


                                       19

<PAGE>

Critical Accounting Policies

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

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

Revenue Recognition

The Company recognizes service revenues when the services, as specified by the
customer and agreed to by the Company, have been performed and the customer
accepts the services, and the services are billed. Airship sales are recognized
when contract specifications are met, the price is determined, title passes to
the customer and the customer is billed. Reasonableness of collectibility of all
revenue transactions is a key element before the transactions are recorded.

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.

Long Lived Assets

Long-lived assets are reviewed for recoverability whenever events or changes in
circumstances indicate that it may be impaired and its carrying amount may not
be recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount that the carrying amount
of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.

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.


                                       20

<PAGE>

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.

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.


                                       21

<PAGE>

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.


                                       22

<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


                                       23

<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.


                                       24

<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.


                                       25

<PAGE>

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.

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.


                                       26

<PAGE>

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.

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.


                                       27

<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.


                                       28

<PAGE>

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.

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.


                                       29

<PAGE>

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
                                                             Ownership of Class
Name/Address of Beneficial                   Position with     A Common Stock     Percentage of
Owner*                                          Company            (1)(2)         Securities(1)
-----------------------------------------   --------------   ------------------   -------------
<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>

*    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
partnership, 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.


                                       30

<PAGE>

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.

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.


                                       31

<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).


                                       32

<PAGE>

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).

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).


                                       33

<PAGE>

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).

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).


                                       34

<PAGE>

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).

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).


                                       35

<PAGE>

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).


                                       36

<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.


                                       37

<PAGE>

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


                                       38

<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 22nd
day of June 2006.

                                  CYBER DEFENSE SYSTEMS, INC.


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


                                  By: /s/ David M. Barnes
                                      ------------------------------------
                                      David M. Barnes
                                      Chief Financial 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,     June 22, 2006
-------------------------------------    Principal Executive Officer
William C. Robinson


/s/ David M. Barnes                      Chief Financial Officer                June 22, 2006
-------------------------------------
David M. Barnes


                                         Director                               June 22, 2006
-------------------------------------
Harvey Frank Lively


/s/ Stephen I. Johnson                   Director                               June 22, 2006
-------------------------------------
Stephen I. Johnson RADM USN (ret.)


/s/ Joseph A. Grace, Jr.                 Director                               June 22, 2006
-------------------------------------
Joseph A. Grace, Jr.


/s/ Marinko Vekovic                      Director                               June 22, 2006
-------------------------------------
Marinko Vekovic


/s/ Keith Vierela                        Chief Operating Officer and Director   June 22, 2006
-------------------------------------
Keith Vierela


/s/ Mike Lawson                          Director                               June 22, 2006
-------------------------------------
Mike Lawson
</TABLE>


                                       39

<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 2, as to which the date is
June 14, 2006.


                                       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              --
                                                      ------------    ------------
Gross profit ......................................        826,287              --
                                                      ------------    ------------
Research and development ..........................             --
General and administrative expenses ...............      1,090,153         372,609
Write off of equipment ............................         12,205              --
Impairment of licenses ............................         19,192              --
Impairment of goodwill ............................             --         121,303
                                                      ------------    ------------
Total Expenses ....................................      1,121,550         493,912
                                                      ------------    ------------
Loss from Operations ..............................       (295,263)       (493,912)

Other Income (expense)

Interest income ...................................             --           3,692
Interest expense ..................................        (98,809)         (9,292)
Gain on forgiveness of debt .......................             --          22,807
                                                      ------------    ------------
Other Income (Expense), Net .......................        (98,809)         17,207
                                                      ------------    ------------
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. As a result of the above, Cherokee is the controlling shareholder of
the Company.

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.


                                       F-7

<PAGE>

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

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 10).

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.

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 recoverability whenever events or changes in
circumstances indicate that it may be impaired and its carrying amount may not
be recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount that the carrying amount
of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
Based on the evaluation, 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.

Certain marketing rights, designs and plans which have been acquired by the
Company, which are more fully described in Note 4, have not been impaired. The
Company concluded, based on industry sales forecasts and internally generated
sales and cash forecasts, that the cost of these assets was likely to be
recoverable in full.

REVENUE RECOGNITION - The Company recognizes service revenues when the services,
as specified by the customer and agreed to by the Company, have been performed
and the customer accepts the services, and the services are billed. Airship
sales are recognized when contract specifications are met, the price is
determined, title passes to the customer and the customer is billed.
Reasonableness of collectibility of all revenue transactions is a key element
before the transactions are recorded.

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.


                                       F-8

<PAGE>

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

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 is anti-dilutive.
Potentially dilutive securities that exist in 2004 that could dilute earnings in
the future include 88,000 shares subject to a stock option held by All- Stars
Marketing since August 9, 2004. No potentially dilutive securities existed
during 2003.

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.

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.


                                       F-9

<PAGE>

                    CYBER DEFENSE SYSTEMS INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED 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.

NOTE 2 -- 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 formal
written contract amendment was executed for the additional procedures, the
Company has determined that the revenue generated from these additional
procedures should be recorded during the year ended December 31, 2004 and the
Company invoiced the customer 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 the testing of
airships that are performed under cost plus fixed fee contracts are to be
treated as reimbursement of expenses in accordance with ARB 43. 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."

In addition, the Company also recorded additional compensation expense within
general and administrative expenses in the accompanying statement of operations
in the amount of $63,440 related to 88,000 options issued to All Stars Marketing
during the year ending December 31, 2004.


                                      F-10

<PAGE>

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

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 Liabilities                              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
  Gross Profit                                                  --       826,287       826,287
  Research and development                                 188,824      (188,824)           --
  General and administrative                             1,282,007      (191,854)    1,090,153
  Total Expenses                                         3,670,831    (2,549,281)    1,121,550
  Loss from operations                                    (167,581)     (127,682)     (295,263)
  Other Income (Expense, net)                             (130,206)       32,197       (98,809)
  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>

NOTE 3 - RELATED PARTY TRANSACTIONS

Proxity, Inc. ("Proxity") - Proxity owned 100% of the stock of On Alert Systems,
Inc. at December 31, 2003. On Alert purchased the GDS and Traptec licenses from
Proxity at Proxity's cost. As of 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
$868,775. Cherokee also owns all of the 150,000 shares of Class B common stock,
which entitles the holder to 1,000 votes per share. As a result, Cherokee is the
controlling shareholder of the Company.

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


                                      F-11

<PAGE>

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

NOTE 4 - INTANGIBLE ASSETS

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

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 5 - 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-12

<PAGE>

NOTE 6 - 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 7 - 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-13

<PAGE>

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

NOTE 8 - 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 9 - 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-14

<PAGE>

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

NOTE 10 - 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.


                                      F-15

<PAGE>

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

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.


                                      F-16

<PAGE>

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

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.

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 11 - 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.


                                      F-17

<PAGE>

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

NOTE 12 - 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-18

<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.


                                      F-19