U. S. SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                   FORM 10-QSB


               QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934


                 For the quarterly period ended: March 31, 2001


                           Commission file No.0-24511


                        ADVANCED OPTICS ELECTRONICS, INC.
           (Name of small business issuer as specified in its charter)

         Nevada                                           88-0365136
(State of incorporation)                       (IRS Employer Identification No.)

           8301 Washington NE, Suite 5, Albuquerque, New Mexico 87113
           (Address of principal executive offices including zip code)

Issuer's telephone number:                                        (505) 797-7878

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 __X__ No _____

The number of issuer's  shares of Common Stock  outstanding as of March 31, 2001
was 63,323,881

  Transitional Small Business Disclosure Format (check one): Yes _____ No __X__

<PAGE>


                         FINANCIAL STATEMENTS AND REPORT
                            OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS'

                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                                 March 31, 2001

<PAGE>


                                 C O N T E N T S



                                                                            Page

REPORT OF INDEPENDENT CERTIFIED PUBLIC
  ACCOUNTANTS..................................................................1

FINANCIAL STATEMENTS

     BALANCE SHEET.............................................................2

     STATEMENTS OF OPERATIONS..................................................3

     STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY..............................4

     STATEMENTS OF CASH FLOWS................................................5-6

     NOTES TO FINANCIAL STATEMENTS..........................................7-20

<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
Advanced Optics Electronics, Inc.

We have reviewed the accompanying  balance sheet of Advanced Optics Electronics,
Inc.  (A  Development  Stage  Company),  as of March 31,  2001,  and the related
statements of operations, changes in stockholders' equity and cash flows for the
three months then ended.  These financial  statements are the  responsibility of
the  Company's   management.   The  financial   statements  of  Advanced  Optics
Electronics,  Inc. for the three  months  ended March 31, 2000 were  reviewed by
other auditors whose report dated April 20, 2000 stated that they were not aware
of any material  modifications  that should be made to those statements in order
for them to be in conformity with generally accepted accounting principles.  The
financial  statements for the 1996,  1997, 1998, and 1999 portions of the period
from May 22, 1996  (inception)  through  December 31, 1999 were audited by other
auditors,  whose reports dated  February 18, 2000 and February 5, 1998 expressed
unqualified opinions on those statements.

We conducted our review in accordance with standards established by the American
Institute  of  Certified  Public  Accountants.  A review  of  interim  financial
information consists principally of applying analytical  procedures to financial
data and making  inquiries of persons  responsible  for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with  generally  accepted  auditing  standards,  the  objective  of which is the
expression of an opinion  regarding the financial  statements  taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material  modifications that should
be made to the  accompanying  financial  statements  in order  for them to be in
conformity with generally accepted accounting principles.


                                        Atkinson & Co., Ltd.

Albuquerque, New Mexico
May 12, 2001


                                      -1-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                                 BALANCE SHEET
                                   (Unaudited)

                                 March 31, 2001


                                     ASSETS
<TABLE>
<S>                                                                       <C>
CURRENT ASSETS
  Cash and cash equivalents                                               $   225,018
  Certificates of deposit                                                      52,935
  Costs and estimated earnings in excess of
    billings on uncompleted contract                                          672,872
                                                                          -----------
          Total current assets                                                950,825
                                                                          -----------

PROPERTY AND EQUIPMENT, net                                                   244,508
                                                                          -----------

DEFERRED TAX ASSET                                                            643,200
                                                                          -----------

OTHER ASSETS
  Intangible assets, net                                                      309,997
  Investment in Bio Moda, Inc.                                                207,335
  Other assets                                                                 64,292
  Note receivable from officer and shareholder                                 44,493
                                                                          -----------
          Total other assets                                                  626,117
                                                                          -----------
            Total assets                                                  $ 2,464,650
                                                                          ===========


                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable                                                        $   166,761
  Accrued liabilities                                                          32,487
  Current portion of long-term
    obligations                                                                36,205
  Allowance for loss on contract                                              119,315
                                                                          -----------
          Total current liabilities                                           354,768
                                                                          -----------

LONG-TERM PORTION OF LONG-TERM
  DEBT AND CAPITAL LEASE OBLIGATION                                            37,842

CONVERTIBLE DEBENTURES                                                      1,290,677

STOCKHOLDERS' EQUITY
  Capital stock - Preferred Series A, 7.5% cumulative, convertible into
    common stock at a rate determined by dividing the purchase price of
    the preferred shares by the conversion price of the common stock;
    $.001 par value; authorized 10,000,000 shares, no shares
    issued or outstanding                                                        --
  Common stock - Authorized 150,000,000 shares, $.001
    par value; 63,403,175 shares issued and 63,320,775
    shares outstanding                                                         63,403
  Additional paid-in capital                                                8,314,681
  Deficit accumulated during the development stage                         (7,345,513)
  Treasury stock, at cost                                                     (57,781)
   Notes receivable from officer for exercise of stock options               (193,427)
                                                                          -----------
          Total stockholders' equity                                          781,363
                                                                          -----------
          Total liabilities and stockholders' equity                      $ 2,464,650
                                                                          ===========
</TABLE>


    The accompanying notes are an integral part of this financial statement.


                                      -2-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                            STATEMENTS OF OPERATIONS
                                   (Unaudited)

               For the Three Months ended March 31, 2001 and 2000
                  and the period from May 22, 1996 (Inception)
                             through March 31, 2001


<TABLE>
<CAPTION>
                                                                                                    May 22, 1996
                                                                                                    (Inception)
                                                                                                      Through
                                                                  2001               2000          March 31, 2001
                                                              ------------       ------------       ------------
<S>                                                           <C>                <C>                <C>
Revenues
  Contract revenue                                            $       --         $     34,039       $    762,745
                                                              ------------       ------------       ------------

Costs and expenses
  General and administrative                                       313,859          1,206,669          5,226,773
  Contract costs                                                   125,000            111,886          1,452,744
  Research and development                                          78,202            133,967          1,238,378
                                                              ------------       ------------       ------------

          Total costs and expenses                                 517,061          1,452,522          7,917,895
                                                              ------------       ------------       ------------

Operating loss                                                    (517,061)        (1,418,483)        (7,155,150)
                                                              ------------       ------------       ------------

Other income (expenses)
  Interest income                                                    7,195              2,293             37,525
  Unrealized gain (loss) on marketable equity securities              --                7,655            (29,368)
  Other investment gains                                              --                 --               59,784
  Loss on Bio Moda, Inc.                                              --              (16,222)          (176,510)
  Gain (loss) on disposal of assets                                  6,000               --               (4,306)
  Interest expense                                                  (2,205)           (76,581)          (657,668)
                                                              ------------       ------------       ------------

          Total other income (expenses)                             10,990            (82,855)          (770,543)
                                                              ------------       ------------       ------------

          Net loss before cumulative effect of
            change in accounting principle                        (506,071)        (1,501,338)        (7,925,693)

Cumulative effect of change in
  accounting principle                                                --                 --              (63,020)

Provision for income tax benefit                                      --                 --              643,200
                                                              ------------       ------------       ------------

          Net loss                                            $   (506,071)      $ (1,501,338)      $ (7,345,513)
                                                              ============       ============       ============

Net loss per share before cumulative effect
  of change in accounting principle                           $      (.008)      $      (.031)      $     (0.249)

Cumulative effect of change in accounting principle                   --                 --                (.002)
                                                              ------------       ------------       ------------

Net loss per share                                            $      (.008)      $      (.031)      $     (0.249)
                                                              ============       ============       ============

Weighted average shares outstanding                             62,665,675         48,153,762         29,492,566
                                                              ============       ============       ============
</TABLE>


    The accompanying notes are an integral part of this financial statement.


                                      -3-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                   (Unaudited)

       For the period from May 22, 1996 (inception) through March 31, 2001


<TABLE>
<CAPTION>
                                                                           Common Stock                   Preferred Stock
                                                                  -----------------------------         -------------------

                                                                                         Par                           Par
                                                                     Shares             Value           Shares        Value
                                                                  -----------          --------         ------        -----
<S>                                                                <C>                 <C>               <C>           <C>
Balance, May 22, 1996                                                    --            $   --            --            $--
Stock issued to incorporators for cash                                500,000               500          --             --
Stock issued for the net assets of PLZ Tech, Inc.                   4,500,000             4,500          --             --
Net loss                                                                 --                --            --             --
                                                                  -----------          --------          ----          ---

Balance, December 31, 1996                                          5,000,000             5,000          --             --
Stock issued in public offering                                     2,281,212             2,281          --             --
Net loss                                                                 --                --            --             --
                                                                  -----------          --------          ----          ---

Balance, December 31, 1997                                          7,281,212             7,281          --             --
Stock issued for cash                                              10,979,275            10,979          --             --
Stock issued for services                                           2,751,000             2,751          --             --
Stock issued in exchange for note receivable                          315,000               315          --             --
Purchase and retirement of treasury stock                            (472,200)             (472)         --             --
Net loss                                                                 --                --            --             --
                                                                  -----------          --------          ----          ---

Balance, December 31, 1998                                         20,854,287            20,854          --             --
Stock issued for cash                                               8,681,624             8,682          --             --
Stock issued for services                                          17,094,313            17,094          --             --
Intrinsic value of beneficial conversion feature of notes
  payable                                                                --                --            --             --
Fair value of warrants related to notes payable                          --                --            --             --
Purchase and retirement of treasury stock                            (489,251)             (489)         --             --
Purchase of treasury stock                                               --                --            --             --
Sale of treasury stock                                                   --                --            --             --
Net loss                                                                 --                --            --             --
                                                                  -----------          --------          ----          ---

Balance, December 31, 1999                                         46,140,973            46,141          --             --
Stock issued for cash                                                 782,000               782           710            1
Stock issued for services                                           3,955,202             3,955          --             --
Purchase of treasury stock                                               --                --            --             --
Sale of treasury stock                                                   --                --            --             --
Exercise of stock options for notes receivable                      1,850,000             1,850          --             --
Amortization of discount on convertible preferred stock                  --                --            --             --
Exercise of preferred stock conversion feature                      9,200,000             9,200          --             --
Issuance of convertible debentures                                       --                --            --             --
Exchange of preferred stock for convertible debentures                   --                --            (710)          (1)
                                                                  -----------          --------          ----          ---
Net loss                                                                 --                --            --             --
                                                                  -----------          --------          ----          ---

Balance, December 31, 2000                                         61,928,175            61,928          --             --
Stock issued for services                                           1,475,000             1,475          --             --
Purchase of treasury stock                                               --                --            --             --
Net loss                                                                 --                --            --             --
                                                                  -----------          --------          ----          ---

Balance, March 31, 2001                                            63,403,175          $ 63,403          --            $--
                                                                  ===========          ========          ====          ===


<CAPTION>
            Treasury Stock
     --------------------------                             Equity (Deficit)         Notes
                                          Additional           During the          Receivable           Total
                                           Paid-In            Development             From           Stockholders'
      Shares             Cost              Capital               Stage              Officer             Equity
     --------          --------          -----------          -----------          ---------          -----------
<S>                    <C>               <C>                  <C>                  <C>                <C>
         --            $   --            $      --            $      --            $    --            $        00
         --                --                 24,500                 --                 --                 25,000
         --                --                281,096                 --                 --                285,596
         --                --                   --                (76,902)              --                (76,902)
     --------          --------          -----------          -----------          ---------          -----------

         --                --                305,596              (76,902)              --                233,694
         --                --                362,720                 --                 --                365,001
         --                --                   --                (84,690)              --                (84,690)
     --------          --------          -----------          -----------          ---------          -----------

         --                --                668,316             (161,592)              --                514,005
         --                --              1,281,728                 --                 --              1,292,707
         --                --                293,719                 --                 --                296,470
         --                --                 28,685                 --                 --                 29,000
         --                --                (39,913)                --                 --                (40,385)
         --                --                   --               (752,111)              --               (752,111)
     --------          --------          -----------          -----------          ---------          -----------

         --                --              2,232,535             (913,703)              --              1,339,686
         --                --                855,101                 --                 --                863,783
         --                --              1,469,320                 --                 --              1,486,414

         --                --                174,610                 --                 --                174,610
         --                --                125,000                 --                 --                125,000
         --                --                (10,643)                --                 --                (11,132)
     (229,000)          (41,760)                --                   --                 --                (41,760)
       85,000            11,130               24,334                 --                 --                 35,464
         --                --                   --             (2,725,804)              --             (2,725,804)
     --------          --------          -----------          -----------          ---------          -----------

     (144,000)          (30,630)           4,870,257           (3,639,507)              --              1,246,261
         --                --              1,012,710                 --                 --              1,013,493
         --                --              1,726,197                 --                 --              1,730,152
      (63,500)          (46,486)                --                   --                 --                (46,486)
      142,400            22,542               54,771                 --                 --                 77,313
         --                --                220,150                 --             (193,427)              28,573
         --                --                159,677                 --                 --                159,677
         --                --                533,678                 --                 --                542,878
         --                --                263,830                 --                 --                263,830
         --                --               (641,779)                --                 --               (641,780)
         --                --                (59,583)                --                 --                (59,583)
         --                --                   --             (3,199,935)              --             (3,199,935)
     --------          --------          -----------          -----------          ---------          -----------

      (65,100)          (54,574)           8,139,908           (6,839,442)          (193,427)           1,114,393
         --                --                174,773                 --                 --                176,248
      (17,300)           (3,207)                --                   --                 --                 (3,207)
         --                --                   --               (506,071)              --               (506,071)
     --------          --------          -----------          -----------          ---------          -----------

      (82,400)         $ 57,781)         $ 8,314,681          $(7,345,513)         $(193,427)         $   781,363
     ========          ========          ===========          ===========          =========          ===========
</TABLE>


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


                                      -4-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)

               For the Three Months ended March 31, 2001 and 2000
                  and the Period from May 22, 1996 (Inception)
                             through March 31, 2001


<TABLE>
<CAPTION>
                                                                                             May 22, 1996
                                                                                             (Inception)
                                                                                               Through
                                                              2001             2000         March 31, 2001
                                                           ---------       -----------       -----------
<S>                                                        <C>             <C>               <C>
Cash flows from operating activities
  Net loss                                                 $(506,071)      $(1,501,338)      $(7,353,766)
  Adjustments to reconcile net loss to net cash
    provided by operating activities
      Provision for deferred tax asset                          --                --            (643,200)
      Intrinsic value of conversion features                    --                --             466,728
      Amortization and depreciation expense                   28,373            27,630           330,218
      Write off of organization costs                           --                --              63,020
      Amortization of discounts on convertible
        notes                                                   --              70,691           295,209
      Unrealized (gain) loss on marketable securities           --              (7,655)           29,368
      Gain (loss) on disposal of assets                       (6,000)             --               4,306
      Loss on Bio Moda, Inc.                                    --              16,222           176,510
      Issuance of common stock for services                  176,248         1,120,233         3,689,284
      Issuance of notes for services                            --                --              50,000
      Increase in excess of costs and earnings over
        billings on uncompleted contract                        --             (34,039)         (672,872)
      (Increase) decrease in other assets                      9,750              (131)          (70,124)
      Increase (decrease) in inventory                          --               6,000           (35,293)
      Increase in allowance for loss on contract              26,933            18,039           119,315
      Increase (decrease) in accrued liabilities
        and accounts payable                                 (16,978)          (50,751)          207,501
      Other non-cash expenses                                   --              31,030            33,447
      Accrued interest                                          --                --              30,667
                                                           ---------       -----------       -----------

          Net cash provided by (used in)
            operating activities                            (287,745)         (304,069)       (3,279,682)
                                                           ---------       -----------       -----------
</TABLE>


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


                                      -5-
<PAGE>


                       Advanced Optics Electronics, Inc.
                         (A Development Stage Company)

                      STATEMENTS OF CASH FLOWS - CONTINUED
                                  (Unaudited)

               For the Three Months ended March 31, 2001 and 2000
                  and the Period from May 22, 1996 (Inception)
                             through March 31, 2001


<TABLE>
<CAPTION>
                                                                                             May 22, 1996
                                                                                             (Inception)
                                                                                               Through
                                                              2001             2000         March 31, 2001
                                                           ---------       -----------       -----------
<S>                                                        <C>             <C>               <C>
Cash flows from investing activities
  Purchase of equipment                                      (22,126)          (31,886)         (374,369)
  Investment in Bio Moda, Inc.                                  --                --            (383,845)
  Sale of marketable securities                                 --                --              40,665
  Purchase of marketable securities                             --             (28,883)          (70,034)
  (Increase) decrease in certificate of deposits              54,491           (51,655)          (52,935)
  Proceeds from sale of equipment                             23,800              --              23,800
  Purchase of other assets                                       650              --            (233,782)
  Redemption of sale of Wizard Technologies, Inc.               --              65,000              --
                                                           ---------       -----------       -----------

          Net cash provided by (used in)
            investing activities                              55,515           (47,424)       (1,050,500)
                                                           ---------       -----------       -----------

Cash flows from financing activities
  Additions to notes payable                                    --                --             622,776
  Payments on notes payable and capital
    lease obligations                                        (23,832)          (15,097)         (195,940)
  Issuance of capital stock                                     --             853,493         3,559,984
  Collection of officer notes                                   --                --              28,573
  Sale of treasury stock                                        --              49,770           112,777
  Purchase of treasury stock                                  (3,207)           (7,683)         (132,970)
  Proceeds from issuance of convertible
    debenture                                                 75,000              --             560,000
                                                           ---------       -----------       -----------

          Net cash provided by financing activities           47,961           880,483         4,555,200
                                                           ---------       -----------       -----------

          NET INCREASE (DECREASE) IN CASH                   (184,269)          528,990           225,018

Cash and cash equivalents, beginning of period               409,287           190,387              --
                                                           ---------       -----------       -----------

Cash and cash equivalents, end of period                   $ 225,018       $   719,377       $   225,018
                                                           =========       ===========       ===========
</TABLE>


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


                                      -6-
<PAGE>


                       Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

                                 March 31, 2001


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant  accounting policies consistently applied
in the preparation of the accompanying financial statements follows.

Notes to Interim Financial Statements

The interim  financial data is unaudited,  however in the opinion of management,
the interim  data  includes  all  adjustments,  consisting  of normal  recurring
adjustments,  necessary  for a fair  statement  of the  results  for the interim
period.  The  financial  statements  included  herein have been  prepared by the
Company  pursuant to the rules and  regulations  of the  Securities and Exchange
Commission.  The organization and business of the Company,  accounting  policies
followed by the Company and other  information are contained in the notes to the
Company's  financial  statements  filed as part of the Company's  March 31, 2001
Form 10-QSB.  This  quarterly  report  should be read in  conjunction  with such
annual report.

Description of Business

Advanced  Optics  Electronics,  Inc.  (the  Company)  is a  developmental  stage
technology company with its principal focus on the development and production of
large-scale  flat panel  displays.  The  Company  is  currently  continuing  its
research and  development of this product.  Upon  substantial  completion of the
research and  development of the large flat panel display,  the Company plans to
make the transition from a developmental  stage company to selling and producing
this product.  The market for the  large-scale  flat panel displays will include
advertising billboards,  flat panel computer monitors, and cockpit displays. The
Company  plans to focus on  producing  and  selling the  large-scale  flat panel
displays for outdoor advertising billboards.

The  Company  has  obtained  a  contract  to  produce  two  outdoor  advertising
billboards using its flat panel display technology. This is the first commercial
application of the Company's technology.  The success of the Company will depend
on its ability to commercialize its technology and complete this contract. As of
March 31, 2001, completion of this contract was behind schedule.

While management  believes the contract will ultimately be completed,  there can
be no certainty  that this will be  accomplished  because the technology has not
yet been used in a  commercial  application.  In  addition,  the  Company may be
required to obtain  additional  capital in order to fund the  completion  of the
contract.


                                      -7-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Cash and Cash Equivalents

Cash  and  cash  equivalents   include  all  cash  balances  and  highly  liquid
instruments with original maturities of three months or less. The Company's cash
deposits are maintained in local branches of national financial institutions and
are insured by the Federal Deposit Insurance  Corporation up to $100,000 at each
institution.  Cash balances may from time to time exceed these insurance limits,
but  management  believes  the  Company is not  exposed to any risk of loss from
these deposits.

Revenue and Cost Recognition

The  Company   recognizes   revenue  on  its  contract  in  process   using  the
percentage-of-completion  method of accounting, which is based on the proportion
of the contract  cost  incurred to the  estimated  total  contract  cost.  Costs
incurred  and  estimated  earnings in excess of billings  represent  the revenue
recognized that has not yet been billed.

Contract  costs include all direct  material and labor costs and those  indirect
costs  related  to  contract  performance,  such as  indirect  labor,  supplies,
overhead, equipment depreciation, and interest.

The contract to produce two outdoor advertising  billboards totals $1.7 million,
with  $885,000  assigned to the first unit. An estimated  loss of  approximately
$690,000 from production of the first unit has been recognized through March 31,
2001. The Company's  estimated cost to complete as of March 31, 2001 is $122,255
which  is  expected  to be  funded  with  cash,  billings  on the  contract  and
contributed capital.

In accordance with the contract, the Company will bill the customer when certain
milestones are met. Billings and collections through March 31, 2001 have totaled
$89,873.

Adjustments to the original estimates of total contract revenues, total contract
costs,  and the extent of progress toward  completion are often required as work
progresses  under the contract,  and as  experience  is gained,  even though the
scope of the work may not change. The nature of accounting for contracts is such
that refinements of the estimating process for continuously  changing conditions
and  new  developments  are  a  characteristic  of  the  process.   Accordingly,
provisions  for losses on contracts  are made in the period in which they become
evident under the  percentage-of-completion  method.  It is at least  reasonably
possible that the estimate of completion costs for this contract will be further
revised in the near-term.


                                      -8-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Investment

As of March 31, 2001, the Company owned 16.4% of the outstanding common stock of
Bio  Moda,  Inc.,  an  unconsolidated  investment  accounted  for using the cost
method.  Prior to December 31, 1999, the Company's  ownership was sufficient for
the investment to be accounted for using the equity method.

The  carrying  value of the  investment  as of March  31,  2001 is the  original
investment  cost  adjusted  by the  Company's  proportionate  interest in losses
reported by the investee through December 31, 1999.

Property, Plant and Equipment

Property,  plant and equipment are carried at cost. Repair and maintenance costs
are  charged  against  income  as  incurred.   Asset  additions,   renewals  and
betterments  are  capitalized at cost and  depreciated  using the  straight-line
method over estimated useful lives ranging from 3 to 15 years.

Other Assets

Intangible   assets  are  carried  at  historical   cost,   net  of  accumulated
amortization.  Patents  are  amortized  on  a  straight-line  basis  over  their
estimated  useful lives of 17 years.  Goodwill is amortized over 40 years.  Debt
origination costs are amortized over 3 years.

Certain  assets  previously  classified  as inventory  are no longer used in the
Company's  on-going  production  processes,  and are held for  sale.  Management
estimates  that the net  realizable  value of these items exceeds their carrying
value as of March 31, 2001.

Research and Development Costs

Research and development costs are expensed as incurred.

Income Taxes

The Company accounts for income taxes using the liability  method,  under which,
deferred  tax  liabilities  and assets are  determined  based on the  difference
between the financial statement carrying amounts and the tax bases of assets and
liabilities  using  enacted  tax  rates in  effect  in the  years  in which  the
differences  are  expected to reverse.  The Company has  recorded a deferred tax
benefit  relating to its  incurrance  of  operating  losses since  inception.  A
valuation allowance has been provided due to uncertainty regarding realizability
of the tax asset.


                                      -9-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Loss Per Share

Loss per share is computed on the basis of the weighted average number of common
shares outstanding during the period and did not include the effect of potential
common stock as their inclusion  would reduce loss per share.  The numerator for
the  computation  is the net loss and the  denominator  is the weighted  average
shares of common stock  outstanding.  Certain  options and warrants  outstanding
were not included in the  computation of loss per share because their  inclusion
would reduce loss per share.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.  The principal areas requiring
estimation are revenue recognition based on the percentage of completion method,
loss allowances and the valuation of common stock issued for services.

Stock-Based Compensation

The Company has elected to apply the provisions of Accounting  Principles  Board
Opinion No. 25,  Accounting  for Stock Issued to  Employees,  and to furnish the
proforma disclosures required by Statement on Financial Accounting Standards No.
123, Accounting for Stock Based Compensation. See note 10.

Reclassifications

Certain  reclassifications  have been made to 1999 information to conform to the
2000 presentation.

Comprehensive Income

In 2000 and  1999,  the  Company  had no  changes  in equity  which  constituted
components of other comprehensive income.


                                      -10-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 2. NOTES RECEIVABLE

Notes receivable at March 31, 2001, consist of the following:

     Due from officer                                               $29,493
     Note receivable from former shareholder,
       interest at 8% and due on demand                              15,000
                                                                    -------
                                                                    $44,493
                                                                    =======

The Company also has notes  receivable from an officer  totaling  $193,427 which
bear interest at 10% per annum,  and are due in 2003.  These notes were received
as consideration upon exercise of stock options.

NOTE 3. INVESTMENTS

As of March 31,  2001,  the  Company  owned  879,707  or 16.4% of the  5,373,858
outstanding  shares of Bio Moda,  Inc.  The  Company's  interest in Bio Moda has
declined  from  22% in  1998  to its  present  level,  as Bio  Moda  has  issued
additional  shares in the course of its  financing  activities.  As of March 31,
2001,  the Company had options to purchase an additional  187,000 shares at .485
cents per share.

Bio  Moda,  Inc.  is a  development  stage  company  involved  primarily  in the
development  of  technology  for  the  early  detection  of  lung  cancer.  As a
development  stage company,  Bio Moda,  Inc. has not had any revenues and, as of
March 31, 2001, was in the process of conducting clinical trials.

There is currently no active  market for the common stock of Bio Moda,  Inc. The
ultimate value of the Company's  investment in Bio Moda, Inc. will depend on its
ability  to  complete  its  research  and  either   commercialize  or  sell  its
proprietary technology.

The  investment  in Bio Moda,  Inc. is accounted  for using the cost  method.  A
summary of the investment is as follows:

     Original cost                                               $ 383,845
     Share of net loss                                            (134,010)
     Amortization of excess of cost
       over book value                                             (42,500)
                                                                 ---------
     Carrying value of investment in Bio Moda, Inc.              $ 207,335
                                                                 =========


                                      -11-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 4. LONG-TERM OBLIGATIONS

As of March 31, 2001, the Company's long-term obligations were as follows:

     Notes payable to a financial institution,
       due in monthly payments aggregating
       $3,221 through October 2003, bearing
       interest at bank prime rate plus 1.5%,
       collateralized by operating equipment
       and a vehicle                                              $ 71,056

     Capital lease obligation                                        2,991
                                                                  --------
                                                                    74,047

     Less:  Current portion                                        (36,205)
                                                                  --------
                                                                  $ 37,842
                                                                  ========

The Company is obligated under a long-term  capital lease which requires monthly
minimum lease  payments of $2,810  through May 2001.  As of March 31, 2001,  the
leased equipment has a net book value of $29,762.

Future  principal  payments on long-term  obligations for the years ending March
31, are as follows:

      2002                                                          $36,205
      2003                                                           28,056
      2004                                                            9,786
                                                                    -------
                                                                    $74,047
                                                                    =======


                                      -12-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 5. CONVERTIBLE DEBENTURES

On June 3, 1999,  the Company issued  $500,000 in  convertible  notes which bear
interest at an annual rate of 8 percent and mature  (principal  and interest) on
May 31, 2001.  Effective  August 1, 1999, the notes were convertible into shares
of common stock at a 25 percent  discount to the closing bid price of a share of
common stock at the time of conversion  or the time of exercise.  The notes were
issued in exchange for $430,000 in cash,  $50,000 in legal  services and $20,000
in commissions.  The commissions have been capitalized as debt origination costs
and are being amortized over the life of the notes. The notes are unsecured.

The  intrinsic  value of the  conversion  feature of the  principal  and accrued
interest was estimated to be $174,610.  This has been recorded as an increase in
paid-in  capital and a discount to the convertible  notes payable,  with related
amortization being charged to interest expense.  The discount is being amortized
over a  one-year  period,  which is  management's  estimate  of time  before any
conversion  will be exercised.  The  convertible  notes also include  detachable
warrants for the purchase of  12,500,000  shares of common stock at the lower of
75 percent of the  closing  bid price of a share of common  stock at the time of
exercise or September 1, 1999. The warrants  expire on June 3, 2002.  Management
estimates  that  approximately  half the  warrants  will be  exercised  prior to
expiration.

Management  estimated  the fair market  value of these  warrants at $125,000 and
recorded  this amount as an  increase  in paid-in  capital and a discount to the
convertible  notes  payable.  The discount is being  amortized over the two-year
life of the notes.

A significant  contingency  required by the aforementioned  convertible note and
warrant  agreements  is the  registration  of the  underlying  shares  with  the
Securities  and Exchange  Commission.  The Company is to use its best efforts to
register  these  shares and is in the  process  of  preparing  the  registration
statement.

On June 12,  2000,  the Company  entered  into an  agreement  that  modified the
convertible  notes  agreement  entered  into on June 3, 1999.  The result of the
modified  agreement was the issuance of 9,200,000 shares of the Company's common
stock upon conversion of the  convertible  notes plus accrued  interest  through
June 12, 2000, which totaled $542,878. This transaction constituted a conversion
of the  outstanding  convertible  notes,  and as such,  $40,058  of  unamortized
intrinsic value of the conversion feature was charged to interest expense during
the quarter.  In addition,  the modified agreement voided the related 12,500,000
detachable  warrants,  and, as a result, the unamortized  discount of $72,917 on
the  estimated  fair market  value of $125,000  for the  warrants was charged to
interest expense during the quarter.


                                      -13-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 5. CONVERTIBLE DEBENTURES - CONTINUED

On September 15, 2000, the Company entered into an agreement to issue a total of
$10,000,000  in  convertible  notes  which bear  interest at an annual rate of 8
percent.  The  Company has  authorized  the initial  sale of  $2,000,000  of the
convertible notes, and has entered into a structured facility with purchasers in
which the purchasers shall be obligated to purchase the remaining  $8,000,000 of
convertible  notes.  The Company's  right to require the  Purchasers to purchase
notes  commences  on  the  actual  effective  date  of the  registration  of the
Company's  securities  in an  amount  equal  to the  securities  that  would  be
convertible  upon issuance of the notes.  The related  agreement  provides for a
limit on the  amount of  obligation  notes  that the  Company  may  require  the
Purchasers to purchase in a given month.

On September 15, 2000, the Company issued $500,000 of the initial  $2,000,000 in
convertible  notes which bear interest at an annual rate of 8 percent and mature
(principal  and  interest) on September  15, 2003.  Effective as of the issuance
date, the notes are  convertible  into shares of common stock at the lesser of a
25 percent discount to the average of the three lowest closing bid prices during
the  thirty  trading  days prior to the issue date of this note and a 20 percent
discount  to the average of the three  lowest  closing bid prices for the ninety
trading days prior to the conversion date. The notes were issued in exchange for
$430,000 in cash,  $20,000 in legal  services  and $50,000 in  commissions.  The
commissions  have  been  capitalized  as debt  origination  costs  and are being
amortized over the life of the notes. The notes are unsecured.

The  intrinsic  value of the  conversion  feature of the  principal  and accrued
interest was estimated to be $238,830.  This has been recorded as an increase in
paid-in  capital and a discount to the convertible  notes payable,  with related
amortization being charged to interest expense.  The discount is being amortized
over a  one-year  period,  which is  management's  estimate  of time  before any
conversion  will be exercised.  The  convertible  notes also include  detachable
warrants  for the purchase of 500,000  shares of common  stock.  Management  has
estimated  the fair market value of these  warrants at $25,000 and recorded this
amount as an increase in paid-in capital and a discount to the convertible notes
payable. The discount is being amortized over the three-year life of the notes.

A significant  contingency  required by the aforementioned  convertible notes is
the  registration  of the  underlying  shares with the  Securities  and Exchange
Commission.  The Company is to use its best efforts to register these shares and
the registration statement has been filed.


                                      -14-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 5. CONVERTIBLE DEBENTURES - CONTINUED

On November 7, 2000,  the Company  entered into an agreement  that  modified the
outstanding  convertible  preferred agreements entered into on March 8, 2000 and
August 2, 2000.  The new  agreement  resulted  in the  exchange  of  outstanding
preferred  stock plus  additional  consideration  for the  Company's 7.5 percent
convertible  debentures due November 7, 2003. The total amount of the debentures
is  $740,667,   including  accrued  interest  of  $30,667.  The  debentures  are
convertible  into  shares of common  stock at the lesser of the  stocks  closing
price on  March 8,  2000 and 77.5  percent  of the  average  of the five  lowest
closing bid prices for 20 days before November 2, 2000.

The  intrinsic  value of the  conversion  feature of the  principal  and accrued
interest was estimated to be $227,898.  The convertible  debentures also include
detachable  warrants  for  the  purchase  of  71,000  shares  of  common  stock.
Management has estimated the fair market value of these warrants at $3,550.

NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's  carrying values and  methodologies for estimating the fair values
of its financial instruments are as follows:

     Cash, cash  equivalents,  and certificates of deposit,  costs and estimated
     loss in excess of billings on uncompleted  contract,  and accounts payable.
     The carrying amounts reported in the accompanying balance sheet approximate
     fair values.

     Notes  receivable.  Management  estimates  that the  carrying  amounts  are
     reasonable estimates of their fair values.

     Long-term  obligations.  Notes  payable  to bank have  variable  rates that
     reflect  currently  available  terms for similar debt, and  accordingly the
     carrying values are reasonable  estimates of their fair values.  Due to the
     short-term  maturity of the capital  lease,  management  estimates that the
     carrying value approximates its fair value.

     Convertible  debentures.   Management  estimates  the  carrying  values  to
     approximate their fair values.

     Notes receivable from officer. Management estimates these notes to be fully
     collectible, and that the carrying values are reasonable estimates of their
     fair values.


                                      -15-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

The carrying amounts and fair values of the Company's  financial  instruments as
of March 31, 2001 are as follows:

                                                                  Estimated
                                                  Carrying          Fair
                                                   Amount           Value
                                                 ----------      ----------
     Cash and cash equivalents                   $  225,018      $  225,018
     Certificates of deposit                         52,935          52,935
     Costs and estimated loss in excess
       of billings on uncompleted contract          672,872         672,872
     Notes receivable                                44,493          44,493
     Accounts payable                               166,761         166,761
     Long-term obligations                           74,047          74,047
     Convertible debentures                       1,290,677       1,290,677
     Notes receivable from officer                  193,427         193,427

NOTE 7. INCOME TAXES

The Company has recorded a deferred tax asset in the amount of $643,200,  net of
a  valuation  allowance  on  $2,316,800,  reflecting  the  expected  benefit  of
approximately  $7,400,000 in net operating  loss  carryforwards  which expire in
varying  amounts  between  2016  through  2020.  Realization  of this  asset  is
dependent on  generating  sufficient  taxable  income prior to expiration of the
loss carryforwards.  Although realization is not assured, management believes it
is more likely than not that the deferred tax asset will be realized. The amount
of the deferred tax asset considered  realizable,  however,  could be reduced or
increased  in the near term if  estimates of future  taxable  income  during the
carryforward period are revised.


NOTE 8. OPERATING LEASES

The Company occupies administrative,  engineering,  and manufacturing facilities
under  operating  leases  which  expire in  February  2002.  The leases call for
aggregate  minimum  monthly  lease  payments of $4,225.  Lease  expense  totaled
$12,675 and $11,200 for the quarter ended March 31, 2001 and 2000, respectively,
and $109,884 in the period from May 22, 1996 (inception) through March 31, 2001.

Future minimum lease payments  under the long-term  operating  lease are $46,475
through February 2002.


                                      -16-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 9. EQUITY TRANSACTIONS

The Company was initially capitalized through the issuance of 500,000 shares for
$25,000 in cash.  In November  1996,  the  Company  issued  4,500,000  shares in
exchange  for the  outstanding  shares of PLZ Tech,  Inc.  The  transaction  was
accounting  for as a purchase,  with assets  acquired  and  liabilities  assumed
recorded at their book values,  determined in accordance with generally accepted
accounting  principles.  Intangible  assets of PLZ Tech acquired in the purchase
transaction  were carried at historical  book values.  Research and  development
costs of PLZ Tech were expensed as incurred.  In previous financial  statements,
the Company did not present  unclaimed shares resulting from the merger with PLZ
Tech, Inc. as outstanding  shares.  In the accompanying 1997 and prior financial
statements the number of shares  outstanding  has been restated to include these
shares.

During 1997, the Company issued  2,281,212 shares of stock in a public offering,
primarily for cash.

During  1998,  the  Company  repurchased  472,200  of its  outstanding  stock in
exchange  for  $10,000  in  notes  receivable  and  $20,385  in cash in  various
transactions. This stock was subsequently retired.

The  Company  also  issued  9,274,811  shares of common  stock in  exchange  for
$1,292,707 in cash, net of sales commissions and other direct costs.  Certain of
these sales included price maintenance  agreements  resulting in the issuance of
an additional 1,704,464 shares of stock in 1998.

In 1998,  the Company  issued  2,751,000  shares of common stock in exchange for
services from contractors,  officers and others. These shares were valued at the
estimated  fair market  value for  similar  issuances  of stock and  amounted to
$296,470. The Company also issued 315,000 shares to an officer in exchange for a
note  receivable  of $29,000.  The note bears  interest at the rate of 7 percent
with interest due semiannually and the principal due July 2001.

In 1999, the Company  repurchased  489,251 shares of its  outstanding  stock for
$11,132 in cash. These shares were retired. The Company also repurchased 229,000
shares for $41,760 and resold 85,000 of these shares for $35,464.  The remaining
144,000 treasury shares have been recorded at cost.

The  Company  also sold  8,681,624  shares  for  $863,782  in cash,  and  issued
17,094,313 shares for services from contractors, officers and others, which were
valued at $1,486,414.

During the quarter ending March 31, 2000, the Company sold 782,000 shares of its
common stock for  $368,495 in cash,  and issued  1,791,733  shares of its common
stock for services from contractors,  officers and others,  which were valued at
$1,120,233.  The value of the  services is included in the costs and expenses on
the Statements of Operations.


                                      -17-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 9. EQUITY TRANSACTIONS - CONTINUED

Also during this quarter,  the Company sold 25,000 shares of its treasury  stock
for $49,770 and repurchased 6,500 shares for $7,683. The repurchased shares have
been recorded at cost.

On March 14,  2000,  the Company  issued 550 shares of its Series A  convertible
preferred  stock for  $550,000.  Related  finders  fees and  attorney  fees were
$65,000,  and were netted  against the  proceeds  for a net increase in cash and
equity of $485,000.  Effective June 14, 2000, the shares were  convertible  into
shares of common  stock at the lesser of 110 percent of the closing bid price of
a share of common  stock on March 13, 2000 or 77.5 percent of the average of the
five lowest  closing bid prices for the common stock for the twenty trading days
immediately preceding the conversion date.

Management  estimated  the  intrinsic  value  of the  conversion  feature  to be
$159,677.  This has been  recorded  as an  increase  in  paid-in  capital  and a
discount to the convertible  preferred stock,  with related  amortization  being
charged to retained  earnings as constructive  dividends.  The discount is being
amortized over a 90-day period, which is the period from the date of issuance to
the point at which the preferred  shares can be converted to common shares.  The
convertible  preferred stock also includes  detachable warrants for the purchase
of 55,000  shares of common  stock at a  purchase  price per share  equal to 110
percent of the closing bid price for the common stock on the closing date (March
8, 2000). The warrants expire on March 8, 2005. The detachable warrants have not
been valued in the accompanying  financial  statements,  as management estimates
their fair market value to be immaterial.

During the quarter ended June 30, 2000, the Company issued  1,247,970  shares of
its common stock for services from contractors,  officers and others, which were
valued at  $385,429.  The value of the  services  is  included  in the costs and
expenses on the Statements of Operations.  The Company also  repurchased  44,000
shares  of its  outstanding  common  stock for  $33,817  in cash.  These  shares
remained in treasury at June 30, 2000, and have been recorded at cost.

Also during this quarter,  an officer of the Company  exercised  1,000,000 stock
options at a price of $0.12 per share.  The Company issued a note  receivable to
the officer in the amount of $120,000  for the  shares.  Interest  for the first
quarter was prepaid.

During the quarter ended  September 30, 2000,  the Company issued 300,000 shares
of its common stock for services from  contractors,  officers and others,  which
were valued at $90,260.  The value of the  services is included in the costs and
expenses on the Statements of Operations. The Company also sold 45,000 shares of
its outstanding  common stock for $27,543 in cash and repurchased  13,000 shares
of its outstanding common stock for $4,986. These shares remained in treasury at
September 30, 2000, and have been recorded at cost.

An officer of the Company  exercised  850,000  stock options at a price of $0.12
per share.  The Company issued notes  receivable to the officer in the amount of
$102,000 for the shares.


                                      -18-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 9. EQUITY TRANSACTIONS - CONTINUED

Also,  during the quarter the Company  issued 160 shares of preferred  stock for
$160,000 in cash.

During the quarter ended December 31, 2001, the Company issued 615,500 shares of
common stock for services  from  contractors,  officers,  and others,  valued at
$130,275.

During the quarter ended March 31, 2001, the Company issued  1,475,000 shares of
common stock for services  from  contractors,  officers,  and others,  valued at
$176,248.

Also,  during  the  quarter  the  Company   repurchased  17,300  shares  of  its
outstanding stock for $3,207 in cash.

NOTE 10. STOCK PLANS

On January 4, 1999,  the Company  established  the Incentive  Stock Option Plan.
Pursuant to the Plan, up to 10,000,000  shares of the Company's common stock may
be granted as options to key  employees.  The shares issued upon exercise of the
options may be authorized  and unissued  shares or shares held by the Company in
its treasury. The exercise date of the options is based on the related agreement
as approved by the Board of Directors.  The Incentive  Stock Option Plan expires
on January 4, 2009. Options awarded under the Plan have four-year terms and vest
ratably over one to two year periods. As of March 31, 2001, there were 6,175,000
shares available under the Plan for future awards.  No stock options were issued
during the three-month period ended March 31, 2001.

The Company  applies APB Opinion  No. 25 in its  accounting  for the Plan,  and,
accordingly,  no compensation  cost has been recognized for its stock options in
the financial statements.  Had the Company determined compensation cost based on
the fair  value at the  grant  date for its stock  options  under  Statement  of
Financial  Accounting  Standards  No. 123, the  Company's  net loss and loss per
share would have been increased to the proforma amounts indicated as follows:

                                                Years ended December 31,
                                           2000           1999          1998
                                       -----------    -----------    ---------
     Net loss, as reported             $(3,199,935)   $(2,725,804)   $(752,111)
     Proforma net loss                  (3,575,534)    (2,940,633)    (752,111)

     Loss per share, as reported            (0.055)        (0.072)      (0.055)
     Proforma loss per share                (0.061)        (0.078)      (0.055)


                                      -19-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                                 March 31, 2001


NOTE 10. STOCK PLANS - CONTINUED

The fair  value of each  option  grant  for the  above  proforma  disclosure  is
estimated on the date of the grant using the Black-Scholes  option-pricing model
with the  following  weighted-average  assumptions:  dividends  of $0 per  year;
expected volatility of 42.3 percent; risk-free interest rate of 6.0 percent; and
expected lives of four years.

Total stock options granted and unexercised were 3,825,000 as of March 31, 2001.
The shares issued upon  exercise of the options may be  authorized  and unissued
shares or shares  held by the  Company in its  treasury.  The  exercise  date of
options granted is based upon the related  agreement as approved by the Board of
Directors.

The Company  also issued Stock  Purchase  Warrants to key  employees.  The total
number of "warrant shares" issued under these  agreements was 3,425,000  shares,
exercisable  at any  time  until  they  expire  on  June  15,  2004.  The  price
established for the shares ranges from $0.15 to $0.41 per share.

A summary of the  common  stock  option  and  warrant  activity  for  employees,
directors and officers is as follows:

                                                        Weighted
                                          Warrants      Average
                                            and         Exercise
                                          Options        Prices     Exercisable
                                         ----------      ------      ----------

      Balance, December 31, 1997            153,954      $ 0.58         153,954
      Balance, December 31, 1998            153,954        0.58         153,954

        Granted                           6,900,000        0.16
        Expired                            (153,954)       0.58
                                         ----------

      Balance, December 31, 1999          6,900,000        0.16       6,185,000
                                                                     ==========

        Cancelled                        (2,775,000)       0.72
        Replacement                       2,775,000        0.34
        Granted                           6,200,000        0.72
        Exercised                        (2,000,000)       0.12
                                         ----------

      Balance, December , 2000           11,100,000        0.27       9,517,500
                                                                     ==========

      Balance, March 31, 2001            11,100,000        0.27      10,361,250
                                         ==========                  ==========

The option price  established  for the shares upon exercise ranges from $0.12 to
$0.34 per share, and expire through October 2004.


                                      -20-
<PAGE>


                        ADVANCED OPTICS ELECTRONICS, INC.


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATION


Forward - Looking Statements

This Quarterly  Report contains  forward-looking  statements about the business,
financial  condition and prospects of the Company that reflect  assumptions made
by management and management's beliefs based on information  currently available
to it. The Company can give no assurance that the expectations indicated by such
forward-looking  statements will be realized. If any of management's assumptions
should prove incorrect, or if any of the risks and uncertainties underlying such
expectations  should  materialize,  the  Company's  actual  results  may  differ
materially from those indicated by the forward-looking statements.

The key factors  that are not within the  Company's  control and that may have a
direct  bearing  on  operating  results  include,  but are not  limited  to, the
acceptance by customers of the  Company's  products,  the  Company's  ability to
develop  new  products  cost-effectively,  the  ability of the  Company to raise
capital in the future, the development by competitors of products using improved
or alternative  technology,  the retention of key employees and general economic
conditions.

There may be other risks and circumstances that management is unable to predict.
When  used in this  Quarterly  Report,  words  such as,  "believes,"  "expects,"
"intends,"  "plans,"  "anticipates"  "estimates"  and  similar  expressions  are
intended to identify forward-looking  statements,  although there may be certain
forward-looking   statements   not   accompanied   by  such   expressions.   All
forward-looking statements are intended to be covered by the safe harbor created
by Section 21E of the Securities Exchange Act of 1934.

                                    OVERVIEW

Advanced Optics Electronics, Inc. is a technology company whose primary focus is
the development, production and sales of its electronic flat panel displays. The
primary  initial  product  will be  marketed  to  users of  outdoor  advertising
billboards.  We believe that our product line has the  potential to create a new
segment of the outdoor advertising industry. Our systems software and electronic
displays represent an innovative approach to advertising that takes advantage of
the recent  technological  convergence of broadcast and billboard  media and the
World Wide Web.


                                      -21-
<PAGE>


Our goal is to create a product line based on  technology  that is scalable both
in terms of size and resolution to meet a wide range of requirements  related to
site,  economics  and  use  from  our  potential  customers.  We also  plan  the
development of a leasing program and an Owned & Operated group.

The major advantages and features of the Display are:

     o    Brightest display ever available (35,000 nits)

     o    Widest viewing angle available

     o    Smallest dot pitch  available for outdoor  large-scale  displays (8 mm
          dot pitch)

     o    High definition picture quality

     o    Modular  assembly (1 meter  increments)  for  scaleable  and shapeable
          architectures

     o    True Color (24 bit)

     o    Full motion video (up to 120 frames per second)

     o    Transportable for mobile operations

     o    Weather resistant for outdoor applications

     o    Modest power requirements

     o    Minimum 5 year continual use lifetime

     o    Real-time live video feeds

     o    Broadcast/simulcast applications

     o    Supports streaming video

     o    Uses  industry  standard  DVI protocol for high speed data linking and
          digital video interfacing

     o    Satellite linkable

Proprietary Billboard software capabilities are:

     o    Manage and update display content remotely

     o    Works with all image file formats and digital video editors

     o    Secure Internet or WAN communications

     o    WEB-based status monitoring

     o    Provides time, temperature and other dynamic content inserts

The Company was organized as a Nevada  corporation  on May 22, 1996. On November
7, 1996,  the Company  acquired the  business and patents of PLZTech,  a company
involved in the  development of flat panel  displays.  Our operating  activities
have related  primarily to the initial  planning and  development of our product
and  building our  operating  infrastructure.  We have  completed,  tested,  and
measured  the   performance   of,  our   prototype  and  are  currently  in  the
manufacturing process of our production model.


                                      -22-
<PAGE>


We expect  our  principal  source of  revenue  to be  derived  from sales of our
electronic display product.  To date we have recognized limited revenue,  but we
have  developed a functioning  prototype  and we  anticipate  sales by the third
quarter  2001.  The  company  has set the price for its  units at  $395,000  and
$1,490,000 respectively for its 2 meter x 3 meter and its 3 meter x 8 meter flat
panel displays.

The  company  has  completed a  marketing  film that is being  distributed  on a
national  and  international  basis.  The  recipients  who receive this film are
institutional  investors  and  qualified  potential  buyers  of the  flat  panel
displays.

Our operating expenses have increased significantly since our inception, and the
rate of increase has risen since last year. This is due to increased engineering
and  management  staff and  investments in operating  infrastructure.  Since our
inception we have incurred  significant losses and, as of March 31, 2001, had an
accumulated deficit of $7,345,513.

RESULTS OF CONTINUING OPERATIONS

Due  to  our  limited  operating  history,  we  believe  that   period-to-period
comparisons of our results of operations are not fully meaningful and should not
be relied upon as an indication of future performance.

Comparison of the Three-Month Periods Ended March 31, 2001 and 2000

Revenue. Since our inception, we have been in the development stage and have had
only limited revenue. Revenues decreased to $0 in the first quarter of 2001 from
$34,039 in the first quarter of 2000.

Product Development. Product development expenses consist primarily of personnel
expenses,  consulting fees and depreciation of the equipment associated with the
development and enhancement of our flat panel displays. Research development and
technical  costs decreased to $78,202 in the first quarter of 2001 from $133,967
in the first  quarter of 2000. We believe that  continued  investment in product
development is critical to attaining our strategic  objectives and, as a result,
expect product development expenses to increase significantly in future periods.
We expense product development costs as they are incurred.

General and  Administrative.  General  and  administrative  expenses  consist of
expenses for executive and administrative  personnel,  facilities,  professional
services,  travel,  general  corporate  activities,  and  the  depreciation  and
amortization  of  office  furniture  and  leasehold  improvements.  General  and
administrative  costs  decreased  to $313,859 in the first  quarter of 2001 from
$1,206,669  in the first  quarter of 2000.  The  decrease was  primarily  due to
increased  duties handled by in-house  personnel and a reduction in professional
service fees and  expenses.  Due to


                                      -23-
<PAGE>


the growth of our business  and  continuing  expansion  of our staff,  we expect
general and administrative costs to increase in the future. The costs associated
with being a publicly traded company and future strategic acquisitions will also
be a contributing factor to increases in this expense.

Other Income  (Expense).  Other income (expense)  consists of interest and other
income and expense.  Interest income increased to $7,195 in the first quarter of
2001 from $2,293 in the first quarter of 2000.  The increase in interest  income
was due to an increase in our average net cash and cash equivalents balance.

Depreciation  increased  slightly  to $28,373 in the first  quarter of 2001 from
$27,630 in the first quarter of 2000 due to the additions of some equipment.

                         LIQUIDITY AND CAPITAL RESOURCES

Since  inception,  we have funded our operations  primarily  through the private
placement of equity securities. As of March 31, 2001 we have raised net proceeds
of $4,555,200.

Advanced  Optics  Electronics,  Inc. has filed a registration  statement,  and a
subsequent  amendment,  on form SB2  related  to common  shares  underlying  the
Company's convertible debenture financings.

We have also utilized  equipment loans and capital lease financing.  As of March
31, 2001 we have a balance of $55,668 on the  equipment  loans and $2,991 on the
capital lease.

In August 1998 Advanced Optics Electronics,  Inc. entered into a lease agreement
for the  financing of equipment  for the  development  of its flat panel display
systems. The Company is required to repay the $101,000 in equal monthly payments
of the lease.  Monthly payments on the lease are approximately  $2,850. The term
of the lease is 3 years and is backed by the credit of the Company.

The Company's holding in BioModa, Inc will provide additional liquidity. BioModa
is a biomedical  development  company. The Company's ownership of BioModa, as of
March 31, 2001 was approximately 16%. No immediate family members of officers or
directors of Advanced Optics Electronics, Inc. are securities holders of BioModa
with the  exception  of Harold  Herman,  who is a director  of  Advanced  Optics
Electronics, Inc. and a small minority shareholder in BioModa.

During the quarter  ended March 31, 2001  $11,733 was spent for the  purchase of
equipment.  Product development  expenditures were $78,202 for the quarter ended
March  31,  2001.  Funds  for  operations,   product   development  and  capital
expenditures were provided from the sale of


                                      -24-
<PAGE>


securities  and  cash  reserves.  As of March  31,  2001,  we had  approximately
$277,953 of cash and cash equivalents.

Management believes that sales of securities, cash reserves and contract revenue
will provide  adequate  liquidity and capital  resources to meet the anticipated
development  stage  requirements  through the end of the third  quarter 2001. At
that time it is  anticipated  that sales of flat panel  displays  will begin and
contribute  to  operating  revenues.  It is  anticipated  that these  sales will
provide the  additional  capital  resources to fund the  proportionately  higher
working capital  requirements of production and sales  initiatives.  The Company
currently has no other significant commitments for capital expenditures in 2001.

                           PART II. OTHER INFORMATION

Item 1. Legal proceedings

The  Company  is not a party to any legal  proceeding,  the  adverse  outcome of
which,  in  management's  opinion,  would have a material  adverse effect on the
Company's operating results.

Item 2. Changes in securities

During the first  quarter of fiscal year 2001 there was a 1,395,705  increase in
shares of common stock.

Item 3. Defaults upon senior securities - Not applicable

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

There were no matters  submitted  to a vote of the  Company's  security  holders
during the first quarter of fiscal year 2001.

Item 5. Other Information - Not applicable

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

27.1     Financial Data Schedule

(b)  Reports on Form 8-K

A report was filed on Form 8-K  related to the  Company's  Change of  Certifying
Accountant. The date of the report was March 19, 2001.


                                      -25-
<PAGE>


                                   SIGNATURES

In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report  on Form  10QSB to be  signed  on its  behalf  by the  undersigned,
thereunto duly authorized.


                                        Dated: May 14, 2001

                                        ADVANCED OPTICS ELECTRONICS, INC.


                                        BY:  /s/  John J. Cousins
                                             ----------------------------------
                                             John J. Cousins
                                             Vice President of Finance
                                             (Principal Accounting Officer)


                                        BY:  /s/  Leslie S. Robins
                                             ----------------------------------
                                             Leslie S. Robins
                                             Executive Vice President
                                             (Principal Executive Officer)


                                      -26-