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 nine month period ended: September 30, 2005

                           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
         November 4, 2005 was 5,315,707,055

         Transitional Small Business Disclosure Format (check one): Yes   No  X
                                                                       ---   ---

<PAGE>

PART I:  FINANCIAL INFORMATION
ITEM 1:  Financial Statements

--------------------------------------------------------------------------------
                   ADVANCED OPTICS ELECTRONICS, INC.
                     (A Development Stage Company)
                       CONSOLIDATED BALANCE SHEET
                           SEPTEMBER 30, 2005
                              (Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S>                                                                             <C>
                                 ASSETS

Current Assets

           Cash and cash equivalents                                            $    132,342
           Marketable securities                                                     928,908
           Other current assets                                                       21,419
                                                                                ------------

                Total current assets                                               1,082,669

Intangibles, net of accumulated amortization of $67,792                              206,038

Property and Equipment, net of accumulated depreciation of $429,062                  129,646

Other Assets

           Notes receivable and deposits                                              53,395

                                                                                ------------
                                                                                $  1,471,748
                                                                                ============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities

           Accounts payable                                                     $    121,904
           Accrued expenses                                                          387,743
           Advances from shareholders                                                146,683
           Advances from officer                                                      64,710
           Convertible debentures                                                     82,584
                                                                                ------------

                Total current liabilities                                            803,624
                                                                                ------------

Commitments and Contingencies

Stockholders' Equity

           Preferred stock, $0.001 par value, 10,000,000 shares authorized;
             no shares issued and outstanding                                             --
           Common stock, $0.001 par value, 6,000,000,000 shares authorized;
             4,940,836,349 shares issued and outstanding                           4,940,836
           Treasury stock, at cost                                                   (39,266)
           Notes receivable from officers                                            (66,659)
           Additional paid in capital                                             17,236,348
           Accumulated other comprehensive income                                    289,427
           Deficit accumulated during the development stage                      (21,692,562)
                                                                                ------------

                Total stockholders' equity                                           668,124
                                                                                ------------

                                                                                $  1,471,748
                                                                                ============
</TABLE>

--------------------------------------------------------------------------------
F-1             See accompanying notes to the consolidated financial statements.

<PAGE>

--------------------------------------------------------------------------------
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                          (A Development Stage Company)
          For the Three Month Periods Ended September 30, 2005 and 2004
                                   (Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              2005                2004
                                                         ---------------     ---------------
<S>                                                      <C>                 <C>
CONTRACT REVENUES                                        $            --     $            --

OPERATING EXPENSES
      General and administrative                                 196,576             209,660
      Payroll and related                                        243,782             174,542
      Research and development                                    16,189             133,421
      Professional Fees                                            6,468              16,923
      Depreciation & amortization                                 14,032              30,718
      Licensing Fees                                                 125                  --
      Inventory write-off                                             --                  --
      Asset impairment                                                --                  --
                                                         ---------------     ---------------
                      Total operating expenses                   477,172             565,264

LOSS ON CONTRACT                                                      --              86,382
                                                         ---------------     ---------------

OPERATING LOSS                                                  (477,172)           (651,646)
                                                         ---------------     ---------------
OTHER INCOME (EXPENSES)
      Interest income                                              1,799                  --
      Realized loss on marketable equity securities               23,324                  --
      Other investment gains                                          --                  --
      Loss from investment in Biomoda, Inc.                           --                  --
      Gain (loss) on disposal of assets                               --                  --
      Gain (loss) on settlement of debts                         (10,122)                 --
      Interest expense                                                --               (450)
      Other income                                                    --                  --
                                                         ---------------     ---------------
                     Total other income (expenses)                15,001                (450)
                                                         ---------------     ---------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
   IN ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS                 (462,171)           (652,096)

EXTRAORDINARY LOSS                                                    --                  --

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
   PRINCIPLE                                                          --                  --
                                                         ---------------     ---------------
NET LOSS                                                        (462,171)           (652,096)

OTHER COMPREHENSIVE (LOSS) GAIN
      Unrealized gain (loss) on marketable securities           (390,806)            (13,849)
                                                         ---------------     ---------------

COMPREHENSIVE LOSS                                       $      (852,977)    $      (665,945)
                                                         ===============     ===============

Basic and diluted net loss before cumulative effect of
   change in accounting principle available to common
   shareholder per common share and extraordinary loss   $        (0.000)    $        (0.000)

Extraordinary loss                                                    --                  --

Cumulative effect of change in accounting principle                   --                  --
                                                         ---------------     ---------------
Basic and diluted net loss available to common
shareholder per common share                             $        (0.000)    $        (0.000)
                                                         ===============     ===============
Basic and diluted weighted average common shares
  outstanding                                              4,609,096,349       2,933,421,132
                                                         ===============     ===============
</TABLE>

*     Weighted average number of shares used to compute basic and diluted loss
      per share is the same since the effect of dilutive securities is
      anti-dilutive.

--------------------------------------------------------------------------------
F-2             See accompanying notes to the consolidated financial statements.

<PAGE>

--------------------------------------------------------------------------------
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                          (A Development Stage Company)
 For the Nine Month Periods Ended September 30, 2005 and 2004 and For The Period
            From May 22, 1996 (Inception) Through September 30, 2005
                                   (Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                      May 22, 1996
                                                                                                      (Inception)
                                                                                                        Through
                                                                                                      September 30,
                                                                   2005               2004               2005
                                                             ---------------    ---------------    ---------------
<S>                                                          <C>                <C>                <C>
CONTRACT REVENUES                                            $            --    $            --    $            --

OPERATING EXPENSES
      General and administrative                                     971,146          1,192,829         11,576,109
      Payroll and related                                            766,773            609,803          2,299,570
      Research and development                                        55,138            604,720          2,156,787
      Professional Fees                                               19,724             68,915            190,105
      Depreciation & amortization                                     39,301             38,005            164,781
      Licensing Fees                                                  15,125             15,000             53,101
      Inventory write-off                                                 --                 --             29,293
      Asset impairment                                                    --                 --            592,884
                                                             ---------------    ---------------    ---------------
                           Total operating expenses                1,867,207          2,529,272         17,062,630

LOSS ON CONTRACT                                                          --            168,455          2,255,944
                                                             ---------------    ---------------    ---------------

OPERATING LOSS                                                    (1,867,207)        (2,697,727)       (19,318,574)
                                                             ---------------    ---------------    ---------------
OTHER INCOME (EXPENSES)
      Interest income                                                  2,791                 15             98,915
      Realized gain (loss) on marketable equity securities            21,177             17,747           (106,751)
      Other investment gains                                              --                 --             59,784
      Loss from investment in Biomoda, Inc.                               --                 --           (289,750)
      Gain (loss) on disposal of assets                                   --                 --             (3,520)
      Gain (loss) on settlement of debts                                  --                 --           (556,088)
      Interest expense                                               (24,213)           (10,147)        (1,324,829)
      Other income                                                        --                 --                551
                                                             ---------------    ---------------    ---------------
                     Total other income (expenses)                      (245)             7,615         (2,121,688)
                                                             ---------------    ---------------    ---------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS                      (1,867,452)        (2,690,112)       (21,440,262)

EXTRAORDINARY LOSS                                                        --                 --           (189,280)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE                                                                 --                 --            (63,020)
                                                             ---------------    ---------------    ---------------

NET LOSS                                                     $    (1,867,452)   $    (2,690,112)   $   (21,692,562)
                                                             ===============    ===============    ===============
OTHER COMPREHENSIVE (LOSS) GAIN
      Unrealized gain (loss) on marketable securities                299,118           (140,029)           289,427
                                                             ---------------    ---------------    ---------------

COMPREHENSIVE LOSS                                                (1,568,334)        (2,830,141)       (21,403,135)
                                                             ===============    ===============    ===============

Basic and diluted net loss before cumulative effect of
   change in accounting principle available to common
   shareholder per common share and extraordinary loss                          $        (0.000)

Extraordinary loss                                                        --                 --

Cumulative effect of change in accounting principle                       --                 --
                                                             ---------------    ---------------
Basic and diluted net loss available to common shareholder
per common share                                             $        (0.000)   $        (0.001)
                                                             ===============    ===============

Basic and diluted weighted average common shares
  outstanding                                                  3,975,833,451      2,887,373,986
                                                             ===============    ===============
</TABLE>

*     Weighted average number of shares used to compute basic and diluted loss
      per share is the same since the effect of dilutive securities is
      anti-dilutive.
--------------------------------------------------------------------------------
F-3             See accompanying notes to the consolidated financial statements.

<PAGE>

                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
                              COMPREHENSIVE INCOME
     For The Period From May 22, 1996 (Inception) Through September 30, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                   Preferred Stock                      Common Stock
                                                          --------------------------------    --------------------------------
                                                               Shares            Amount           Shares            Amount
                                                          --------------    --------------    --------------    --------------
<S>                                                       <C>               <C>               <C>               <C>

Balance at May 22, 1996 (Inception)                                   --    $           --                --    $           --
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 for cash and services                                    --                --         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                                                710                 1           782,000               782
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 of 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)               --                --
Intrinsic value of convertible debenture                              --                --                --                --
De-investment in Wizard Technologies                                  --                --                --                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2000                                            --                --        61,928,175            61,928


--------------------------------------------------------------------------------
F-4             See accompanying notes to the consolidated financial statements.

<PAGE>

Stock issued for cash                                                 --                --         1,382,778             1,383
Stock issued for services                                             --                --        10,461,498            10,461
Purchase of treasury stock                                            --                --                --                --
Amortization of discount on convertible debentures                    --                --                --                --
Stock issued upon debt conversion                                     --                --         7,064,886             7,065
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2001                                            --                --        80,837,337            80,837
Stock issued for cash                                                 --                --       315,845,000           315,845
Stock issued for services                                             --                --       115,768,000           115,768
Purchase of treasury stock                                            --                --                --                --
Sale of treasury stock                                                --                --                --                --
Exercise of stock options for notes receivable                        --                --         1,100,000             1,100
Advances to officer                                                   --                --                --                --
Reclass of accrued interest with note receivable                      --                --                --                --
Stock issued upon debt conversion                                     --                --        78,695,566            78,696
Retroactive application of equity method for investment               --
  in Bio Moda, Inc.                                                   --                --                --                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2002                                            --                --       592,245,903           592,246
Stock issued for cash                                                 --                --     1,477,760,000         1,477,760
Stock issued for services                                             --                --       367,249,994           367,250
Purchase of treasury stock                                            --                --                --                --
Sale of treasury stock                                                --                --                --                --
Accrued interest on advances to officer                               --                --                --                --
Cancellation of stock issued for note receivable                      --                --        (2,950,000)           (2,950)
Stock issued upon debt conversion, including
   $67,000 of interest                                                --                --       320,830,452           320,830
Unrealized holding gain on available for sale securities              --                --                --                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2003                                            --                --     2,755,136,349         2,755,136
Stock issued for cash                                                 --                --       462,800,000           462,800
Stock issued for services                                             --                --        47,200,000            47,200
Purchase of treasury stock                                            --                --                --                --
Sale of treasury stock                                                --                --                --                --
Stock issued upon debt conversion, including
    $166,240 of interest                                              --                --       103,000,000           103,000
Realized loss on sale of market of available for
    sale securities, net                                              --                --                --                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2004                                            --                --     3,368,136,349         3,368,136
Stock issued for cash                                                 --                --     1,551,700,000         1,551,700
Stock issued for services                                             --                --                --                --
Purchase of treasury stock                                            --                --                --                --
Sale of treasury stock                                                --                --                --                --
Accrued interest on advances to officer                               --                --                --                --
Stock issued upon debt conversion                                     --                --        21,000,000            21,000
Realized loss on sale of market of available for
    sale securities, net                                              --                --                --                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------
Balance, September 30, 2005                                           --    $           --     4,940,836,349    $    4,940,836
                                                          ==============    ==============    ==============    ==============

--------------------------------------------------------------------------------
F-5             See accompanying notes to the consolidated financial statements.

<PAGE>


                                                                   Treasury Stock
                                                          --------------------------------       Additional
                                                                                                   Paid In            N/R
                                                               Shares            Amount            Capital        Stockholder
                                                          ---------------   --------------    --------------    --------------

Balance at May 22, 1996 (Inception)                                   --    $           --    $           --    $           --
Stock issued to incorporators for cash                                --                --            24,500                --
Stock issued for the net assets of PLZ Tech, Inc.                     --                --           281,096                --
Net loss                                                              --                --                --                --
                                                          ---------------   --------------    --------------    --------------

Balance, December 31, 1996                                            --                --           305,596                --
Stock issued for cash and services                                    --                --           362,720                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 1997                                            --                --           668,316                --
Stock issued for cash                                                 --                --         1,281,728                --
Stock issued for services                                             --                --           293,719                --
Stock issued in exchange for note receivable                          --                --            28,685                --
Purchase and retirement of treasury stock                             --                --           (39,913)               --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 1998                                            --                --         2,232,535                --
Stock issued for cash                                                 --                --           855,101                --
Stock issued for services                                             --                --         1,469,320                --
Intrinsic value of beneficial conversion feature of
   notes payable                                                      --                --           174,610                --
Fair value of warrants related to notes payable                       --                --           125,000                --
Purchase and retirement of treasury stock                             --                --           (10,643)               --
Purchase of treasury stock                                      (229,000)          (41,760)               --                --
Sale of treasury stock                                            85,000            11,130            24,334                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 1999                                      (144,000)          (30,630)        4,870,257                --
Stock issued for cash                                                 --                --         1,012,710                --
Stock issued for services                                             --                --         1,726,197                --
Purchase of treasury stock                                       (63,500)          (46,486)               --                --
Sale of treasury stock                                           142,400            22,542            54,771                --
Exercise of stock options for notes receivable                        --                --           220,150          (193,427)
Amortization of discount of convertible preferred stock               --                --           159,677                --
Exercise of preferred stock conversion feature                        --                --           533,678                --
Issuance of convertible debentures                                    --                --           263,830                --
Exchange of preferred stock for convertible debentures                --                --          (869,678)               --
Intrinsic value of convertible debenture                              --                --           227,898                --
De-investment in Wizard Technologies                                  --                --           (59,583)               --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2000                                       (65,100)          (54,574)        8,139,907          (193,427)
Stock issued for cash                                                 --                --            66,844                --
Stock issued for services                                             --                --           412,284                --
Purchase of treasury stock                                      (251,700)          (16,215)               --                --
Amortization of discount on convertible debentures                    --                --           143,875                --
Stock issued upon debt conversion                                     --                --           147,008                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2001                                      (316,800)          (70,789)        8,909,918          (193,427)
Stock issued for cash                                                 --                --           229,816                --
Stock issued for services                                             --                --           366,301                --
Purchase of treasury stock                                    (1,400,000)           (8,732)               --                --
Sale of treasury stock                                           507,800            72,887           (65,058)               --
Exercise of stock options for notes receivable                        --                --            20,900           (22,000)
Advances to officer                                                   --                --                --           (34,300)
Reclass of accrued interest with note receivable                      --                --                --           (59,175)
Stock issued upon debt conversion                                     --                --           348,324                --
Retroactive application of equity method for investment
  in Bio Moda, Inc.                                                   --                --                --                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2002                                    (1,209,000)           (6,634)        9,810,201          (308,902)

--------------------------------------------------------------------------------
F-6             See accompanying notes to the consolidated financial statements.


<PAGE>

Stock issued for cash                                                 --                --         4,553,055                --
Stock issued for services                                             --                --         1,464,845                --
Purchase of treasury stock                                   (13,250,000)          (61,943)               --                --
Sale of treasury stock                                         9,950,000            24,846            31,707                --
Accrued interest on advances to officer                               --                --                --            (2,397)
Cancellation of stock issued for note receivable                      --                --          (241,050)          244,000
Stock issued upon debt conversion, including
   $67,000 of interest                                                --                --           337,563                --
Unrealized holding gain on available for sale securities              --                --                --                --
Net loss
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2003 (as restated)                      (4,509,000)          (43,731)       15,956,321           (67,299)
Stock issued for cash                                                 --                --           656,231                --
Stock issued for services                                             --                --           207,580                --
Purchase of treasury stock                                    (9,800,000)          (41,724)               --                --
Sale of treasury stock                                        14,100,000            48,260                --                --
Stock issued upon debt conversion, including
    $166,240 of interest                                              --                --         1,022,790                --
Realized loss on sale of market of available for
    sale securities, net                                              --                --                --                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2004                                      (209,000)          (37,195)       17,842,922           (67,299)
Stock issued for cash                                                 --                --          (616,696)               --
Stock issued for services                                             --                --                --                --
Purchase of treasury stock                                    (3,370,000)           (3,266)               --                --
Sale of treasury stock                                         1,804,000             1,195                --                --
Accrued interest on advances to officer                               --                --                --               640
Stock issued upon debt conversion                                     --                --            10,122                --
Realized loss on sale of market of available for
    sale securities, net                                              --                --                --                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------
Balance, September 30, 2005                                   (1,775,000)   $      (39,266)   $   17,236,348    $      (66,659)
                                                          ==============    ==============    ==============    ==============

</TABLE>

--------------------------------------------------------------------------------
F-7             See accompanying notes to the consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>

                                                                               Deficit
                                                             Other           Accumulated          Total
                                                          Comprehensive      During the       Stockholders'
                                                             Income       Development Stage  equity (deficit)
<S>                                                       <C>             <C>                <C>

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

Balance at May 22, 1996 (Inception)                       $           --    $           --   $            --
Stock issued to incorporators for cash                                --                --            25,000
Stock issued for the net assets of PLZ Tech, Inc.                     --                --           285,596
Net loss                                                              --           (76,902)          (76,902)
                                                          --------------    --------------    --------------

Balance, December 31, 1996                                            --           (76,902)          233,694
Stock issued for cash and services                                    --                --           365,001
Net loss                                                              --           (84,690)          (84,690)
                                                          --------------    --------------    --------------

Balance, December 31, 1997                                            --          (161,592)          514,005
Stock issued for cash                                                 --                --         1,292,707
Stock issued for services                                             --                --           296,470
Stock issued in exchange for note receivable                          --                --            29,000
Purchase and retirement of treasury stock                             --                --           (40,385)
Net loss                                                              --          (752,111)         (752,111)
                                                          --------------    --------------    --------------

Balance, December 31, 1998                                            --          (913,703)        1,339,686
Stock issued for cash                                                 --                --           863,783
Stock issued for services                                             --                --         1,486,414
Intrinsic value of beneficial conversion feature of
   notes payable                                                      --                --           174,610
Fair value of warrants related to notes payable                       --                --           125,000
Purchase and retirement of treasury stock                             --                --           (11,132)
Purchase of treasury stock                                            --                --           (41,760)
Sale of treasury stock                                                --                --            35,464
Net loss                                                              --        (2,765,862)       (2,765,862)
                                                          --------------    --------------    --------------

Balance, December 31, 1999                                            --        (3,679,565)        1,206,203
Stock issued for cash                                                 --                --         1,013,493
Stock issued for services                                             --                --         1,730,152
Purchase of treasury stock                                            --                --           (46,486)
Sale of treasury stock                                                --                --            77,313
Exercise of stock options for notes receivable                        --                --            28,573
Amortization of discount of convertible preferred stock               --                --           159,677
Exercise of preferred stock conversion feature                        --                --           542,878
Issuance of convertible debentures                                    --                --           263,830
Exchange of preferred stock for convertible debentures                --                --          (869,679)
Intrinsic value of convertible debenture                              --                --           227,898
De-investment in Wizard Technologies                                  --                --           (59,583)
Net loss                                                              --        (3,827,873)       (3,827,873)
                                                          --------------    --------------    --------------

Balance, December 31, 2000                                            --        (7,507,438)          446,396
Stock issued for cash                                                 --                --            68,227
Stock issued for services                                             --                --           422,745
Purchase of treasury stock                                            --                --           (16,215)
Amortization of discount on convertible debentures                    --                --           143,875
Stock issued upon debt conversion                                     --                --           154,073
Net loss                                                              --        (1,985,142)       (1,985,142)
                                                          --------------    --------------    --------------

Balance, December 31, 2001                                            --        (9,492,580)         (766,041)

--------------------------------------------------------------------------------
F-8             See accompanying notes to the consolidated financial statements.





Stock issued for cash                                                 --                --           545,661
Stock issued for services                                             --                --           482,069
Purchase of treasury stock                                            --                --            (8,732)
Sale of treasury stock                                                --                --             7,829
Exercise of stock options for notes receivable                        --                --                --
Advances to officer                                                   --                --           (34,300)
Reclass of accrued interest with note receivable                      --                --           (59,175)
Stock issued upon debt conversion                                     --                --           427,020
Retroactive application of equity method for investment
  in Bio Moda, Inc.                                                   --           (97,674)          (97,674)
Net loss                                                              --        (1,285,830)       (1,285,830)
                                                          --------------    --------------    --------------

Balance, December 31, 2002                                            --       (10,876,084)         (789,173)
Stock issued for cash                                                 --                --         6,030,815
Stock issued for services                                             --                --         1,832,095
Purchase of treasury stock                                            --                --           (61,943)
Sale of treasury stock                                                --                --            56,553
Accrued interest on advances to officer                               --                --            (2,397)
Cancellation of stock issued for note receivable
Stock issued upon debt conversion, including
   $67,000 of interest                                                --                --           658,393
Unrealized holding gain on available for sale securities          17,449                --            17,449
Net loss                                                              --        (3,900,959)       (3,900,959)
                                                          --------------    --------------    --------------

Balance, December 31, 2003                                        17,449       (14,777,043)        3,840,833
Stock issued for cash                                                 --                --         1,119,031
Stock issued for services                                             --                --           254,780
Purchase of treasury stock                                            --                --           (41,724)
Sale of treasury stock                                                --                --            48,260
Stock issued upon debt conversion, including
    $166,240 of interest                                              --                --         1,125,790
Realized loss on sale of market of available for
    sale securities, net                                         (27,140)               --           (27,140)
Net loss                                                              --        (5,048,067)       (5,048,067)
                                                          --------------    --------------    --------------
Balance, December 31, 2004                                        (9,691)      (19,825,110)        1,271,763

Stock issued for cash                                                 --                --           935,004
Stock issued for services                                             --                --                --
Purchase of treasury stock                                            --                --            (3,266)
Sale of treasury stock                                                --                --             1,195
Accrued interest on advances to officer                               --                --               640
Stock issued upon debt conversion                                     --                --            31,122
Realized loss on sale of market of available for
    sale securities, net                                         299,118                --           299,118
Net loss                                                              --        (1,867,452)       (1,867,452)
                                                          --------------    --------------    --------------
                                                          $      289,427    $  (21,692,562)   $     (668,124)
                                                          ==============    ==============    ==============
</TABLE>


--------------------------------------------------------------------------------
F-9             See accompanying notes to the consolidated financial statements.

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
 FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004 AND FOR THE PERIOD
            FROM MAY 22, 1996 (INCEPTION) THROUGH SEPTEMBER 30, 2005
                                   (Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                 May 22, 1996
                                                                                                                 (Inception)
                                                                                                                   Through
                                                                                                                 September 30,
                                                                                     2005            2004            2005
                                                                                 ------------    ------------    ------------
<S>                                                                              <C>             <C>             <C>
Cash flows from operating activities:
     Net loss                                                                    $ (1,867,452)   $ (2,690,112)   $(21,692,562)
     Adjustments to reconcile net loss to net cash
       used in operating activities:
        Intrinsic value of conversion features                                             --              --         610,603
        Write off of organization costs/goodwill                                           --              --          63,020
        Extraordinary loss                                                                 --              --         189,280
        Inventory write off                                                                --              --          29,293
        Amortization of discount on convertible notes and
          preferred stock                                                                  --              --         295,209
        Loss (Gain) on marketable securities                                          (21,177)        (17,747)        106,751
        Loss on disposal of assets                                                         --              --           3,520
        Issuance of common stock for services                                              --              --       6,504,726
        Issuance of Biomoda common stock and options for services                          --              --         165,000
        Issuance of notes payable for services                                             --              --          50,000
        Exchange of stock investment for services                                     275,428              --         275,428
        Increase in excess of costs and earnings over billings
        on uncompleted contract                                                            --              --      (2,050,000)
        Increase in allowance for loss on contract                                         --              --       2,050,000
        Loss (Gain) on extinguishment of debt                                              --              --         556,088
        Interest accrued on convertible debentures                                      2,495              --         311,999
        Interest earned on note receivable from stockholder and
          related parties                                                                  --              --         (17,823)
        Depreciation and amortization                                                  39,301          38,018         702,741
        Bad debt expense                                                                   --              --          15,000
        Asset impairment                                                                   --              --         592,884
        Other non-cash expenses                                                            --              --          33,447
        Accrued interest                                                                   --              --          30,667
     Changes in operating assets and liabilities:
        Decrease (Increase) in other current assets                                    (3,973)         (7,285)        (16,186)
        Decrease in inventory                                                              --              --         (35,293)
        (Decrease) Increase in accounts payable, accrued and other liabilities        146,911        (251,810)        172,851
                                                                                 ------------    ------------    ------------
     Net cash used in operating activities                                         (1,428,467)     (2,928,936)    (10,763,608)
                                                                                 ------------    ------------    ------------

Cash flows from investing activities:

     Purchases of property and equipment                                               (3,780)             --        (521,860)
     Additions to Patent, trademark and license fee, net of extraordinary gain        (41,460)       (114,473)       (122,232)
     Investment in Genomed                                                             76,949      (1,022,282)       (823,051)
     Investment other                                                                      --              --              --
     Investment in Biomoda, Inc.                                                           --              --        (383,845)
     Proceeds from sale of Biomoda, Inc. stock                                             --              --          28,930
     Advances to Biomoda, Inc.                                                             --              --         (38,432)
     Advances from shareholders                                                            --              --          14,009
     Sale of marketable securities                                                         --              --         192,787
     Purchases of marketable securities                                                    --         (19,404)       (645,334)
     Cash of variable entity on consolidation                                              --              --             155
     Decrease in certificates of deposit                                                   --              --              --
     Increase in notes receivable                                                      (3,816)        (17,500)        (53,395)
     Purchase of other assets                                                              --              --        (245,579)
                                                                                 ------------    ------------    ------------
     Net cash used in investing activities                                             27,893      (1,173,659)     (2,597,846)
                                                                                 ------------    ------------    ------------
</TABLE>

--------------------------------------------------------------------------------
F-10          See accompanying notes to the consolidated financial statements.

<PAGE>

<TABLE>
<CAPTION>
                                                                                                                 May 22, 1996
                                                                                                                 (Inception)
                                                                                                                   Through
                                                                                                                 September 30,
                                                                                     2005            2004            2005
                                                                                 ------------    ------------    ------------
<S>                                                                              <C>             <C>             <C>
Cash flows from financing activities:
     Principal repayments on notes payable and capital leases                              --              --        (269,987)
     Proceeds from notes payable                                                           --              --         622,776
     Issuance of common stock for cash                                                935,000       1,303,250      12,258,718
     Issuance of Biomoda common stock for cash                                             --              --          60,000
     (Increase) decrease in note receivable stockholder                                11,695          (7,826)          6,273
     Repayment for advances from officer                                              (25,000)             --         (25,000)
     Proceeds from sale of treasury stock                                               1,195              --         226,614
     Purchase of treasury stock                                                        (3,266)        (19,222)       (261,643)
     Increase in note receivable officer                                                  640              --             640
     Proceeds from issuance of convertible debt                                            --              --       1,270,965
     Principal repayments on convertible debt                                              --        (492,179)       (395,560)
                                                                                 ------------    ------------    ------------
     Net cash provided by financing activities                                        920,264         784,023      13,493,796
                                                                                 ------------    ------------    ------------
Net (decrease) increase in cash                                                      (480,310)     (3,318,572)        132,342
Cash at beginning of period                                                           612,652       3,964,609              --
                                                                                 ------------    ------------    ------------
Cash at end of period                                                            $    132,342    $    646,037    $    132,342
                                                                                 ============    ============    ============

Supplemental disclosure of cash flow information -
  Cash paid during the year
     for:
        Interest                                                                 $         --    $         --
                                                                                 ============    ============
        Income taxes                                                             $         --    $         --
                                                                                 ============    ============
</TABLE>

--------------------------------------------------------------------------------
F-11            See accompanying notes to the consolidated financial statements.

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

MANAGEMENTS' REPRESENTATION:

The management of Advanced  Optics  Electronics,  Inc. (the  "Company")  without
audit has prepared the  condensed  consolidated  financial  statements  included
herein. The accompanying  unaudited condensed  consolidated financial statements
have been prepared in accordance with accounting  principles  generally accepted
in the United  States of America  for  interim  financial  information.  Certain
information and note disclosures  normally included in the financial  statements
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America have been omitted.  In the opinion of  management,  all
adjustments   considered  necessary  for  fair  presentation  of  the  condensed
financial  statements have been included and were of a normal recurring  nature,
and the accompanying  condensed consolidated financial statements present fairly
the financial  position as of September 30, 2005,  the results of operations and
cash flows for the nine month periods ended  September 30, 2005 and 2004 and the
results of operations  for the three month periods ended  September 30, 2005 and
2004.

It is suggested that these condensed financial statements be read in conjunction
with the audited financial  statements and notes for the year ended December 31,
2004,  included in the  Company's  Form  10-KSB  filed with the  Securities  and
Exchange Commission.  The interim results are not necessarily  indicative of the
results for a full year.

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF OPERATIONS

Advanced Optics Electronics,  Inc. (the "Company") and its subsidiary,  Biomoda,
Inc  (Biomoda)  are  development  stage  technology  companies.   The  Company's
principal  focus is the  development  and production of  large-scale  flat panel
displays and Biomoda's is cancer  detection and diagnostic  tests. The Company's
stock trades on the Over The Counter Bulletin Board under the symbol "ADOT." The
Company  plans to focus on  producing  and  selling the  large-scale  flat panel
displays for outdoor advertising billboards.

The  Company  is  developing  a color  recognition  optical  device and plans to
initially focus on marketing it as a color  identifier to the visually  impaired
and as a  teaching  aid for  small  children.  The  Company's  unique  and novel
conception  and  implementation  of  hardware  and  firmware   determines  color
optically  and  expresses  the  results  with vocal  responses.  The  Company is
intending to establish  marketing  arrangements  for the  distribution to retail
locations after a supply has been manufactured and inventoried.

The  Company's  research and  development  work have not  completed  the initial
product.  Completion  of the product is now  expected in the first half of 2006.
Because of the lack of  anticipated  revenues  in 2005,  the  Company  has taken
excess cash funds and invested these in what they deem to be a sound  investment
in Genomed that may produce  additional  funds and gains to the company in 2005.
These funds and gains would then be used for additional product  development and
administrative expenses in the initial production stage of the product.

In 2002, the Company's Chief  Executive  Officer ("CEO") and the Chief Financial
Officer  ("CFO")

--------------------------------------------------------------------------------
F-12

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

replaced Biomoda's  management team,  effecting a change in control. The Company
also owns approximately 16% of Biomoda's  outstanding common stock. In 2003, the
CEO and the CFO each acquired 7.27% of the outstanding  common stock of Biomoda.
On August 13,  2003,  Biomoda  formed a 100% owned  subsidiary  known as Biomoda
Holdings, Inc., a Nevada corporation, for the purpose of research,  development,
production and marketing of medical and biomedical products.  As of December 31,
2004,  the  Company  owned  approximately  1,132,000  or 15.9% of the  7,117,000
outstanding  shares of Biomoda.  In addition,  two of the Company's officers own
approximately 12%, collectively,  of Biomoda's outstanding shares.  Further, the
Company  subleases  office  space and lab  equipment  to Biomoda  and two of the
Company's  officers are also officers of Biomoda.  The Company has been the sole
source of funding to Biomoda  since 2002 through  advances  made under a line of
credit agreement. The Company is considered the primary beneficiary as it stands
to absorb the majority of  Biomoda's,  called  herein as the  variable  interest
entity,  expected losses.  Since Biomoda and the Company are considered entities
under common control for accounting  purposes,  the Company  measures the assets
and liabilities of Biomoda at their carrying amounts in consolidation. (Note 5)

Biomoda's  primary  focus is on early  cancer  detection  technology.  Its novel
cell-targeting   technology   is  globally   patented   for  the   detection  of
pre-cancerous  and cancerous  conditions in all human tissue.  This  technology,
based  on a  compound  called  Tetrakis  Carboxy  Phenyl  Porphine  (TCPP),  was
developed  at  St.  Mary's   hospital  in  Colorado  and  Los  Alamos   National
Laboratories.  Biomoda  obtained  a  worldwide  exclusive  license  to the  TCPP
technology  from the  University  of  California  in late  1995,  and  began new
research broadening the scope of the original patent and technology. In November
2000,  Biomoda  filed a new U.S.  provisional  patent  application  defining the
ability  of its  version  of the  TCPP to  detect  pre-cancerous  and  cancerous
conditions in all human tissue.  Biomoda began the commercialization  process by
trade marking the  technology as CyPath.  Management  expects to continue  assay
validation work and register its product with the FDA in 2005. There are several
business models,  product types and regulatory routes that Biomoda is evaluating
including: licensing, ASR, 510K, PMA and IVD kits. Biomoda is evaluating several
cancers with a focus on large markets that are in the need of the most immediate
diagnostic support. These include: lung, bladder and cervical.

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include accounts of the Company and the
accounts  of  the  variable  interest  entity,   Biomoda,  Inc.  (Note  5).  All
significant  inter-company  accounts and  transactions  have been  eliminated in
consolidation.

USE OF ESTIMATES

The  preparation of the  consolidated  financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
("GAAP")  requires  management to make estimates and assumptions that affect the
reported  amounts of assets and  liabilities  and the  disclosure  of contingent
assets and liabilities at the date of the consolidated financial statements, and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Significant  estimates made by management are, among others,  expected losses of
the  variable  interest  entity,  valuation  of  marketable  securities  and the
valuation of other assets.  Actual  results could  materially  differ from those
estimates.

--------------------------------------------------------------------------------
F-13

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

RISKS AND UNCERTAINTIES

The Company operates in a highly competitive industry that is subject to intense
competition.  The Company has no operating history and has not generated revenue
from its business  operations.  As a development stage entity, the Company faces
risks and  uncertainties  relating to its ability to successfully  implement its
business  strategy.  Among  other  things,  these  risks  include the ability to
develop and sustain revenue growth; managing expanding operations;  competition;
attracting,  retaining  and  motivating  qualified  personnel;  maintaining  and
developing new strategic relationships;  and the ability to anticipate and adapt
to the changing markets. Therefore, the Company may be subject to uncertainties,
including  financial,  operational,  technological,  regulatory  and other risks
associated with an emerging  business,  including the potential risk of business
failure.

DEVELOPMENT STAGE AND GOING CONCERN

The  Company has been in the  development  stage  since  Inception,  and has not
generated any revenues from  operations  and there is no assurance of any future
revenues.

The accompanying  consolidated  financial statements have been prepared assuming
the Company will continue as a going concern,  which  contemplates,  among other
things,  the realization of assets and satisfaction of liabilities in the normal
course of  business.  As of  September  30,  2005,  the Company has  accumulated
deficit  of   $21,692,562.   The  Company's  total  assets  exceeded  the  total
liabilities by $668,124.  These factors,  among others,  raise substantial doubt
about the Company's ability to continue as a going concern.

The  Company  may  require  additional  funding  for  continuing   research  and
development,   obtaining   acceptance   in  the   market   place   and  for  the
commercialization  of its product.  There can be no  assurance  that the Company
will be able to obtain  sufficient  additional  funds when needed,  or that such
funds, if available, will be obtainable on terms satisfactory to the Company.

Management  plans to  obtain  revenues  from  product  sales,  but  there are no
significant  commitments for purchases of any of the proposed  products.  In the
absence  of  significant  sales  and  profits,  the  Company  may  seek to raise
additional  funds  to  match  its  working  capital   requirements  through  the
additional sales of debt and equity  securities.  There is no assurance that the
Company will be able to obtain sufficient additional funds when needed, although
such funds,  if  available,  will be  obtainable  on terms  satisfactory  to the
Company.  The successful  outcome of future  activities  cannot be determined at
this time and there is no  assurance  that if  achieved,  the Company  will have
sufficient  funds to execute its  intended  business  plan or generate  positive
operating results.

MARKETABLE SECURITIES

The  Company   classifies   its   investments   in   marketable   securities  as
"available-for sale" in accordance with the provisions of Statement of Financial
Accounting  Standards No. 115,  "ACCOUNTING FOR CERTAIN  INVESTMENTS IN DEBT AND
EQUITY  SECURITIES"  (SFAS  115).  The  Company  does not  have any  investments
classified as "trading" or "held to maturity".

--------------------------------------------------------------------------------
F-14

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

On  January 8, 2004,  the  Company  entered  into a Stock  Sale  Agreement  (the
"Agreement") with GenoMed,  Inc., a Florida corporation  ("GenoMed") whereby the
Company purchased approximately  33,300,000 shares of restricted common stock of
GenoMed for  $900,000  in cash,  representing  approximately  17.9% of the total
outstanding shares of GenoMed  immediately after the execution of the Agreement.
The Company has accounted for this investment under the cost method as it cannot
exercise  significant  influence  over the operating  and financial  policies of
GenoMed.  As of January and  February,  2005,  these shares  become free trading
shares. At September 30, 2005, the Company held 27,320,821 of these shares.

Following is a summary of marketable securities classified as available for sale
as of September 30, 2005:

                                      COST BASIS    FAIR VALUE   UNREALIZED GAIN
                                      ------------------------------------------
Marketable securities-Common stock     $639,481      $928,908       $289,427

Available-for-sale  securities  consist of securities in GenoMed and are carried
at fair  value  with  the  unrealized  gain or  loss,  net of tax,  reported  in
accumulated other comprehensive  income. The fair value of marketable securities
was determined  based on available  market  information.  During the nine months
ended  September 30, 2005, the Company  transferred  4,571,000  shares valued at
approximately $275,428 to consultants in exchange for services.

STOCK BASED COMPENSATION

The Company accounts for stock-based  compensation issued to employees using the
intrinsic  value based  method as  prescribed  by  Accounting  Principles  Board
Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Under the
intrinsic value based method, compensation expense is the excess, if any, of the
fair  value of the stock at the grant  date or other  measurement  date over the
amount an employee must pay to acquire the stock.  Compensation expense, if any,
is recognized over the applicable  service period,  which is usually the vesting
period.

SFAS 123, "ACCOUNTING FOR STOCK-BASED  COMPENSATION," if fully adopted,  changes
the method of accounting for employee stock-based compensation plans to the fair
value based method.  For stock  options and  warrants,  fair value is determined
using an option  pricing  model that takes into  account  the stock price at the
grant date,  the exercise  price,  the  expected  life of the option or warrant,
stock  volatility  and the  annual  rate of  quarterly  dividends.  Compensation
expense,  if any, is recognized  over the applicable  service  period,  which is
usually the vesting period.

The  adoption of the  accounting  methodology  of SFAS 123 is  optional  and the
Company has elected to continue  accounting for stock-based  compensation issued
to  employees  using APB 25;  however,  pro forma  disclosures,  as the  Company
adopted the cost  recognition  requirement  under SFAS 123,  are  required to be
presented (see below). For stock-based compensation issued to non-employees, the
Company uses the fair value method of  accounting  under the  provisions of SFAS
123.

FASB  Interpretation  No. 44 ("FIN 44"),  "ACCOUNTING  FOR CERTAIN  TRANSACTIONS
INVOLVING  STOCK  COMPENSATION,  AN  INTERPRETATION  OF APB  25"  clarifies  the
application of APB 25 for (a) the definition of

--------------------------------------------------------------------------------
F-15

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

employee  for  purpose of  applying  APB 25, (b) the  criteria  for  determining
whether  a  plan  qualifies  as a non  compensatory  plan,  (c)  the  accounting
consequence for various  modifications  to the terms of a previously fixed stock
option or award and (d) the  accounting  for an exchange  of stock  compensation
awards in a business combination.  Management believes that the Company accounts
for transactions involving stock compensation in accordance with FIN 44.

SFAS 148, "ACCOUNTING FOR STOCK-BASED  COMPENSATION - TRANSITION AND DISCLOSURE,
AN  AMENDMENT  OF FASB  STATEMENT  NO.  123,"  provides  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for stock-based employee  compensation.  In addition,  this statement amends the
disclosure  requirements  of SFAS 123 to require  prominent  disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.

At December 31, 2004, the Company has one stock-based employee compensation plan
(the "Plan"), which is described more fully in Note 11. The Company accounts for
the Plan under the recognition and measurement principles of APB 25, and related
interpretation.  No  stock-based  compensation  cost is  recognized in net loss.
Stock options  granted  under the Plan have exercise  prices equal to the market
value of the underlying common stock on the dates of grant.

The  Company  did not grant any  options  during  the nine month  periods  ended
September 30, 2005 and 2004.

COMPREHENSIVE INCOME

The  Company  reports  comprehensive  income in  accordance  with SFAS No.  130,
"REPORTING  COMPREHENSIVE  INCOME."  SFAS  130  establishes  standards  for  the
reporting and display of comprehensive  income and its components.  SFAS No. 130
requires  unrealized  holding gains and losses,  net of related tax effects,  on
available  for sale  securities  to be included in  comprehensive  income  until
realized.

REPORTING SEGMENTS

Statement of financial accounting standards No. 131, "DISCLOSURES ABOUT SEGMENTS
OF AN  ENTERPRISE  AND RELATED  INFORMATION"  (SFAS No. 131),  which  superseded
statement of financial  accounting  standards  No. 14,  Financial  reporting for
segments of a business enterprise, establishes standards for the way that public
enterprises  report  information  about operating  segments in annual  financial
statements  and  requires  reporting  of selected  information  about  operating
segments  in interim  financial  statements  regarding  products  and  services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components  of an  enterprise  about which  separate  financial  information  is
available that is evaluated  regularly by the chief operating  decision maker in
deciding how to allocate  resources and in assessing  performances.  The Company
allocates resources and assesses the performance based upon information from two
reporting units, (1) ADOT and (2) Biomoda, Inc.

Advanced  Optics  has been the sole  source of  funding  to  Biomoda  since 2002
through  advances made under a line of credit  agreement.  Such advances totaled
$1,363,236 at September  30, 2005.  Advanced  Optics is  considered  the primary
beneficiary  as it stands to absorb the majority of the VIE's  expected

--------------------------------------------------------------------------------
F-16

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

losses. Advanced Optics owns 16% of Biomoda and its officers own 12% of Biomoda.
The note  between the  companies  is over 70% of  liabilities  and six times the
total assets of Biomoda.

In January 2003, the FASB issued FIN No. 46, "CONSOLIDATION OF VARIABLE INTEREST
ENTITIES, AN INTERPRETATION OF ARB 51." The primary objectives of FIN No. 46 are
to provide  guidance  on the  identification  of entities  for which  control is
achieved through means other than voting rights (variable  interest  entities or
"VIEs")  and  how  to  determine  when  and  which  business  enterprise  should
consolidate the VIE. This new model for  consolidation  applies to an entity for
which  either:  (1) the equity  investors  do not have a  controlling  financial
interest;  or (2) the equity  investment at risk is insufficient to finance that
entity's activities without receiving additional  subordinated financial support
from other  parties.  In  addition,  FIN No. 46  requires  that both the primary
beneficiary and all other enterprises with a significant  variable interest in a
VIE make  additional  disclosures.  As amended in December  2003,  the effective
dates of FIN No. 46 for public  entities  that are small  business  issuers,  as
defined ("SBIs"), are as follows: (a) For interests in special-purpose entities:
periods  ended after  December  15,  2003;  and (b) For all other VIEs:  periods
ending after  December 15, 2004.  The December 2003 amendment of FIN No. 46 also
includes  transition  provisions that govern how an SBI which previously adopted
the  pronouncement  (as it was originally  issued) must account for consolidated
VIEs.

As disclosed in Note 3, the Company is associated with Biomoda, Inc. because two
officers  of the Company  also serve as  officers  of Biomoda and other  factors
discussed in FIN No. 46R, the Company has complied  with the  pronouncement  and
consolidated the two Company's financial  statements.  See note 6 for the impact
of adoption of the standard.

      Per FIN 46 (R),  Interpretation  of Accounting  Research  Bulletin No. 51,
      Consolidated Financial Statements,  which replaces FASB Interpretation No.
      46, Consolidation of Variable Interest Entities,  addresses  consolidation
      by business  enterprises of variable interest entities,  which have one or
      more of the following characteristics:

      1. The equity investment at risk is not sufficient to permit the entity to
      finance its activities without additional  subordinated  financial support
      provided by any parties, including the equity holders.

      2.  The  equity  investors  lack  one or more of the  following  essential
      characteristics of a controlling financial interest:

      a. The direct or indirect  ability to make  decisions  about the  entity's
      activities through voting rights or similar rights

      b. The obligation to absorb the expected losses of the entity

      c. The right to receive the expected residual returns of the entity.

      3. The equity  investors have voting rights that are not  proportionate to
      their economic interests,  and the activities of the entity involve or are
      conducted on behalf of an investor with a disproportionately  small voting
      interest.

2. RECENT PRONOUNCEMENTS

In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R").  FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based  compensation  issued to employees.  FAS
No. 123R is effective  beginning in the Company's

--------------------------------------------------------------------------------
F-17

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

second quarter of fiscal 2006. The Company is evaluating the effects adoption of
SFAS 123R will have on its financial statements.

In December  2004,  the FASB  issued  SFAS  Statement  No.  153,  "Exchanges  of
Nonmonetary  Assets."  The  Statement  is an  amendment of APB Opinion No. 29 to
eliminate the exception for nonmonetary  exchanges of similar  productive assets
and replaces it with a general  exception  for exchanges of  nonmonetary  assets
that do not have  commercial  substance.  The Company is evaluating  the effects
adoption of SFAS 123R will have on its financial statements.

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections."  This  statement  applies to all  voluntary  changes in accounting
principles and requires  retrospective  application to prior periods'  financial
statements   of  changes  in   accounting   principle,   unless  such  would  be
impracticable.  This statement also makes a distinction  between  "retrospective
application"  of an  accounting  principle  and the  "restatement"  of financial
statements to reflect the  correction of an error.  This  statement is effective
for accounting  changes and corrections of errors made in fiscal years beginning
after  December  15,  2005.  We are  evaluating  the effect the adoption of this
interpretation  will have on the Company's  financial  position,  cash flows and
results of operations.

In March 2004, the Emerging  Issues Task Force  ("EITF")  reached a consensus on
Issue  No.  03-1,  "The  Meaning  of  Other-Than-Temporary  Impairment  and  its
Application  to Certain  Investments."  The EITF  reached a consensus  about the
criteria  that should be used to  determine  when an  investment  is  considered
impaired,  whether that impairment is other-than-temporary,  and the measurement
of an  impairment  loss and how that criteria  should be applied to  investments
accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND
EQUITY   SECURITIES."  EITF  03-01  also  included   accounting   considerations
subsequent to the recognition of another-than-temporary  impairment and requires
certain  disclosures  about  unrealized  losses that have not been recognized as
other-than-temporary   impairments.   Additionally,   EITF  03-01  includes  new
disclosure  requirements  for  investments  that are  deemed  to be  temporarily
impaired.  In September  2004, the Financial  Accounting  Standards Board (FASB)
delayed  the  accounting  provisions  of  EITF  03-01;  however  the  disclosure
requirements  remain  effective for annual  reports  ending after  September 15,
2004.  The Company will evaluate the impact of EITF 03-01 once final guidance is
issued.

In June 2005,  the EITF reached  consensus on Issue No.  05-6,  Determining  the
Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides
guidance on  determining  the  amortization  period for  leasehold  improvements
acquired in a business  combination or acquired  subsequent to lease  inception.
The guidance in EITF 05-6 will be applied  prospectively  and is  effective  for
periods  beginning  after June 29,  2005.  EITF 05-6 is not  expected  to have a
material effect on its consolidated financial position or results of operations.

3. PATENTS

Biomoda has entered into license agreements with a major university and national
laboratory to obtain rights for the purpose of  developing,  manufacturing,  and
selling products using its patented technologies.  Under such agreement, Biomoda
will pay  royalties  at  varying  rates  based upon the level of  revenues  from
licensed  products.  The  agreement  continues as long as any  licensed  patents
remain in force.  Biomoda has not incurred any royalty expense during the period
from January 3, 1990  (inception)  to September  30, 2005.  Biomoda also pays an
annual  fee in the amount of $15,000  to renew  such  license  agreement.  As of
September 30, 2005,  Biomoda was in full  compliance with the provisions of this
agreement.  All patent costs are held in Biomoda.  The gross carrying  amount is
$273,830 and accumulated  amortization is $67,792.  Amortization expense for the
Company's current amortizable  intangible assets over the next five fiscal years
is estimated to be: 2006 $16,814; 2007 $16,814; 2008 $16,814; 2009 $16,814; 2010
$16,814.

Biomoda has entered into a license  agreement  with the University of California
to license three patents  related to TCCP. As provided in the license  agreement
and its amendments,  US Patents No.  5,162,231 and No. 5,391,547 are licensed by
the University to Biomoda.  The license  agreement is in good standing and there
are no defaults of the license provisions.

Biomoda,  Inc.  has been  awarded US Patent No.  6,838,248.  The company is also
applying for one CIP and one Divisional Patent.

--------------------------------------------------------------------------------
F-18

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

The following table provides further outlines on the key referenced patents:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
COUNTRY                           TITLE                            PATENT NO.        ISSUE DATE    EXPIRATION DATE
==================================================================================================================
<S>       <C>                                                      <C>                <C>            <C>
  US      COMPOSITIONS AND METHODS OF DETECTING PRE-CANCEROUS      6,838,248          1/4/05         1/4/22
          CONDITIONS IN CELL AND TISSUE SAMPLES USING
          5,10,15,20 - TETRAKIS {CARBOXYPHENYL} PORPHINE                              Application was filed
                                                                                      for a Continuation
                                                                                      In Part additional patent.
------------------------------------------------------------------------------------------------------------------
  US      METHOD USING 5,10,15,20 - TETRAKIS {R-CARBOXYPHENYL}     5,162,231          11/10/1992     11/10/2009
          PORPHINE FOR DETECTING CANCERS OF THE LUNG
------------------------------------------------------------------------------------------------------------------
  US      METHOD USING 5,10,15,20 - TETRAKIS {R-CARBOXYPHENYL}     5,391,547          2/21/1995      2/21/2012
          PORPHINE FOR TREATING CANCERS OF THE LUNG
------------------------------------------------------------------------------------------------------------------
</TABLE>

Biomoda  has  received  foreign  patents in sixteen  countries  protecting  U.S.
Patents No.  5,162,231 and No.  5,391,547,  noted above in table.  These patents
have  been  issued  in  Austria,   Belgium,  Denmark,  France,  Germany,  Italy,
Netherlands, Spain, Sweden, Australia, Brazil, Canada, Japan, Korea, Russia, and
the United Kingdom and are effective until 6/17/2011.

4. NOTES RECEIVABLE

Notes Receivable consists of the following at September 30, 2005

    Notes receivable bearing a 7% and will mature on March 2005          $28,194
    Notes receivable bearing a 6.5% and will mature on December 2005     $25,201
                                                                         -------
            Total                                                        $53,395
                                                                         =======

5. VARIABLE INTEREST ENTITY-BIOMODA, INC.

At September 30, 2005, the Company owned approximately 1,132,000 or 15.8% of the
7,147,000 outstanding shares of Biomoda,  Inc. ("Biomoda"),  a development stage
company  involved in the  development of technology  for the early  detection of
lung cancer. In addition,  two of the Company's  officers own approximately 12%,
collectively,  of Biomoda's  outstanding shares.  Further, the Company subleases
office space and lab equipment to Biomoda and two of the Company's  officers are
also  officers  of  Biomoda.  Finally,  the  Company has been the sole source of
funding  to  Biomoda  since 2002  through  advances  made under a line of credit
agreement.  Such  advances  totaled  $1,363,236  at  September  30, 2005 and the
Company has recorded interest income on advances of $83,028.  These amounts have
been  eliminated  in  consolidation.  The  Company  is  considered  the  primary
beneficiary  as it stands to absorb the majority of the VIE's  expected  losses.
Since Biomoda and the Company are considered entities under common control,  the
Company measures the assets and liabilities of Biomoda at their carrying amounts
in consolidation.

--------------------------------------------------------------------------------
F-19

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

As of September 30, 2005, the Company has consolidated  Biomoda's  balance sheet
and its results of the operations for the quarter then ended in the accompanying
financial statements. Biomoda has a stockholders' deficit at September 30, 2005.
General  creditors  of  Biomoda  have no  recourse  against  the  Company.  From
inception through September 30, 2005, Biomoda has generated no revenues

In 2005,  Biomoda  anticipates  being  able to raise its own funds in the public
equity market. In this case,  Biomoda may be able to sustain its own operations,
repay its  obligation to the Company,  and hire its own officers.  In such case,
the Company may no longer be considered the primary  beneficiary and the results
of Biomoda may be deconsolidated. There can be no assurance that Biomoda will be
able to raise sufficient funds to repay its obligation to the Company and become
self-sustaining in its operations.

6. RELATED PARTY TRANSACTIONS

NOTES RECEIVABLE - OFFICER

As of  September  30, 2005 and 2004,  the Company has net advances to an officer
approximating $66,659 and $67,300, respectively. The advances accrue interest at
rates  ranging  from 5% to 6%  (interest  income was minimal for the nine months
ended  September  30,  2005 and  2004)  and are due on  demand.  As these  notes
receivable  are with the  shareholder  and a Company  officer,  the  Company has
classified these amounts as a decrease to stockholders'  equity at September 30,
2005.

ADVANCES FROM OFFICER

As of September  30, 2005,  the Company has advances from an officer of $64,710.
This is  unsecured,  due on demand and non  interest  bearing.  The Company paid
$25,000 during the nine months ended September 30, 2005.

ADVANCES FROM STOCKHOLDERS

As of September  30, 2005,  the Company had advances of  approximately  $146,683
payable to two of its  stockholders.  Such advances are unsecured,  historically
bore interest at 10% per annum. No interest expense related to such advances for
the nine month period ended September,  2004 was recorded.  Interest expense was
approximately $12,000 and $135,000 for the nine month period ended September 30,
2005 and for the period from inception through September 30, 2005, respectively.

7. CONVERTIBLE DEBENTURES

On September 15, 2000, the Company entered into an agreement to issue a total of
$10,000,000 in convertible debentures which bear interest at an annual rate of 8
percent.   The  Company  authorized  the  initial  sale  of  $2,000,000  of  the
convertible  debentures,  and entered into a structured facility with purchasers
(the  "Purchasers")  in which the Purchasers  shall be obligated to purchase the
remaining  $8,000,000 of convertible  debentures at certain obligation dates, as
defined.  The Company's  right to require the Purchasers to purchase  debentures
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

--------------------------------------------------------------------------------
F-20

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

of the debentures.  The related agreement  provides for a limit on the amount of
obligation debentures 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
unsecured convertible  debentures discussed above.  Effective as of the issuance
date, the debentures 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, as defined.  The debentures
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 to interest  expense over the life of
the  debentures.  The  embedded  intrinsic  value of the  beneficial  conversion
feature  was  estimated  to be  approximately  $239,000,  which was  immediately
charged to interest expense. The convertible  debentures also include detachable
warrants for the purchase of 500,000 shares of common stock at an exercise price
of $0.38 per  share,  which  vested  upon grant and  expire in  September  2005.
Management  has  estimated  the fair market  value of these  warrants at $25,000
(based on the Black Scholes  pricing model  pursuant to SFAS 123 and EITF 00-27)
and immediately charged such amounts to interest expense.  During the year ended
December 31, 2003, the Company  settled amounts owed and in connection with such
settlement,  the  Company  recorded a gain on  extinguishment  of  approximately
$40,000, which is included in the accompanying statement of operations.

On November  7, 2000,  the  Company  entered  into an  agreement  that  modified
outstanding convertible preferred agreements.  The new agreement resulted in the
exchange of  outstanding  preferred  stock for the  Company's  7.5%  convertible
debentures  and  other  consideration.  The  total  amount  of  the  convertible
debentures approximated $741,000,  including $31,000 of interest. The debentures
are convertible into shares of common stock at the lesser of the stock's closing
price on March 8, 2000 and 77.5% of the average of the five  lowest  closing bid
prices  for 20  days  before  November  2,  2000.  The  intrinsic  value  of the
conversion  feature  was  estimated  to be  approximately  $228,000,  which  was
immediately  charged  to  expense.  The  convertible   debentures  also  include
detachable  warrants for the purchase of 71,000  shares of common  stock,  which
value was insignificant.  The principal balance of the convertible debentures at
September 30, 2005 amounts to $82,584.

8. STOCKHOLDERS' EQUITY

COMMON STOCK

During  the  nine  months  ended   September  30,  2005,   the  Company   issued
1,551,700,000   shares  of  common   stock  for  cash,   which  were  valued  at
approximately $935,000.

During the nine months ended  September 30, 2005, the Company issued  21,000,000
shares of common  stock for its  convertible  debentures.  Conversion  price per
share shall be the lesser of 75% of the average of the three lowest  closing bid
prices  during the 30 trading days prior to but not  including the issue date of
the  debentures  and 80% of the average of the three  lowest  closing bid prices
during the 90 trading days immediately prior to but not including the conversion
date,  which is  approximately  $0.01 per share.  These  shares  were  valued at
approximately $31,000.

--------------------------------------------------------------------------------
F-21

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

During the nine months ended  September  30, 2004,  the Company sold  39,800,000
shares of common stock for approximately $455,000 in cash or approximately $0.01
per share.

During the nine months ended  September 30, 2004, the Company issued  42,000,000
shares of common stock for services, which were valued at approximately $335,000
(based on the  closing  market  price on the date of grant,  which  approximated
$0.01  per  share).  The  Company  recorded  such  amounts  in the  accompanying
statement of operations.

During  the nine  months  ended  September  30,  2004,  in  accordance  with the
applicable  convertible  debentures  agreement,  the Company issued  103,000,000
shares of common  stock at  conversion  prices of less than $0.01 in  connection
with  the  conversion  of  notes  payable  approximating   $505,000,   including
approximately $160,000 of accrued interest.

During  the  quarter  ended  September  30,  2005,  the  Company  increased  its
authorized shares to 6,000,000,000.

STOCK OPTIONS

On January 4, 1999, the Company established the Incentive Stock Option Plan (the
"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  with exercise  prices at least
equal to the fair market value on the date of grant.  The exercise  dates of the
options  are  based  on the  related  agreement,  as  approved  by the  Board of
Directors.  The Plan expires on January 4, 2009.  Options awarded under the Plan
mature four years from the date of grant and vest  ratably  over one to two year
periods.

The  following is a status of the stock options  outstanding  for the nine month
periods ended September 30, 2005 and 2004

<TABLE>
<CAPTION>
                                                    Nine Months Ended                      Nine Months Ended
                                                      September 30,                          September 30,
                                                           2005                                  2004
                                             ---------------------------------     ---------------------------------
                                                                   Weighted                               Weighted
                                                                   Average                                Average
                                                Options             Price             Options              Price
                                             --------------      ------------      --------------       ------------
<S>                                          <C>                 <C>               <C>                  <C>
Outstanding, beginning of year                      400,000             $0.02           3,175,000              $0.30
Granted                                                  --                --                  --                 --
Exercised                                                --                --                  --                 --
Cancelled/Terminated                                     --                --                  --                 --
                                             --------------      ------------      --------------       ------------
Outstanding and exercisable                         400,000             $0.02           3,175,000              $0.30
                                             ==============      ============      ==============       ============
Weighted average fair value of options
granted                                                                                                        $0.30
                                                                                                        ============
</TABLE>

--------------------------------------------------------------------------------
F-22

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

The following table summarizes  information related to stock options outstanding
at September 30, 2005:

<TABLE>
<CAPTION>
                                      Options Outstanding                             Options Exercisable
                        -------------------------------------------------        -------------------------------
                                           Weighted
                                            Average          Weighted                                Weighted
                                           Remaining         Average                                 Average
                                          Contractual        Exercise                                Exercise
  Exercise Price          Number         Life (Years)         Price                  Number           Price
-------------------     -----------------------------------------------------------------------------------------
<S>                     <C>                   <C>            <C>                    <C>               <C>
      $0.02               400,000             1.04           $  0.02                400,000           $  0.02
                        ---------                            -------                -------           -------
-------------------     -----------------------------------------------------------------------------------------
</TABLE>

There were no stock options granted during the nine month periods ended 2005 and
2004.

WARRANTS

From time to time, the Company issues warrants to employees and to third parties
pursuant to various agreements.

In January 2002, the Company issued  warrants to purchase  300,000 shares of the
Company's  common stock to two directors.  The exercise price of the warrants is
$0.02 per share (the fair market value of the Company's common stock on the date
of grant) and vested  immediately.  The warrants expire five years from the date
of issuance.

The following  represents a summary of warrants  outstanding  for the nine month
periods ended September 30, 2005 and 2004:

<TABLE>
<CAPTION>
                                                   Nine Months Ended                      Nine Months Ended
                                                     September 30,                          September 30,
                                                         2005                                   2004
                                           ----------------------------------    -----------------------------------
                                                                  Weighted                               Weighted
                                              Warrants         Average Price         Warrants         Average Price
                                           ---------------     --------------    ----------------    ---------------
<S>                                        <S>                 <C>               <C>                 <C>
Outstanding, beginning of year                   4,796,000              $0.11           8,646,000              $0.11
Granted                                                 --                 --                  --                 --
Exercised                                               --                 --                  --                 --
Cancelled/Terminated                            (2,946,000)              .016         ( 3,850,000)                --
                                           ---------------     --------------    ----------------    ---------------
Outstanding and exercisable                      1,850,000              $0.04           4,796,000              $0.11
                                           ===============     ==============    ================    ===============
Weighted average fair value of warrants
granted                                                                                                        $0.11
                                                                                                      ==============
</TABLE>

--------------------------------------------------------------------------------
F-23

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

The following table summarizes  information  related to warrants  outstanding at
September 30, 2005:

<TABLE>
<CAPTION>
                                    Warrants Outstanding                            Warrants Exercisable
                      ------------------------------------------------        -------------------------------
                                        Weighted
                                         Average           Weighted                               Weighted
                                        Remaining          Average                                 Average
                                       Contractual         Exercise                               Exercise
  Exercise Price        Number        Life (Years)          Price                 Number            Price
-------------------   ---------------------------------------------------------------------------------------
<S>                     <C>              <C>               <C>                  <C>               <C>
      $0.02              1,250,000         .11             $  0.02              1,250,000             .02
    $.031-.34              600,000         .46                0.08                600,000             .08
                         ---------                         -------              ---------         -------
                         1,850,000                         $  0.04              1,850,000         $  0.04
-------------------   ---------------------------------------------------------------------------------------
</TABLE>

There were no warrants  issued during the nine month periods ended September 30,
2004 and 2005.

9. SEGMENTS AND MAJOR CUSTOMERS

The Company has two reportable  segments consisting of (1) producing and selling
large-scale flat panel displays for outdoor advertising billboards and its color
identifier for the vision impared;  (2) early cancer detection  technology.  The
accounting  policies  of the  segments  are the same as those  described  in the
summary of significant accounting policies.

The following is information for the Company's  reportable segments for the nine
months ended September 30 (in thousands):

<TABLE>
<CAPTION>
                                          2005                                              2004
                       -------------------------------------------       ------------------------------------------
                         ADOT       Biomoda   Unallocated    Total         ADOT       Biomoda  Unallocated    Total
                       -------------------------------------------       ------------------------------------------
<S>                    <C>          <C>          <C>        <C>          <C>          <C>          <C>       <C>
Revenue                $   --       $   --       $ --       $   --       $   --       $   --       $--       $   --
Loss                     1520          377         --        1,867        2,212          526        --        2,690
on Operations
Depreciation               24           15         --           39           27           11        --           38
    and amortization
Interest expense            3           64         --           40           10           22        --           10
Capital expenditure         4           41         --           45           64           51        --          115
Net Loss               $1,520       $  441       $ --       $1,867       $2,246       $  548       $--       $2,690
</TABLE>

10. EARNINGS PER SHARE

Earnings per share for the nine month and three month  periods  ended  September
30, 2005 and 2004 were  determined by dividing net income for the periods by the
weighted  average  number of both basic and diluted  shares of common  stock and
common stock equivalents outstanding. Stocks to be issued are regarded as common
stock equivalents and are considered in diluted earnings per share calculations.

--------------------------------------------------------------------------------
F-24


<PAGE>

                 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR
                               PLAN OF OPERATIONS.

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 27A of the  Securities  Act of 1933, as amended and by Section 21E of
the Securities Exchange Act of 1934, as amended.

                                    OVERVIEW

GENERAL
-------

Advanced  Optics  Electronics,  Inc.  (the  "Company",  "us",  "we",  or "ADOT")
(ADOT-OTC BB) is a technology  company  based in  Albuquerque,  New Mexico.  Its
primary  focus  is the  development,  production  and  sales  of its  novel  and
innovative  electronic  flat panel  displays.  We maintain an R&D  facility  and
manufacturing plant, and are engaged in building large-scale flat panel displays
utilizing  its  patented  technology.   We  are  currently  investigating  other
applications  of this core technology and different  products  related to optics
and image recognition and analysis.

                                      -2-
<PAGE>

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.

COMPANY OVERVIEW
----------------

We are a developmental  stage  technology  company with our primary focus on the
development,  production and sales of our large-scale flat panel displays, which
utilize our patented  technology.  We are  currently  continuing  our  research,
development,  prototyping,  and manufacturing of our products and the underlying
technology.  We are in the process of making the transition from a developmental
stage  company to producing  and selling our product  line.  We plan to focus on
producing  and  selling  our  large-scale  flat panel  displays  for the outdoor
advertising  billboard  industry.  In  addition,  there  are other  markets  and
applications that represent  opportunities  for additional  sources of business,
and we are  beginning  to  explore  these  markets  and  applications,  such  as
e-cinema, lighting sources, stadium and sports applications and systems, control
and status monitoring.

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 are also planning to
develop 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


                                      -3-
<PAGE>

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.  The initial
production  model is scheduled to be  completed in the  third/fourth  quarter of
2005.

We expect  our  principal  source of  revenue  to be  derived  from sales of our
electronic display product.  To date we have not recognized any revenue,  but we
have developed a functioning prototype and we anticipate completion of our first
sign by the first half of 2006.  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 made research and  development  progress in the third quarter of
2005 but has not  completed  the initial  product as expected  due to  technical
hurdles.  Completion  of the  product  is now  expected  in the  first to second
quarter  of 2006.  Because  of the lack of  anticipated  revenues  in 2004,  the
Company has taken excess cash funds and  invested  these in what they deem to be
sound investments that may produce  additional funds and gains to the Company in
2005 and 2006.  These funds and gains would then be used for additional  product
development and  administrative  expenses in the initial production stage of the
product.  These  investments  include  marketable  securities of other companies
including the bio-medical companies Biomoda and GenoMed.

Advanced  Optics  Electronics,  Inc.  completed  filing for its  initial  patent
relating to its hand held color check  device  known as  COLOR-CHEK.  The patent
covers the Company's unique and novel conception and  implementation of hardware
and firmware  system for  determining  the color  optically and  expressing  the
result with vocal  responses.  This invention will initially  benefit the vision
impaired.  ADOT is also developing a color coding kit to enhance the color check
capabilities of a broader application of the color spectrum. Pricing is targeted
in the $70-85  range.  The Company is currently in the  development  stages of a
second iteration prototype.  The first prototype, of which five were made, was a
success  from  a  proof-of-performance   standpoint.   This  next  version  will
incorporate a number of refinements  and  improvements  in software and hardware
components and incorporate an initial design of the casing.

Our operating expenses have increased significantly since our inception. 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 September 30, 2005, had a deficit accumulated during the development stage of
$21,692,562.

BIOMODA, INC.

Beginning  with the 2004  10-KSB,  the Company has  consolidated  the  financial
statements of Advanced Optics Electronics,  Inc with the financial statements of
Biomoda, Inc. This has been done in order to comply with FIN 46, a pronouncement
that became  effective  December 15, 2004.  The nature of Biomoda's  business is
substantially  different  from that of Advanced  Optics  Electronics,  Inc.  The
following  is  a  discussion  of  Biomoda's  results  of  operations,  financial
condition  and  liquidity.  More  information  about  Biomoda  is  available  in
Biomoda's 2004 10-KSB which is accessible from the SEC website.  The SEC website
(HTTP://WWW.SEC.GOV)  contains

                                      -4-
<PAGE>

reports and information  statements and other information  regarding Biomoda and
other companies that file materials with the SEC electronically.

Biomoda's  initial  product is a  diagnostic  test for lung  cancer that will be
performed out of body by using a sputum sample from the patient.  This test does
not require any invasive  sample  taking.  The sample will be sent to a clinical
lab where a procedure  will be performed to determine the presence,  or lack, of
lung cancer or  precancerous  cells.  This diagnostic test can be used for other
cell samples and Biomoda  intends to create and market  products to diagnose and
screen for other prevalent  cancers such as cervical,  bladder,  and colorectal.
Biomoda has  determined  that its initial  markets  will be among the  developed
nations of Europe and North America and Japan.  This has been  determined on the
basis of  available  healthcare  delivery  and  payer  infrastructure.  Japan is
leading  the  world  in  this  area  and  has   instituted  a  nationwide   lung
cancer-screening program.

Management  of Biomoda  expects to continue  assay  validation  work and seek to
register its product with the FDA in 2006.  There are several  business  models,
product types and regulatory routes that Biomoda is evaluating  including:  ASR,
510K, PMA and IVD kits:

ASR:  This is the FDA  designation  for  Analyte  Specific  Reagent.  There  are
generally  two classes:  Class I & Class II. Class I is considered to the lowest
risk.  Biomoda's  ASR product is a Class I and only  requires  registration  and
meeting the FDA  standards.  This  product is viewed as a component  for a assay
developed in-house by Medical Reference Laboratories.

510K:  This is the FDA  designation for approvals that are based on "Substantial
Equivalence"  with previously  approved products and does require approval prior
to marketing. There are generally three classes: Class I, Class II, & Class III.
Depending on the indication  established  with the FDA,  Biomoda's  product will
either be Class I or Class II, if Biomoda  proceeds  with this product  approval
route.  This  product  will be a kit  developed  to  determine  the  presence of
abnormal cells in a body fluid sample.

PMA: This is the FDA designation  for approvals for new product  indications (no
Substantial Equivalence) and does require approval prior to marketing. There are
generally  two  classes:  Class II, & Class III. If Biomoda  proceeds  with this
approval route, Biomoda's expects this product to be Class III due to indication
of diagnostic for a specific cancer.

IVD: This is an industry  designation for In Vitro  Diagnostic.  Products in the
industry are either reagents or kits.  Kits include the key components  required
to conduct the assay for the specific  indication  stated in the package insert.
Reagents are single components used in assays developed by a Reference Labs. The
lab  will be  required  to have met the FDA CLIA  (current  Clinical  Laboratory
Improvement  Act)  regulations  to market a  diagnostic.  Biomoda is  evaluating
several  cancers  with a focus  on  large  markets  that are in need of the most
immediate diagnostic support. These include: lung, bladder and cervical.

Our products are subject to FDA  registration  or approval and to  post-approval
FDA reporting requirements.

                                      -5-
<PAGE>

Costs in complying with regulatory and legislative  matters such as the Clinical
Laboratory Improvement Amendment of 1988 (CLIA), which regulates the quality and
reliability of medical testing in the U.S.,  adverse changes in zoning laws, tax
laws, or other laws affecting the medical and  diagnostic  industry may prove to
be a major  obstacle,  both in respect of time and costs,  in our  research  and
development.

The timing of  regulatory  filings  and  approvals,  if any,  for the  Company's
products are made less certain by the Company's  strategy of seeking one or more
collaborative  arrangements with development and marketing  partners,  which may
require that a  collaborative  partner be responsible  for seeking and obtaining
regulatory  approvals either in foreign countries or in the U.S. Biomoda intends
to market its  products  throughout  the world.  There are  numerous  regulatory
agencies that  regulate the sale of diagnostic  and  therapeutic  products,  and
these  agencies may be affected or influenced by criteria  materially  different
than those of the FDA. The sale of Biomoda's products may be materially affected
by the policies of these  regulatory  agencies or the  domestic  politics of the
countries  involved.  Biomoda  has not  applied  for and  does  not now have the
approval  of any  foreign  country  to  sell  its  products  for  diagnostic  or
therapeutic use.

Biomoda's lung cancer product validation is projected to be complete by year-end
and a contract  manufacturing  relationship  is projected to be  established  in
2006.  Based on these  benchmarks,  ASR  registration and product listing can be
completed by that time also. At that juncture  reagent sales can begin.  This is
estimated to cost an additional $500,000.

Class I/II 510K can be completed as judged appropriate for the business and will
require  approximately 6 to 9 months effort to prepare documentation and receive
FDA  approval.  During that time kit  manufacturing  can be  initiated.  Partial
funding will be provided from reagent sales revenue. It is estimated  additional
funding of $300,000 will be required.

PMA will require  clinical studies to be completed and will be initiated when it
is viewed as appropriate for the business.  This will require on the order of 18
months to plan, execute, and document. During that time kit manufacturing can be
initiated.  FDA  approval  will require 6 to 9 months.  Partial  funding will be
provided from reagent sales.  It is estimated  additional  funding of $2 million
will be required

Biomoda's  current  intention  regarding  regulatory  strategy,  is to  initiate
product  introductions  via an ASR registration  and potentially  migrate up the
regulatory spectrum as markets require.

RESULTS OF OPERATIONS

The Company is  currently in the process of final  assembly,  testing and system
integration of approximately 1500 of its display subassemblies. This will create
a 2 meter by 3 meter display.  It is anticipated that this work can be completed
in the first  quarter of 2006.  The company  currently  employs  four  full-time
electronic  technicians and a supervisor  working  specifically on this project.
Additional research and development is anticipated and planned in electrical and
mechanical  realms.  These  include but are not limited  to:  power  systems and
distribution, heat dissipation, and weatherproofing.

                                      -6-
<PAGE>

The Company  expects its display product to be finalized and ready for market in
the second quarter of 2006.

The Company hired a full time controller in 2005 in order to support our efforts
in meeting new  reporting  requirements.  The  Company has hired two  additional
technicians in 2005. There are no explicit plans to hire additional personnel at
this time  but,  from  time to time,  the  Company  expects  to hire  additional
personnel in order to carry out its business strategy.

COMPARISON OF THE NINE AND THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------------------------------------

Research  and  development   expenses  consist   primarily  of  consulting  fees
associated  with the  development  and  enhancement of our flat panel  displays.
These  expenses  decreased to $16,189 in the third quarter of 2005 from $133,421
in the same period of 2004 and  decreased to $55,138 from  $604,720 for the year
to  date  from  2004  to  2005.  This  significant   change  is  the  result  of
reclassifying  Biomoda's  payroll  costs  as a  separate  item in  2005  and the
substantial  completion of design  engineering  activity for the panel  display.
Continued  investment  in product  development  is  critical  to  attaining  our
strategic  objectives  and, as such, we expect product  development  expenses to
increase  significantly in future periods.  We expense product development costs
as they are incurred.

General  and  administrative   expenses  consist  of  expenses  for  facilities,
professional services,  travel,  general corporate activities,  and depreciation
and   amortization  of  equipment  and  leasehold   improvements.   General  and
administrative  and payroll  costs  increased to  approximately  $440,000 in the
third  quarter of 2005 from  $384,000 in the third quarter of 2004 and decreased
to $1,738,000 in 2005 from  $1,803,000 in 2004,  year to date.  Considering  the
payroll reclassification,  the reduction is in general and administrative costs,
primarily in various types of consulting, public relations and legal expense. We
expect  general  and  administrative  costs to  increase  in the  future  as our
business  prospects develop and we will require more staff. The costs associated
with being a publicly traded company and potential future strategic acquisitions
will also be a contributing factor to increases in this expense.

BIOMODA, INC.

Biomoda's  plan of operation  for the next twelve months is to verify and refine
its assay,  design  their kit,  prepare for  clinical  studies,  and  initiate a
dialogue with the FDA relative to their approval  submission.  Biomoda,  Inc. is
relying on a bridge  financing  arrangement  with Advanced  Optics  Electronics,
Inc.,  and also intends to raise  additional  funds from its effective Form SB-2
Registration  Statement during the next six months. Biomoda is currently leasing
Laboratory equipment from Advanced Optics Electronics,  Inc. on a month to month
basis and intends to purchase this equipment when adequate funds are raised.

Biomoda has recorded no revenue from its inception  through  September 30, 2005.
The accumulated deficit is $2,917,461.  In 2005, the net loss was $440,972.  The
loss from operations was $377,264 in 2005 and $2,713,558 since  inception.  Most
of its expense is related to product  development.  Product development expenses
consist  primarily  of personnel  expenses,  consulting  fees and lab  expenses.
Research  development  and technical  costs were $229,691 in 2005 and $1,650,391
since inception. Biomoda believes, however, that continued investment in product

                                      -7-
<PAGE>

development is critical to attaining its strategic  objectives and, as a result,
expect product development expenses to increase significantly in future periods.
Biomoda expenses product development costs as they are incurred.

General and  administrative  expenses  consist of  expenses  for  executive  and
administrative personnel, facilities,  professional services, travel and general
corporate activities.  General and administrative costs were $97,499 in 2005 and
$430,426 since inception.  Biomoda expects general and  administrative  costs to
increase in the future as its business matures and develops.

LIQUIDITY AND CAPITAL RESOURCES

Since  inception,  we have funded our operations  primarily  through the private
placement of equity securities and the issuance of convertible debentures. As of
September  30,  2005,  we  have  raised  such  net  proceeds  of   approximately
$22,000,000.

The cash balance at September 30, 2005 of $132,342 represents  approximately one
month of future cash operating expenses.

We have  also  utilized  equipment  loans and  capital  lease  financing.  As of
September  30, 2005 the only debt  financing is a  Convertible  debenture in the
approximate amount of $83,000 (including accrued interest) that we intend to pay
off in its entirety in 2005.

The  Company's  holding in  Biomoda,  Inc  ("Biomoda")  may  provide  additional
liquidity.  The Company's direct ownership of Biomoda,  as of September 30, 2005
was approximately  15.84 %. Two officers of ADOT are also securities  holders of
Biomoda in addition to the ADOT  ownership.  Biomoda filed an SB-2  registration
statement  with the  Securities  and  Exchange  Commission,  which was  declared
effective February 11, 2003 offering 6,000,000 shares at $3.00 per share (for an
aggregate  offering of $18,000,000).  It is anticipated that a public market for
Biomoda's securities will be established in 2005 at the revised price. Because a
market for Biomoda's shares has not been established, the potential value of the
Company's investment cannot be measured. Consequently, there can be no assurance
that if the  Company  were to sell such  investment  that it would be able to on
terms favorable to the Company or for the initial  offering price.  Factors such
as dilution, and a lack of a market may be encountered.

The  Company's  relationship  to its  investment in Biomoda  changed  during the
second quarter of 2002. There is now an active  leadership role in Biomoda being
provided  by John  Cousins  and Leslie  Robins,  officers  of the  Company.  The
consolidated financial statements include the accounts of Biomoda and its wholly
owned subsidiary,  Biomoda Holdings, Inc. All significant inter-company accounts
and transactions have been eliminated in consolidation.

During the first six months of 2004, we purchased  33,300,000  restricted shares
under Rule 144 of GenoMed,  Inc.,  which represents  approximately  17.6% of the
outstanding  shares of GenoMed,  Inc. At September  30,  2005,  the Company held
27,320,821  shares.  GenoMed is a publicly  traded  biotech  company  working in
genomics based disease management.

The  investment  in GenoMed  was made as an interim  cash  management  decision.
Management's  opinion  is that  the  investment  represented  the  potential  to
increase the resources the Company has

                                      -8-
<PAGE>

to fund  ongoing  operations.  The  Company  made  this  decision  based  on its
determination  that GenoMed has very promising  technology  and  prospects.  The
company  intends to liquidate its investment over time in order to fund its core
operations.

GenoMed uses medical genomics to improve patient outcomes. GenoMed is working to
translate  knowledge  of  medical  genomics--the  study  of  which  genes  cause
disease--into clinical practice.

During the nine months ended September 30, 2005,  approximately $4,000 was spent
for the purchase of computers and software and approximately  $41,000 for patent
development. Research and development expenditures were approximately $55,000 in
the first nine months of 2005.  Funds for  operations,  research and development
and capital  expenditures  were provided  from the sale of  securities  and cash
reserves.

MARKETABLE SECURITIES PORTFOLIO

As of September  30, 2005,  the Company had a  marketable  securities  portfolio
valued at $928,908.  The Company's monthly burn-rate,  the amount of money spent
each month, is approximately $170,000. This represents approximately 5 months of
operating funds. The Company is actively pursuing potential financing options as
it looks to secure  additional  funds to both  stabilize  and grow its  business
operations.  Management  will review any  financing  options at its disposal and
will judge each potential source of funds on its individual merits. There can be
no assurance that the Company will be able to secure  additional funds from debt
or equity  financing,  or if it can,  that it will be on terms  favorable to the
Company or existing stockholders.

There are no expected purchases or sales of significant equipment.

Management  believes  that  inflation  has  not  had a  material  effect  on the
Company's results of operations.

BIOMODA, INC.

Biomoda's total assets are $250,444 at September 30, 2005. Of this,  $236,038 is
patent costs,  net of accumulated  amortization  of $67,792.  Its liabilities of
1,803,209  primarily  consist of its debt to Advanced  Optics of $1,363,236  and
advances from  shareholders of $146,683.  Stockholders'  deficit as of September
30, 2005 is $2,917,461.

In 2005,  pursuant to a registration  statement on Form SB-2 (the  "Registration
Statement")  under the Securities  Act of 1933, as amended,  Biomoda is offering
for sale up to 6,000,000  shares of its common stock at a price of $3 per share.
The  Registration  Statement  was declared  effective on February 11, 2005.  The
Offering will terminate on the earlier of February 11, 2008 or the date on which
the maximum number of shares have been sold.

Since  inception,  Biomoda  has  funded  operations  primarily  through  private
placement  of equity  securities  to third  parties  and to ADOT and loans  from
Advanced  Optics  Electronics,  Inc. As of September  30, 2005 it had raised net
proceeds of  approximately  $2,727,932,  of which  approximately  $1,363,236 was
loaned by ADOT. On May 1, 2002,  Biomoda entered into a line of credit agreement
(the "Agreement") with Advanced Optics Electronics,  Inc., an affiliated entity,

                                      -9-
<PAGE>

("Advanced  Optics")  with an  annual  interest  rate of 5%.  On May 1, 2003 the
agreement was extended.

Biomoda had negative  cash flows of $4,560 for the nine months  ended  September
30, 2005 resulting from $352,531 used in Biomoda's operating activities, $41,460
used  in  Biomoda's  investing  activities  and  $388,071  of cash  provided  by
financing  activities.  Cash used in  operating  activities  for the nine months
ended September 30, 2005 was primarily due to $377,264 in operating expenses, of
which  $97,499  is  General  and   Administrative,   $229,691  is  Research  and
Development and $19,724 is professional fees. Cash used in investing  activities
of  $41,460  for  the  period  was  solely  due  to  payments  for  patents  and
intangibles.  Cash provided by financing  activities for the nine months was due
to the proceeds from a line of credit from Advanced Optics

Biomoda has been in the development  stage since it began  operations on January
3, 1990 and has not  generated  any  revenues  from  operations  and there is no
assurance  of  any  future  revenues.  As of  December  31,  2004,  Biomoda  had
accumulated deficit of approximately $2,476,000 and a working capital deficit of
approximately  $1,651,000.  In addition,  Biomoda did not generate any cash from
operations and had no cash reserve dedicated to fund expenditures. These factors
create an uncertainty as to Biomoda's ability to continue as a going concern.

                         Item 3. CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

Under the supervision and with the  participation  of our management,  including
our Chief  Executive  Officer ("CEO") and Chief Financial  Officer  ("CFO"),  we
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls  and  procedures  (as defined in Rule  13a-15(e)  and  15d-15(e) of the
Exchange  Act as of the end of the period  covered by this  report).  Based upon
that  evaluation,  the CEO and  CFO  concluded  that  the  Company's  disclosure
controls and procedures were effective.

CHANGES IN CONTROLS AND PROCEDURES

There were no significant  changes made in our internal  controls over financial
reporting  during the nine months ended  September 30, 2005 that have materially
affected or are  reasonably  likely to  materially  affect these  controls.  The
Company,  however,  is  evaluating  changes to its  existing  controls or adding
controls to improve the design effectiveness of its system.

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROL

The Company's management, including the CEO, does not expect that our disclosure
controls and procedures or our internal  control over  financial  reporting will
necessarily  prevent all fraud and material errors.  An internal control system,
no matter how well  conceived and  operated,  can provide only  reasonable,  not
absolute,  assurance that the objectives of the control system are met. Further,
the design of a control  system must  reflect  the fact that there are  resource
constraints,  and the benefits of controls must be considered  relative to their
costs.  Because of the inherent  limitations on all internal control systems, no
evaluation of controls can provide  absolute  assurance  that all control issues
and instances of fraud,  if any,  within the Company have been

                                      -10-
<PAGE>

detected.  These  inherent  limitations  include the realities that judgments in
decision-making  can be faulty,  and that breakdowns can occur because of simple
error or mistake.  Additionally,  controls can be circumvented by the individual
acts of some persons,  by collusion of two or more people,  and/or by management
override of the  control.  The design of any system of internal  control is also
based in part upon certain  assumptions  about the  likelihood of future events,
and there can be no  assurance  that any design will  succeed in  achieving  its
stated goals under all  potential  future  conditions.  Over time,  controls may
become  inadequate  because of changes  in  circumstances,  and/or the degree of
compliance with the policies and procedures may deteriorate.

                           PART II. OTHER INFORMATION

Item 1. Legal proceedings

The Company may on occasion be a party to litigation involving claims made by or
against the company arising in the ordinary course of business. The officers and
directors know of no legal  proceedings  pending or  contemplated by any person,
entity or governmental  authority which would have a material  adverse effect on
the Company.

Item 2. Changes in securities

Common Stock

As of  September  30,  2005,  the status of the common stock of the Company was:
6,000,000,000 shares authorized and 4,950,707,055 shares issued and outstanding.

During the nine month  period  ended  September  30,  2005,  the Company  issued
1,551,700,000 shares for cash of approximately $935,000 and 21,000,000 shares of
common stock for debentures in the amount of $31,122.

Item 3. Defaults upon senior securities - None

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 third quarter of 2005.

Item 5. Other Information - Not applicable

Item 6. Exhibits

31.1  Certification of CEO pursuant to Securities  Exchange Act rules 13a-15 and
      15d-15(c) as adopted pursuant to section 302 of the  Sarbanes-Oxley act of
      2002.

31.2  Certification of CFO pursuant to Securities  Exchange Act rules 13a-15 and
      15d-15(c) as adopted pursuant to section 302 of the  Sarbanes-Oxley act of
      2002.

32.1  Certification of Leslie S. Robins,  Chief Executive Officer pursuant to 18
      U.S.C.   section  1350,  as  adopted   pursuant  to  section  906  of  the
      Sarbanes-Oxley act of 2002.

32.2  Certification  of John J.  Cousins,  Chief  Financial  Officer  (Principal
      Accounting  Officer)  pursuant  to 18  U.S.C.  section  1350,  as  adopted
      pursuant to section 906 of the Sarbanes-Oxley act of 2002.

                                      -11-
<PAGE>

                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) 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:    November 11, 2005

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)



                                      -12-