**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**





S ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the
      fiscal year ended December 31, 2006





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


For
      the
      transition period from _______ to ________


*Commission
      file number: 333-79405*





**Tactical
      Air Defense Services, Inc.**


(Name
      of
      small business issuer on its charter)





**NEVADA**
            **88-0455809**State
                or other jurisdiction of incorporation or organization
            (I.R.S.
                Employer Identification Number)





**5501
      Airport Drive**


**Denison,
      TX 75020**


(Address,
      Including Zip Code of Principal Executive Offices)





**(903)
      786-5300**


(Issuer's
      telephone number)





Securities
      registered under Section 12(b) of the Exchange Act:


NONE


Securities
      registered under Section 12(g) of the Exchange Act:


Common
      stock, par value $0.001 (Title of class)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.


Yes £ No S





Check
      if
      no disclosure of delinquent filers in response to Item 405 of Regulation S-B
      is
      contained in this form, and no disclosure will be contained, to the best of
      registrant'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. S





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





State
      issuer's revenues for its most recent fiscal year: $0





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days: Based on the closing sale price on
      the
      OTC Bulletin Board on June 13, 2007, the aggregate market value of the
      registrant's common stock held by non-affiliates was approximately
      $8,629,200 .
      For
      purposes of this computation, all directors and executive officers of the
      registrant are considered to be affiliates of the registrant. This assumption
      is
      not to be deemed an admission by the persons that they are affiliates of the
      registrant.











**TABLE
      OF CONTENTS**


PART
                  IITEM
                  1.
              DESCRIPTION
                  OF BUSINESS
              3ITEM
                  2.
              DESCRIPTION
                  OF PROPERTY
              22ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              22ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
              22PART
                  IIITEM
                  5.
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDERS
                  MATTERS
              22ITEM
                  6.
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              25ITEM
                  7.
              FINANCIAL
                  STATEMENTS
              28ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND
                  FINANCIAL DISCLOSURE
              29ITEM
                  8A.
              CONTROLS
                AND PROCEDURES
              29ITEM
                  8B.
              OTHER
                INFORMATION
              29PART
                  IIIITEM
                  9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                  PERSONS; COMPLIANCE
                  WITH SECTION 16 (A) OF THE EXCHANGE ACT
              29ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              32ITEM
                  11.
              SECURITIES
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT
                AND RELATED STOCKHOLDER MATTERS
              33ITEM
                  12.
              CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND
                DIRECTORINDEPENDENCE
              34ITEM
                  13.
              EXHIBITS
              35ITEM
                  14.
              PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
              36





**Forward
      Looking Statements**




This
      Annual Report on Form 10-KSB and all other reports filed by Tactical Air Defense
      Services, Inc., a  Nevada corporation (“TADS”), from time to time with
      the Securities and Exchange Commission (collectively the “Filings”) contain or
      may contain forward looking statements and information that are based upon
      beliefs of, and information currently available to, the management of TADS
      as
      well as estimates and assumptions made by TADS management. When used in the
      filings the words “may”, “will”, “should”, “estimates”,  “anticipate”,
“believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of
      these terms and similar expressions as they relate to TADS or its management,
      identify forward looking statements. Such statements reflect the current view
      of
      TADS and with respect to future events and are subject to risks, uncertainties,
      assumptions and other factors (including the risks contained in the section
      of
      this report entitled “Risk Factors”) relating to TADS, its ability to raise
      capital and to acquire, lease and operate F-16 or other fourth generation
      aircraft in order to fulfill its contracts, its ability to acquire, lease and
      operate air-to-air tanker refueling aircraft, its ability to complete and
      maintain parts, safety and maintenance programs that will be acceptable to
      the
      government contracting parties that it does business with, its ability to
      procure and fulfill government contracts, and its results of operations and
      any
      businesses that may be acquired by TADS. Should one or more of these risks
      or
      uncertainties materialize, or should the underlying assumptions prove incorrect,
      actual results may differ significantly from those anticipated, believed,
      estimated, expected, intended or planned.




Although
      TADS believes that the expectations reflected in the forward looking statements
      are reasonable, we cannot guarantee future results, levels of activity,
      performance or achievements. Except as required by applicable law, including
      the
      securities laws of the United States, management does not intend to update
      any
      of the forward-looking statements to conform these statements to actual results.
      The following discussion should be read in conjunction with TADS’s consolidated
      financial statements and the related notes filed herewith.







**PART
      I**





All
      references in this Annual Report on Form 10/KSB to the “Company,” “we,” “our,”
or “us,” ” refer to TADS and its subsidiaries as constituted subsequent to the
      acquisition of substantially all of the assets of AeroGroup Incorporated on
      December 15, 2006, except where the context makes clear that the reference
      is
      only to TADS. Information about the Company and the principal terms of this
      acquisition are set forth below.





**Item
      1.****Description of Business**





**Recent
      Developments**





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





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





As
      a
      result of this transaction there was a change of control of TADS effective
      as of
      December 15, 2007 and, we are deemed to be the legal surviving acquirer in
      the
      AeroGroup Acquisition and therefore, the assets and liabilities and historical
      operations of AeroGroup prior to the Closing Date of the acquisition is
      reflected in our financial statements and will be recorded at the historical
      cost basis of AeroGroup.





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





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





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





**Amendment
      to Articles of Incorporation**





Effective
      as of December 20, 2006 we have filed an amendment to our Articles of
      Incorporation (the “Amendment”) so as to increase our authorized capital from
      100,000,000 shares of common stock, par value $.001 per share only, to
      350,000,000 shares, par value $.001 per share, of which 300,000,000 shares
      are
      common stock and the remaining 50,000,000 shares are a newly created class
      of
“blank check” preferred stock.





The
      Amendment authorizes the board of directors to issue one or more series of
      the
      preferred stock with such designations, rights, preferences, limitations,
      privileges and/or restrictions as it should determine by vote of a majority
      of
      such directors.





The
      Amendment was approved by the board and stockholders of the Corporation in
      May
      of 2006, as more fully set forth in an Information Statement filed and
      distributed to stockholders shortly thereafter.





3


**Series
      A Preferred Stock**





On
      March
      21, 2007, the Company filed a Certificate of Designation of Series A Preferred
      Stock (the “Series A Certificate of Designation”) with the Secretary of State of
      the State of Nevada, designating a series of 50,000,000 shares of Preferred
      Stock of the Company, $.001 par value (the “Series A Preferred Stock”). The
      Series A Preferred Stock provisions provide for a 7% preferred dividend and
      are
      granted super voting rights of 25 votes for each share of common stock voting
      at
      a meeting and contain liquidation preference rights. Additionally, the holders
      of the Series A Preferred Stock are entitled to appoint a director by vote
      of a
      majority of the Series A Preferred Stock holders. An aggregate of 6,400,000
      shares of Series A Preferred Stock have been issued to certain officers and
      directors and a consultant in lieu of cash compensation under their respective
      employment or consulting agreements. See “Series A Preferred Stock Issuances”
and the entire “Market For Common Equity and Related Shareholder Matters”
sections and the sections titled “Executive Compensation” and “Security
      Ownership of Certain Beneficial Owners and Management” in this report for
      additional information relating to these share issuances and related control
      matters.




**Private
      Placement**





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





**TADS
      Corporate History**




TADS
      was
      incorporated in the State of Nevada on July 9, 1998 under the name Natalma
      Industries, Inc. Originally, TADS operated as a junior mining company engaged
      in
      the exploration of mining properties. We were unsuccessful in locating a joint
      venture partner to assist us in the development of our mining claims. As a
      result, TADS was unable to pay for and perform the exploration and development
      required in its agreement with the owners of its properties and lost our rights
      to the mining claims. Our management at the time, therefore determined that
      it
      was in the best interest of our shareholders that we seek potential operating
      businesses and business opportunities with the intent to acquire or merge with
      another business, which led to the AeroGroup Acquisition.





**AeroGroup
      Corporate History**




AeroGroup
      commenced its operations and business plan as a contractor of military flight
      training as Aerogroup International Corporation in
      January 2002, **** and
      eventually merged with and acquired AeroGroup Incorporated, which was, prior
      to
      such time, a non-operating entity called Diversified
      Resources Group, Inc.





In
      June
      of 2006, AeroGroup, through its subsidiaries, acquired two MiG 29 aircraft
      in
      Ukraine, and four flight simulators (which we then purchased from AeroGroup
      in
      the AeroGroup Acquisition) from three entities controlled by Mark Daniels,
      our
      current sole director, majority beneficial shareholder and an officer.
      AeroGroup also acquired various government licenses and permits that enable
      it
      to trade, own and operate military class aircraft and to bid for government
      contracts. Specifically, AeroGroup acquired the following intellectual property
      from Mark Daniels:




·
            Copyrights
                to a specialized F-16 Fighter Aircraft training course syllabus,
                specially
                created by AeroGroup in training pilots to use this aircraft’s Flight
                Control Navigation Panel; and




·
            Assignments
                of Provisional applications for utility patents****filed
                relating to methods of operational training uses of fighter aircraft
                by
                civilian corporations of these type of military aircraft for training
                of
                military personnel, specifically F-16, Pat. Pend. 60805870; Kfir,
                Pat.
                Pend. 60805885; A-4 Skyhawk, Pat Pend. 60805877; and MiG 29, Pat
                Pend.
                60805888.




AeroGroup
      obtained appraisals from certified independent appraisers prior to the
      acquisition which valued the aircraft and simulators at $6,740,000. As
      consideration for the purchase of the aircraft and intellectual property from
      Mr. Daniels and the companies he controlled, AeroGroup assumed (i) indebtedness
      of $1.1 million owed to Mr. Daniels incurred by the selling companies in
      connection with Mr. Daniels’ funding of their business operations as evidenced
      by the Daniels Note, (ii) a promissory note in the original principal amount
      of
      $2.2 million, plus interest at 8% per year, purchase money debt which was
      originally incurred in the acquisition of the aircraft and simulators by the
      selling companies and (iii) a $3.44 million unsecured promissory note which
      was
      made jointly with the AeroGroup Subsidiaries and issued to Mr. Daniels and
      certain limited liability companies owned by him from which the assets were
      acquired (the “Unassumed Debt”).





**Overview
      of Business**





*Government
      Licenses*





We
      are
      licensed with the United States Bureau of Alcohol, Tobacco and Firearms as
      an
      Importer of Implements of War relating to former military aircraft and related
      parts. As we are dependent on this license to own, lease, operate and import
      military aircraft, such as our MiG 29 fighter jets, it was necessary for us
      to
      obtain this license as a pre-condition to the closing of the AeroGroup
      Acquisition. We also hold certain other government licenses that that will
      enable us to bid for government contracts and to provide flight training and
      related aviation services to military personnel. (See “Government Licenses”
below).




4




*Military
      Flight Training Services*





We
      have
      been developing our business as a provider of outsourced military aviation
      services which include fighter jet pilot training, operational deployment
      training support, air to air combat (also sometimes referred to as “Red-Air”)
      support and close air support training for “Forward Air Controllers.” In order
      for us to be able to perform services and be compensated on any of our current
      or prospective contracts, and in addition to our need to acquire additional
      aircraft, we are required to demonstrate that we have established and are able
      to remain in compliance with a certified parts replacement program, a
      maintenance program and a safety program.





We
      intend
      to initially focus on providing flight training in fourth generation military
      aircraft, such as F-16, MiG 29, SU-27 or F-15 fighter jets. (see the subsection
      titled “Flight Training and Other Services” below in this Business Overview
      Section).





We
      do not
      currently own or lease any F-16 jet aircraft or any other fourth generation
      aircraft (other then the MiG 29s which are in the Ukraine and which are not
      currently operational). However, we believe that opportunities exist to acquire
      such aircraft from NATO countries that are looking to update or downsize their
      F-16 fleets. We must acquire, import and maintain sufficient numbers of these
      aircraft in order to fulfill our current and prospective government contracts.
      We do not have any commitments to acquire these aircraft, or to finance the
      acquisition of these aircraft.




We
      have
      recently acquired two modern MiG 29 fighter jet aircraft that are stationed
      in
      the Ukraine which are disassembled and are preparing for shipment to the United
      States for reassembly into airworthy fighter jet attack aircraft. We intend
      to
      modify these aircraft for use in air-to-air combat training and other roles
      discussed above. In addition, we have acquired four Singer Link Flight
      Simulators used in the training of fighter jet flight operations. These
      simulators are located at our training facility at Grayson County Airport,
      Denison Texas.





We
      have
      entered into certain contracts and are parties to three subcontracts as
      described below under the subheading “Government Contracts”, to provide a
      variety of services including: training, flight support, parts, maintenance,
      refueling, research, safety and photo chase support of F-16 flight training.
      We
      have not yet received tasking orders on any of these contracts as we do not
      have
      all of the requisite aircraft and materials and we anticipate that, due to
      the
      age of these contracts and our focus on preparations for performing under the
      most recently obtained F-16 training contract that we will not be asked to
      perform under these contracts.




We
      have
      developed a flight training syllabus for F-16 aircraft that involves both basic
      flight training and emergency procedures. (See “Flight Training and Other
      Services” subsection of this Business Overview section below). We also own the
      copyrights to an F-16 pilot training syllabus relating to certain avionics
      on
      the F-16 that we believe is critical to our business plan.





*Maintenance
      and Fixed Base Operations*





As
      part
      of the AeroGroup Acquisition, we have leased aircraft hangars which will allow
      us to provide aircraft maintenance and storage, parts inventory storage,
      personnel housing, transportation and catering services. In addition, we have
      been developing parts, maintenance and safety programs with the assistance
      of
      consultants experienced with military aircraft operations, maintenance and
      safety.





*Dependence
      on Additional Capital Prior to Commencement of Operations*





Our
      business plan necessitates significant additional capital in order to acquire
      specialized aircraft which are not readily available in the United States.
      We
      will also be required to expend significant additional capital to complete
      our
      parts, maintenance and safety programs. We anticipate that used F-16 fighter
      aircraft will cost at least $5,500,000 per aircraft. We currently have no
      capital commitments and, if we are not able to raise capital or borrow
      sufficient funds in order to acquire these aircraft we will not be able to
      perform on existing or new contracts. (see “Risk Factors” and “Management
      Discussion and Analysis or Plan of Operations”).





We
      have
      experienced significant delays, setbacks and management turnover in completion
      of the AeroGroup Acquisition in December of 2006 as a result of our lack of
      funding and will continue to experience setbacks unless we can secure material
      additional funding.




5




**Government
      Contracts**





Our
      business is dependent on our ability to bid for, negotiate, secure and perform
      under specialized government contracts. In addition to the F-16 Training
      Contract (as hereinafter defined) with the U.S. Army RDECOM, we have also been
      assigned by AeroGroup, three subcontracts to provide F-16 training support
      and
      related services. Because of the age of the subcontracts, and because AeroGroup
      has not been able to acquire the necessary aircraft, we do not anticipate that
      we will ever be requested to perform services under these three subcontracts.
      We
      will need substantial capital in order to complete our programs and acquire
      or
      lease the requisite aircraft. Additionally, even if we do acquire or lease
      F-16
      aircraft or other appropriate fourth generation military aircraft and are
      otherwise able to provide services under these agreements, we anticipate that
      we
      will reject any tasking orders under the three older subcontracts in light
      of
      our allocation of resources towards the F-16 Training Contract and any contract
      related thereto. A summary of the F-16 Training Contract and the other
      subcontracts assumed by us after the acquisition is as follows:





*Recent
      F-16 Training Contract*





In
      November of 2006, AeroGroup entered into a definitive F-16 Training Contract
      with the U.S. Army RDECOM memorializing the terms of the Justification and
      Approval and further expanding the scope of services to permit use of fourth
      generation fighter aircraft other than the F-16, such as our MiG 29 jets (the
      “F-16 Training Contract”). The F-16 Training Contract, which has been assigned
      to TADS, initially will require us to have access to at least seven F-16 jet
      aircraft and other fourth generation fighter jet aircraft ( *i.e.* MiG-29,
      SU-27, F-15 or F-16) and to provide basic and continuation combat flight
      training.





The
      F-16
      Training Contract specifically requires that we have in place, prior to
      accepting performance obligations thereunder, parts, maintenance and safety
      programs that are satisfactory based on government standards. While we
      originally anticipated beginning performance on this contract in April 2007,
      we
      have not been able to do so as a result of funding constraints. We anticipate
      that, presuming we are able to raise additional capital promptly, we will be
      completed with the implementation of these programs in September of 2007. These
      programs are designed to ensure the reliability and dispatch readiness of our
      aircraft. We will be required to update and keep these programs current. We
      will
      be subject to regular inspections by the contracting party for compliance with
      these programs.





The
      terms
      of the F-16 Training Contract anticipates that up to 800 hours per year will
      be
      requested, or 2,400 flight hours of training through the end of the contract.
      We
      will be compensated the amount of $10,350 per flight hour.





The
      F-16
      Training Contract also budgets up to the following amounts for expenses for
      which we may be reimbursed:




·
            $
                150,000 for travel in support of flight training services performed
                under
                the contract, which expenses must be approved in advance by the
                contracting party,




·
            $
                75,000 for materials and additional services as required to provide
                services under the contract, such as spare parts, parachutes, fluids
                for
                engine subsystems, batteries, etc.,
                and




·
            $
                300,000 for fuel used in connection with our training services under
                the
                contract.





All
      of
      the above expenses must be properly documented in order to be reimbursed and
      travel expenses must be approved in advance.





In
      addition, the F-16 Training Contract requires that program managers, pilots,
      ground crew and other personnel we utilize in connection with our services
      have
      certain minimum training and experience qualifications.





As
      a
      result of the foregoing and our lack of funds, we have not been able to accept
      tasking orders or perform under the F-16 Training Contract. Even if we are
      able
      to raise capital expeditiously, we will not be able to accept tasking orders
      under this Contract until we complete our parts, safety and training programs,
      obtain F-16 or other fourth generation fighter aircraft and retain appropriately
      trained personnel.





*Other
      Service Contracts*





We
      are
      also parties to the below listed subcontracts. However, due to the age of these
      contracts, we do not anticipate being requested to provide services under these
      contracts. Additionally, even if we are able to acquire the necessary aircraft,
      we intend to dedicate our resources to performance under the F-16 Training
      Contract and other contracts to provide flight training.




6




*Prospective
      contract to provide F-16 ground and air training*





Pursuant
      to a Subcontract Agreement dated as of August 15, 2003 with Airborne Tactical
      Advantage Company, LLC, we have agreed to provide F-16 aircraft, equipment,
      technical assistance and maintenance services for work under Primary Contract
      N0019-02-D-3158, known as the “CAS-MOS” contract, with the U.S. Navy, Naval Air
      Systems Command. Specifically, this contract will require us to provide the
      U.S.
      Navy with air-to-air and air-to-ship simulated combat scenarios and simulated
      maritime missile attack training. The agreement is conditioned upon our
      acquiring the necessary aircraft and equipment to perform, including an
      F-16.




*Subcontract
      to provide maintenance to parts*





Pursuant
      to a Subcontract Agreement dated as of May 20, 2003 with Advanced Information
      Engineering Services, Inc., we have agreed to provide, in-flight simulation
      and
      research relating to flight control and flight characteristics to the U.S.
      Air
      Force under Prime Contract Number F04611-02-D-0007, dated March 1, 1999.
      Specifically, this contract will require us to provide aircraft to conduct
      research on flight control handling, flight characteristics stability control,
      cockpit displays and ergonomics. Under this contract we may also be requested
      to
      provide F-16 aircraft to developed software for use in these
      aircraft. ****





*Subcontract
      to provide safety chase, target towing and photography support*





Pursuant
      to Subcontract Agreement dated June 21, 2004 with Lockheed Martin Aeronautics
      Company - Fort Worth (LM Aero), we have agreed to provide, upon request, certain
      safety chase, target towing and photo chase support in connection with F-16
      flight training.





We
      will
      not be able to perform services under the above contracts until and unless
      we
      have acquired or leased F-16 fighter jet aircraft or, in the case of the F-17
      Training Contract, other fourth generation fighter jet aircraft. In addition,
      certain contracts require us to provide maintenance personnel or flight
      instructor personnel and to have developed, among other things, adequate safety
      programs and a pilot syllabus. While we believe that the market provides a
      sufficient number of retiring military F-16 flight instructor candidates, pilots
      and maintenance professionals we are likely to allocate these resources and
      personnel towards other operations. Additionally, we will need substantial
      additional capital in order to complete these programs and acquire or lease
      F-16
      or other acceptable fourth generation aircraft.




**Flight
      Training and Other Services**





AeroGroup
      has provided operational training support for F-16 Flight training with the
      Royal Netherlands Air Force in Melbourne Florida in 2003 and in Jacksonville
      Florida in 2004.





Our
      flight training services will focus on two major components, “initial
      qualification” flight training and continuation flight training, both of which
      consist of ground, simulator and in the air flight training. In addition, we
      are
      preparing to perform other flight training support services as described herein.





*Initial
      Qualification Flight Training*





Initial
      qualification flight training consists of the training of military pilots
      that have only recently become qualified in their aircraft and of more
      experienced pilots returning for recurrency training. Initial qualification
      flight training involves aircraft specific flight theory, flight maneuvers,
      aerodynamics, emergency in flight procedures as they relate to combat in a
      specific aircraft. Pilots and other crew members are also trained in cockpit
      resource management, which focuses on division of duties between pilot and
      co-pilot and utilization of resources within the aircraft cockpit to complete
      the flight plan and address emergencies. Initial qualification training involves
      many hours of classroom instruction in aircraft systems operations, air-to-air
      flight maneuvers, tactics, formation flying, instrument training and
      air-to-ground tactics. In flight instruction is generally provided only once
      the
      pilot has shown proficiency in ground instruction and flight simulator
      instruction.




*Continuation
      Flight Training*





****  Continuation
      flight training focuses on combat and other advanced maneuvers and is conducted
      after the pilot completes initial qualification training and returns to a “full
      service” training facility where he is provided refresher or upgrade training to
      sharpen his or her combat skills. We intend to focus the training venue on
      NATO
      customers who would use our facilities and ranges to qualify, in some cases,
      and
      re-qualify in other cases in specific combat skills like air-to-air,
      air-to-ground, electronic countermeasure training, air-refueling training,
      and
      other advanced maneuvers. We anticipate that we will utilize our flight
      simulators to aid in ground training for continuation flight training.
      Additionally, we believe that use of “foreign” aircraft, such as our MiG 29
      aircraft greatly enhances the air-to-air / Red Air combat training
      program.




7




*Flight
      training support services*





The
      flight training support services that we may be asked to provide will likely
      consist of various support functions, which include: supplying flight operation
      facilities, logistics for personnel accommodations, lodging, transportation,
      flight planning, munitions security and storage, airspace and military range
      scheduling, parts and maintenance, aircraft ground handling and overall training
      management.





*Other
      support services*





We
      are
      developing a parts and maintenance program and plan to provide maintenance,
      parts sales and other support services. Additionally, we can currently provide
      tie-down and aircraft storage services. We do not have any agreements to provide
      such services at this time, however, we anticipate that if a contract is awarded
      relating to the F-16 Training Contract, that it will require us to provide
      certain services relating to our flight instruction.





We
      do not
      have any persons soliciting service contracts on our behalf and our only methods
      to obtain new contracts are currently based on our ability to identify needed
      services and negotiate the privatization of provision of these services with
      the
      government entities in question.





**Customers
      and Competition**




We
      are
      dependent on a small, limited pool of customers for our services. Our services
      will only be requested, if at all, by United States military agencies with
      specific needs or by contractors for these services who sub-contract to us.
      Additionally, we will seek to enter into training and flight support agreements
      with NATO aligned countries.





The
      contract procurement process is lengthy and the government military
      organizations that are our primary target customers are often times delayed
      and
      cautious when issuing contracts such as ours. These customers all have strict
      regulations and policies with respect to procuring private sector companies,
      such as us, for their contracts. In addition, unless no other competitors are
      available, the government contracts we target are generally required to request
      bids before awarding contracts. While we believe, based on the issuance of
      the
      F-16 Training Contract, that no other entities are able to provide services
      under this or similar training agreements, no assurance can be made that new
      entities with more resources then us will enter into this business.





**Parts
      Availability**





Almost
      all parts used in the aircraft that we fly have limitations on their useful
      life. The useful life of the parts used in our aircraft are based on the number
      of hours flown and/or the age of the parts. In addition, many parts have
      performance limitations that require replacement or inspection in the event
      of
      accident or flight that exceeds the flight envelope of the aircraft. Finally,
      developments such as accidents of similar aircraft may lead us to replace or
      repair suspect parts to prevent such accidents on our aircraft. Therefore,
      in
      order to maintain our aircraft in airworthy condition, we will be required
      to
      obtain and utilize an inventory of surplus parts. We will also be required
      to
      keep excess parts in locations other than our headquarters so as to enable
      on-site repairs when providing services outside of Grayson County Airport.
      In
      addition, the aircraft we intend to utilize will be specialized military
      aircraft some of which were manufactured overseas. These parts are available
      from very few manufacturers. We are not aware of any United States based
      manufacturers or resellers of suitable parts for MiG or Sukhoi aircraft and
      these parts are limited to few overseas sellers.





With
      respect to United States jet aircraft that we intend to operate, a number of
      both domestic and foreign parts manufacturers are available who supply F-16
      and
      F-15 related parts. Additionally, based on management’s experience in
      restoration and operation of other aircraft, we believe that certain surplus
      parts for United States military aircraft can be easily retrieved at reasonable
      or nominal prices, from AMARC (Aerospace Maintenance and Regeneration Center),
      which is also commonly known as the military aircraft “bone-yard” that is part
      of Davis-Monthan Air Force Base at Tucson Arizona.





If
      we are
      not able to maintain an adequate supply of replacement parts, we will not be
      able to develop or maintain a parts program or a maintenance program and will
      therefore, not be eligible to accept work orders under our contracts.




8




**Intellectual
      Property**





We
      own
      patent applications to a number of procedures that related to the methods of
      conversion of military aircraft for use by civilian entities in training
      military personnel. These patents, which were part of the AeroGroup Assets
      acquired from AeroGroup, are as follows:





**Aircraft**
            
            **Patent**F-16
                Falcon
            
            
            Pat.
                Pend. 60805870Kfir
            
            
            Pat.
                Pend. 60805885A-4
                Skyhawk
            
            
            Pat
                Pend. 60805877MiG
                29
            
            
            Pat
                Pend. 60805888




No
      assurance can be made that we will be awarded patents or that they will not
      be
      challenged. Moreover, no assurance can be made that competitors will not utilize
      similar procedures to privatize military aircraft.





Additionally,
      we have a copyright on an F-16 Pilot Training Syllabus used in training F-16
      pilots in use of a fire control navigation panel.




Finally,
      as part of the AeroGroup Assets acquired in the AeroGroup Acquisition we have
      been assigned Federal Aviation Administration Aircraft Dealer license, which
      will be necessary for us to import and resell aircraft.





**Government
      Approval and Regulation**





Our
      proposed business is heavily regulated. All of our operations involve intense
      government approval and oversight. Prior to awarding contracts other then on
      a
“bid for service” basis, military agencies are required to publish their
      proposed award of a contract with details of such contract. During this time
      period, other persons may submit objections or counter bids on these contracts.





Our
      aircraft operations will also be subject to all regulations of the Federal
      Aviation Administration that relate to civil “experimental” aircraft, and will
      be subject to airworthiness standards and operating procedures of the Federal
      Aviation Administration. Additionally, our pilots, instructors and mechanics
      also must generally be appropriately certified to perform their duties by the
      Federal Aviation Administration and are required to comply with strict
      recurrency flight training rules and medical certification.





In
      addition to the foregoing, government agencies will require that we have and
      maintain a proper safety program, an approved parts program and an approved
      maintenance program, each of which must be sufficient to support the contracts
      that we undertake to perform and each of which must be continually kept current.





Under
      our
      F-16 Training Contract, we are also subject to audit and inspection to ensure
      that we are in compliance with all of the foregoing requirements insofar as
      they
      relate to providing services under this agreement. If we are not in compliance
      we could be fined and we risk suspension or loss of the contract.





Additionally,
      we may be subject to rules of foreign governments with respect to operations
      of
      our aircraft over their territories.





*Effect
      of Government Regulation*





As
      evidenced by the Justification and Approval for the F-16 Training Contract,
      we
      believe that it is not common for branches of the United States military to
      issue contracts to private entities such as us, for training of military
      personnel in combat and other military exercises. No assurance can be made,
      therefore, that other government agencies will outsource their training or
      flight support services, or that the government agencies that we deal with
      will
      not change their policy with respect to such contracts to not renew or issue
      new
      contracts to us or others in our business sector. Additionally, due to terrorist
      or other national safety concerns, no assurance can be made that Bureau of
      Alcohol, Tobacco and Firearms will not restrict or prohibit the renewal of
      a
      permit to private companies such as us, to own and operate our military
      aircraft.





*Government
      Licenses*





In
      order
      to own and operate military aircraft and to enter into government contracts
      we
      are required to have certain government licenses and permits (the “Government
      Licenses”).




9




As
      of
      September 21, 2006 we were issued a license as a registered importer of
“Implements of War: former military aircraft and related parts,” with the
      exclusion of guns and ammunition, from the United States Bureau of Alcohol,
      Tobacco and Firearms (Registration No. A-67-262-0921). We are required to renew
      this registration annually. We must maintain this license in order to import,
      own and operate the kinds of military aircraft that we need in order to fulfill
      our training contracts, such as MiG 29, F-16, Su-27 and similar modern fighter
      jets. We are dependent on having qualified personnel as members of our
      management in order to maintain this license.





We
      are
      also registered as a government contractor through the United States Central
      Contractors Registration office. We are required to maintain our registration
      with the Central Contractor Registration in order to be eligible to bid on
      government contracts.




Finally,
      we have recently become registered with the United States Department of Defense
      Trade Control.





**Development
      of Programs**





During
      fiscal 2005 we spent approximately $88,000 in developing
      our training syllabus with an no expenditures in fiscal 2006 for these
      programs. We believe that we are required to have a strong and efficient
      training syllabus in order to maintain and bid for additional military training
      contracts. We have also begun development of an approved parts program, a safety
      program and maintenance program, all of which are required to be in effect
      prior
      to being tasked on any military contracts. We anticipate that, while we are
      nearly completed with this syllabus, we will have to expend at least
      $1,000,000 of additional funds in developing our parts, maintenance and
      safety programs.





**Employees**





As
      of May
      30, 2007, we have nine full time and six part time **** part
      time
      employees.





*Accounting
      Treatment; Change Of Control*




The
      AeroGroup Acquisition has been accounted for as a "reverse acquisition," as
      AeroGroup owns a vast majority of the outstanding shares of the Company's Common
      Stock as a result of the AeroGroup Acquisition. Consequently, AeroGroup is
      deemed to be the accounting acquirer in the reverse acquisition and TADS is
      deemed the legal acquirer. Therefore the assets and liabilities and the
      historical operations of AeroGroup prior to the AeroGroup Acquisition will
      be
      reflected in the financial statements and will be recorded at the historical
      cost basis of AeroGroup. The consolidated financial statements for the Company
      after completion of the Acquisition includes the assets and liabilities of
      both
      TADS and AeroGroup, historical operations of AeroGroup, and operations of TADS
      from the closing date of the AeroGroup Acquisition.





Except
      as
      described herein and under the Asset Purchase Agreement, as amended, no
      arrangements or understandings exist among present or former controlling
      stockholders with respect to the election of members of the Company's board
      of
      directors and, to our knowledge, no other arrangements exist that might result
      in a future change of control of the Company.




**AeroGroup
      Assets Acquired**





The
      AeroGroup Assets acquired from AeroGroup in December 2006 include:




·
            Two
                MiG 29 “Fulcrum” fighter aircraft, which were appraised in late 2005 at
                $2,800,000 each (pre-modification) which are located in the Ukraine
                and
                are being prepared to be shipped to the United States for
                reassembly;




·
            Four
                Singer Link tactical jet simulators, and related equipment, recently
                appraised in late 2005 $285,000 each (pre-modification)
                currently located at the Company’s facility at the Grayson County
                Airport;




·
            Assignments
                of copyrights to a specialized F-16 Fighter Aircraft training course
                syllabus, specially created by AeroGroup for training pilots to use
                this
                aircraft’s Flight Control Navigation
                Panel;




·
            Assignments
                of provisional applications for utility patents****filed
                relating to methods of operational training uses of fighter aircraft
                by
                civilian corporations of these type of military aircraft for training
                of
                military personnel, specifically F-16, Pat. Pend. 60805870; Kfir,
                Pat.
                Pend. 60805885; A-4 Skyhawk, Pat Pend. 60805877; and MiG 29, Pat
                Pend.
                60805888;




·
            Assignment
                of a Federal Aviation Administration issued license as an Aircraft
                Dealer;




10




·
            Rights
                as assignee under three subcontracts and one contract to provide
                combat,
                primary and other flight training, as well as training research,
                in the
                F-16 and various other types of aircraft to military personnel of
                the U.S.
                Armed Forces and to the armed forces of certain NATO aligned countries
                (the “Training Contracts”);




·
            Assignment
                of a sublease of facilities at the Grayson County Airport in Grayson,
                Texas, including aircraft hangars, land and office space; and




·
            Assignment
                of an option to enter into an exclusive agreement with Air Support
                Systems, LLC, to lease IL-78 tanker aircraft which are used primarily
                in
                air-to-air refueling operations.





It
      is
      intended that the AeroGroup Assets will be used by the Company in connection
      with both “basic flight training” and “combat flight training” of military
      pilots. The Company will use the MiG’s and other assets to provide U.S. and NATO
      military pilots with a “real life” opportunity to train against threat-type
      aircraft whose performance and flight characteristics are superior in some
      respects to those of U.S. and NATO fighter aircraft.





Additionally,
      simultaneously with the acquisition of AeroGroup Assets, TADS has entered into
      an option agreement with Air Support Systems, LLC, granting TADS the right
      to
      lease IL-78 tanker aircraft (the “Tanker Lease Option”).





**Consideration
      Paid For AeroGroup Assets Acquired**





The
      consideration paid to AeroGroup for the assets consisted of:




·
            14,989,900
                shares of restricted Common Stock of TADS, par value $.001;




·
            the
                assumption of AeroGroup’s convertible indebtedness with an outstanding
                aggregate principal balance of approximately $13 million on the closing
                date (the “Convertible Notes”);




·
            the
                assumption of AeroGroup’s obligations under certain outstanding warrants
                exercisable into 23,968,315 shares of Common Stock as of the Closing
                Date (the “Warrants”);




·
            the
                assumption of AeroGroup’s obligations to issue shares to a former employee
                and to or to a former consultant;
                and




·
            the
                assumption of AeroGroup’s obligations under assumed contracts, the Tanker
                Lease Option and the property and hangar sublease at the Grayson
                County
                Airport which was used by AeroGroup prior to our
                acquisition.




**Material
      Agreements Entered Into**





As
      consideration for the AeroGroup Assets acquired in the AeroGroup
      Acquisition, TADS assumed notes, warrants and contracts and entered into certain
      other material agreements, each effective as of the Closing Date, as
      follows:







**·**
            *Cambar
                Note*.
                TADS assumed a promissory note dated December 30, 2005, held by Cambar
                Associates, Inc. in the initial principal amount of $2,200,000, plus
                interest at the rate of eight percent (8 %) per year (the “Cambar Note”).
                On December 15, 2006, the closing date of this acquisition, the Cambar
                Note had an aggregate balance of $2,376,000. Accrued and unpaid interest
                on the Cambar Note is payable every six months. The entire outstanding
                principal balance and accrued and unpaid interest on the Camber Note
                is
                due December 30, 2008.  The outstanding balance of the Cambar Note
                may become immediately due and payable upon the occurrence of any
                event of
                default, including the failure of the borrower to make payment when
                due,
                the borrower’s seeking relief under the bankruptcy code, or if an
                involuntary petition in bankruptcy or receivership is not vacated
                within
                30 days. Pursuant to an assumption and novation agreement between
                TADS and
                Cambar entered into in connection with the AeroGroup Acquisition,
                the
                Cambar Note is convertible into Common Stock at a conversion rate
                of $.50
                per share but only during the one month period prior to the due date
                of
                December 30, 2008.




**·**
            *Secured
                Daniels Note*.
                TADS assumed a promissory note dated June 30, 2006 held by Mark Daniels
                in
                the initial principal amount of $1,100,000, plus interest at the
                rate of
                12% per year (the “Secured Daniels Note”). On the Closing Date, the
                Secured Daniels Note had an outstanding balance of $1,553,528.****The
                Secured Daniels Note is payable beginning July 1, 2008 in 36 equal
                monthly
                installments of principal in the amount of $30,555, plus accrued
                and
                unpaid interest. The outstanding balance of the Secured Daniels Note
                may
                come immediately due and payable upon the occurrence of any event
                of
                default, including dissolution of TADS or any TADS Subsidiary; default
                in
                the payment when due of principal, interest or other amount payable;
                the
                filing of a voluntary or involuntary petition in bankruptcy; the
                appointment or the filing of an application or appointment of a receiver,
                trustee, liquidator or committee; and the making of an assignment
                for the
                benefit of creditors by or against TADS or any TADS Subsidiary.  The
                Secured Daniels Note is secured by a first lien on TADS’ assets, including
                its stock in the TADS Subsidiaries. The outstanding principal and
                interest
                on the Secured Daniels Note is convertible into Common Stock of TADS
                at
                any time at a conversion price of $.50 per share, with no anti-dilution
                provisions.




11




·
            *Security
                Agreements Related to Secured Daniels Note.*The TADS Subsidiaries guaranteed the Secured Daniels Note and TADS
                and
                each of the TADS Subsidiaries entered into security agreements with
                Mark
                Daniels to secure the payment and performance of the Secured Daniels
                Note
                and granting a security interest in certain of TADS’ assets including, all
                goods, equipment, inventory, general intangibles, contracts and
                securities. In the event of a default in the payment of the Secured
                Daniels Note, the Asset Purchase Agreement or in any of TADS’ obligations
                under the security agreements, Mr. Daniels may enforce his rights
                against
                the collateral, including foreclosing his security interest.




·
            *Investor
                Notes*.
                TADS assumed various promissory notes in the original aggregate principal
                amount of (i) $1,445,599 to Sprout Investments, LLC, (ii) $1,433,120
                to
                Gary Fears, (iii) $160,000 to Ron Topper, (iv) $20,000 to Dilair,
                Inc. and
                (v) $366,602 to Mark Daniels (collectively, the “Investor Notes”)
                reflecting loans made by the investors to AeroGroup with various
                issuance
                dates between March of 2002 and April of 2006 each maturing three
                years
                from the date of issuance of the respective notes. The Investor Notes
                were
                issued in conjunction with warrants which have also been assumed
                by TADS,
                as set forth below. On the Closing Date, the Investor Notes had an
                aggregate outstanding principal and interest balance of approximately
                $4.1
                million. Interest on the Investor Notes accrues at 12% per year and
                is
                payable quarterly in arrears, with the outstanding principal and
                interest
                balance due and payable on the third anniversary of each note. The
                outstanding balance of each Investor Note may come immediately due
                and
                payable upon the occurrence of any event of default, including the
                non-payment by the borrower when due, or upon a material breach of
                the other provisions of each Investor Note that is not cured a reasonable
                time after notice. The Investor Notes grant “piggy-back” registration
                rights to the holders whenever the Company files a registration statement
                other than on Form S-4 or Form S-8 and, if such registration statement
                does not include shares underlying the Investor Notes, the holders
                thereof
                are entitled to a penalty equal to 2% of the principal amount of
                its Investor Note per month until registered or otherwise tradable
                under Rule 144 of the Securities Act of 1933, as amended (the “Securities
                Act”). The Investor Notes are convertible into shares of Common Stock
                at
                the conversion price of $.15 per share, except the Investor Note
                held by
                Dilair which is convertible at the rate of $.50 per share. There
                is no
                provision for anti-dilution in these notes. The Investor Notes provide
                for
                a limitation on conversion such that the holder may not convert the
                Investor Notes held by such holder to the extent that the conversion
                thereof would result in said holder having beneficial ownership of
                TADS
                Common Stock that exceeds 4.9% of the outstanding shares of the TADS
                Common Stock, when combined with all other shares held or acquirable
                within 60 days by such converting holder. This provision can be waived
                by
                the holder after 60 days' advance notice to TADS. The holders of
                the
                Investor Notes have waived any default penalties or remedies under
                the Investor Notes and related warrants, relating to any default
                or anti
                dilution adjustment that would have otherwise occurred through August
                31,
                2007, and have waived any damages relating to the failure to register
                their shares prior to such
                time.




·
            *Davenport
                Reserve Holding, LLC, Debenture.*TADS assumed a convertible debenture issued to Davenport Reserve
                Holding,
                LLC in the original principal amount of $422,176, plus interest at
                the
                rate of 8% per annum. Interest and principal is payable on the debenture
                on April 18, 2009. The debenture is convertible into shares of common
                stock at the rate of $.45 per share. The debenture does not contain
                an
                anti-dilution adjustment. It may be prepaid in full on 90 days’ notice,
                provided that the debenture has not been converted by the prepayment
                date.
                The holder may require prepayment in full in the event of an underwritten
                public offering of securities by TADS resulting in gross proceeds
                of
                $5,000,000 or more. The debenture contains covenants which must be
                observed by TADS, including prohibition against distribution to
                shareholders by TADS and the TADS Subsidiaries; prohibition against
                borrowing or guarantying any persons indebtedness or other obligation
                except for indebtedness or guarantees existing at the time of the
                debenture, trade payables, borrowings or guarantees made in the ordinary
                course of business and borrowings for general corporate purposes
                or
                borrowings to repay the debenture. The outstanding balance of the
                debenture may be accelerated upon an event of default, including,
                failure
                to pay principal and interest when due, failure to convert when requested
                by holder, breach of covenants, appointment of a receiver or trustee
                or
                assignment for the benefit of creditors by TADS or any subsidiary,
                filing
                of an un-vacated or stayed judgment in excess of $200,000, bankruptcy
                by
                TADS or a TADS Subsidiary, or institution of a proceeding against
                any of
                them not dismissed in 60 days. At the option of the holder, a merger
                or
                consolidation of TADS may be treated either as an event of default
                or the
                holder may elect to convert the note into shares of the surviving
                entity.
                In December of 2006 Davenport Reserve Holdings, LLC acquired at an
                additional promissory note in the principal amount of $82,145****under
                similar terms.****(See
                “Notes Issued in December 2006”).




12




·
            *Notes
                Issued in Second, Third and Fourth Fiscal Quarters of
                2006*.
                TADS assumed various convertible notes in the aggregate principal
                amount
                of $868,398 which notes were issued to SilverLeaf Capital, Inc.,
                Sprout
                Investments, LLC, Gary Fears, Davenport Reserve Holdings, LLC, Air
                Support
                Systems and Dilair, Inc. which were issued between October and December
                of
                2006 and all of which are due on October 19, 2009 (the “Additional Notes”)
                evidencing loans made to AeroGroup between October through December
                2006.
                The Additional Notes were issued in connection with warrants to the
                investors therein. The Additional Notes accrue interest at the rate
                of 12%
                per year and principal and interest on the Additional Notes is due
                and
                payable on October 19, 2006. The Additional Notes are identical in
                all
                material respects to the Investor Notes, except that they are convertible
                at $1.00 per share, except for the Additional Note to SilverLeaf
                Capital,
                Inc.****which
                are convertible at a price of $0.45 per share and all of these notes
                specifically contemplate the assumption of said notes by TADS pursuant
                to
                the AeroGroup Acquisition. The warrants issued in conjunction with
                the
                Additional Notes were exercisable at $1.00 per share, other then
                the
                warrants to SilverLeaf Capital, Inc., which is exercisable at $.45
                per
                share. In an event of default, the Conversion Price of the Additional
                Notes is automatically reduced to the lesser of $1.00 per share or
                50% of
                the average trading price during the 5 day period immediately prior
                to any
                conversion, with a minimum conversion price of****$.15.
                The Additional Notes grant the holders “piggy-back” registration rights.
                If the borrower does not register the holder’s stock when required, it
                will be obligated to pay liquidated damages each month of 1% of the
                initial principal amount until the shares are registered for resale
                or are
                eligible for sale under Rule 144 promulgated under the Securities
                Act of
                1933, as amended (the “Securities
                Act”).




·
            *Warrants
                Issued In Conjunction With Investor Notes and Additional
                Notes*.
                TADS assumed warrants to acquire stock in AeroGroup, which warrants
                were
                issued in connection with the issuance of the Investor Notes and
                the
                Additional Notes. The warrants issued in connection with the Investor
                Notes (the “Investor Warrants”) became exercisable for an aggregate of
                TADS Common Stock at the closing of the AeroGroup Acquisition, at
                an
                exercise price of $.15 per share, with the exception of the Investor
                Warrant to Dilair which is exercisable at $.50 per share. There were
                23,968,315 Investor Warrants assumed in all, all of which expire
                five
                years from the date of issuance thereof and include: (i) 9,970,667
                warrants issued to Sprout Investments, LLC between April of 2003
                and
                January of 2006, (ii) 9,554,130 warrants issued to Gary Fears between
                May
                2002 and March 2006, (iii) 2,444,014 warrants issued to Mark Daniels
                between April 2003 and November 2005, (iv) 1,066,667 warrants issued
                to
                Ron Topper in December of 2005 and (v) 40,000 warrants issued to
                Dilair,
                inc on January 2006 which are exercisable at $.50 per share. The
                warrants
                issued in conjunction with the Additional Notes (the “Additional
                Warrants”) became exercisable at for the acquisition of TADS Common Stock
                at the Closing of the AeroGroup Acquisition, at an exercise price
                of $1.00
                per share, with the****exception
                of the Investor Warrants issued to SilverLeaf Capital LLC,****which
                will become exercisable into TADS Common Stock at $.45 per share
                and all
                of the Additional Warrants expire on October 19, 2011. There were
                892,842
                Additional Warrants assumed in all, which include (i) 41,803 warrants
                issued to Sprout Investments, (ii) 449,370 warrants issued to Gary
                Fears,
                (iii) 159,800 warrants issued to Air Support Systems, LLC, (iv) 115,280
                warrants issued to Dilair, Inc. (v) 82,145 warrants issued to Davenport
                Reserve Holdings, LLC and (vi) 44,444 warrants issued to SilverLeaf
                Capital, Inc., which are the only warrants exercisable at $.45 per
                share.
                These warrants are afforded certain anti-dilution protection in the
                event
                of share issuances that are dilutive to the warrant holders. These
                warrants all provide for a limitation on exercise such that the holder
                may
                not exercise the warrants held by such holder to the extent that
                the
                exercise thereof would result in said holder having beneficial ownership
                of TADS Common Stock that exceeds 4.9% of the outstanding shares
                of the
                TADS Common Stock, when combined with all other shares held or acquirable
                within 60 days by such converting holder. This provision can be waived
                by
                the holder after 60 days' advance notice to TADS. The warrants are
                immediately exercisable and have a warrant exercise term of five
                years
                from the issuance date below, with the exception of the Additional
                Warrants which all expire October 19, 2011.




·
            *Sublease
                of Office and Aircraft Hangar Space at Grayson County
                Airport*.
                TADS assumed the Sublease between AeroGroup and International Tactical
                Training Center, Inc., an entity that is 51% owned and controlled
                by Mark
                Daniels and 49% owned by****Victor
                Miller**,**dated May 8, 2006 (the “Sublease”). At the time of the assumption of the
                sublease, Mr. Miller was not an officer or director of the Company.
                The
                sublease covers 15,397 square feet of office space in Building No.
                110
                located at 5501 Airport Drive, Denison, Texas and 36,598 square feet
                of
                land also at the Grayson County Airport. The Sublease is a gross
                lease and
                rental under the sublease is $9,000 per month, subject to an annual
                increase equal to the increase in the consumer price index, which
                increase
                will not be less than 2% nor more than 8% over the previous year’s rental.
                With respect to the office space, the sublease expires in May,2046.The balance of the sublease, which relates to the land, expires in
                April,
                2011**.**(See
                also**“**Certain
                Relationships and Related Transactions”).




·
            *Assumed
                Salary Obligations*.
                TADS assumed a note issued in connection with a settlement agreement
                in
                the principal amount of $250,000, with an interest rate of 12%, payable
                in
                36 equal monthly installments of principal, plus interest commencing
                April
                13, 2008. The note has a maturity date of April 13, 2011. The note
                is
                convertible into shares of Common Stock at a rate of $.50 per share.
                In
                addition, TADS agreed to issue 600,000 shares of TADS Common Stock,
                in
                connection with its assumption of AeroGroup’s obligations to issue
                30,000,000 shares under a consulting agreement entered into in 2003
                with
                Sprout Investments, LLC. However, Sprout Investments LLC is required
                to
                provide no less then 61 days’ written notice prior to requesting such
                shares.




·
            *Assumption
                of Contracts*.
                TADS assumed the rights of AeroGroup under three subcontracts to
                provide
                flight training and support and one contract to provide flight training
                in
                F-16 fighter jet and other fourth generation aircraft, each as more
                fully
                described below.




13




**Private
      Placement**





On
      March
      2, 2007, pursuant to binding Unit Purchase Agreements with 11 accredited
      investors submitted by such investors in 2006, we accepted subscriptions for,
      and sold to such Investors, an aggregate of 629,911 Units (each, a “ Unit ”)
      at a
      purchase price of $.55 per Unit. Each Unit is comprised of (i) one share of
      our
      Common Stock ,
      (ii) a
      Class A Warrant to purchase one share of Common Stock at $1.00 per share and
      expiring on March 2, 2008 (the “ Class
      A
      Warrant ”)
      and
      (iii) a Class B Warrant to purchase one share of Common Stock at $1.50 per
      share
      and expiring on March 2, 2010 (the “ Class
      B
      Warrant ”).
      The
      gross proceeds to the Company of the offering was $346,451.05.


Additionally,
        between January 1, 2007 and June 8, 2007, we received loan proceeds of $697,000
        from four unrelated parties. The loans provide for interest at an annual
        rate of
        12%. The loans are due within three years of issuance. The loans are convertible
        into TADS Common Stock at a conversion rate of $1.00 per share and provide
        for
        warrants to purchase shares of TADS Common Stock at an exercise price $1.00
        per
        share.


**Material
      Relationships**





On
      the
      Closing Date, Mark Daniels, a controlling shareholder of AeroGroup was serving
      as the sole director of TADS and as its Secretary and Treasurer. Mr. Daniels
      became a director and officer of TADS on August 22, 2006 in order for TADS
      to
      secure the government licenses required to be obtained as a condition to the
      closing of the AeroGroup Acquisition. At the time TADS and the AeroGroup
      negotiated and entered into the Asset Purchase Agreement, Mr. Daniels was not
      an
      officer, director or affiliate of TADS and, Mr. Sinclair, the sole director
      and
      executive officer of TADS at such time was not an officer, director or affiliate
      of TADS. While these transactions were approved by the board of both companies,
      there were no independent board members of either Company at the time of such
      approvals.




Mr.
      Daniels remains a director through the date of this report. As a result of
      the
      Aero Group Acquisition, AeroGroup acquired a controlling interest in TADS.
      Mr.
      Daniels is a controlling stockholder in AeroGroup and has indirect voting and
      dispositive control over its TADS stock. As a result, Mr. Daniels is the
      beneficial owner of AeroGroup's TADS stock and has a 81% beneficial ownership
      interest in TADS as of the closing of the AeroGroup Acquisition.




As
      consideration for the AeroGroup Acquisition, TADS assumed notes and warrants
      held by Mr. Daniels as follows:




·
            TADS
                assumed the $1,100,000 Secured Daniels
                Note,




·
            TADS
                and the TADS Subsidiaries entered into the Daniels Security
                Agreement,




·
            TADS
                assumed Investor Notes held by Mr. Daniels in the aggregate original
                principal amount of $366,602.04,




·
            TADS
                assumed Warrants to acquire stock in AeroGroup, which Warrants will
                now be
                exercisable for the acquisition of 2,444,014 shares of Common Stock.
                The
                Warrants are exercisable at an exercise price of $.15****per
                share. They are immediately exercisable and have a warrant exercise
                term
                of five years. The warrants were issued between April 1, 2003 and
                November
                12, 2005 in conjunction with Investor Notes issued to Mr.
                Daniels,




·
            TADS
                assumed the Cambar Note, which was originally the obligation of Mr.
                Daniels and certain entities owned by him,
                and




·
            TADS
                assumed all obligations under the Sublease with respect to the office
                and
                hangar space previously used by AeroGroup which is now occupied by
                TADS.




The
      terms
      and conditions of the foregoing instruments and agreements are described above
      under the heading “Material Agreements Assumed and Entered Into”.





As
      a
      result of the AeroGroup Acquisition, TADS assumed AeroGroup’s obligations to
      issue over **** 251,802,762
      shares of AeroGroup common stock pursuant to the convertible notes and warrants
      which have become convertible into or exercisable for 29,559,367 shares of
      TADS
      Common Stock as part of the terms of the AeroGroup Acquisition. Conversion
      of
      those convertible securities prior to the closing of the AeroGroup Acquisition
      would have resulted in a dilution of Mr. Daniels’ stock in AeroGroup, which will
      no longer be the case.





In
      addition, Mark Daniels owns 51% of the issued and outstanding stock of
      International Tactical Training Center, Inc., which is the Sublandord in the
      Sublease. The remaining 49% is owned by Victor Miller, who was not an officer
      or
      director of TADS at the time of the transaction. The sublease relates to space
      previously occupied by AeroGroup, which is now being occupied by TADS. This
      sublease was assumed at “cost” and neither Mr. Daniels, nor International
      Tactical Training Center, Inc. have profited or will profit from such sublease.




14




**RISK
      FACTORS**


*We
      are subject to a number of risks, including those enumerated below. Any or
      all
      of these risks could have a material adverse effect on our business, financial
      condition, results of operations, and cash flows and on the market price of
      our
      Common Stock.* *Additional
      risks and uncertainties that we do not presently know about or that we currently
      believe are immaterial may also adversely impact our business operations.
      Negative consequences associated with the following risks would likely cause
      our
      business, financial condition or results of operations to
      suffer.*





**Risks
      Relating to Our Company**





**Our
      auditors have expressed substantial doubt in their report on our financial
      statements about our ability to continue business.**





Our
      auditors have included an explanatory paragraph in their report on our
      consolidated financial statements for the years ended December 31, 2006 and
      2005, indicating that there is substantial doubt regarding our ability to
      continue as a going concern. The financial statements included elsewhere in
      this
      current report do not include any adjustments to asset values or recorded
      liability amounts that might be necessary in the event we are unable to continue
      as a going concern. If we are in fact unable to continue as a going concern,
      you
      may lose your entire investment in our company. We will therefore need immediate
      additional substantial capital in order to continue to operate.





**We
      have a history of losses since our inception, we expect future
      losses, have minimal revenues and we may never achieve or sustain
      profitability** .





We
      have
      incurred net losses each year since our inception. Additionally, we have only
      one viable contract, the F-16 Training Contract, which we can not perform
      services under until we acquire or lease additional aircraft and complete our
      parts, maintenance and safety programs.





**We
      have a significant amount of secured and unsecured indebtedness. We have
      substantial debt interest payments under our Investor Notes, Additional Notes,
      Secured Daniels Note and Cambar Note. We have no revenues in 2006 and will
      likely be in default if we do not earn revenues or raise additional capital
      to
      repay these debts.**





We
      have
      been funded to date primarily from the sales of convertible promissory notes
      and
      warrants. Additionally, the AeroGroup Assets were acquired with a purchase
      money
      note of $2.2 Million issued to Cambar Associates. These significant amounts
      of
      indebtedness are required to be repaid. Interest on the Investor Notes and
      Additional Notes are paid quarterly. We are likely to be in default in a
      substantial portion of this indebtedness in the near future if we are not able
      to raise additional capital to repay them.





Additionally,
      all of the foregoing indebtedness, is convertible at prices ranging between
      $.15
      and $1.00 per share, while our share price at the time of the assumption of
      this
      indebtedness was far above this. This may act as a deterrent for future
      investors who wish to invest in the Company.





We
      expect
      to continue to incur net losses until at least the third quarter of our fiscal
      year 2007 and these losses may be substantial. To implement our business
      strategy, we will have to incur a high level of fixed operating expenses and
      we
      will continue to incur considerable business development expenses and capital
      expenditures relating to our acquisition or lease of aircraft and development
      of
      our parts, maintenance and safety programs. Accordingly, if we are unable to
      generate substantial revenues and positive cash flows we will not achieve
      profitability. Even if we do achieve profitability, we may not be able to
      sustain or increase our profitability on a quarterly or annual basis. We are
      therefore dependant on our ability to raise substantial additional capital
      as
      further discussed herein.





**Our
      business is capital intensive and we will require substantial additional capital
      in order to carry out our business plan.**





We
      will
      need to import our two existing MiG 29 aircraft from the Ukraine and acquire
      or
      lease additional aircraft in order to become operational and will need to
      acquire or lease at least seven additional F-16 fighter jet or other fourth
      generation fighter aircraft in order to perform under existing contract or
      bid
      for additional training contracts. If we fail to perform under existing
      contracts these contracts may also be terminated. The operation of jet aircraft
      is highly capital intensive. Additionally, we are required to invest substantial
      additional capital through September of 2007 in order to develop our parts,
      maintenance and safety programs. If we do not complete these programs we will
      be
      ineligible to perform under our F-16 Training Contract or bid in future
      contracts and such contract may be terminated. We do not have any commitments
      for additional financings and no assurance can be made that we will be able
      to
      secure such financing commitments on terms that are acceptable to us. (See
      next
      risk factor for specific risks relating to aircraft availability.)




15





**Our
      success is dependent on our ability to locate, acquire, import and operate,
      used
      F-16 fighter jet aircraft or other fourth generation military aircraft, which
      are difficult to find and expensive.**





Our
      existing and current prospective contracts require, among other things, that
      we
      first acquire at least two to five additional operating F-16 fighter jet
      aircraft or other fourth generation fighter jet aircraft (e.g. Su-27s, F-15,
      F-16, or MiG 29 or Mig 31 aircraft) before we can be called upon to perform
      services. We have entered into negotiations with the air forces of several
      NATO
      aligned European countries that have expressed an interest to selling these
      aircraft, however, a number of impediments exist to our ability to acquire
      these
      aircraft:





·
            
            we
                do not have financing arranged to acquire these aircraft, which we
                estimate will cost at least $5,500,000 each (plus transportation,
                mechanical and maintenance costs and repairs),·
            
            we
                have negotiated but have not entered into, formal contracts for the
                acquisition of these and other aircraft,.·
            
            we
                may encounter unexpected government regulation imposed by policymakers
                that would make the trafficking of these military aircraft more
                difficult,·
            
            others
                may bid for or acquire aircraft from our sources, thereby increasing
                our
                purchase price and/or limiting the number of aircraft available to
                us.




If
      we are
      not able to afford to acquire these aircraft, we will have to attempt to find
      leasing companies willing to acquire these aircraft and lease these aircraft
      to
      us at reasonable terms. We have not identified any known leasing sources and
      no
      assurance can be made that we will be able to do so. Moreover, even a lease
      will
      still require a substantial capital commitment by the Company.





We
      currently do not have any financing commitments and no assurance can be made
      that we will be able to obtain such commitments or raise sufficient capital
      to
      acquire, import, operate and maintain in airworthy condition, our aircraft
      or
      that we will be able to enter into definitive agreements to acquire these
      aircraft with our prospective vendors.





No
      assurance can be made that we will be able to acquire the modern aircraft
      necessary to the operation of our business. Additionally, even if we acquire
      the
      necessary aircraft they must be modified for our purposes. No assurance can
      be
      made that we will be able to successfully implement our acquisition strategy
      for
      these aircraft, or, if we do acquire the aircraft, that we will be able to
      maintain and operate them efficiently.





**Our
      business plan is based on an unproven business model and limited or no public
      information is readily available for civilian companies that provide military
      flight training.**




All
      efforts that were previously initiated by us in an attempt to develop a viable
      business plan have been abandoned in light of the acquisition of the AeroGroup
      Assets and related business. In place thereof, we have adopted as a new plan
      of
      operations the strategy that has been developed and evolving since 2002. To
      date, implementation of our business strategy relating to civilian training
      of
      military personnel has been limited, with only one contract and several
      subcontracts having been entered into. Accordingly, our business and operations
      are in the development stage, subject to all of the risks inherent in the
      establishment of new business ventures. There can be no assurance that our
      intended business and operations will be successful. Any future success that
      we
      might enjoy will depend upon many factors including factors which may be beyond
      our control, or which cannot be predicted at this time. We may encounter
      unforeseen difficulties or delays in the implementation of our business plan.
      There can be no assurance that such difficulties or delays will not have a
      material adverse effect upon our financial condition, business prospects and
      operations and the value of an investment in us.





We
      can
      also be adversely affected by a number of external factors, such as conditions
      prevailing in the securities markets and/or the economy generally. Consequently,
      an investment in the Company is highly speculative and no assurance can be
      given
      that purchasers of our securities will realize any return on their investment
      or
      that purchasers will not lose their entire investment.





**Recent
      Securities and Exchange Commission interpretations of rules relating to
      registration of securities acquired in private placements could adversely affect
      the trading market of our Common Stock or our ability to raise
      capital.**





The
      company believes that SEC staff has recently taken the position with respect
      to
      recently filed shelf registration statement filings covering selling shareholder
      stock that if a large percentage of the company’s outstanding restricted
      securities are being registered, those selling shareholders are deemed to be
      underwriters who must sell into the market at a fixed price. In addition, for
      selling shareholder shelf offerings related to stock underlying convertible
      securities, we believe some of the staff has indicated in comment letters that
      the registration statements cannot be filed until the convertible security
      has
      been converted. The SEC has not issued any specific guidance or interpretation
      on this issue. However, these positions regarding selling security holders
      registration statements could severely restrict our ability to raise capital
      through private offerings. Potential financing sources, such as funds and
      wealthy private investors, may re-think their investment strategies and not
      want
      to invest in small public companies where they are restricted in this manner
      from liquidating their investments through registration and resale of their
      securities. As a result, our cost of capital may increase or we may not be
      able
      to access private investments at all.




16




**We
      are currently in a growth-stage and may experience setbacks in business
      development and expansion.**





We
      are
      subject to all of the risks inherent in the creation of a new business. As
      a
      growth-stage company, our cash flows may be insufficient to meet expenses
      relating to our operations and the growth of our business, and may be
      insufficient to allow us to service new and additional contracts.




**A
      majority shareholder, who is also our sole director, has the ability to exert
      control in matters requiring stockholder approval.**





Approximately
      60% of our outstanding Common Stock is beneficially owned by Mark Daniels.
      As a
      result, he has significant influence and control over all actions requiring
      stockholder approval, including the election of the board of directors. In
      addition, he is currently the sole member of the Board of Directors. Through
      his
      concentration of voting power, he could delay, deter or prevent a change in
      control of the Company or other business combinations that might otherwise
      be
      beneficial to the other stockholders. In deciding how to vote on such matters,
      he may be influenced by interests that conflict with other stockholders'
      interests. The Company is also indebted to him, and that loan is secured by
      a
      lien on certain of the Company’s material assets.





**Potential
      foreign customers may not be able to obtain permission from the U.S. Government
      to train in the U.S.**




In
      the
      event that any foreign country wishes to engage us to provide training services
      in the U.S., they must obtain the approval of the U.S. government. If they
      are
      not able to obtain such approval, they may not be able to retain our services.
      This may restrict the size of our market and our ability to enter into new
      contracts.





**The
      auditors of AeroGroup’s financial statements have found certain deficiencies in
      the reports for the years ended 2006 and 2005.**





In
      connection with the audit of the financial statements for AeroGroup,
      Incorporated for the years ended December 31, 2006 and 2005, the auditors for
      AeroGroup communicated to AeroGroup's board of directors, the existence of
      material weaknesses in the internal controls related to financial
      reporting. Specifically, they communicated the occurrence of
      significant adjusting journal entries, principally related to the accounting
      for
      derivative instruments, and deficiencies related to disclosures
      in the notes to the financial statements. In connection with our plan of
      operations during the next twelve months, we plan on hiring a full time CFO,
      adding additional accounting staff and strengthening the
      internal controls over our financial reporting.





**The
      loss of the services of key personnel would adversely affect our business,
      and
      could cause us to lose our government permits or contracts.**





Our
      future success depends to a significant degree on the skills, experience and
      efforts of our executive officers, particularly our senior management and staff.
      Specifically, and without limitation, we do not currently have any employment
      agreements with Mark Daniels, Gen. Charles Searock or Victor Miller. Loss of
      any
      one of the services of any one of these employees would be detrimental to our
      overall business. We also depend significantly upon our skilled training staff
      and mechanics. The specialized nature of our military flight and in-air
      refueling training businesses require our training staff to have specialized
      skills and expertise. In order to maintain our aircraft we need specially
      trained jet mechanics. If we are not able to obtain and retain personnel with
      the appropriate skill and licensing, we may not be able to fulfill our
      obligations under our contracts and it may limit our ability to enter into
      future contacts, if we do not have the employees necessary to fulfill
      them.





**Because
      there are a limited number of suppliers, we may not be able to acquire aircraft
      or replacement parts necessary for the operation of our
      business.**





In
      order
      to operate our business, we must have sufficient aircraft in operating condition
      to fulfill our contractual obligations. The aircraft and replacement parts
      which
      we need in order to operate our business are manufactured in only a few
      locations by a limited number of manufacturers. If any of those manufacturers
      ceases to manufacture required replacement parts, or we cannot obtain those
      parts because, for example, restrictions are placed upon the export and import
      of those parts, and we are otherwise not able to obtain such parts in the open
      market, we may not be able to keep our aircraft in operating condition. In
      addition, if we cannot replace aircraft when we need to or expand our fleet
      when
      we wish to, it will negatively affect our ability to perform our contracts,
      and
      to enter into new contracts. As a result, not only may existing revenue
      potential decrease, we will not be able to expand our business.





17




**We
      depend heavily on government contracts that may not be fully funded or may
      be
      terminated, and the failure to receive funding or the termination of one or
      more
      of these contracts could reduce our revenue and increase our costs.**





Some
      of
      our contracts may not be fully appropriated when entered into and may be subject
      to future legislative appropriations. Legislatures may appropriate funds for
      a
      given program on a year-by-year basis, even though contract performance may
      take
      more than one year. As a result, the contract may only be partially funded,
      and
      additional funding is normally committed only as appropriations are made in
      each
      subsequent year. These appropriations, and the timing of payment of appropriated
      amounts, may be influenced by, among other things, the state of the economy,
      competing political priorities, curtailments in the use of government
      contracting firms, budget constraints, the timing and amount of tax receipts
      and
      the overall level of government expenditures. If appropriations are not made
      in
      subsequent years of a multiple-year contract, we may not realize all of our
      potential revenues and profits from that contract.





**If
      we are unable to accurately estimate and control our contract costs, then we
      may
      incur losses on our contracts, which may result in decreases in our operating
      margins and in a significant reduction or elimination of our profits.**





It
      is
      important for us to control our contract costs so that we can maintain positive
      operating margins. We anticipate that the nature of our flight training
      contracts will provide for fixed hourly fee payments to us for flight time.
      Additionally, parts and fuel may be requested under a “cost-plus” contract.
      Under cost-plus contracts, which may be subject to contract ceiling amounts,
      we
      are reimbursed for allowable costs and fees, which may be fixed or
      performance-based. If our costs exceed the contract ceiling or are not allowable
      under the provisions of the contract or any applicable regulations, we may
      not
      be reimbursed for all our costs. Under fixed-price contracts, we receive a
      fixed
      price per hour of flight operations regardless of what our actual costs will
      be.
      Additionally, we may be penalized if the percentage of aborted flights during
      any month exceed a percentage (for example 10%) of the actual flight hours.
      Consequently, we realize a profit on fixed-price contracts only if we control
      our costs and prevent cost over-runs on the contracts. Under each type of
      contract, if we are unable to control costs, we may incur losses on our
      contracts, which may result in decreases in our operating margins and in a
      significant reduction or elimination of our profits.





**If
      we fail to timely complete, miss a required performance standard or otherwise
      fail to adequately perform on a contract above a specified percentage, then
      we
      may incur a loss on that contract, which may affect our overall profitability.**





Our
      contracts will likely require us to be available with our aircraft and training
      personnel at a particular time and place. If we fail to be present on a timely
      basis and a training exercise needs to be aborted, we may not be paid for such
      tasking.




**Our
      future revenues depend on our ability to consistently bid and win new contracts
      and renew existing contracts and, therefore, our failure to effectively obtain
      future contracts could adversely affect our profitability.**





Our
      future revenues and overall results of operations require us to successfully
      bid
      on new contracts and renew existing contracts. Contract proposals and
      negotiations are complex and frequently involve a lengthy bidding and selection
      process, which is affected by a number of factors, such as market conditions,
      equipment availability and required governmental approvals. If negative market
      conditions arise, if the required governmental approval is not obtained, if
      we
      lose any of our government licenses, or are unable to develop parts, safety
      and
      maintenance programs, we may not be able to pursue particular projects, which
      will adversely affect our profitability.





**We
      previously operated as a mining company and may have liabilities associated
      with
      that business.**




We
      were
      incorporated in Nevada in July, 1998 under the name Natalma Industries, Inc.
      for
      the purpose of engaging in the exploration and development of mining properties.
      We were unsuccessful in locating a joint venture partner to assist us in the
      development of our mining claims. As a result, we were unable to pay for and
      perform the exploration and development required in our agreement with the
      owners of our properties and we lost our rights to our mining claims. We then
      determined that it was in the best interest of our shareholders that we seek
      potential operating businesses and business opportunities with the intent to
      acquire or merge with another business, which led to the AeroGroup Acquisition.
      While we are no longer engaged in the mining business, we could incur
      unanticipated liabilities relating to our previous operations such as claims
      relating to violations of environmental law or claims for property damage or
      personal injury.




18




**Risks
      Relating to Government Contractors and Flight Training
      Services**





**As
      a government contractor, we may be subject to audit and review on certain of
      our
      contracts. A negative outcome of any such audit and review could have a negative
      impact on our business and results of operation.**





As
      a
      government contractor, we are subject to a number of procurement laws,
      regulations and government audits; a violation of any such laws and regulations
      could result in sanctions, contract termination, forfeiture of profit, harm
      to
      our reputation or loss of our status as an eligible government contractor.
      These
      laws and regulations affect how we transact business with our clients and in
      some instances, impose additional costs to our business operations. Even though
      we take precautions to prevent and deter fraud and misconduct, we face the
      risk
      that our employees or outside partners may engage in misconduct, fraud or other
      improper activities. Government agencies, such as the U.S. Defense Contracting
      Audit Agency (“ DCAA ”),
      routinely audit and investigate government contractors. These government
      agencies review and audit a government contractor’s performance under its
      contracts and cost structure, and compliance with applicable laws, regulations
      and standards. We can provide no assurance that the DCAA or other government
      audits will not result in material disallowances for incurred costs in the
      future. Government contract violations could result in the imposition of civil
      and criminal penalties or sanctions, contract termination, forfeiture of profit,
      and/or suspension of payment, any of which could make us lose our status as
      an
      eligible government contractor. We could also suffer serious harm to our
      reputation, which would have a negative impact on our revenue and profitability
      and could have a negative effect on our reputation and ability to procure other
      government contracts in the future.





**Significant
      existing or additional governmental regulation could subject us to unanticipated
      delays and costs, which would adversely affect our
      revenues.**





Nearly
      every aspect of our business is highly regulated by one or more government
      agencies. We are subject to compliance with regulatory rules imposed by aviation
      authorities, the acquisition of aircraft in foreign jurisdictions may be
      regulated in those jurisdictions, and the import of those aircraft into the
      U.S.
      is regulated in the U.S. These laws and regulations may change without notice,
      resulting in disruptions to our operations. Additional laws and regulations
      that
      are applicable to our business may be enacted. The interpretation of any future
      laws, regulations, applications or enforcements or changes in the
      interpretations or enforcement of existing law or regulation and their effect
      on
      our business cannot be predicted. Any changes imposed by a regulatory agency,
      including changes imposed by aviation authorities such as the U.S. Federal
      Aviation Administration to safety standards, could require us to make unplanned
      modifications to our services or may result in delays or cancellations of
      contracts, all of which could have a materially adverse effect on our operations
      and financial condition. Moreover, if we do not comply with existing or future
      laws, we could be subject to enforcement actions by U.S., as well as foreign
      governments. We could incur fines or civil penalties; we could be subject to
      injunctions prohibiting us from taking certain actions necessary to the
      operation of our business; it may be recommended that we not be allowed to
      enter
      into government contracts; and/or we may be subject to criminal
      prosecution.





In
      addition, our operations include the use, generation, storage, handling and
      disposal of hazardous materials. New laws and regulations, stricter enforcement
      of existing laws and regulations, the discovery of previously unknown
      contamination or the imposition of new clean-up requirements may require us
      to
      incur substantial costs in the future which could have a materially adverse
      effect on our financial condition and results of operations.





**We
      are subject to fluctuations in military spending and a downturn in such spending
      could result in a decrease in our anticipated future
      revenues.**





We
      derive
      most of our revenue from sales to military customers in the United States.
      We
      also may wish to enter into contracts with military customers in other
      countries. The termination of funding for a government program could result
      in a
      loss of the anticipated future revenue attributable to that program, which
      could
      have a negative impact on our operations. While spending authorization for
      defense-related programs has increased in recent years due to greater homeland
      security and foreign military commitments, as well as the trend to outsource
      federal government jobs to the private sector, these spending levels may not
      be
      sustainable. Future levels of expenditures and authorizations for these programs
      may decrease, remain constant or shift to programs in areas where we do not
      provide services. As a result, a general decline in U.S. defense spending could
      harm our operations and significantly reduce our future revenues.




**We
      face competition in our industry, and many of our competitors have substantially
      greater experience and resources than we do.**





While
      we
      do not believe that we face significant competition for private military flight
      training, the markets in which we sell our simulation training services are
      highly competitive, with new entrants emerging and positioning themselves to
      take advantage of our market. Some of our competitors in the flight simulation
      sector are larger than we are and have greater financial, technical, marketing,
      manufacturing and distribution resources. In addition, some competitors have
      well-established relationships with aircraft manufacturers, airlines and
      governments which may give them an advantage over us in winning contracts with
      these organizations. We obtain our contracts through competitive bidding
      processes that subject us to the risk that we will expend substantial time
      and
      effort on proposals for contracts that may not be awarded to us. We cannot
      assure investors that it will win competitively awarded contracts.




19




**Liability
      claims from casualty loss could cause us to incur significant payment
      obligations. This is compounded by the fact that liability insurance is not
      readily available for the kinds of operations we conduct.**





We
      may be
      subject to liability claims arising out of accidents or disasters involving
      our
      aircraft, including claims for serious personal injury or death. Conventional
      aviation liability and casualty insurance carriers do not cover hull, liability
      or casualty insurance for the kinds of operations we intend to conduct making
      finding insurance difficult and expensive. While some of our government
      contracts allocate the risk of loss from an aircraft accident to the government
      entity with whom we have contracted, those entities have not assumed one hundred
      percent of the risk. If an accident is found to have occurred as a result of
      our
      negligence or wrongful act, such as a failure to properly maintain our aircraft,
      or if it occurs at a time other than during training exercises, we might be
      found liable and might have to pay significant damages to others for their
      losses. Additionally, if the accident happens while an aircraft is not
      conducting operations for a government contract providing for risk assumption
      by
      the government, the Company will be subject to material liability. We cannot
      be
      certain that we will find adequate and reasonable insurance or that our
      insurance coverage will be sufficient to cover one or more substantial
      claims.





**Risks
      Relating to Our Securities**


**We
        have a large number of notes and warrants outstanding, which are convertible
        into shares of our Common Stock at prices below our current trading price.
        Therefore, investors in the Company’s Common Stock could experience immediate
        and substantial dilution from the conversion of these notes or exercise of
        these
        warrants.**




We
      have
      assumed over $9 million in outstanding indebtedness, convertible primarily
      at
      prices ranging between $.15 per share and $.50 per share, with certain, more
      recently issued indebtedness being convertible at $1.00 per share or less,
      depending on the trading market for our securities. These notes are convertible
      into approximately 39 million shares of TADS Common Stock. Additionally, we
      have
      assumed warrants to acquire over 24 million shares at similar prices. Therefore,
      shareholders who acquire our stock at current market prices may suffer
      substantial dilution in the event that such noteholders and warrantholders
      elect
      to convert their notes or exercise their warrants.





Additionally,
      the overhang from convertible notes and warrants with low conversion prices
      and
      exercise prices could cause resistance in the marketplace for our Common Stock
      and prevent our stock price from increasing.





**There
      is no established public trading market for our securities, which could
      adversely affect the ability of investors in our Company to sell their
      securities in the public market.**





Our
      Common Stock, which is quoted on the OTC Bulletin Board, or OTCBB, is thinly
      traded. We cannot predict the extent to which a trading market will develop
      or
      how liquid that market might become. Accordingly, holders of our Common Stock
      may be required to retain their shares for an indefinite period of time.





The
      OTCBB
      is an inter-dealer, over-the-counter market that provides significantly less
      liquidity than stock exchanges. Quotes for stocks included on the OTCBB are
      not
      listed in the financial sections of newspapers, as are those for the exchanges.
      Therefore, prices for securities traded solely on the OTCBB may be difficult
      to
      obtain and holders of Common Stock may be unable to resell their securities
      at
      or near their original acquisition price or at any price. Market prices for
      our
      Common Stock will be influenced by a number of factors, including:


·
            the
                issuance of new equity securities pursuant to future
                offering;


·
            changes
                in interest rates;


·
            competitive
                developments, including announcements by our competitors;


·
            new
                services or significant contracts,
                acquisitions;


·
            strategic
                partnerships, joint ventures or capital
                commitments;


·
            variations
                in quarterly operating results;


·
            change
                in financial estimates by securities
                analysts;


·
            the
                depth and liquidity of the market for our Common
                Stock;


·
            investor
                perceptions of us and of the aviation military training industry
                generally; and


·
            general
                economic and other national and international
                conditions.




20




**Our
      Common Stock is considered a "penny stock" and may be difficult to sell. We
      have
      also recently received notice of delisting of our securities from the OTC
      Bulletin Board system.**





Our
      Common Stock is currently quoted on the OTCBB, and trades below $5.00 per share;
      therefore, our Common Stock is considered to be a “penny stock” and, as such,
      the market for our Common Stock may be further limited by certain SEC rules
      applicable to penny stocks. We have received notice that our shares may be
      delisted from the OTC Bulletin Board as a result of failure to timely file
      certain SEC reports, which would result in our delisting. To the extent the
      price of our Common Stock remains below $5.00 per share or we have net tangible
      assets of $2,000,000 or less, our common shares will be subject to certain
      “penny stock” rules promulgated by the SEC. Those rules impose certain sales
      practice requirements on brokers who sell penny stock to persons other than
      established customers and accredited investors. For transactions covered by
      the
      penny stock rules, the broker must make a special suitability determination
      for
      the purchaser and receive the purchaser’s written consent to the transaction
      prior to the sale. Furthermore, the penny stock rules generally require, among
      other things, that brokers engaged in secondary trading of penny stocks provide
      customers with written disclosure documents, monthly statements of the market
      value of penny stocks, disclosure of the bid and asked prices and disclosure
      of
      the compensation to the brokerage firm and disclosure of the sales person
      working for the brokerage firm. These rules and regulations adversely affect
      the
      ability of brokers to sell our common shares and limit the liquidity of our
      securities.




**We
      may not be able to borrow money when we need or wish to because our significant
      assets are subject to a lien securing an outstanding indebtedness to our
      majority stockholder and because a covenant in one of out outstanding debt
      instruments does not permit us to borrow money without that lender’s consent. We
      also face the risk of losing our assets in foreclosure of the lien on them
      if we
      default on our loan.**





We
      are
      indebted to our majority shareholder and that loan is secured by a lien on
      our
      significant assets. If we defaulted on the loan, those assets may be foreclosed
      upon and we will not have the assets necessary for the operation of our
      business. We might not be able to fulfill our existing or future contracts.




In
      addition, even if we do not default on the loan, the presence of a lien on
      our
      assets may prevent us from obtaining financing elsewhere. Both institutional
      lenders and private lenders may only be willing to lend us money if they have
      a
      first lien on our assets. If our majority shareholder does not subordinate
      or
      release his lien, we may not be able to obtain other loans if
      required.





We
      also
      have issued an 8% Convertible Debenture to Davenport Reserve Holding, LLC which
      contains a covenant that prohibits us from borrowing money other than
      indebtedness existing at the time of the debenture, trade payables, borrowings
      in the ordinary in the ordinary course of business and for general corporate
      purposes or borrowings to repay the debenture.




**We
      do not intend to pay dividends in the near future, if at
      all** ***.***




We
      do not
      intend to pay any dividends and we do not foresee making any cash distributions
      in the manner of a dividend or otherwise. Our board of directors presently
      intends to follow a policy of retaining earnings, if any. In addition, the
      8%
      Convertible Debenture held by Davenport Reserve Holding, LLC which we assumed
      in
      the AeroGroup Acquisition prohibits us from making any distribution to our
      stockholders without their consent. Even if we had funds to declare and pay
      dividends, we could not do so without Davenport Reserve’s consent.





**Our
      anticipated cash requirements are significant and we may attempt to raise
      capital through the issuance of Common Stock, a series of preferred stock or
      we
      may incur debt or issue other securities convertible or exercisable into out
      stock resulting in dilution of our existing shareholders’ ownership of the
      Company.**





Because
      we anticipate our current cash on hand and revenue from operations may not
      be
      sufficient to fund our anticipated needs, we may attempt raise capital through
      a
      private offering of securities. The issuance of significant amounts of equity
      or
      instruments convertible or exercisable into equity will dilute the ownership
      interest of our existing stockholders.





**To
      the extent we finance the acquisition of our aircraft and training equipment,
      we
      may be subject to loan covenants restricting the conduct of our business, or
      loss of assets used as collateral if we default on a loan.**





We
      intend
      to finance the acquisition of our aircraft and training equipment by borrowing
      from lenders, including banks. Typically, such financing requires us to agree
      to
      certain negative and affirmative covenants which may limit the way in which
      we
      conduct our business. In addition, if we breach any of these covenants we may
      be
      declared in default and be required to repay the outstanding balance of such
      loans. If we fail to pay such amounts when due, upon acceleration or otherwise,
      any assets which were used as collateral for the loans could be foreclosed
      upon
      by our lenders, which may prevent us from performing some or all of our
      contracts.




21




**Item
      2. Description of Property**


TADS’
        offices and other facilities are located at the Grayson County Airport in
        Sherman-Denison, Texas. These facilities were formerly occupied by Aerogroup.
        TADS occupies these facilities pursuant to a sublease. The Company’s address is
        5501 Airport Drive, Denison Texas 75020, and the telephone number is (903)
        786-5300. TADS assumed the Sublease between AeroGroup and International Tactical
        Training Center, Inc., an entity that is 51% owned and controlled by Mark
        Daniels, dated May 8, 2006 (the “Sublease”). The sublease covers 15,397 square
        feet of office space in Building No. 110 located at 5501 Airport Drive, Denison,
        Texas and 36,598 square feet of land also at the Grayson County Airport.
        The
        Sublease is a gross lease and rental under the sublease is $9,000 per month,
        subject to an annual increase equal to the increase in the consumer price
        index,
        which increase will not be less than 2% nor more than 8% over the previous
        year’s rental. With respect to the office space, the sublease expires in May,
        2046. The balance of the sublease, which relates to the land, expires in
        April,
        2011 **.** (See
        also **“** Certain
        Relationships and Related Transactions ”)


**Item
      3. Legal Proceedings**





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




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





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




In
      the
      fourth quarter of fiscal 2006, our board took action by written consent in
      lieu
      of meeting in order to approve the AeroGroup Acquisition, all share issuances
      and debt assumption incurred thereby and related matters.





**Item
      5.****Market
      for Common Equity and Related Stockholder Matters**


The
        TADS
        Common Stock is quoted on the Over-the-Counter Bulletin Board, under the
        symbol,
        "TADF.OB". The foregoing notwithstanding, we have recently been advised that
        our
        securities may be delisted from the OTC Bulletin Board as a result of our
        failure to timely file this report and our 10-QSB for the quarter ended March
        31, 2007. Trading in the Common Stock in the over-the-counter market has
        been
        limited and sporadic and the quotations set forth below are not necessarily
        indicative of actual market conditions. Further, these prices reflect
        inter-dealer prices without retail mark-up, mark-down, or commission, and
        may
        not necessarily reflect actual transactions.


**Fiscal
                  Period:****2007**
              
              **High**
              
              **Low****April
                1,
                2007 through May 31, 2007**
              
              $
              1.19
              
              $
              0.56**March
                  31, 2007**
              
              $
              2.55
              
              $
              0.94**2006**December
                  31, 2006September
                  30, 2006
              
              $
              4.00
              
              $
              2.00June
                  30, 2006
              
              $
              5.37
              
              $
              1.80March
                  31, 2006
              
              $
              3.96
              
              $
              1.50**2005**December
                  31, 2005
              
              $
              1.60
              
              $
              0.55September
                  30, 2005
              
              $
              1.56
              
              $
              0.45June
                  30, 2005
              
              $
              0.80
              
              $
              0.45March
                  31, 2005
              
              $
              0.80
              
              $
              0.46**2004**December
                  31, 2004
              
              $
              0.70
              
              $
              0.37September
                  30, 2004
              
              $
              0.74
              
              $
              0.47June
                  30, 2004
              
              $
              1.06
              
              $
              0.60March
                  31, 2004
              
              $
              3.00
              
              $
              0.56







22





As
      of
      June 5, 2007 there were 85 record holders of TADS outstanding Common
      Stock.





We
      have
      not declared or paid dividends to our stockholders during this or our two most
      recently completed fiscal years. We do not anticipate that we will pay dividends
      any time in the near future. In addition, the 8% Convertible Debenture held
      by
      Davenport Reserve Holding, LLC which we assumed in the AeroGroup Acquisition,
      prohibits us from making any distribution to our stockholders without
      Davenport’s consent. Even if we had funds with which to declare and pay
      dividends, we could not do so without Davenport Reserve’s consent.





Shareholders
      of AeroGroup will not be issued any of the shares issued to AeroGroup itself.
      Additionally, any such distribution is likely to require registration under
      the
      Securities Act.





**Recent
      Sales of Unregistered Securities**





As
      part
      of the consideration for the AeroGroup Assets, TADS issued to AeroGroup
      14,989,900 shares of Common Stock which were not registered.





The
      issuance of the stock in the AeroGroup Acquisition was exempt from registration
      under the Securities Act pursuant to Section 4(2) in that it did not involve
      a
      public offering of securities.





In
      addition, the Company consummated an offering of Units, as described above,
      comprised of Common Stock, Class A Warrants and Class B Warrants.


*Conversion
        of Notes and Exercise of Warrants*
 
 During
        the period January 1, 2007 through June 8, 2007 the issuances of unregistered
        securities were made as a result of various warrant exercises and note
        conversions. In all, during this period, various holders of warrants exercised
        warrants to purchase 7,611,480 shares of the Company’s Common Stock. These
        warrants were exercisable at $.15 per share and were exercised through cashless
        exercise method. In addition, during this period, various holders of the
        convertible debentures converted $274,060 of debentures plus accrued interest
        of
        $58,521 at conversion price of $.15 per share, resulting in the issuance
        of
        2,236,586 shares of Common Stock.
 
 *Issuance
        of Convertible Debt*
 
 During
        the period January 1, 2007 through June 8, 2007, the Company received loan
        proceeds of $697,000 from four unrelated parties. The loans provide for interest
        at an annual rate of 12%. The loans are due within three years of issuance.
        The
        loans are convertible into TADS Common Stock at a conversion rate of $1.00
        per
        share and provide for warrants to purchase shares of TADS Common Stock at
        an
        exercise price $1.00 per share.
 
 *Issuance
        of Common Stock to ZA Consulting*
 
 The
        Company issued an aggregate of 250,000 restricted shares of Common Stock
        to ZA
        Consulting Group in the first quarter of 2007, as compensation for investor
        relations services and related consulting services. No registration rights
        were
        issued in connection with these shares.


23
 *Issuance
        of Shares of Common Stock for Services*
  Between
        March and April of 2007, the Company issued an aggregate of 1,465,000 shares
        in
        satisfaction of invoices to various services providers. These shares are
        restricted and no registration rights were granted in connection with these
        issuances.
  **Series
        A Preferred Stock Issuances**
 
 On
        March
        21, 2007, the Company filed a Certificate of Designation of Series A Preferred
        Stock (the “Series A Certificate of Designation”) with the Secretary of State of
        the State of Nevada, designating a series of 50,000,000 shares of Preferred
        Stock of the Company, $.001 par value (the “Series A Preferred Stock”). Pursuant
        to the Series A Certificate of Designation, holders of the Company’s Series A
        Preferred Stock are entitled to:
 
 ·
              elect
                  one director to the Company’s board of
                  directors
 ·
              vote
                  on all other matters on a 25 votes per share Common Stock
                  basis.
 ·
              with
                  respect to dividend rights, rights on redemption, rights on conversion
                  and
                  rights on liquidation, winding up and dissolution, rank senior
                  to all
                  Common Stock, warrants and options to purchase Common Stock established
                  by
                  the Board or the Stockholders (all of such equity securities of
                  the
                  Corporation to which the Series A Preferred Stock ranks senior
                  are
                  collectively referred to herein as “Junior
                  Stock”).
 ·
              Each
                  share of Series A Preferred Stock is initially convertible into
                  2 shares
                  of the Common Stock of the Company, subject to adjustment for stock
                  splits, recapitalization or other
                  reorganizations.
 
 In
        addition, the Series A Preferred Stock:
 
 ·
              has
                  weighted average antidilution protection that will cause the conversion
                  price to adjust downward in the event that the Company issues shares
                  of
                  Common Stock or securities convertible into Common Stock at a price
                  of
                  less than the conversion price of the Series A Preferred Stock
                  then in
                  effect.
 ·
              may
                  be converted into Common Stock at the option of the holder.
 
 In
        addition, at any time after the closing bid price for the Company’s Common Stock
        on the NASDAQ OTCBB or the primary United States exchange on which the Common
        Stock is then traded exceeds $5.00 during any five consecutive trading days,
        the
        Company may, at its sole option, convert the Series A Preferred and any accrued
        but unpaid dividends into common shares at the then-applicable conversion
        price
        by providing written notice of such conversion to the holders of the Series
        A
        Preferred; provided that there is an effective registration statement under
        the
        Securities Act registering the resale of the Common Stock to be issued upon
        such
        conversion.
 
 Each
        share of Series A Preferred Stock is entitled to receive a dividend of 7%
        per
        annum. The dividend begins to accrue on January 1, 2007 and will be payable
        quarterly thereafter. The dividend is cumulative. In the event of a liquidation
        or acquisition of the Company, the holders of the Series A Preferred Stock
        will
        be entitled to receive an amount equal to any accrued and unpaid dividend
        prior
        and in preference to any distributions to the holders of the Common Stock.
        Thereafter, the holders of the Series A Preferred Stock will be entitled
        to
        participate in distributions on an as converted to common stock
        basis.
 
 Shares
        of
        Series A Preferred may be redeemed, in whole or in part, by the Company out
        of
        funds lawfully available therefore from the holders of then outstanding shares
        of Series A Preferred on a pro rata basis, at any time by providing written
        notice to the holders of the Series A Preferred owned by each holder, that
        number of outstanding shares of Series A Preferred owned by each holder,
        that
        number of outstanding shares of Series A Preferred that the Company has elected
        to purchase for the following consideration: (i) an amount equal to a price
        per
        share equal to the $4.00 plus any accrued and unpaid dividends multiplied
        by the
        number of shares of Series A Preferred being redeemed from such holder and
        (ii)
        the issuance of the number of shares of Common Stock equal to seventeen and
        one-half percent (17.5%) of the shares of Common Stock then issuable upon
        conversion of the shares of Series A Preferred being redeemed from such holder.
        A cash payment will be provided in lieu of any fractional shares of Common
        Stock.
 
 *Issuance
        of Preferred Securities*
 
 During
        the period January 1, 2007 through May 31, 2007, the Company issued 2,065,000
        of
        shares of Common Stock and 1,200,000 of its Series A Preferred Stock for
        services. (See “Series A Preferred Stock Issuances” above).


24





During
      the period January 1, 2007 through May 31, 2007, the Company issued 4,340,000
      shares of Common Stock and 5,200,000 shares of its Series A Preferred Stock
      to
      various officers and directors for compensation due under various employment
      agreements. (See “Series A Preferred Stock Issuances” above).




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





THE
      FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE INFORMATION CONTAINED
      IN
      THE FINANCIAL STATEMENTS AND RELATED NO TES
      INCLUDED IN THIS ANNUAL REPORT ON FORM 10- KSB,
      THE
      FORWARD LOOKING STATEMENTS PROVISIONS ABOVE, AND THE RISK FACTORS
      ABOVE.





The
      Company has experienced substantial delays as a result of its inability to
      raise
      capital and is also late with the filing of this report and other reports.
      Additionally, the Company has recently received notice of delisting of its
      securities from the OTC Bulletin Board market system as a result of its failure
      to timely file these reports. The Company has requested a hearing to appeal
      its
      delisting. In the event that our Common Stock is delisted from trading on the
      OTC Bulletin Board market system, we will trade on the Pink Sheets, which is
      a
      far less liquid market.





**Plan
      of Operation**





**Liquidity
      and Capital Resources**


Our
        predecessor, AeroGroup, has had no revenues during 2006. We anticipate that
        our
        current cash on hand of $19,000 as of May 31, 2007 is sufficient to satisfy
        our
        cash requirements only through the end of June of 2007. We do not have any
        financing commitments and no assurance can be made that we will be obtaining
        financing at the times and terms needed. Therefore, there is substantial
        doubt
        that we will be able to continue as a going concern. In addition, we will
        need
        substantial additional capital during the next 12 months on order to complete
        our business plan.
 
 Our
        business involves the ownership, operation and maintenance of jet aircraft,
        which typically require significant amounts of capital. Some of our anticipated
        one time and ongoing expenses are discussed below.
 
 AeroGroup
        has funded its operations and met its capital expenditures requirements
        primarily through cash generated from contributions from the issuance of
        convertible debt securities and warrants.
 
 As
        of
        December 31, 2006, AeroGroup had negative working capital in the amount of
        $4,621,385. Cash used by operating activities were $1,157,571 for the year
        ended
        December 31, 2006 compared to cash used by operating activities for the year
        ended December 31, 2005 of $967,573.
 
 As
        of
        December 31, 2005, AeroGroup had negative working capital in the amount of
        $6,870,838. Cash used by operating activities were $967,573 for the year
        ended
        December 31, 2005.


25




Net
      cash
      provided by financing activities for the year ended December 31, 2006 was
      $1,443,150 compared to $967,319 for the year ended December 31, 2005. The
      increase was predominantly due to increased debt raised in 2006.





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





Cash
      used
      in investing activities was $150,241 in 2006 with no cash invested in
      2005.





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


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




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





**Immediate
      Expenses and Cost of Equipment**





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





*Cost
      of Importing our Existing Aircraft*





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


We
        estimate that it will cost $200,000.00 import our MiG 29 aircraft that are
        in
        the Ukraine and $420,000 to modify these aircraft for use in military training.
        Presuming that we are able to finance this shipment promptly, we anticipate
        that
        these two aircraft will become fully operational in the United States no
        sooner
        then September of 2007. We estimate that it will take no less than 50 days
        from
        the closing of a financing, if any, to ship such aircraft to the United
        States.




*Cost
      of Developing Parts, Maintenance and Safety Programs*





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





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





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





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




26




**Employees**





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





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




**Off
      Balance Sheet Arrangements**





As
      of May
      28, 2006, we do not have any off balance sheet arrangements, as defined in
      Section 303(c) of Regulation S-B, other then as specifically disclosed in this
      report. Off balance sheet arrangements include, without limitation, contractual
      arrangements with any entity whose financial information is not consolidated
      with our own, under which we have:





·
              Guaranteed
                  any obligation of such other
                  entity;


·
              A
                  retained or contingent interest in assets transferred to such
                  unconsolidated entity or similar arrangement that serves as credit,
                  liquidity or market risk support to that entity for such
                  assets;


·
              Any
                  obligation under certain derivative
                  instruments;


·
              Any
                  obligation under a material variable interest held by the registrant
                  in an
                  unconsolidated entity that provides financing, liquidity, market
                  risk or
                  credit risk support to the registrant, or engages in leasing, hedging
                  or
                  research and development services with the registrant.





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




27


Item
      7. Financial
      Statements




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




Report
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Balance Sheet at December 31, 2006
            
            F-2Consolidated
                Statements of Operations for the Years Ended December 31, 2006
                (commencement as a development stage company) and 2005
            
            F-3Consolidated
                Statements of Stockholders' (Deficiency) Equity for the Years Ended
                December 31, 2006 and 2005
            
            F-4Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006
                (commencement as a development stage company) and 2005
            
            F-5Notes
                to the Consolidated Financial Statements
            
            F-6
                to F-22






28


REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
        the Board of Directors of
 Tactical
        Air Defense Services Inc.
 
 We
        have audited the accompanying consolidated balance sheet of Tactical Air
        Defense
        Services Inc. and Subsidiaries (the “Company”) (a development stage company
        commencing January 1, 2006) as of December 31, 2006, and the related
        consolidated statements of operations, stockholders’ (deficiency) equity and
        cash flows for the years ended December 31, 2006 and 2005. These financial
        statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these consolidated 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 audit to obtain reasonable assurance about whether
        the
        financial statements are free of material misstatement.  The Company is not
        required to have, nor were we engaged to perform, an audit of its internal
        control over financial reporting. Our audits included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion.   An audit also
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements, 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 consolidated financial statements referred to above present
        fairly, in all material respects, the consolidated financial position of
        Tactical Air Defense Services Inc. and Subsidiaries (a development stage
        company
        commencing January 1, 2006) as of December 31, 2006, and the consolidated
        results of their operations and their cash flows for the years ended December
        31, 2006 and 2005 in conformity with accounting principals generally accepted
        in
        the United States of America.
 
 As
        discussed in Note 1 to the consolidated financial statements, the Company
        continues to generate operating losses and has a significant working capital
        deficiency as of December 31, 2006. These conditions raise substantial doubt
        about the Company’s ability to continue as a going concern. Management’s plans
        regarding these matters are also described in Note 1. The consolidated financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.
 
 Marcum
        & Kliegman, LLP
 New
        York, New York
 June
        6, 2007
  F-1
  **TACTICAL
        AIR DEFENSE SERVICES, INC.**
 **(A
        Development Stage Company, Commencing January 1, 2006)**
 **CONSOLIDATED
        BALANCE SHEET**
 **DECEMBER
        31, 2006**
 
 ASSETSCurrent
                  Assets:Cash
              
              $
              136,058Property
                  and Equipment, net
              
              
              7,128,985TOTAL
                  ASSETS
              
              
              7,265,043LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  Liabilities:Accounts
                  payable
              
              
              7,762Accrued
                  liabilities
              
              
              777,914Advances
                  from private placement subscription
              
              
              346,451Convertible
                    Debentures, including accrued interest, net of debtdiscount
                    of $1,964,746
              
              
              3,625,316Total
                  Current Liabilities
              
              
              4,757,443Convertible
                  Notes Payable, net of discount of $3,792,148, includes related
                  party of
                  $1,330,729
              
              
              69,107TOTAL
                  LIABILITIES
              
              
              4,826,550COMMITMENTSSTOCKHOLDERS'
                  EQUITY:Preferred
                    stock-$.001 par value; 50,000,000 shares authorized; -shares
                    issued and outstanding - none
              
              
              -Common
                    stock-$.001 par value; 300,000,000 shares authorized; - 18,915,655
                    shares issued and outstanding
              
              
              18,916Additional
                  paid-in-capital
              
              
              2,563,950Deficit
                  accumulated during the development stage
              
              
              (144,373
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              2,438,493TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              7,265,043
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-2
  **TACTICAL
        AIR DEFENSE SYSTEMS, INC.**
 **(A
        Development Stage Company, Commencing January 1, 2006)**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 
 **Years
                  Ended December 31****2006**
              
              **2005**(Development
                  Stage)REVENUES
              
              $
              -
              
              $
              5,142Operating
                  costs
              
              
              337,346
              
              
              131,710General
                  and administrative, including compensatory element of stock issuance
                  of
                  $144,773 for the year ended December 31, 2006
              
              
              1,658,628
              
              
              680,527TOTAL
                  COSTS
              
              
              1,995,974
              
              
              812,237OPERATING
                  LOSS
              
              
              (1,995,974
              )
              
              (807,095
              )OTHER
                  (EXPENSE) INCOME:(Loss)
                  gain on derivative liabilities
              
              
              (27,599,597
              )
              
              8,659,065Forgiveness
                  of liquidated damages
              
              
              1,074,188
              
              
              -Interest
                  expense
              
              
              (1,466,590
              )
              
              (4,254,371
              )Other
              
              
              (2,386
              )
              
              206TOTAL
                  OTHER (EXPENSES) INCOME
              
              
              (27,994,385
              )
              
              4,404,900NET
                  (LOSS) INCOME
              
              $
              (29,990,359
              )
              $
              3,597,805Preferred
                  distribution (Note 3)
              
              $
              311,255
              
              
              -NET
                  (LOSS) INCOME APPLICABLE TO COMMON STOCKHOLDERS
              
              $
              (30,301,614
              )
              $
              3,597,805Loss
                  per common share - basic
              
              $
              (2.00
              )
              $
              0.31Loss
                  per common share - diluted
              
              $
              (2.00
              )
              $
              0.06Weighted
                  average number of shares outstanding - basic
              
              
              15,138,190
              
              
              11,089,926Weighted
                  average number of shares outstanding - diluted
              
              
              15,138,190
              
              
              57,088,620
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-3
  **** **TACTICAL
        AIR DEFENSE SYSTEMS, INC.**
 **(A
        Development Stage Company, Commencing January 1, 2006)**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY**
 **Common
                      Stock****Shares**
                  
                  **Amount**
                  
                  **Additional**
                    **Paid-in**
                    **Capital**
                  
                  **Accumulated**
                    **Deficit**
                  
                  **Total**
                    **Stockholders’**
                    **(Deficiency)**
                    **Equity**BALANCE- January 1, 2005, (Note 1)
                  
                  
                  11,089,926
                  
                  $
                  11,090
                  
                  $
                  8,786,468
                  
                  $
                  (19,178,201
                  )
                  $
                  (10,380,643
                  )Net
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,597,805
                  
                  
                  3,597,805BALANCE-
                      December 31, 2005
                  
                  
                  11,089,926
                  
                  
                  11,090
                  
                  
                  8,786,468
                  
                  
                  (15,580,396
                  )
                  
                  (6,782,838
                  )Stock
                      issued to settle accruedCompensation-
                      First Quarter 2006- $.10 per share
                  
                  
                  2,452,254
                  
                  
                  2,452
                  
                  
                  242,775
                  
                  
                  -
                  
                  
                  245,227Stock
                      issued for compensation-First Quarter 2006-$.10 per share
                  
                  
                  1,447,720
                  
                  
                  1,448
                  
                  
                  143,325
                  
                  
                  -
                  
                  
                  144,773Preferred
                      distribution to stockholder-Second Quarter 2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (311,255
                  )
                  
                  (311,255
                  )Warrants
                      issued with convertible debentures-Fourth Quarter 2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  676,529
                  
                  
                  -
                  
                  
                  676,529Fair
                      value assigned to beneficial conversions of debt-Fourth Quarter
                      2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,053,125
                  
                  
                  -
                  
                  
                  4,053,125Liabilities
                      not assumed in reverse acquisition- Fourth Quarter 2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,505,560
                  
                  
                  -
                  
                  
                  4,505,560Reclassification
                      of derivative liability to equity-Fourth Quarter 2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  29,930,094
                  
                  
                  -
                  
                  
                  29,930,094Stockholders
                      Deficiency of TADS at date of reverse
                    acquisition
                    Fourth
                      Quarter 2006
                  
                  
                  3,925,755
                  
                  
                  3,926
                  
                  
                  (36,289
                  )
                  
                  -
                  
                  
                  (32,363
                  )Reclassification
                      of accumulated deficit of Aero to paid in capital (Note 7)
                  
                  
                  
                  
                  
                  
                  
                  
                  (45,737,637
                  )
                  
                  45,737,637
                  
                  
                  -Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (29,990,359
                  )
                  
                  (29,990,359
                  )BALANCE- December 31, 2006
                  
                  
                  18,915,655
                  
                  $
                  18,916
                  
                  $
                  2,563,950
                  
                  $
                  (144,373
                  )
                  $
                  2,438,493
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-4
  **TACTICAL
        AIR DEFENSE SYSTEMS, INC.**
 **(A
        Development Stage Company, Commencing January 1, 2006)**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 **Year
                    Ended December 31,****2006**
                
                **2005**(Development
                    Stage)CASH
                    FLOWS FROM OPERATING ACTIVITIESNet
                    (loss) income
                
                $
                (29,990,359
                )
                $
                3,597,805Adjustments
                    to reconcile net (loss) income to net cashused
                    in operating activities:Loss
                    (gain) on derivative liabilities
                
                
                27,599,597
                
                
                (8,659,065
                )(Forgiveness)
                    provision for liquidated damages
                
                
                (1,074,188
                )
                
                499,778Stock
                    based compensation
                
                
                144,773
                
                
                **-**Excess
                    of initial derivative liability over debtdiscount
                
                
                -
                
                
                2,577,988Debt
                    discount amortization
                
                
                638,788
                
                
                814,744Changes
                    in operating assets and liabilities:Other
                    assets
                
                
                -
                
                
                (11,669
                )Accounts
                    payable
                
                
                7,762
                
                
                (17,517
                )Accrued
                    liabilities
                
                
                1,516,056
                
                
                230,363Net
                    Cash Used in Operating Activities
                
                
                (1,157,571
                )
                
                (967,573
                )CASH
                    USED IN INVESTING ACTIVITIESPurchase
                    of property and equipment
                
                
                (300,985
                )
                
                -Cash
                    received from the issuance of reverse acquisition
                
                
                150,744Net
                    Cash Used in Investing Activities
                
                
                (150,241
                )
                
                -CASH
                    FLOWS FROM FINANCING ACTIVITIES:Due
                    to related parties, net
                
                
                (67,484
                )
                
                (32,876
                )Proceeds
                    from the issuance of convertible debentures
                
                
                1,510,634
                
                
                1,000,195Net
                    Cash Provided by Financing Activities
                
                
                1,443,150
                
                
                967,319Increase
                    (Decrease) in cash
                
                
                135,338
                
                
                (254
                )Cash
                    - Beginning of year
                
                
                720
                
                
                974Cash
                    - End of year
                
                $
                136,058
                
                $
                720Interest
                    paid
                
                
                -
                
                
                -Taxes
                    paid
                
                
                -
                
                
                -Non-cash
                    Transactions:Stockissued to settle accrued compensation
                
                $
                390,000
                
                $
                -Liabilities
                    not assumed in reverse acquisition
                
                $
                4,505,560
                
                $
                -Reclassification
                    of derivative liability
                
                $
                29,930,094Conversion
                    of loan payable to convertible debenture
                
                $
                -
                
                $
                366,602Acquisition
                    of assets for issuance of debt
                
                $
                6,740,000
                
                $
                -Warrants
                    issued with convertible debentures
                
                $
                676,529Fair
                    value assigned to beneficial conversions
                
                $
                4,053,125Preferred
                    distribution to stockholder
                
                $
                311,525
                
                $
                -
 
 Assets
        and liabilities of TADS at December
        15, 2006:
 Cash
                
                $
                150,744
                
                $
                -Prepaid
                    expenses
                
                
                324,529
                
                
                -Advances
                    from private placement subscription
                
                
                (346,451
                )
                
                -Accrued
                    liabilities
                
                
                (161,185
                )
                
                -Net
                    Deficiency of TADS on December 15, 2006
                
                $
                (32,363
                )
                $
                -
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-5
 **TACTICAL
          AIR DEFENSE SYSTEMS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
          Ended December 31, 2006 and
          2005
  **NOTE
        1 - COMPANY AND BASIS OF PRESENTATION**
  General
 
 Tactical
        Air Defense Services, Inc. (“TADS” and the “Company”), a development stage
        company ,which was incorporated in Nevada in 1998 under the name Natalma
        Industries, Inc. Originally, TADS operated as a junior mining company with
        minimal operations. In 2005, the former management of TADS commenced seeking
        potential operating businesses and business opportunities with the intent
        to
        complete a merger with an operating business.
 
 On
          December 15, 2006 (the “Closing Date”), TADS and three of its wholly-owned
          subsidiaries, Resource Financial Aviation Holdings Inc., OneSource Aviation
          Acquisition Inc. and Genesis Aviation Acquisition Inc., each a Nevada
          corporation (the “TADS Subsidiaries” and, collectively with TADS,”) acquired
          substantially all of the assets of AeroGroup Incorporated (“Aero or AeroGroup”),
          a Utah corporation, and its three wholly-owned subsidiaries, OneSource
          Acquisition, Inc., Genesis Acquisition, Inc. and Resource Financial Holding
          Acquisition, Inc., each a Delaware corporation (the “AeroGroup Subsidiaries”
and, collectively with AeroGroup Incorporated, “AeroGroup”), pursuant to an
          Asset Purchase Agreement dated July 14, 2006, as amended (the “Asset Purchase
          Agreement”) and in consideration of the acquisition issued stock and assumed
          certain indebtedness and other obligations under various
          warrants, a real property sublease, government and non-government
          aviation contracts and certain other contracts of AeroGroup (the
“AeroGroup Acquisition”). As a result of the asset purchase, the
          Company intends to be a provider of outsourced military fighter jet pilot
          training to military personnel, including certain flight support
          services.
 
 Since
        the
        AeroGroup Acquisition was settled through the issuance of a controlling interest
        in TADS common stock, AeroGroup is deemed to be the acquirer for accounting
        purposes. Furthermore, since TADS is deemed to be a shell company prior to
        the
        acquisition, purchase accounting was not applied. Therefore, the transaction
        was
        accounted for as a reverse acquisition and recapitalization of AeroGroup.
        Accordingly, the historical financial statements presented in the financial
        statements are those of AeroGroup as adjusted to reflect the recapitalization
        and elimination of certain assets and liabilities that were not assumed by
        TADS.
        The net liabilities not assumed by TADS was recorded as a contribution to
        capital totaling $4,505,560. These liabilities substantially consisted of
        indebtedness due to Aero’s controlling stockholder, Mark Daniels
        (“Daniels”).
  The
        accompanying share information for AERO has been
        retroactively restated to reflect the recapitalization transactions, including
        the exchange of common stock and common stock equivalents of AERO for common
        stock and common stock equivalents of TADS based on the exchange ratio of
        50 to
        1.
 
 In
        connection with the reverse acquisition, the consideration paid to Aero Group
        for the assets consisted of:
 
 ·
              14,989,900
                  shares of restricted common stock of TADS, constituting a majority
                  of the
                  then outstanding common stock of
                  TADS.
 
 ·
              Assumption
                  by TADS of Aero’s' obligations under its convertible debentures totaling
                  approximately $5.6 million, inclusive of accrued interest, all
                  convertible
                  into shares of TADS common stock at prices ranging $0.15 to $1.00
                  per
                  share.
 
 ·
              Assumption
                  by TADS of Aero’s' obligation under a convertiblenote
                  issued in connection with a settlement agreement in the principal
                  amount
                  of $250,000, with an interest rate of 12%, payable in 36 equal
                  monthly
                  installments of principal, plus interest. The note has a maturity
                  date of
                  April 13, 2011. The note is convertible into shares of common stock
                  at a
                  rate of $.50 per share.
 
 ·
              Assumption
                  by TADS of Aero’s obligation under an assumed secured note payable to
                  Daniels in the principal amount of $1,100,000, plus interest, at
                  the rate
                  of 12% per annum. The outstanding principal and interest is convertible
                  into shares of TADS common stock at a conversion price of $.0.50
                  per
                  share.
  F-6
 **TACTICAL
            AIR DEFENSE SYSTEMS, INC.**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
            Ended December 31, 2006 and
            2005
 **NOTE
        1 - COMPANY AND BASIS OF PRESENTATION-Continued**
 
 ·
              Assumption
                  by TADS of Aero’s' obligation under a note assumed by the Company in
                  connection with its June 2006 asset purchase (Note 3) in the principal
                  amount of $2.2 million, plus interest at the rate of 8% per annum.
                  The
                  outstanding principal and interest is convertible into shares of
                  TADS
                  common stock at a conversion price of $0.50 per
                  share.
 
 ·
              Assumption
                  by TADS of Aero’s obligations under certain outstanding Warrants to
                  purchase 23,968,315 shares of common stock exercisable at $0.15
                  per
                  share.
 
 ·
              Assumption
                  by TADS of Aero’s obligations under government contracts and
                  subcontracts and of leases relating to its Grayson Airport
                  facilities, a $300,000 consulting contract and property leases
                  discussed
                  in Note 8.
 
 ·
              Assumption
                  by TADS of Aero’s obligations for accrued expenses totaling $136,000.
 
 In
        2006, the Company is in the development stage and its operations principally
        involve research and development, market analysis, and other business planning
        activities, and minimal revenue has been generated to date.
 
 Aero
          is a Utah corporation, which was incorporated on July 31, 1984 under the
          name
          Diversified Resources Group, Inc. Aero was a provider of outsourced
          military fighter jet pilot training to military personnel, including certain
          flight support services. Effective January 1, 2006, Aero became a development
          stage company as it was devoting all of its present efforts to securing
          and
          establishing a new business. Accordingly, the accompanying consolidated
          financial statements for 2006 represent the cumulative financial statements
          from
          the commencement of the development stage through December 31,
          2006.
 
 **Going
        Concern and Management's Plan**
 
 The
        accompanying consolidated financial statements have been prepared in conformity
        with accounting principles generally accepted in the United States of America,
        which contemplate the continuation of the Company as a going concern. However,
        as shown in the accompanying consolidated financial statements, the Company
        has
        incurred losses from operations since inception and has a significant working
        capital deficiency as of December 31, 2006.
 
 As
        discussed above, on December 15, 2006, TADS acquired all of the assets of
        Aero
        and assumed certain contracts in exchange for the assumption by TADS of certain
        liabilities of Aero. Management believes the Company as successor can raise
        adequate capital for the Company’s required working capital needs for 2007
        including additional modifications to its aircrafts necessary to make them
        operational. Management also believes that it still needs substantial capital
        in
        order to carry out its business plan, which is to become a civilian provider
        of
        outsourced military aviation services which includes fighter jet pilot training,
        operational deployment training, aviator combat support and close air support
        for “Forward Controllers,”.  No assurance can be given that the Company can
        obtain the required estimated additional working capital, or if obtained,
        that
        such funding will not cause substantial dilution to stockholders of the Company.
        Being a development stage company, the Company is subject to all the risks
        inherent in the establishment of a new enterprise and the marketing of a
        new
        product, many of which risks are beyond the control of the Company. All of
        the
        factors discussed above raise substantial doubt about the Company's ability
        to
        continue as a going concern. During 2006, Aero raised from various stockholders
        approximately $1,510,634 through the issuance of convertible debt securities
        and
        warrants. From the period January 1, 2007 through May 31, 2007, the Company
        has raised from various financing sources approximately $697,000 through
        the
        issuance of convertible debt. In addition, the Company received proceeds
        totaling $346,451 from the sale of 629,911 units comprising one share of
        common
        stock and warrants to purchase common stock.
 
 These
        consolidated financial statements do not include any adjustments relating
        to the
        recoverability of recorded asset amounts that might be necessary as a result
        of
        the above uncertainty.
 
 F-7
  **TACTICAL
          AIR DEFENSE SYSTEMS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
          Ended December 31, 2006 and
          2005
  **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Principals
        of Consolidation**
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiaries, Genesis Acquisition, Inc., Resource Financial
        Holding
        Acquisition, Inc. and OneSource Acquisition, Inc. All significant intercompany
        transactions have been eliminated.
 
 **Use
        of Estimates**
 
 The
        preparation of the consolidated financial statements in conformity with
        accounting principles generally accepted in the United States of America
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and disclosure of contingent assets and
        liabilities in the consolidated financial statements and accompanying notes.
        The
        most significant estimates relate to the estimated useful lives and assessment
        for impairment of the Company’s property and equipment, contingencies, revenue
        recognition and valuation of derivative instruments. Actual results could
        differ
        from those estimates.
 
 **Property
        and Equipment**
 
 Property
        and equipment are recorded at cost. Property and equipment acquired by Aero
        pursuant to the June 2006 Asset Purchase Agreement (Note 3) was recorded
        at its
        then net carrying value due to the entities being controlled by Aero's majority
        stockholder. The provision for depreciation of operating equipment is computed
        on the straight line method applied to each unit of property over the estimated
        useful lives, generally five to ten years, commencing when the assets are
        placed
        into service.
 
 Leasehold
        improvements shall be amortized over the shorter of their useful life or
        the
        remaining lease term. Upon retirement or other disposition of these assets,
        the
        cost and related accumulated depreciation of these assets are removed from
        the
        accounts and the resulting gains or losses are reflected in the results of
        operations.
 
 As
        of December 31, 2006 and 2005, the Company did not have any assets placed
        into
        service. As a result, there was no depreciation expense for the years ended
        December 31, 2006 and 2005.
 
 The
        Aircraft acquired pursuant to the June 2006 Asset Purchase Agreement (Note
        3)
        are stationed in the Ukraine awaiting for shipment to the United States.
        Additional modifications are necessary to make them operational for use within
        the United States. The Company estimates that it will cost approximately
        $200,000 to ship the MIGs to the United States, and approximately $420,000 to
        get the MIGs fully operational.
 
 Maintenance
        and repair costs for owned and leased flight equipment are charged to operating
        expense as incurred.
 
 **Fair
        Value of Financial Instruments**
 
 The
        recorded carrying values of accounts payable and accrued liabilities and
        interest bearing indebtedness approximate the fair value of such financial
        instruments. The derivative liabilities are recorded at fair value and are
        marked-to-market at each balance sheet date.
  F-8
 **TACTICAL
            AIR DEFENSE SYSTEMS, INC.**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
            Ended December 31, 2006 and
            2005
 **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- Continued**
 
 **Cash
        and Cash Equivalents**
 
 For
        purposes of the statement of cash flows, the Company considers all short-term
        investments with original maturities of three months or less when purchased
        to
        be cash equivalents. The Company had no cash equivalents as of December 31,
        2006.
 
 **Concentration
        of Credit Risk**
 
 The
        Company places its cash in what it believes to be creditworthy financial
        institutions. However, cash balances may exceed FDIC insured levels at various
        times during the year.
  **Impairment
        of Long-Lived Assets**
 
 In
        accordance with Statement of Financial Accounting Standards (" **SFAS** ")
        No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
        the
        Company reviews the carrying amount of long-lived assets on a regular basis
        for
        the existence of facts or circumstances, both internally and externally,
        that
        suggest impairment. The Company determines if the carrying amount of a
        long-lived asset is impaired based on anticipated undiscounted cash flows
        before
        interest from the use of the asset. In the event of impairment, a loss is
        recognized based on the amount by which the carrying amount exceeds the fair
        value of the asset. Fair value is determined based on appraised value of
        the
        assets or the anticipated cash flows from the use of the asset, discounted
        at a
        rate commensurate with the risk involved. There were no impairment charges
        recorded during each of the years ended December 31, 2006 and 2005.
 
 **Income
        Taxes**
 
 The
        Company provides for federal and state income taxes payable, as well as for
        those deferred because of the timing differences between reporting income
        and
        expenses for financial statement purposes versus tax purposes. Deferred tax
        assets and liabilities are recognized for the future tax consequences
        attributable to differences between the carrying amount of assets and
        liabilities for financial reporting purposes and the amounts used for income
        tax
        purposes. Deferred tax assets and liabilities are measured using the enacted
        tax
        rates expected to apply to taxable income in the years in which those temporary
        differences are expected to be recoverable or settled. The effect of a change
        in
        tax rates is recognized as income or expense in the period of the change.
        A
        valuation allowance is established, when necessary, to reduce deferred income
        tax assets to the amount that is more likely than not to be realized.
 
 **Revenue
        Recognition**
 
 Revenue
        is recognized once four criteria are met: (1) the Company must have
        persuasive evidence that an arrangement exists; (2) services have been
        performed and accepted by the Customer, (3) the price must be fixed and
        determinable; and (4) collectibility must be reasonably
        assured.
 
 For
        the year ended December 31, 2005, revenue associated with outsourced military
        training and support services was recognized as the services were rendered.
        There was no revenue in 2006.
 
 F-9
  **TACTICAL
          AIR DEFENSE SYSTEMS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
          Ended December 31, 2006 and
          2005
  **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued**
 
 **Net
        (Loss) Income Per Share of Common Stock**
 
 Basic
        net (loss) income per share of common stock are computed by dividing net
        (loss)
        income available to common stockholders by the weighted average number of
        shares of common stock outstanding during the periods presented.
 
 Diluted
        net (loss) income per share reflects per share amounts that result if
        dilutive common stock equivalents are converted to common stock. Common stock
        equivalents, consisting of convertible debt, options and warrants, discussed
        in
        Note 7, were not included in the calculation of diluted (loss) income per
        share
        for the years ended December 31, 2006 because their inclusion would have
        had
        been anti-dilutive.
 **Years
                  Ended December 31,****2006**
              
              **2005**Numerator:Net
                  (loss) income applicable to common stockholders - numerator for
                  basic
              
              $
              (30,301,614
              )
              $
              3,597,805Effect
                  of dilutive securities:Interest
                  related to Debentures
              
              
              N/A
              
              
              4,254,371Derivative
                  gain - Debentures
              
              
              N/A
              
              
              (4,390,005
              )Numerator
                  for diluted (loss) income per share - loss
                attributable
                  to common stockholders after assumed
                conversions
              
              
              (30,301,614
              )
              
              3,462,171Denominator:Denominator
                  for basic (loss) income per share
                -
                  weighted average shares
              
              
              15,138,190
              
              
              11,089,926Effect
                  of diluted securities:Convertible
                  debentures and accrued interest
              
              
              N/A
              
              
              23,622,929Warrants
              
              
              N/A
              
              
              22,375,765Total
                  potentially dilutive securities
              
              
              -
              
              
              45,998,694Denominator
                  for diluted (loss) income per
                -
                  adjusted weighted average shares and assumed
                Conversions
              
              
              15,138,190
              
              
              57,088,620Basic
                  net (loss) income per share
              
              $
              (2.00
              )
              $
              0..31Diluted
                  net (loss) income per share
              
              $
              (2.00
              )
              $
              0.06
  F-10
  **TACTICAL
          AIR DEFENSE SYSTEMS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
          Ended December 31, 2006 and
          2005
  **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued**
 
 **Convertible
        Notes and Warrants**
 
 The
        Company accounts for conversion options embedded in convertible notes in
        accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging
        Activities" (" **SFAS 133** ") and Emerging Issues Task Force (" **EITF** ") 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
        Potentially Settled in, a Company's Own Stock" (" **EITF 00-19** "). SFAS 133 generally requires companies to bifurcate conversion options
        embedded in convertible notes from their host instruments and to account
        for
        them as free standing derivative financial instruments in accordance with
        EITF
        00-19. SFAS 133 provides for an exception to this rule when convertible notes,
        as host instruments, are deemed to be conventional as that term is described
        in
        the implementation guidance under Appendix A to SFAS 133 and further clarified
        in EITF 05-2 "The Meaning of "Conventional Convertible Debt Instrument" in
        Issue
        No. 00-19.”
 
 The
        Company accounts for convertible notes deemed conventional and conversion
        options embedded in non-convertible notes which qualify as equity under EITF
        00-19, in accordance with the provisions of Emerging Issues Task Force Issue
        (" **EITF** ") 98-5 "Accounting for Convertible Securities with Beneficial Conversion
        Features," and EITF 00-27 "Application of EITF 98-5 to Certain Convertible
        Instruments," Accordingly, the Company records, as a discount to convertible
        notes, the intrinsic value of such conversion options based upon the differences
        between the fair value of the underlying common stock at the commitment date
        of
        the note transaction and the effective conversion price embedded in the note.
        Debt discounts under these arrangements are amortized over the term of the
        related debt.
 
 The
        Company’s Debenture Notes that host embedded conversion options are deemed to be
        derivative financial instruments. As of December 31, 2006, the Company had
        no
        derivative financial instruments.
 
 The
        Company accounts for embedded conversion options in non-conventional convertible
        notes which do not qualify as equity under EITF 00-19, as derivative
        liabilities. Accordingly, the Company determines the fair value (as determined
        through a lattice model) of these embedded derivatives (usually conversion
        options and redemption rights). Such fair value is recorded as a debt discount
        up to the proceeds of the debt and any amount in excess of the proceeds of
        the
        debt is charged to operations at the security issuance date.
 
 The
          Company accounts for the issuance of common stock purchase warrants issued
          and
          other free standing derivative financial instruments in accordance with
          the
          provisions of EITF 00-19. Based on the provisions of EITF 00-19, the Company
          classifies as equity any contracts that (i) require physical settlement
          or
          net-share settlement or (ii) gives the Company a choice of net-cash settlement
          or settlement in its own shares (physical settlement or net-share settlement).
          The Company classifies as assets or liabilities any contracts that (i)
          require
          net-cash settlement (including a requirement to net cash settle the contract
          if
          an event occurs and if that event is outside the control of the Company)
          and
          (ii) give the counterparty a choice of net-cash settlement or settlement
          in
          shares (physical settlement or net-share settlement). The Company determines
          the
          fair value of these free standing instruments under the Black-Scholes Pricing
          Model using
          the
          following range of assumptions: 
 ·
                expected
                    volatility – 
                    350%-450% ·
                expected
                    dividend –
                    none ·
                risk-free
                    interest rate –
                    4.75%-5.00% ·
                contractual
                    term –
                    3-5 years 
 **Non-Employee
            Stock Based Compensation**
 
 The
        Company accounts for stock based compensation awards issued to non-employees
        for
        services, as prescribed by SFAS No. 123R, at either the fair value of the
        services rendered or the instruments issued in exchange for such services,
        whichever is more readily determinable, using the measurement date guidelines
        enumerated in EITF 96-18, "Accounting for Equity Instruments That Are Issued
        to
        Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
        or
        Services."
 
 F-11
  **TACTICAL
          AIR DEFENSE SYSTEMS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
          Ended December 31, 2006 and
          2005
  **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued**
 
 **Recently
        Issued Accounting Pronouncements**
 
 In
        February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
        No. 159, “Establishing the Fair Value Option for Financial Assets and
        Liabilities (“SFAS No. 159”). SFAS No. 159 permits all entities to
        choose to elect, at specified election dates, to measure eligible financial
        instruments at fair value. An entity shall report unrealized gains and losses
        on
        items for which the fair value option has been elected in earnings at each
        subsequent reporting date, and recognize upfront costs and fees related to
        those
        items in earnings as incurred and not deferred. SFAS No. 159 applies to
        fiscal years beginning after November 15, 2007, with early adoption
        permitted for an entity that has also elected to apply the provisions of
        SFAS
        No. 157, “Fair Value Measurements.” An entity is prohibited from
        retrospectively applying SFAS No. 159, unless it chooses early adoption.
        SFAS No. 159 also applies to eligible items existing at November 15, 2007
        (or early adoption date). The Company does not believe that the adoption
        of SFAS
        No. 159 will materially impact the Company’s consolidated financial
        statements.
 
 In
        December 2006, the FASB issued Staff Position (FSP) EITF 00-19-2, “Accounting
        for Registration Payment Arrangements.” This FSP specifies that the contingent
        obligation to make future payments or otherwise transfer consideration under
        a
        registration payment arrangement, whether issued as a separate agreement
        or
        included as a provision of a financial instrument or other agreement, should
        be
        separately recognized and measured in accordance with FASB Statement No.
        5,
“Accounting for Contingencies.” The guidance is effective for fiscal years
        beginning December 15, 2006. The Company has evaluated the new pronouncement
        and
        has determined that it will not have a significant impact on the determination
        or reporting of the Company’s financial results.
 
 SFAS
        No. 157, “Fair Value Measurements”, issued in September 2006, establishes a
        formal framework for measuring fair value and expands disclosure of fair
        value
        under generally accepted accounting principles. It defines and codifies the
        many
        definitions of fair value included among various other authoritative literature,
        clarifies and, in some instances, expands on the guidance for implementing
        fair
        value measurements, and increases the level of disclosure required for fair
        value measurements. Although SFAS No. 157 applies to and amends the provisions
        of existing FASB and AICPA pronouncements, it does not, of itself, require
        any
        new fair value measurements, nor does it establish valuation standards. SFAS
        No.
        157 applies to all other accounting pronouncements requiring or permitting
        fair
        value measurements, except for; SFAS No. 123 (R), share-based payment and
        related pronouncements, the practicability exceptions to fair value
        determinations allowed by various other authoritative pronouncements, and
        AICPA
        Statements of Position 97-2 and 98-9 that deal with software revenue
        recognition. This statement is effective for financial statements issued
        for
        fiscal years beginning after November 15, 2007, and interim periods within
        those
        fiscal years.
 
 In
        September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
        Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how
        the effects of prior year uncorrected misstatements should be considered
        when
        quantifying misstatements in current year financial statements. SAB No. 108
        requires companies to quantify misstatements using a balance sheet and income
        statement approach and to evaluate whether either approach results in
        quantifying an error that is material in light of relevant quantitative and
        qualitative factors. SAB No. 108 is effective for periods ending after November
        15, 2006. The Company is currently evaluating the impact of adopting SAB
        No. 108
        but does not expect that it will have a material effect on its financial
        statements.
 
 In
        June
        2006, FASB Interpretation 48 (" FIN
        48")
        "Accounting for Uncertainty in Income Taxes" was issued, which clarifies
        the
        accounting for uncertainty in income taxes recognized in an enterprise's
        financial statements in accordance with FASB Statement No. 109, Accounting
        for
        Income Taxes. FIN 48 prescribes a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken or expected to be taken in a tax return. FIN
        48
        also provides guidance on de-recognition, classification, interest and
        penalties, accounting in interim periods, disclosure, and
        transition. FIN 48
        is effective for fiscal years beginning after December 15, 2006, and earlier
        application of the provisions of FIN
        48 is
        encouraged if the enterprise has not yet issued financial statements, including
        interim financial statements, in the period that FIN 48 is adopted. The Company
        has not yet determined the impact of FIN
        48 on
        its financial statements.
 
 F-12
 **TACTICAL
            AIR DEFENSE SYSTEMS, INC.**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
            Ended December 31, 2006 and
            2005
 **NOTE
        3- ASSETS PURCHASED BY AERO**
 
 **Assets
        Purchased By Aero**
 
 In
        June of 2006, Aero, through its subsidiaries, acquired certain assets from
        three
        entities (“the Selling Entities”) owned 100% by Aero's controlling
        stockholder, Mark Daniels. The Selling Entities acquired these assets on
        December 29, 2005 from an unrelated entity in exchange for assets with a
        fair
        value of $4,540,000 and a promissory note of $2,200,000. The assets acquired
        included two MIG29 Aircrafts and four flight simulators and certain intellectual
        assets. The Selling Entities obtained appraisals from certified independent
        appraisers dated December 2005, which valued the aircrafts and simulators
        at
        $6,740,000.
 
 As
        consideration for the purchase of these assets, Aero (i) assumed
        indebtedness of $1.1 million owed to Daniels by the Selling Entities, (ii)
        assumed obligations under a promissory note in the principal amount of $2.2
        million, with interest at 8% per annum, which was originally issued in December
        2005, in connection with the acquisition of aircraft and simulators by the
        Selling Entities, and (iii) issued a $3,440,000 unsecured promissory note
        to
        Daniels. The $1.1 million due to Daniels is collateralized by TADS assets
        and is guaranteed by its subsidiaries.
 
 In
        reviewing the above transaction, Management determined that it had purchased
        a
        group of assets, rather than acquiring a business. Since Aero and the Selling
        Entities are commonly controlled, the recorded value of the assets purchased
        for
        accounting purposes is limited to the Selling Entities carrying value of
        the
        assets, which totaled $6,740,000 in June of 2006. The difference between
        the
        considerations provided to the Selling Entities of $7,051,255, inclusive
        of
        accrued interest assumed of $311,255, and the carrying value of the assets
        sold
        of $6,740,000 was $311,255. This amount was recorded as a distribution in
        June
        of 2006. Prior to this asset purchase, Aero did not have any business
        transactions with the Selling Entities.
 
 In
        connection with the reverse acquisition, TADS assumed the notes payable of
        $2.2
        million and $1.1 million and did not assume the note payable to Daniels of
        $3,440,000.
 
 **NOTE
        4 - CONVERTIBLE DEBENTURES**
 
 As
        part of the reverse acquisition, the Company assumed Convertible Debentures
        issued by Aero. During the period May 2002 through December 31, 2006, Aero
        sold
        4,715,895 Convertible Debentures (“Debentures”), along with Debenture Warrants
        to purchase 23,968,315 shares of common stock of Aero which were assumed
        by the
        Company at exercise prices ranging from $.15 to $1.00.
 
 Debentures
        and Debenture Warrants as of December 31, 2006 consist of the
        following:
 
 **Year
                  Ended**
              
              **Debentures**
              
              **Debenture
                  Warrants**2002
              
              $
              250,000
              
              
              1,666,6672003
              
              
              1,091,199
              
              
              7,141,3292004
              
              
              487,265
              
              
              3,248,4332005
              
              
              1,376,797
              
              
              9,645,311Total
                  Principal at December 31, 2005
              
              
              3,205,261
              
              
              21,701,7402006
              
              
              1,510,634
              
              
              2,266,575Total
                  principal at December 31, 2006
              
              
              4,715,895
              
              
              23,968,315Accrued
                  interest
              
              
              874,167Unamortized
                  Debt Discount
              
              
              (1,964,746
              )Net
                  Carrying Value at December 31, 2006
              
              $
              3,625,316
 
 Included
        in principal at December 31, 2006 is $366,602 due to the Company's majority
        stockholder which was converted in 2005 from shareholder loans to
        Convertible Debentures notes.
  F-13
 **TACTICAL
            AIR DEFENSE SYSTEMS, INC.**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
            Ended December 31, 2006 and
            2005
 **NOTE
        4 - CONVERTIBLE DEBENTURES-Continued**
 
 **2002-2005
        Convertible Debentures**
 
 The
        Debentures bear interest at 12% per annum on a simple non-compounded basis
        and
        were due and payable in three years from their respective issuance date.
        The
        Company was currently in default on substantially all of these Debentures
        as of
        December 31, 2006 and subsequently has received a waiver extending the maturity
        date of the notes which were in default through August 31, 2007. The
        Debentures and related accrued interest are convertible, at the holder's
        option, into shares of the Company’s common stock at a conversion rate equal to
        a range of $.15 to $1.00. The holder may accelerate the maturity date of
        the
        Debentures following the occurrence of certain events of default as defined
        under the Debenture Agreement.
 
 The
        Debenture Warrants are exercisable at per share exercise prices of $.15 and
        $1.00 per share of common stock, are exercisable immediately up until the
        fifth
        anniversary of the initial warrant date, and such exercise price is subject
        to
        adjustment for subsequent lower price issuances by the Company and other
        customary events including stock splits, reverse stock splits, issuance of
        convertible securities, sale of common stock and spin-offs. Pursuant to a
        September, 2006 agreement and amended agreement signed in June of 2007,
        all dilutive adjustments have been waived by the holders of the warrants
        from inception through August 31, 2007.
 
 Aero
        did not have sufficient authorized and unissued common stock to settle
        conversion and exercises under the Debentures and Debenture Warrants. In
        accordance with EITF issue No. 00-19 "Accounting for Derivative Financial
        Instruments Indexed to and Potentially Settled in a Company's Own Stock",
        Aero
        had classified all of its conversion options embedded in its Debentures and
        the
        Debenture Warrants as derivative obligations.
 
 These
        derivative liabilities were measured at fair value with changes in fair value
        reported in operations as long as they remain classified as liabilities.
 
 Aero
        valued the embedded derivative obligations using the Lattice Model and uses
        the
        Black-Scholes Pricing Model for its warrant derivatives. Aero valued the
        initial
        derivative obligations at the date of grant/issuance and recorded a debt
        discount up to the amount of the proceeds of the Debentures. Any excess of
        the
        value of the derivative obligations at issuance/grant date over the proceeds
        of
        the Debenture was immediately charged to interest expense.
 
 During
        the year ended December 31, 2005, $2,577,988 was charged to interest expense
        related to the excess discussed above.
 
 Since
        TADS has adequate authorized and unissued shares to settle the conversion
        and
        exercises under the Debenture and Debenture Warrants and these contracts
        could
        be settled in unregistered shares of TADS common stock, upon the closing
        of the
        reverse acquisition, the warrants and embedded derivatives qualified as equity
        in accordance with EITF No. 00-19 and were reclassified to additional paid-in
        capital.
 
 The
        fair value of all of the Company’s derivative obligations prior to the reverse
        merger acquisition on December 15, 2006 totaled $29,930,094. The change in
        the
        fair value of the derivative liabilities from January 1, 2006 through December
        15, 2006 and the year ended December 31, 2005 resulted in a loss of $27,599,597
        on derivative obligations for the year ended December 31, 2006 and a gain
        of
        $8,659,065 on derivative obligations for the year ended December 31,
        2005.
  F-14
  **TACTICAL
          AIR DEFENSE SYSTEMS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
          Ended December 31, 2006 and
          2005
  **NOTE
        4 - CONVERTIBLE DEBENTURES-Continued**
 
 **2006
        Debentures**
 
 During
        2006, Aero issued to investors $200,060 aggregate principal amount of its
        12%
        Convertible Debentures convertible into 1,333,733 shares of TADS common stock
        and warrants to purchase 1,333,733 shares of common stock at a per share
        exercise price of $.15 per share. The terms of these securities are the same
        as
        the securities issued in 2005. The Debentures mature three years from the
        issue
        date.
 
 During
          2006, Aero issued to an investor $422,176 aggregate principal amount of
          8%
          Convertible Debentures convertible into 939,369 shares of TADS common stock
          at a
          conversion price of $.45 per share. The Debentures mature on April 18,
          2009.
          Under the terms of the Debentures, the Company is prohibited from making
          any
          distribution to its stockholders without the Debenture holders'
          consent.
 
 During
        2006, Aero issued to an investor $20,000 aggregate principal amount of its
        12%
        Convertible Debentures and warrants to purchase 40,000 shares of TADS common
        stock at an exercise price of $.50 per share. The Debentures are convertible
        into TADS shares of common stock on a converted basis at $.50 per share.
        The
        terms of these securities are substantially the same as the securities issued
        in
        2005. The Debentures mature three years from the issuance date.
 
 The
        gross proceeds of the total convertible debt issued by Aero in 2006 of $642,236
        were recorded net of a debt discount of $358,417. The Debenture Warrants
        were
        initially valued at $178,413 and the embedded derivatives were valued at
        $180,004. The debt discount is being amortized over the term of the
        debt.
 
 **December
        15** **th** **Financing**
 
 Between
        January 1, 2006 and December 14, 2006, Aero received proceeds of loans totaling
        $868,398. These original loans did not provide for interest. Commencing with
        the
        reverse acquisition, these notes were modified to conform to the above described
        Convertible Debentures. The Debentures are convertible into TADS common stock
        at
        conversion prices ranging from $.45 to $1.00 per share and provide for warrants
        to purchase  892,842
        shares of TADS common stock at exercise prices ranging from $.45 to $1.00.
        The
        Debentures bear interest of 12% and are due on October 19, 2009. The
        Debenture Warrants are exercisable at per share exercise prices of $.15 and
        $1.00 per share of common stock, are exercisable immediately up until the
        fifth
        anniversary of the initial warrant date, and such exercise price is subject
        to
        adjustment for subsequent lower price issuances by the Company and other
        customary events including stock splits, reverse stock splits, issuance of
        convertible securities, sale of Common Stock and spin-offs.
  The
        gross
        proceeds of the $868,398 were allocated 22.1% or $191,869 to the Debentures
        and
        77.9% or $676,529 to the Warrants. The effective conversion price of the
        Debentures was below the market price of TADS common stock at December 15,
        2006,
        which resulted in a beneficial conversion feature of $191,869. In accordance
        with EITF 00-27 the amount allocated to the beneficial conversion feature
        was
        limited to the net proceeds of the offering less the value allocated to the
        Warrants.
  As
        of December 31, 2006, all of the principal and accrued interest related to
        the
        Convertible Debentures has been classified as a current liability as they
        are either in default or due within one year.
 
 F-15
  **TACTICAL
          AIR DEFENSE SYSTEMS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
          Ended December 31, 2006 and
          2005
  **NOTE
        4 - CONVERTIBLE DEBENTURES-Continued**
 
 **Registration
        Rights**
 
 In
        connection with the issuance of the Convertible Debentures, the Company was
        required to file a Registration Statement to register the shares of common
        stock issuable upon the conversion of the Debentures and the exercise of
        the
        Debenture Warrants. The Company will be obligated to the pay the holders
        of the Debentures certain liquidated damages in the event the shares are
        not registered within sixty days of the date of issuance. The Company has
        not
        filed the Registration Statement and therefore must pay the holders of the
        Debentures liquidated damages in the aggregate amount equal to two percent
        (2%)
        for each (thirty) days (or part thereof) per month until such Registration
        Statement is filed and declared effective. As of December 31, 2005, the Company
        has accrued $1,074,188 in liquidated damages. In September of 2006, the holders
        of Debentures waived the right to receive such liquidating damages and agreed
        to
        postpone this registration requirement through January 31, 2007 and in June
        of
        2007 agreed to postpone the registration requirement through August 31, 2007.
        During the year ended December 31, 2006, the Company eliminated the accrued
        liability which resulted in income of $1,074,188.
 
 **NOTE
        5 - CONVERTIBLE NOTES PAYABLE**
 
 The
        following table summarizes the Convertible Notes Payable at December 31,
        2006:
  Promissory
                  note(1)
              
              $
              2,200,000Secured
                  promissory note(2)
              
              
              1,100,000Promissory
                  note(3)
              
              
              250,000Accrued
                  interest on assumed notes
              
              
              311,2553,861,255Less:
                  current portion
              
              
              -Long-term
                  portion
              
              
              3,861,255Less:
                  Unamortized discount(4)
              
              
              (3,792,148
              )Balance
                  at December 31, 2006
              
              $
              69,107
 
 In
        connection with the Asset Purchase Agreement entered into in June 2006, Aero
        incurred the following debt:
 
 (1)
              A
                  $2,200,000 promissory note that was assumed by Aero in connection
                  with the
                  June 2006 acquisition by Aero of the two MIG 29 aircraft and flight
                  simulators that were ultimately acquired by Tactical Air Defense
                  Systems.
                  Under the terms of the note, it has a principal balloon payment
                  in
                  thirty-six months of the original agreement which was dated December
                  31,
                  2005. Interest is payable at a rate of eight percent per annum.
                  There is
                  no penalty for payment before the maturity date. This note was
                  assumed by
                  TADS as part of the acquisition by TADS (Note 3) and the debt is
                  convertible into TADS common stock at a price of $0.50 per share
                  during
                  the one month period prior to the maturity
                  date.
 
 (2)
              A
                  $1,100,000 secured promissory note reflecting indebtedness assumed
                  by Aero
                  in connection with the June 2006 acquisition of assets by Aero.
                  This note
                  is payable to Daniels and under the terms of the note, the note
                  is due in
                  installments beginning on July 1, 2008, and monthly thereafter,
                  to and
                  including June 30, 2011 (“the “Maturity Date”), the Company shall pay to
                  the note holder a total of thirty-six (36) monthly installments
                  of
                  principal, each in the amount of $30,555, each installment of principal
                  to
                  be accompanied by payment of accrued and unpaid interest on the
                  then
                  unpaid principal balance of the Note. Interest is payable at a
                  rate of 12%
                  percent per annum. The note is guaranteed by the Company's subsidiaries
                  and collateralized by all of the Company's assets. This note was
                  assumed
                  by TADS and the debt is convertible into TADS common stock at $.50
                  per
                  share.
 
 F-16
  **TACTICAL
          AIR DEFENSE SYSTEMS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
          Ended December 31, 2006 and
          2005
  **NOTE
        5 - CONVERTIBLE NOTES PAYABLE -Continued**
 
 (3)
              In
                  April 2006, as part of a settlement agreement with a former employee,
                  Aero
                  issued an unsecured promissory note in the amount of $250,000.
                  Under the
                  terms of the note, the note is due in installments beginning on
                  April 13,
                  2008, and monthly thereafter, to and including April 13, 2011 (“the
                  “Maturity Date”), the Company shall pay to the note holder a total of
                  thirty-six (36) monthly installments of principal, each in the
                  amount of
                  $6,944, each installment of principal to be accompanied by payment
                  of
                  accrued and unpaid interest on the then unpaid principal balance
                  of the
                  note. Interest is payable at a rate of twelve percent per annum.
                  The note
                  is guaranteed and secured by the Tactical Air Defense Systems
                  Subsidiaries, and collateralized by the Company's assets. The Note
                  was
                  assumed by TADS and is convertible into TADS stock at $0.50 per
                  share.
 
 (4)
                In
                    accordance with EITF 98-5 commencing on December 15, 2006, the
                    Company
                    recorded a debt discount of $3,861,255 related to the intrinsic
                    value of
                    the beneficial conversion option of the above described debt.
                    The embedded
                    conversion options qualified as equity and their recorded value
                    was
                    limited to the gross proceeds of the debt pursuant to EITF 98-5.
                    The debt
                    discount is being amortized to interest expense over the term
                    of the debt.
                    Amortization of such debt discount totaled $69,107 for the year
                    ended
                    December 31, 2006.
 
 **NOTE
        6 - INCOME TAXES**
 
 There
        is no provision for income taxes for the years ended December 31, 2006 and
        2005.
        Although the 2005 net income was $3,597,805, there was no provision for income
        taxes for the year ended December 31, 2005 as the derivative gain of $8,659,065
        is not taxable and is considered a permanent difference.
  The
          Company has minimal net operating loss carry forwards for income tax purposes
          at
          December 31, 2006. Any resultant deferred tax asset has been offset by
          a
          valuation allowance.
 
 The
        reconciliation of the federal statutory rate to the effective tax rate is
        as
        follows:
 
 Years
                  Ended December 31,2006
              2005Federal
                  statutory rate
              (34%)
              34%Permanent
                  differences
                (derivative
                  gains and losses and non-deductible interest)
              34%
              (34%)Effective
                  Tax Rate
              -0-
              -0-
 
 **NOTE
        7 - STOCKHOLDERS' EQUITY**
 
 Effective
        as of December 20, 2006, the Company filed an amendment to its Articles of
        Incorporation (the “Amendment”) to increase the Company’s authorized capital
        stock from 100,000,000 shares of common stock, par value $.001 per share
        only,
        to 350,000,000 shares, par value $.001 per share, of which 300,000,000 shares
        are common stock and the remaining 50,000,000 shares are a newly created
        class
        of “blank check” preferred stock. As of December 31, 2006, the Company has no
        shares of preferred stock issued or reserved for issuance, and the Company’s
        board of directors has never designated the rights, preferences or privileges
        of
        a preferred stock.
  On
        the
        effective date of the reverse acquisition (December 15, 2006), the Company
        reclassified $45,737,637 of accumulated deficits to paid-in-capital. This
        amount
        represented Aero’s accumulated deficit on December 15, 2006 which was not
        transferred to TADS as part of reverse acquisition.
  **Common
        Stock Issuances**
 
 During
        2006, Aero issued to an officer and director of the Company 2,452,254 shares
        of
        Common Stock as settlement of accrued compensation at December 31, 2005 of
        $245,227 and 1,447,720 shares of common stock for stock based compensation
        of
        $144,773 for the year ended December 31, 2006.
 
 F-17
  **TACTICAL
          AIR DEFENSE SYSTEMS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
          Ended December 31, 2006 and
          2005
 **NOTE
        7 - STOCKHOLDERS' EQUITY-Continued**
 
 **Sale
        of Units**
 
 Pursuant
        to a 2006 Private Placement, on March 2, 2007, TADS sold to eleven investors
        an
        aggregate 629,911 units, each a “unit” at a purchase price of $0.55 per unit.
        Each unit is comprised of (i) one share of common stock, (ii) a Class A Warrant
        to purchase one share of common stock at $1.00 per share and expiring on
        March
        2, 2008 and (iii) a Class B Warrant to purchase one share of common stock
        at
        $1.50 per share and expiring on March 2, 2010. The gross proceeds of this
        offering totaled $346,451. During 2006, TADS received advances from this
        financing totaling $346,451. This amount was initially recorded as a liability
        at December 31, 2006 and in 2007 will be reclassified to equity.
  **Warrants**
 
 At
        December 31, 2006 outstanding warrants to purchase common stock consisted
        of the
        following:
 
 **No.
                  of**
                **Warrants**
              
              **Weighted**
                **Average
                  Price**Balance
                  at January 1, 2005
              
              
              12,056,428
              
              $
              0.15Issued-
                  2005
              
              
              9,645,312
              
              $
              0.15Balance
                  - December 31, 2005
              
              
              21,701,740
              
              $
              0.15Issued-2006
              
              
              2,266,575
              
              $
              0.67Balance
                  December 31, 2006
              
              
              23,968,315
              
              $
              0.20Potential
                  Proceeds Assuming all Exercised atDecember
                  31, 2006
              
              $
              4,766,435
 
 **Earnings
        per Share**
 
 Securities
        that could potentially dilute basic earnings per share (" **EPS** ")
        in the future that were not included in the computation of diluted EPS because
        to do so would have been anti-dilutive for the periods presented consist
        of the
        following at December 31, 2005:
 **Principal
                  and Interest**
              
              **Additional
                  Number of Potential Common Shares if
                  Converted/Exercised**Convertible
                  Debentures
              
              $
              5,590,062
              
              
              30,547,043Notes
                  Payable
              
              $
              4,057,246
              
              
              8,099,493Warrants
                  to purchase Common Stock
              
              
              N/A
              
              
              23,968,315Accrued
                  Consulting fees
              
              $
              300,000
              
              
              600,000Total
                  at December 31, 2006
              
              
              
              
              
              63,214,851
 
 Substantial
        issuances after December 31, 2006:
 
 Common
                  Stock issued and issuable to consultants
              2,065,000Common
                  Stock issued as compensation
              4,340,000Preferred
                  Stock issued as compensation, on a converted basis
              10,400,000Preferred
                  Stock issued to consultants, on a converted basis
              2,400,000Exercise
                  of warrants
              6,234,238Conversion
                  of convertible debentures into common stock
              2,236,586Sale
                  of Units-2006 Private Placement
              629,911Class
                A Warrants
              629,911Class
                B Warrants
              629,911
 
 F-18
 **TACTICAL
            AIR DEFENSE SYSTEMS, INC.**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
            Ended December 31, 2006 and
            2005
 **NOTE
        8- COMMITMENTS**
 
 **Consulting
        Agreement** ****
 
 On
        December 15, 2006 the Company entered into an agreement with a consultant
        to
        provide investor relation services. The term of this agreement is for six
        months. As consideration for the consultant’s investor relations services, the
        Company agreed to pay the consultant: (a) a monthly fee of $5,000 and following
        the initial six-month period and without any further action by either party
        this
        Agreement shall be renewed automatically on a month-to-month basis for a
        monthly
        fee of $5,000, (b) a fee of 250,000 shares of the Company’s common stock, and
        (c) all of the consultant’s out-of-pocket expenses. The shares were issued in
        March of 2007 and the Company terminated the agreement in March of
        2007.
  **Compensation
        Agreements**
 
 On
        September 1, 2003, Aero entered into an agreement with a consultant to perform
        long-term strategic planning for Aero, and, in such capacity, to provide
        general
        advice to Aero on business and financial
        matters. The term of the agreement is three years. The agreement provides
        for a
        total fee of $300,000 or $100,000 per year. As of December 31, 2006, $300,000
        has been accrued and is included as part of accrued liabilities. As part
        of the
        agreement with TADS, TADS assumed this obligation and such debt is convertible
        into 600,000 shares of TAD’s common stock.
 
 Pursuant
        to a compensation agreement dated January 3, 2007, the Company’s Chief Executive
        Officer is being paid a salary of $220,000 per annum for a period of three
        years.
 
 Pursuant
        to a compensation agreement dated January 3, 2007, the Company’s Vice President
        is being paid a salary of $220,000 per annum for a period of three
        years.
 
 Pursuant
        to a compensation agreement dated January 3, 2007, a director is being paid
        a
        salary of $75,000 per annum for a period of three years.
 
 Sublease
          of Office and Hangar Space at Grayson County Airport
 
 Prior
        to the reverse acquisition with TADS, Aero rented its operating facilities
        from
        International Tactical Training Center, Inc., an entity that is 51% owned
        and
        controlled by Mark Daniels, dated May 8, 2006 (the “Sublease”). The sublease
        covers 15,397 square feet of office space in Building No. 110 located at
        5501
        Airport Drive, Denison, Texas and 36,598 square feet of land also at the
        Grayson
        County Airport its office space. The Sublease is a gross lease and rental
        under
        the sublease is $9,640 per month, subject to an annual increase equal to
        the
        increase in the consumer price index, which increase will not be less than
        2%
        nor more than 8% over the previous year's rental.
  F-19
 **TACTICAL
            AIR DEFENSE SYSTEMS, INC.**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
            Ended December 31, 2006 and
            2005
 **NOTE
        8- COMMITMENTS -Continued**
 
 With
        respect to the office space, the sublease expires in May, 2046. The balance
        of
        the sublease, which relates to the land, expires in April, 2011, pursuant
        to
        operating lease agreements expiring at various dates through 2010. The leases
        for certain facilities contain escalation clauses relating to increases in
        real
        property taxes as well as certain maintenance costs TADS assumed the sublease
        between Aero and International Tactical Training Center. Future minimum
        operating lease commitments, along with sub-lease income consisted of the
        following at December 31, 2006:
 
 **Year
                  Ending December 31,**
              **Operating
                  Leases**2007
              $115,6802008
              115,6802009
              115,6802010
              115,6802011
              115,680Thereafter
              539,520Total
                  Minimum Obligations
              $1,117,920
 
 Rent
        expense for operating leases approximated $95,000 and $89,000 for the years
        ended December 31, 2006 and 2005, respectively.
 
 As
        of May 31, 2007, under the terms of the lease agreement, the Company is in
        default and owes approximately $30,000.
 
 **Periodic
        Filings**
 
 Under
        a 2005 rule change, OTC Bulletin Board ("OTCBB") issuers that are cited for
        filing delinquency three times in a 24-month period and those removed for
        failure to file two times in a 24-month period will be ineligible for quotation
        by an NASD member. Following removal under this new rule, an issuer's securities
        would again become eligible for quotation on the OTCBB when the issuer has
        filed
        periodic reports for one year in a timely manner.
 The
          Company has not filed its 2006 form 10-KSB with the Security and Exchange
          Commission (“SEC”) within the grace period. The Company has a schedule hearing
          with the NASD on June 14, 2007 to determine its eligibility to remain quoted
          on
          the OTCBB. If the Company is not successful in its hearing or is late in
          its
          future filings over the next two years, the Company securities will become
          listed on the pink sheets.
  **NOTE
        9 - SUBSEQUENT EVENTS**
 
 **Debt
        Issuances in Year 2007**
 
 During
        the period January 1, 2007 through June 8, 2007, the Company received loan
        proceeds of $697,000 from four unrelated parties. The loans provide for interest
        at an annual rate of 12%. The loans are due within three years of issuance.
        The
        loans are convertible into TADS common stock at a conversion rate of $1.00
        per
        share and provide for warrants to purchase shares of TADS common stock at
        an
        exercise price $1.00 per share.
  F-20
 **TACTICAL
            AIR DEFENSE SYSTEMS, INC.**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
            Ended December 31, 2006 and
            2005
 **NOTE
        9 - SUBSEQUENT EVENTS -Continued**
 
 **Preferred
        Stock**
 
 SERIES
        A
        PREFERRED STOCK:
 
 On
        March
        21, 2007, the Company filed a Certificate of Designation of Series A Preferred
        Stock (the “Series A Certificate of Designation”) with the Secretary of State of
        the State of Nevada, designating a series of 50,000,000 shares of Preferred
        Stock of the Company, $.001 par value (the “Series A Preferred Stock”). Pursuant
        to the Series A Certificate of Designation, holders are entitled
        to:
 
 ·
              elect
                  one director to the Company’s board of
                  directors
 ·
              vote
                  on all other matters on a 25 votes per share Common Stock
                  basis.
 ·
              The
                  Series A Preferred Stock shall, with respect to dividend rights,
                  rights on
                  redemption, rights on conversion and rights on liquidation, winding
                  up and
                  dissolution, rank senior to all common stock, warrants and options
                  to
                  purchase Common Stock established by the Board or the Stockholders
                  (all of
                  such equity securities of the Corporation to which the Series A
                  Preferred
                  Stock ranks senior are collectively referred to herein as “JUNIOR
                  STOCK”).
 ·
              Each
                  share of Series A Preferred Stock is initially convertible into
                  2 shares
                  of the Common Stock of the Company, subject to adjustment for stock
                  splits, recapitalization or other
                  reorganizations.
  F-21
 **TACTICAL
            AIR DEFENSE SYSTEMS, INC.**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 Years
            Ended December 31, 2006 and
            2005
 **NOTE
        9 - SUBSEQUENT EVENTS -Continued**
 
 In
        addition, the Series A Preferred Stock:
 
 ·
              have
                  broad-based weighted average antidilution protection that will
                  cause the
                  conversion price to adjust downward in the event that the Company
                  issues
                  shares of common stock or securities convertible into common stock
                  at a
                  price of less than the conversion price of the Series A Preferred
                  Stock
                  then in effect.
 
 ·
              The
                  shares of Series A Preferred Stock may be converted into common
                  stock at
                  the option of the holder. In addition, at any time after the closing
                  bid
                  price for the Company’s common stock on the NASDAQ OTCBB or the primary
                  United States exchange on which the Common Stock is then traded
                  exceeds
                  $5.00 during any five consecutive trading days, the Company may,
                  at its
                  sole option, convert the Series A Preferred and any accrued but
                  unpaid
                  dividends into common shares at the then-applicable conversion
                  price by
                  providing written notice of such conversion to the holders of the
                  Series A
                  Preferred; provided that there is an effective registration statement
                  under the Securities Act registering the resale of the Common Stock
                  to be
                  issued upon such conversion.
 
 Each
        share of Series A Preferred Stock is entitled to receive a dividend of 7%
        per
        annum. The dividend begins to accrue on January 1, 2007 and will be payable
        quarterly thereafter. The dividend is cumulative. In the event of a liquidation
        or acquisition of the Company, the holders of the Series A Preferred Stock
        will
        be entitled to receive an amount equal to any accrued and unpaid dividend
        prior
        and in preference to any distributions to the holders of the common stock.
        Thereafter, the holders of the Series A Preferred Stock will be entitled
        to
        participate in distributions on an as converted to common stock
        basis.
 
 ·
              Shares
                  of Series A Preferred may be redeemed, in whole or in part, by
                  the Company
                  out of funds lawfully available therefore from the holders of then
                  outstanding shares of Series A Preferred on a pro rata basis, at
                  any time
                  by providing written notice to the holders of the Series A Preferred
                  owned
                  by each holder, that number of outstanding shares of Series A Preferred
                  owned by each holder, that number of outstanding shares of Series
                  A
                  Preferred that the Company has elected to purchase for the following
                  consideration: (i) an amount equal to a price per share equal to
                  the $4.00
                  plus any accrued and unpaid dividends multiplied by the number
                  of shares
                  of Series A Preferred being redeemed from such holder and (ii)
                  the
                  issuance of the number of shares of Common Stock equal to seventeen
                  and
                  one-half percent (17.5%) of the shares of Common Stock then issuable
                  upon
                  conversion of the shares of Series A Preferred being redeemed from
                  such
                  holder. A cash payment will be provided in lieu of any fractional
                  shares
                  of common stock.
 
 **Stock
        Issuances in Year 2007**
 
 During
        the period January 1, 2007 through June 8, 2007 various holders of warrants
        exercised warrants to purchase 6,234,238 shares of the Company’s common
        stock.
 
 During
        the period January 1, 2007 through June 8, 2007 various holders of the
        convertible debentures converted $274,060 of debentures plus accrued interest
        of
        $58,521 into 2,236,586 shares of common stock.
 
 During
        the period January 1, 2007 through May 31, 2007, the Company issued 2,065,000
        of
        shares of common stock and 1,200,000 of its Series A Preferred Stock for
        services.
 
 During
        the period January 1, 2007 through May 31, 2007, the Company issued 4,340,000
        shares of common stock and 5,200,000 shares of its Series A Preferred Stock
        to
        various officers and directors for compensation due under various employment
        agreements.
  F-22
 **Item
        8. Changes in and Disagreements with Accountants on
        Accounting and Financial Disclosure**





In
      connection with the AeroGroup Acquisition, as of December 15, 2006, we dismissed
      our accounting firm, James Stafford, Chartered Accountants and engaged Marcum
      and Kliegman, LLP, as the Company’s independent registered public accountants.
      The Board has approved the change in accountants and appointment of Marcum
      and
      Kliegman, LLP.





Stafford,
      Chartered Accountant's audit report on the financial statements for the years
      ended December 31, 2005 did not contain any adverse opinion or disclaimer of
      opinion, and was not modified as to uncertainty, audit scope or accounting
      principles. James Stafford, Chartered Accountant did not serve as our
      accountants during fiscal year 2004. There have been no disagreements with
      James
      Stafford, Chartered Accountants on any matter of accounting principles or
      practices, financial statement disclosure, or auditing scopes or procedures.




Inasmuch
      as we had no disagreements with our former accountants on any matter of
      accounting principles or practices, financial statement disclosure, or auditing
      scopes or procedures, we did not consult with our new accountants on any such
      disagreement. The company has not consulted with Marcum and Kliegman, LLP during
      the last two fiscal years or any subsequent interim period on either the
      application of accounting principles or the type of audit opinion that might
      be
      provided on the Company’s financial statement.





**Item
      8A. Controls and Procedures**





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


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




(b) **Changes
      in Internal Controls**





During
      the period ended December 31, 2006, there were no changes in our internal
      control over financial reporting identified in connection with the evaluation
      required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.





**Item
      8B. Other Information**





None





**Item
      9. Directors, Executive Officers, Promoters and Control
      Persons; Compliance with Section 16(a) of the Exchange
      Act**





The
      following table sets forth certain information regarding our directors and
      executive officers as of May 28, 2007. To facilitate the AeroGroup Acquisition
      and resulting change of control, Mr. Derrick Sinclair, our former officer and
      director, temporarily resigned from all positions in August of 2006 and
      appointed the new management consisting of Mark Daniels, Charles Searcok and
      John Riley Farley. Mr. Sinclair’s resignation became final at the closing of the
      AeroGroup Acquisition on December 15, 2006. Mr. Searock has since resigned
      from
      all positions as of December 31, 2006.




**Name**
            
            **Age**
            
            **Position**Mark
                Daniels
            
            41
            
            Director,
                Secretary and Treasurer, Principal Financial Officer and Principal
                Executive Officer and President, since January 1, 2007.Victor
                Miller
            
            42
            
            DirectorFred
                Daniels
            
            66
            
            DirectorCharles
                Searock
            
            70
            
            President
                (Resigned, December 31, 2006)John
                Riley Farley
            
            57
            
            Vice
                President





29




**Mark
      Daniels.** Mr. Mark
      Daniels was appointed as the sole director and Chairman of the Company and
      as
      its Secretary and Treasurer on August 22, 2006 and was appointed as President
      as
      of January 1, 2007. Currently, and since 2002, Mr. Daniels has been the sole
      board member, President and the Chief Executive officer of AeroGroup. Prior
      to
      that time, and since 1998, Mr. Daniels was Vice President and a Manager of
      Global Aviation Associates, Inc., a Florida based aircraft leasing company
      that
      leased military and non-military aircraft to government and commercial
      contractors. Between 1988 and 1998, Mr. Daniels was President and founder of
      National Search Services, Inc, an investigative services company. Between 1989
      and 2001, Mr. Daniels was elected as a director of the National Aviation Museum,
      a Not-For-Profit corporation located in Oklahoma, where Mr. Daniel’s primary
      responsibility was the acquisition and importation of military fighter aircraft.
      Mr. Mark Daniels is primarily responsible for the development of AeroGroup’s
      business as an aviation government contractor to outsource fighter aircraft
      for
      training and other purposes to the U.S. Government and other countries. Mr.
      Daniels is also an inventor, having authored numerous patents directly related
      to utility and methods of military type aircraft. Certain of these patents
      are
      owned by AeroGroup and were acquired as part of the AeroGroup Acquisition.




**Fred
      Daniels** . 
      On January 8, 2007, Fred Daniels was appointed to serve as a Director of the
      Company. Mr. Fred Daniels has been involved in aviation over 40 years, having
      been employed by General Dynamics from 1960 through 1972. At General Dynamics,
      Mr. Fred Daniels was involved with projects such as the F-111 and F-16 program.
      Over the last 5 years, Mr. Fred Daniels has also acted as a consultant in
      connection with the acquisition of aircrafts, and served as a consultant to
      AeroGroup Incorporated from 2002 through 2007. Mr. Fred Daniels is the father
      of
      our President, Secretary and Treasurer, Mark Daniels.




**Victor
      Miller** .  On
      January 8, 2007, Victor Miller was appointed to serve as a Director of the
      Company. Mr. Miller has over 21 years of aviation management experience. As
      a
      civilian pilot, Victor has logged many flight hours in various military high
      performance jet fighters. Mr. Miller served as maintenance director of Million
      Air, a nationally known chain of fixed base operators, from 1987 through 1996.
      Mr. Miller also served as President of his own aviation company, Victor Aviation
      Inc, from 1996 through 2002. From 2002 through 2007 Mr. Miller served as a
      Director at AeroGroup Incorporated where Mr. Miller assisted with forming a
      viable company to fulfill the business case of outsourcing commercial companies
      to support the U.S. Military.




**John
      Riley Farley.** Mr.
      Farley was appointed as Vice President of the Company on August 22, 2006. Prior
      to such time, and since 1998, Mr. Farley has been a manager of Area Wide
      Realtors Inc., a commercial and residential real estate development and finance
      firm. Between 1980 and 1997 Mr. Farley served in various executive capacities
      of
      First National Bank of Whitewright (Sherman, Whitewright and Dennison branches),
      where he was eventually appointed as President and Chief Executive Officer.
      Prior to such time, Mr. Farley founded and operated his own livestock feed
      corporation in Texas. Mr. Farley Served in the Air Force Reserve at Carswell
      Air
      force Base -336 th Squadron, between 1970 and 1976 when he was Honorably Discharged.





**Lt.
      General (Ret.) Charles Searock.** Mr.
      Searock was appointed President of the Company effective August 22, 2006. From
      December 1996 through his retirement in August 2001, Mr. Searock was Chief
      Executive Officer of Dynasil Corp. Mr. Searock entered the Air National Guard
      in
      1954 and entered the U.S. Air Force in 1956 and served as Commander of the
      380 th and
      393 rd Bombardment Squadron and in numerous other distinguished capacities and officer
      positions until his retirement from the military in 1993. Prior to his
      retirement, he attained the rank of Lt. General. Mr. Searock holds numerous
      airmen ratings and aircraft type ratings for both civilian and military aircraft
      and has over 7,000 flying hours. Mr. Searock earned his Bachelor of Science
      degree in 1954 from the University of Nebraska at Omaha. Mr. Searock resigned
      from all positions with the company effective as of December 31, 2006 due to
      non-payment of our salary obligations to him.




The
      directors of the Company do not receive any compensation for their services
      as
      members of the Board of Directors, but are entitled to reimbursement for
      expenses incurred in connection with their attendance at Board of Directors’
meetings. Our by-laws also provide that they may be paid a fee for their
      services as directors, although we do not currently pay such fees. Officers
      are
      appointed by the Board of Directors and serve at the discretion of the
      Board.





30





**Audit
      Committee**





Because
      we are not an issuer listed on a national securities exchange or listed in
      an
      automated inter-dealer quotation system of a national securities association,
      we
      are not required to have an audit committee. Although we hope to have an audit
      committee established at some time in the near future, we have not done so
      yet.
      Since we have not established such a committee, we have not identified any
      member of such a committee as a financial expert. Our board of directors
      currently consists of one member, Mr. Mark Daniels. Accordingly, we do not
      have
      any audit committee financial expert or independent person on our board of
      directors.





**Family
      Relationships**





There
      are
      no family relationships among our officers, directors, or affiliates, except
      that Mr. Fred Daniels is the father of Mark Daniels.





**Involvement
      in Certain Legal Proceedings** .





Except
      as
      set forth herein, no officer or director of the Company has, during the last
      five years: (i) been convicted in or is currently subject to a pending a
      criminal proceeding; (ii) been a party to a civil proceeding of a judicial
      or
      administrative body of competent jurisdiction and as a result of such proceeding
      was or is subject to a judgment, decree or final order enjoining future
      violations of, or prohibiting or mandating activities subject to any federal
      or
      state securities or banking laws including, without limitation, in any way
      limiting involvement in any business activity, or finding any violation with
      respect to such law, nor (iii) has any bankruptcy petition been filed by or
      against the business of which such person was an executive officer or a general
      partner, whether at the time of the bankruptcy of for the two years prior
      thereto.





**Compliance
      with Section 16(a) of the Exchange Act**





Section
      16(a) of the Exchange Act requires our directors and executive officers, and
      persons who beneficially own more than 10% of a registered class of our equity
      securities, to report their initial beneficial ownership and any subsequent
      changes in that beneficial ownership of our securities to the Commission.
      Directors, executive officers and beneficial owners of more than 10% of our
      Company’s Common Stock are required by SEC regulations to furnish us with copies
      of all Section 16(a) forms that they file.




Messrs.
      Daniels and Searock have each timely filed a Form 3 upon appointment to their
      respective officer positions in August of 2006, however, Mr. Farley filed one
      late report as a result of his appointment.




**Code
      of Ethics**





To
      date,
      we have not adopted a Code of Ethics as described in Item 406 of Regulation
      S-B.
      Given our recent acquisition of AeroGroup’s assets, we have not yet had the
      opportunity to adopt a code of ethics. However, we intend to adopt a code of
      ethics as soon as practicable.




31




**Item
      10. Executive Compensation**





**SUMMARY
      COMPENSATION TABLE**





The
      following table sets forth the cash compensation (including cash bonuses) paid
      or accrued and equity awards granted by us for years ended December 31, 2006
      to
      our Chief Executive Officer and our most highly compensated officers other
      than
      the Chief Executive Officer at December 31, 2006 whose total compensation
      exceeded $100,000.





Name
                & Principal Position
            Year
            Salary
                ($)
            Bonus
                ($)
            Stock
                Awards($)
            Option
                Awards ($)(7)
            Non-Equity
                Incentive Plan Compensation ($)
            Change
                in Pension Value and Non-Qualified Deferred Compensation Earnings
                ($)
            All
                Other Compensation ($)
            Total
                ($)Mark
                Daniels
            2006
            0
            
            220,227Charles
                Searock
            2006
            0John
                Riley Farley
            2006
            0(





**OUTSTANDING
      EQUITY AWARDS**





The
      following table sets forth information with respect to outstanding equity awards
      at December 31, 2006.





Option
                Awards
            Stock
                AwardsName
            Number
                of Securities Underlying Unexercised
              options
                / Unexercisable
            Number
                of Securities Underlying Unexercised Options /
                Unexercisable
            Equity
            Option
            Option
            Number
            Market
            Equity
            Equity
                Incentiveof
            Incentive
            Exercise
            Expiration
            of
                Shares
            Value
                of
            Incentive
            Plan
                Awards:Plan
            Price
            Date
            or
                Units
            Shares
                or
            Plan
                Awards:
            Market
                or PayoutAwards:
            ($)
            
            of
                Stock
            Units
                of
            Number
            ValueNumber
            
            
            That
                Have
            Stock
            of
            ofof
            
            
            Not
            That
                Have
            Unearned
            UnearnedSecurities
                Underlying
            
            
            Vested
            Not
            Shares,
            Shares,Unexercised
            
            
            (#)
            Vested
            Units
                or
            Units
                orUnearned
            
            
            
            ($)
            Other
                Rights
            OtherOptions
            
            
            
            
            That
                Have
            Rights(#)
            
            
            
            
            Not
            That
                HaveVested
            Not(#)
            Vested($)Mark
                DanielsCharles
                SearockJohn
                Riley Farley




32




**DIRECTOR
      COMPENSATION**





The
      following table sets forth with respect to the named director, compensation
      information inclusive of equity awards and payments made in the year end
      December 31, 2006.





Name
            Fees
                Earned or Paid in Cash
            Stock
                Awards
            Option
              Awards
            Non-Equity
                Incentive Plan Compensation
            Change
                in Pension Value and Nonqualified Deferred Compensation Earnings
            All
                Other Compensation
            Total($)
            ($)
            ($)
            ($)
            
            ($)
            ($)Mark
                Daniels


**Employment
        Agreements**
 
 Pursuant
        to an agreement dated January 3, 2007 with Mark Daniels, the Company’s Chief
        Executive Officer, Mr. Daniels is being paid a salary of $220,000 per annum
        for
        a period of three years. The agreement provides that a portion of the salary
        may
        be paid in stock of the company. Additionally, the Company has agreed to
        allow
        Mr. Daniels to participate in employee benefit plans and to receive bonuses
        at
        the discretion of the board. The agreement also contains a confidentiality
        provision and a one (1) year from termination, non-compete provision. This
        agreement may be terminated by mutual consent of the parties or by vote of
        the
        majority of the board for cause. Mr. Daniels received no cash compensation
        under
        this agreement, to date, but has been compensated 3,200,000 shares of Common
        Stock and 3,200,000 shares of Series A Preferred Stock (which convert into
        6,400,000 shares of Common Stock) in lieu of cash payments under this salary
        through June 30, 2007 and in lieu of certain bonus compensation based payments.
 
 Pursuant
        to a compensation agreement dated January 3, 2007 with Victor Miller, the
        Company’s Vice President, we have agreed to compensate Mr. Miller a salary of
        $220,000 per annum for a period of three years. The agreement provides that
        a
        portion of the salary may be paid in stock of the company. Additionally,
        the
        Company has agreed to allow Mr. Miller to participate in employee benefit
        plans
        and to receive bonuses at the discretion of the board. The agreement also
        contains a confidentiality provision and a one (1) year from termination,
        non-compete provision. This agreement may be terminated by mutual consent
        of the
        parties or by vote of the majority of the board for cause. Mr. Miller received
        no cash compensation under this agreement to date, but has been compensated
        810,000 shares of Common Stock and 2,000,000 shares of Series A Preferred
        Stock
        (which convert into 4,000,000 shares of Common Stock) in lieu of cash payments
        under this salary through June 30, 2007 and in lieu of certain bonus
        compensation based payments.
 
 Pursuant
        to a compensation agreement dated January 3, 2007 with Mr. Fred Daniels,
        a
        director is being paid a salary of $75,000 per annum for a period of three
        years. This agreement may be terminated by mutual consent of the parties
        or by
        vote of the majority of the board for cause. Mr. Fred Daniels received 255,000
        shares of Common Stock in lieu of cash payments under this salary through
        June
        30, 2007.


**Item
      11. Security Ownership of Certain Beneficial Owners and
      Management**


The
        following table sets forth certain information regarding Common Stock
        beneficially owned on May 28, 2007 for (i) each stockholder known by the
        Company
        to be the beneficial owner of five (5%) percent or more of our issued and
        outstanding Common Stock, (ii) each executive officer and director, and (iii)
        all executive officers and directors as a group. Prior to closing the AeroGroup
        Acquisition, there were 3,925,855 shares of TADS Common Stock issued and
        outstanding. As of June 13, 2007 there were 49,188,198 shares of our Common
        Stock issued and outstanding. In addition, there are 6,400,000 shares of
        restricted, non-trading Series A Preferred Stock outstanding, which are
        convertible into 12,800,000 shares of common stock.


**Name
                  and Address**
                **of
                  Beneficial Owner**
              
              **Amount
                  and**
                **Nature
                  of**
                **Beneficial**
                **Ownership
                  (1)**
              
              **Percent
                  of**
                **Class**Mark
                  Daniels(2)
              
              
              26,789,800
              (3)(4)
              
              51.14
              %Fred
                  Daniels(2)
              
              
              255,000
              (5)
              
              *Victor
                  Miller (2)
              
              
              4,810,000
              (6)
              
              9.40
              %John
                  Riley Farley (2)
              
              
              75,000
              (7)
              
              *Lt.
                  Gen (ret) Charles Searock(8)
              
              
              -0-
              
              
              *Derick
                  Sinclair (2)
              
              
              1,000,000
              
              
              *1550
                  Ostler CourtN.
                  Vancouver, B.C.Canada
                  V7G 2P1Officers
                  and Directorsas
                  a Group (per person)
              
              
              
              
              
              61.00
              %*Indicates
                  ownership of under 5%.


(1)  In
        general, a person is considered a beneficial owner of a security if that
        person
        has or shares the power to vote or direct the voting of such security, or
        the
        power to dispose of such security. A person is also considered to be a
        beneficial owner of securities which the person has the right to acquire
        beneficial ownership within of (60) days. In computing the number of shares
        beneficially owned by a person and the percentage of ownership of that person,
        we have included all shares of common stock owned or beneficially owned by
        that
        person, and the number of shares of common stock issuable upon conversion
        or
        exercise of all convertible securities owned or beneficially owned by
        such person. Those shares, however, are not deemed outstanding for the purpose
        of computing the percentage ownership of any other person. All Series A
        Preferred Stock vote on a 25 to 1 basis with the Common Stock holders for
        all
        matters submitted to vote of shareholders. In addition, the holders of the
        Series A Preferred Stock are entitled to appoint a designee to the board
        of
        directors.
 
 (2)  Addresses
        c/o AeroGroup Incorporated, 5501 Airport Drive, Denison Texas
        75020.
 
 (3)  Indicates
        shares indirectly beneficially owned by Mr. Daniels which shares were issued
        to
        AeroGroup upon closing of the AeroGroup Acquisition.




33







(4)  Includes
      (i) 2,200,000 shares which are issuable upon conversion of the Secured
      Promissory Note at $.50 per share, within the next 60 days, (ii) 14,989,800
      shares of Common Stock owned by AeroGroup Incorporated over which Mr. Daniels
      has voting and dispositive power, and (iii) 3,200,00 shares of Common Stock
      and
      6,400,000 shares of Common Stock issuable upon conversion of Series A Preferred
      Stock issued to Mr. Daniels in lieu of cash compensation under his employment
      agreement through June 2007. Excludes (i) 2,444,013 shares underlying the
      Unsecured Daniels Note or 4,366,602 (plus shares underlying interest) and (ii)
      2,444,013 shares issuable in exercise of a warrant acquired by Mr. Mark Daniels,
      which Note and Warrant are not convertible or exercisable within the next 60
      days. All Series A Preferred Stock vote on a 25 to 1 basis with the Common
      Stock
      in any matter brought to shareholder for a vote.





(5)  Includes
      255,000 shares of Common Stock issued to Mr. Fred Daniels in early 2007, in
      lieu
      of cash compensation under his employment agreement through June 2007.





(5)  Includes
      810,000 shares of Common Stock and 4,000,000 shares of Common Stock issuable
      upon conversion of Series A Preferred Stock issued to Mr. Victor Miller in
      lieu
      of cash compensation under his employment agreement. All Series A Preferred
      Stock vote on a 25 to 1 basis with the Common Stock in any matter brought to
      shareholder for a vote.





(6)  Includes
      75,000 shares of Common Stock to Mr. Farley in early 2007 in lieu of cash
      compensation under his employment agreement through June 2007.




(7)  The
        address for Gen. Searock is 1412 Victoria Place, Edmond Oklahoma, 73003.
 
 (8)  Prior
        to
        the AeroGroup Acquisition, Mr. Sinclair’s ownership represents approximately 25%
        of the Company’s shares. After the issuance of Common Stock to AeroGroup in
        connection with the AeroGroup Acquisition, Mr. Sinclair’s ownership will
        constitute beneficial ownership of approximately 5.2% of TADS Common Stock.
 
 Other
        then as discussed above for Mr. Daniels, there are currently no options,
        warrants, rights or other securities conversion privileges granted to our
        officers, directors or beneficial owners and no plans to issue any such rights
        in the future.
  **Item
      12. Certain Relationships and Related Transactions, and
      Director Independence.**





*The
      AeroGroup Acquisition*





At
      the
      time we and the AeroGroup negotiated and entered into the Asset Purchase
      Agreement, Mr. Daniels was not an officer, director or affiliate of TADS. After
      execution of and entry into the Asset Purchase Agreement, Mr. Daniels became
      a
      director and officer on August 22, 2006 in order for us to secure the government
      licenses required to be obtained as a condition to closing the AeroGroup
      Acquisition. At the time of the AeroGroup Acquisition on December 15, 2006,
      Mark
      Daniels, a controlling shareholder of AeroGroup, was serving as our sole
      director and as Secretary and Treasurer.





As
      a
      result of the Aero Group Acquisition, AeroGroup acquired a controlling interest
      in TADS. Mr. Daniels is a controlling shareholder in AeroGroup and has voting
      and dispositive control over its TADS stock. As a result, Mr. Daniels is the
      beneficial owner of AeroGroup's TADS stock and owns a 81% indirect beneficial
      interest in TADS as of the closing of the AeroGroup Acquisition.







As
      consideration for the AeroGroup Acquisition, TADS assumed notes and warrants
      held by Mr. Daniels as follows:




**·**
              TADS
                  assumed the Secured Daniels
                  Note;




·
              TADS
                  entered into the Daniels Security
                  Agreement;




·
              TADS
                  assumed Investor Notes held by Mr. Daniels in the aggregate original
                  principal amount of
                  $366,602.04;




·
              TADS
                  assumed Warrants to acquire stock in AeroGroup, which Warrants
                  will now be
                  exercisable for the acquisition of 2,444,014 shares of Common Stock.
                  The
                  Warrants are exercisable at an exercise price of $.15 per share.
                  They are
                  immediately exercisable and have a warrant exercise term of five
                  years.
                  The warrants were issued between April 1, 2003 and November 12,
                  2005.





The
      terms
      and conditions of the foregoing instruments and agreements are described above
      under the heading “Material Agreements Entered Into”.




34




Mr.
      Daniels is a majority stockholder of AeroGroup Incorporated. As a result of
      the
      AeroGroup Acquisition, TADS assumed AeroGroup’s obligations to issue shares of
      AeroGroup common stock pursuant to the convertible notes and warrants of
      AeroGroup. Conversion of those convertible securities prior to the Closing
      Date
      would have resulted in a dilution of Mr. Daniels stock in AeroGroup,
      Incorporated, which will no longer be the case.





Mr.
      Daniels also owns a controlling interest of 51% of the issued and outstanding
      stock of International Tactical Training Center, Inc. who is the Sublandord
      in
      the Sublease. The remaining 49% of International Tactical Training Center,
      Inc.
      is owned by Mr. Victor Miller. Mr. Miller was not an officer or director of
      TADS
      at the time of this assumption or the time of the AeroGroup Acquisition in
      December 2006.





*Acquisition
      of Aircraft and Simulator Assets from Entities owned by Mr. Daniels.*





In
      June
      of 2006, AeroGroup acquired substantially all of the assets of three limited
      liability companies owned by Mr. Daniels, OneSource Financial Holdings, LLC,
      Genesis Capital Services, LLC, and Resource Financial Holdings, LLC. These
      assets (the “Daniels Assets”) included two MiG 29 fighter jets and four full
      motion aircraft flight simulators. The Daniels Assets were acquired by AeroGroup
      in exchange for the assumption by the AeroGroup Subsidiaries of certain
      indebtedness incurred by Daniels in connection with his acquisition of these
      assets and certain other consideration. These assets were appraised by a
      certified aircraft appraiser and AeroGroup believes that the acquisition of
      these assets from Daniels was on terms that were no less favorable to it then
      if
      the Company had attempted to acquire these assets in the open market.




The
      Daniels Assets are part of the AeroGroup Assets acquired by the Company in
      the
      AeroGroup Acquisition.





We
      do not
      currently have any employment agreement in place with Mr. Daniels or with any
      other executive officer.





We
      believe that we have executed the AeroGroup Acquisition and all of the related
      transactions set forth above on terms no less favorable to us than we could
      have
      obtained from unaffiliated third parties on an arms-length transaction.
      Additionally, all of the foregoing transactions have been approved by both
      a
      majority of the board and a majority of disinterested directors. It is our
      intention to ensure that all future transactions including loans or any other
      transactions or commitments between us, our officers and directors and their
      affiliates are approved by a majority of the board of disinterested board
      members, and are on terms obtained at an arms-length transactions that are
      no
      less favorable to us than we could obtain from unaffiliated third parties.
      Moreover, it is our intention to obtain estimates from unaffiliated third
      parties for similar goods or services to ascertain whether such transactions
      with affiliates are on terms that are no less favorable to us than are otherwise
      available from unaffiliated third parties.


**Issuance
        of Shares of Common Stock and Preferred Stock to Executive
        Management**
 
 In
        January of 2007 the Company entered into employment agreements with Messers.
        Fred Daniels, Mark Daniels and John Farley. In lieu of cash compensation
        for
        salary and bonus payments through June of 2007, the Company issued:
  ·
              3,200,000
                  shares of Common Stock and 3,200,000 shares of Series A Preferred
                  Stock
                  (which convert into 6,400,000 shares of Common Stock) to Mr. Mark
                  Daniels,
  ·
              810,000
                  shares of Common Stock and 2,000,000 shares of Series A Preferred
                  Stock
                  (which convert into 4,000,000 shares of Common Stock),
  ·
              75,000
                  shares of Common Stock issued to Mr. John Farley, and
  ·
              255,000
                  shares of Common Stock to Mr. Fred Daniels.
 
 See
        the
“Series A Preferred Stock” section above for additional rights relating to these
        shares of preffered stock. . The
        compensation under these employment contracts and related share issuances
        were
        not approved by independent directors or shareholders.




**Item
      13. Exhibits.**




**Exhibits**
            **Description**2.1
            Amendment
                No. 3 dated December 14, 2006, to Asset Purchase Agreement dated
                of July
                14, 2006 by and among Tactical Air Defense Services, Inc., Resource
                Aviation Financial Holdings, Inc., Genesis Aviation Acquisition,
                Inc. and
                OneSource Aviation Acquisition, Inc., as purchasers, and AeroGroup
                Incorporated, Resource Financial Holding Acquisition, Inc. and OneSource
                Acquisition, Inc., as sellers.*3.1
            Articles
                  of Amendment To Articles of incorporation increasing capitalization
                  to
                  300,000,000 shares of Common Stock and 50,000,000 shares of blank
                  check
                  preferred stock.*3.2
            Certificate
                of Designation, with Respect to Series A Preferred Stock, dated March
                21,
                200710.1
            Assignment
                and Assumption of Lease, and lease agreement with respect to hangar,
                at
                Grayson County Airport.*10.2
            Form
                of Investor Notes (duties, conversion prices and maturity dates may
                vary).*10.3
            Form
                of Additional Note (duties and conversion prices only may
                vary).*10.4
            Form
                of warrant issued to noteholders (duties, exercise prices and
                expiration dates may vary).*10.5
            Secured
                Promissory Note in principal amount of $1,100,000 issued to Mark
                Daniels.*10.6
            Security
                Agreement with respect to secured Promissory Note issued to Mark
                Daniels.*10.7
            Solicitation,
                Offer and Award, between U.S. Army Research, Development and Engineering
                Command Acquisition Center and AeroGroup Incorporated, with respect
                to
                providing flight training at Townsend Range and Savannah Combat Readiness
                Training Center.*




35




10.8
            Convertible
                Promissory Note to Chris Beck in principal amount of
                $250,000.*10.9
            Employment
                Agreement, dated as of January 3, 2007, between the Company and Mark
                Daniels.10.10
            Employment
                Agreement, dated as of January 3, 2007, between the Company and Mark
                Daniels.10.11
            Employment
                Agreement, dated as of January 3, 2007, between the Company and Mark
                Daniels.31.1
            Certification
                by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act, promulgated pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            Certification
                by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act, promulgated pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            Certification
                by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code, promulgated pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.32.2
            CertificCertification
                by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code, promulgated pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.




*
        Incorporated by reference to the Issuer’s Form 8-K/A filed on December 21,
        2006.





**Item
      14. Principal Accountant Fees and Services.**





**Appointment
      of Auditors**




Our
      Board
      of Directors selected Marcum and Kliegman, LLP, as our auditors for the year
      ended December 31, 2006.





**Audit
      Fees**


Marcum
        and Kliegman, LLP, the independent auditors of our financial statements,
        billed
        us $167,000 in fees for our annual audit for the year ended December 31,
        2006.


**Audit-Related
      Fees**




We
      did
      not pay any fees to Marcum and Kliegman, LLP for assurance and related services
      that are not reported under Audit Fees above, during our fiscal years ending
      December 31, 2006 and December 31, 2005.





**Tax
      and All Other Fees**




We
      did
      not pay any fees to Marcum and Kliegman, LLP, for tax compliance, tax advice,
      tax planning or other work during our fiscal years ending December 31, 2006
      and
      December 31, 2005.





**Pre-Approval
      Policies and Procedures**


We
        have
        implemented pre-approval policies and procedures related to the provision
        of
        audit and non-audit services. Under these procedures, our board of directors
        pre-approves all services to be provided by Marcum and Kliegman, LLP, the
        estimated fees related to these services.


With
      respect to the audit of our financial statements as of December 31, 2006, and
      for the year then ended, none of the hours expended on Marcum and Kliegman,
      LLP,
      engagement to audit those financial statements were attributed to work by
      persons other than Marcum and Kliegman, LLP, full-time, permanent
      employees.




36


**SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
        has duly caused this report to be signed on its behalf by the undersigned
        on
        June 13, 2007, thereunto duly authorized.
  **TACTICAL
                  AIR DEFENSE SERVICES,**
                **INC.**By:
              /s/
                  Mark
                  DanielsName:
                  Mark DanielsTitle:
                  President and Chairman (Principal
                Executive
                  and Principal Accounting
                Officer)
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, as amended, this
        report has been signed below by the following persons on behalf of the
        registrant and in the capacities indicated.
 
 **Signatures**
              
              **Title**
              **Date***/s/
                  Mark Daniels*
              
              President,
                  Treasurer and Chairman of the Board of Directors
              June
                  13, 2007Mark
                  Daniels*/s/John
                  Riley Farley*
              
              Vice
                  President
              June
                  13, 2007John
                  Riley Farley*/s/Victor
                  Miller*
              
              Director
              June
                  13, 2007Victor
                  Miller/*s*/*Fred
                  Daniels*
              
              Director
              June
                  13, 2007Fred
                  Daniels


56