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 six month period ended: June 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 August
         13, 2005 was 4,497,136,349.

         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
                                  JUNE 30, 2005
                                   (Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                 ASSETS
<S>                                                                           <C>
Current Assets
           Cash and cash equivalents                                          $    205,195
           Marketable securities                                                 1,357,497
           Other current assets                                                     30,857
                                                                              ------------

                Total current assets                                             1,593,549

Intangibles, net of accumulated amortization of $63,589                            210,241

Property and Equipment, net of accumulated depreciation of $419,232                139,476

Other Assets
           Notes receivable and deposits                                            52,612
                                                                              ------------
Total assets                                                                  $  1,995,878
                                                                              ============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
           Accounts payable                                                   $    117,438
           Accrued expenses                                                        300,772
           Advances from shareholders                                              152,200
           Advances from officer                                                    74,710
           Convertible debentures                                                   81,754
                                                                              ------------
                Total current liabilities                                          726,874
                                                                              ------------
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, 5,000,000,000 shares authorized;
             4,273,136,349 shares issued and outstanding                         4,273,136
           Treasury stock, at cost                                                 (38,947)
           Notes receivable officer                                                (67,299)
           Additional paid in capital                                           17,652,272
           Accumulated other comprehensive income                                  680,233
           Deficit accumulated during the development stage                    (21,230,391)
                                                                              ------------
                Total stockholders' equity                                       1,269,004
                                                                              ------------
Total liabilities and stockholders' equity                                    $  1,995,878
                                                                              ============
</TABLE>

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

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
    For the Six Month Periods Ended June 30, 2005 and 2004 and For The Period
               From May 22, 1996 (Inception) Through June 30, 2005
                                   (Unaudited)
--------------------------------------------------------------------------------

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

OPERATING EXPENSES
      General and administrative                                     774,570            983,169         11,379,533
      Payroll and related                                            522,991            435,261          2,055,788
      Research and development                                        38,949            471,299          2,140,598
      Professional Fees                                               13,256             51,992            183,637
      Depreciation & amortization                                     25,269              7,287            150,749
      Licensing Fees                                                  15,000             15,000             52,976
      Inventory write-off                                                 --                 --             29,293
      Asset impairment                                                    --                 --            592,884
                                                             ---------------    ---------------    ---------------
            Total operating expenses                               1,390,035          1,964,008         16,585,458

LOSS ON CONTRACT                                                          --             82,073          2,255,944
                                                             ---------------    ---------------    ---------------

OPERATING LOSS                                                    (1,390,035)        (2,046,081)       (18,841,402)
                                                             ---------------    ---------------    ---------------
OTHER INCOME (EXPENSES)
      Interest income                                                  1,743                 15             82,124
      Realized loss on marketable equity securities                   (2,147)            17,747           (130,075)
      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                              10,122                 --           (545,966)
      Interest expense                                               (24,964)            (9,697)        (1,309,837)
      Other income                                                        --                 --                551
                                                             ---------------    ---------------    ---------------
            Total other income (expenses)                            (15,246)             8,065         (2,136,689)
                                                             ---------------    ---------------    ---------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS                      (1,405,281)        (2,038,016)       (20,978,091)

EXTRAORDINARY LOSS                                                        --                 --           (189,280)

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

NET LOSS                                                     $    (1,405,281)   $    (2,038,016)   $   (21,230,391)
                                                             ===============    ===============    ===============
OTHER COMPREHENSIVE (LOSS) GAIN
      Unrealized gain (loss) on marketable securities                680,233            (56,343)           680,233
                                                             ---------------    ---------------    ---------------

COMPREHENSIVE LOSS                                                  (725,048)        (2,094,359)       (20,550,158)
                                                             ===============    ===============    ===============
Basic and diluted netloss before cumulative
effect of change in  accounting principle available
to common shareholder
per common share and extraordinary loss                      $        (0.000)   $        (0.001)

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                                                  3,591,538,375      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-2             See accompanying notes to the consolidated financial statements.

<PAGE>

               CONSOLIDATED STATEMENTS OF OPERATIONS
            For the Three Month Periods Ended June 30, 2005 and 2004
                                   (Unaudited)
--------------------------------------------------------------------------------

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

OPERATING EXPENSES
      General and administrative                                     491,123            456,717
      Payroll and related                                            245,633            259,657
      Research and development                                        30,229            231,957
      Professional Fees                                               11,352             30,628
      Depreciation & amortization                                     12,770             (6,705)
      Licensing Fees                                                  15,000             15,000
      Inventory write-off                                                 --                 --
      Asset impairment                                                    --                 --
                                                             ---------------    ---------------
               Total operating expenses                              806,107            987,254

LOSS ON CONTRACT                                                          --             34,610
                                                             ---------------    ---------------

OPERATING LOSS                                                      (806,107)        (1,021,864)
                                                             ---------------    ---------------
OTHER INCOME (EXPENSES)
      Interest income                                                    883                 --
      Realized loss on marketable equity securities                       66                703
      Other investment gains                                              --                 --
      Loss from investment in Biomoda, Inc.                               --                 --
      Gain (loss) on disposal of assets                                   --                 --
      Gain (loss) on settlement of debts                                  --                 --
      Interest expense                                               (18,543)               (46)
      Other income                                                        --                 --
                                                             ---------------    ---------------
               Total other income (expenses)                         (17,594)               657
                                                             ---------------    ---------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS                        (823,701)        (1,021,207)

EXTRAORDINARY LOSS                                                        --                 --

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE                                                                 --                 --
                                                             ---------------    ---------------

NET LOSS                                                     $      (823,701)   $    (1,021,207)
                                                             ===============    ===============
OTHER COMPREHENSIVE (LOSS) GAIN
      Unrealized gain (loss) on marketable securities                395,007            (13,849)
                                                             ---------------    ---------------

COMPREHENSIVE LOSS                                                  (428,694)        (1,035,056)
                                                             ===============    ===============
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                                                  3,776,180,793      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-3             See accompanying notes to the consolidated financial statements.

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                     May 22, 1996
                                                                                                      (Inception)
                                                                                                        Through
                                                                                                        June 30,
                                                                          2005            2004            2005
                                                                     ------------    ------------    ------------
<S>                                                                  <C>             <C>             <C>
Cash flows from operating activities:
     Net loss                                                        $ (1,405,281)   $ (2,038,016)   $(21,230,391)
     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                                  --              --         127,928
         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
         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                            --              --         309,504
         Interest earned on note receivable from stockholder and
           related parties                                                     --              --         (17,823)
         Depreciation and amortization                                     25,268         (44,852)        688,708
         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                      (13,411)          3,328         (25,624)
         Decrease in inventory                                                 --              --         (35,293)
         (Decrease) Increase in accounts payable and
            accrued expenses                                               47,306        (160,201)         73,246
                                                                     ------------    ------------    ------------

     Net cash used in operating activities                             (1,346,118)     (2,239,741)    (10,681,259)
                                                                     ------------    ------------    ------------
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)        (52,854)       (146,032)
     Proceeds from sale of property and equipment                              --          50,928          23,800
     Investment in Genomed                                                293,347        (956,343)       (606,653)
     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                                        --         (20,302)       (645,334)
     Cash of variable entity on consolidation                                  --              --             155
     Decrease in certificates of deposit                                       --              --              --
     Increase in notes receivable                                          (3,033)        (28,500)        (52,612)
     Purchase of other assets                                                  --              --        (245,579)
                                                                     ------------    ------------    ------------

     Net cash used in investing activities                                245,074      (1,007,071)     (2,380,665)
                                                                     ------------    ------------    ------------
</TABLE>

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

<PAGE>

<TABLE>
<CAPTION>
                                                                                                     May 22, 1996
                                                                                                      (Inception)
                                                                                                        Through
                                                                                                        June 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                                    714,350       1,303,250      12,038,068
     Issuance of Biomoda common stock for cash                                 --              --          60,000
     (Increase) decrease in note receivable stockholder                    17,212              --          11,790
     Repayment for advances from officer                                  (15,000)             --         (15,000)
     Proceeds from sale of treasury stock                                      --              --         225,419
     Purchase of treasury stock                                            (1,752)         (6,543)       (260,129)
     Proceeds from issuance of convertible debt                                --              --       1,270,965
     Principal repayments on convertible debt                             (21,223)       (492,820)       (416,783)
                                                                     ------------    ------------    ------------

     Net cash provided by financing activities                            693,587         803,887      13,267,119
                                                                     ------------    ------------    ------------
Net (decrease) increase in cash                                          (407,457)     (2,442,925)        205,195

Cash at beginning of period                                               612,652       3,964,609              --
                                                                     ------------    ------------    ------------

Cash at end of period                                                $    205,195    $  1,521,684    $    205,195
                                                                     ============    ============    ============
Supplemental disclosure of cash flow
   information --
   Cash paid during the year for:
         Interest                                                    $         --    $         --
                                                                                     ============
         Income taxes                                                $         --    $         --
                                                                                     ============
</TABLE>

--------------------------------------------------------------------------------
F-5                       See accompanying notes to the 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 June 30, 2005,  the results of operations and cash
flows for the six month  periods ended June 30, 2005 and 2004 and the results of
operations for the three month periods ended June 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 latter half of 2005.
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-6

<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 7)

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-7

<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 June 30, 2005, the Company has accumulated deficit of
$21,230,391.  The  Company's  total  assets  exceeded the total  liabilities  by
$1,269,004.  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-8

<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 June 30, 2005,  the Company held  approximately  19,392,821 of these
shares.

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

                                    COST BASIS    FAIR VALUE    UNREALIZED GAIN
                                    -----------   -----------   ---------------
Marketable securities-Common stock  $   523,121   $ 1,357,497   $       834,376

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 six months
ended  June 30,  2005,  the  Company  transferred  14,471,409  shares  valued at
approximately $390,366 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-9

<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 option during the six month periods ended June 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
$1,261,869  at  June  30,  2005.  Advanced  Optics  is  considered  the  primary
beneficiary  as it stands to absorb the majority of the VIE's  expected  losses.

--------------------------------------------------------------------------------
F-10

<PAGE>

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

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-11

<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 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 June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.

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 June 30, 2005.  Biomoda also pays an annual
fee in the amount of $15,000 to renew  such  license  agreement.  As of June 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 $63,589.  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.

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

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

<PAGE>

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
   COUNTRY                       TITLE                    PATENT NO.      ISSUE DATE            EXPIRATION DATE
===============================================================================================================
<S>          <C>                                          <C>          <C>                       <C>
     US      COMPOSITIONS AND METHODS OF                   6,838,248     1/4/05                     1/4/22
             DETECTING PRE-CANCEROUS
             CONDITIONS IN CELL AND TISSUE                 Application was filed for
             SAMPLES USING 5,10,15,20 - TETRAKIS           Continuation In Part addtional
            {CARBOXYPHENYL} PORPHINE                       patent.
---------------------------------------------------------------------------------------------------------------
     US      METHOD USING 5,10,15,20 - TETRAKIS            5,162,231    11/10/1992                 11/10/2009
            {R-CARBOXYPHENYL} PORPHINE FOR
             DETECTING CANCERS OF THE LUNG
---------------------------------------------------------------------------------------------------------------
     US      METHOD USING 5,10,15,20 - TETRAKIS            5,391,547     2/21/1995                 2/21/2012
            {R-CARBOXYPHENYL} 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 June 30, 2005

   Notes receivable bearing a 7% and will mature on March 2005         $27,709
   Notes receivable bearing a 6.5% and will mature on December 2005    $24,903
                                                                       -------
           Total                                                       $52,612
                                                                       =======

5. VARIABLE INTEREST ENTITY-BIOMODA, INC.

At June 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 $1,194,584 at June 30, 2005 and the Company has
recorded  interest  income on  advances  of  $67,285.  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-13

<PAGE>

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

As of June 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 June 30,  2005.
General  creditors  of  Biomoda  have no  recourse  against  the  Company.  From
inception through June 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 June 30,  2005 and  2004,  the  Company  has net  advances  to an  officer
approximating  $67,300. The advances accrue interest at rates ranging from 5% to
6% (interest income was insignificant for the six months ended June 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 June 30, 2005.

Advances From Officer
---------------------

As of June 30, 2005,  the Company has advances from an officer of $74,710.  This
is due on demand and non interest  bearing.  The Company paid $25,000 during the
six months ended June 30, 2005.

Advances From Stockholders
--------------------------

As of June 30, 2005, the Company had advances of approximately  $152,000 payable
to two of its stockholders.  Such advances historically bore interest at 10% per
annum.  No interest  expense  related to such  advances for the six month period
ended June, 2004 was recorded.  Interest expense was  approximately  $17,000 and
$140,000  for the six month  period  ended June 30, 2005 and for the period from
inception through June 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 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.

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

<PAGE>

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

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
June 30, 2005 amounts to $81,754.

8. STOCKHOLDERS' EQUITY

Common Stock
------------

During the six months ended June 30, 2005, the Company issued 884,000,000 shares
of common stock for cash, which were valued at approximately $693,000.

During the six months ended June 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 $21,000.

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

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

<PAGE>

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

During the six months ended June 30, 2004, the Company issued  19,800,000 shares
of common stock for services, which were valued at approximately $210,000 (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 six months ended June 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.

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 six month
periods ended June 30, 2005 and 2004

<TABLE>
<CAPTION>
                                        Six Months Ended                      Six Months Ended
                                          June 30, 2005                         June 30, 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              $0.23
Granted                                     --                --                  --                 --
Exercised                                   --                --                  --                 --
Cancelled/Terminated                        --                --                  --                 --
                                --------------      ------------      --------------       ------------
Outstanding and exercisable            400,000             $0.02           3,175,000              $0.23
                                ==============      ============      ==============       ============
Weighted average fair value
of options granted                                                                                $0.23
                                                                                           ============
</TABLE>

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

<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 June 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 six 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 six month
periods ended June 30, 2005 and 2004:

<TABLE>
<CAPTION>
                                                    Six Months Ended                       Six Months Ended
                                                     June 30, 2008                           June 30, 2004
                                           -----------------------------------    ----------------------------------
                                                                  Weighted                              Weighted
                                              Warrants         Average Price         Warrants         Average Price
                                           ---------------     --------------     --------------     ---------------
<S>                                        <C>                 <C>                <C>
Outstanding, beginning of year                   4,796,000              $0.10          8,646,000               $0.09
Granted                                                 --                 --                 --                  --
Exercised                                               --                 --                 --                  --
Cancelled/Terminated                              (55,000)               1.62                 --                  --
                                           ---------------     --------------     --------------     ---------------
Outstanding and exercisable                      4,741,000              $0.10          8,646,000               $0.09
                                           ===============     ==============     ==============     ===============
Weighted average fair value
of warrants granted                                                                                            $0.09
                                                                                                     ===============
</TABLE>

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

<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
June 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                 3,250,000         0.79             $  0.02              3,250,000         $  0.02
  $0.34 - $0.43             1,491,000         1.97                0.22              1,491,000            0.22
                        -------------                          -------           ------------         -------
                            4,741,000                          $  0.10              4,741,000         $  0.10
-------------------     ---------------------------------------------------------------------------------------
</TABLE>

There were no warrants  issued  during the six month periods ended June 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 six
months ended June 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 on Operations           1,165           234         --         1,390         1,677           372         --         2,046
Depreciation
    and amortization            16             9         --            25            --             7         --             7
Interest expense                 2            47         --            25            10            13         --            10
Capital expenditure              4            41         --            45            --             2         --             2
Net Loss                    $1,096        $  282       $ --        $1,405        $1,720        $  382       $ --        $2,056
</TABLE>

10. EARNINGS PER SHARE

Earnings per share for the six month and three month periods ended June 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-18


<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 end of 2005. 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 first 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  third to fourth
quarter  of 2005.  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 June 30, 2005,  had a deficit  accumulated  during the  development  stage of
$21,230,391.

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

                                       4
<PAGE>

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  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 2005.  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.

                                       5
<PAGE>

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

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  by
year-end. 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 third  quarter of 2005.  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

                                       6
<PAGE>

mechanical  realms.  These  include but are not limited  to:  power  systems and
distribution, heat dissipation, and weatherproofing.

The Company  expects its display product to be finalized and ready for market in
the fourth quarter of 2005.

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 Six and Three-month Periods Ended June 30, 2005 and 2004
--------------------------------------------------------------------------

Research and development  expenses consist  primarily of personnel  expenses and
consulting  fees  associated  with the  development  and enhancement of our flat
panel  displays.  These  expenses  decreased to $30,229 in the second quarter of
2005 from  $231,957 in the same  period of 2004 and  decreased  to $38,949  from
$471,299 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  $737,000 in the
second quarter of 2005 from $716,000 in the second quarter of 2004 and decreased
to $1,298,000 in 2005 from  $1,418,000 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 June 30, 2005.  The
accumulated deficit is $2,758,317.  In 2005, the net loss was $281,828 and since
inception,  it is $2,758,317.  The loss from operations was $234,438 in 2005 and
$2,570,732  since  inception.   Most  of  its

                                       7
<PAGE>

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  $148,534 in 2005 and  $1,569,234  since
inception.  Biomoda  believes,  however,  that  continued  investment in product
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 $63,385 in 2005 and
$396,312 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
June 30, 2005, we have raised such net proceeds of approximately $22,000,000.

The cash balance at June 30, 2005 of $205,195 represents an estimated two months
of future cash operating expenses.

We have also utilized  equipment loans and capital lease  financing.  As of June
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 June 30, 2005 was
approximately 15.9%. 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 June  30,  2005,  the  Company  held
19,392,821  shares.  Genomed is a publicly  traded  biotech  company  working in
genomics based disease management.

                                       8
<PAGE>

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 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 six months  ended June 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 $39,000 in
the first half 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 June 30, 2005, the Company had a marketable securities portfolio valued at
$1,357,497.  The  Company's  monthly  burn-rate,  the amount of money spent each
month, is  approximately  $170,000.  This represents  approximately 12 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  $256,390 at June 30,  2005.  Of this,  $240,241 is
patent costs,  net of accumulated  amortization  of $63,589.  Its liabilities of
1,360,646  primarily  consist of its debt to Advanced  Optics of $1,261,869  and
advances from  shareholders  of $152,200.  Stockholders'  deficit as of June 30,
2005 is $2,780,413.

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

                                       9
<PAGE>

June 30, 2004 it had raised net proceeds of approximately  $2,175,199,  of which
approximately  $363,845 was  invested  and or loaned by ADOT in 1998.  On May 1,
2002,  Biomoda entered into a line of credit  agreement (the  "Agreement")  with
Advanced Optics  Electronics,  Inc., an affiliated entity,  ("Advanced  Optics")
with an annual interest rate of 5%. On May 1, 2003 the agreement was extended.

Biomoda had negative cash flows of $1,178 for the six months ended June 30, 2005
resulting from $246,421 used in Biomoda's operating activities,  $41,461 used in
Biomoda's  investing  activities  and  $259,572 of cash  provided  by  financing
activities.  Cash used in  operating  activities  of $246,421 for the six months
ended June 30, 2005 was  primarily  due to $253,486 in  operating  expenses,  of
which  $63,385  is  General  and   Administrative,   $148,534  is  Research  and
Development and $13,256 is professional fees. Cash used in investing  activities
of  $77,922  for  the  period  was  solely  due  to  payments  for  patents  and
intangibles.  Cash  provided by  financing  activities  of $259,572  for the six
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 $2,758,000 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 a date (the "Evaluation Date") within 90 days prior to filing
the Company's June 30, 2005 Form 10-QSB. Based upon that evaluation, the CEO and
CFO concluded that, as of March 31, 2005, the Company's  disclosure controls and
procedures were of limited effectiveness.

CHANGES IN CONTROLS AND PROCEDURES

There were no significant  changes made in our internal  controls over financial
reporting  during  the six  months  ended  June 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

                                       10
<PAGE>

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  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 June  30,  2005,  the  status  of the  common  stock of the  Company  was:
5,000,000,000 shares authorized and 4,273,136,349 shares issued and outstanding.

During the six month period ended June 30, 2005, the Company issued  884,000,000
shares for cash of approximately  $693,000 and 21,000,000 shares of common stock
for debentures in the approximate amount of $21,122.

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 second quarter of 2005.

Item 5.  Other Information - Not applicable

Item 6.  Exhibits

                                       11
<PAGE>

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.

                                       12
<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:    August 13, 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)