<PAGE>

                    U. S. SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                   FORM 10-QSB


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

                         SECURITIES EXCHANGE ACT OF 1934


               For the quarterly period ended: September 30, 2001


                           Commission file No.0-24511


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

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

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

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

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

 The number of issuer's shares of Common Stock outstanding as of September 30,
                              2001 was 70,628,617

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


<PAGE>


                         FINANCIAL STATEMENTS AND REPORT
                            OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS

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

                               September 30, 2001


<PAGE>

                                 C O N T E N T S



                                                                        Page

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

FINANCIAL STATEMENTS

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

     STATEMENTS OF OPERATIONS...........................................3-4

     STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT........................5

     STATEMENTS OF CASH FLOWS..........................................6-10

     NOTES TO FINANCIAL STATEMENTS....................................11-25




<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Advanced Optics Electronics, Inc.

We have reviewed the accompanying  balance sheet of Advanced Optics Electronics,
Inc. (A Development  Stage  Company),  as of September 30, 2001, and the related
statements of operations,  changes in  stockholders'  deficit and cash flows for
the quarter and nine-month period then ended. These financial statements are the
responsibility of the Company's management. The financial statements of Advanced
Optics  Electronics,  Inc. for the quarter and nine-month period ended September
30, 2000 were  reviewed by other  auditors  whose report dated  October 20, 2000
stated  that they were not aware of any  material  modifications  that should be
made to  those  statements,  before  restatement,  in  order  for  them to be in
conformity with accounting principles generally accepted in the United States of
America.  The financial  statements for the 1998 and 1999 portions of the period
from May 22, 1996  (inception)  through  December 31, 1999 were audited by other
auditors,  whose reports dated February 18, 2000 expressed  unqualified opinions
on those statements, before restatement.

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

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



                                                 Atkinson & Co., Ltd.

Albuquerque, New Mexico
November 9, 2001


                                      -1-

<PAGE>

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

BALANCE SHEET
                                   (Unaudited)

                               September 30, 2001

<TABLE>
<S>                                                                       <C>

                                     ASSETS

CURRENT ASSETS
  Cash and cash equivalents                                               $    93,934
  Costs and estimated earnings in excess of
    billings on uncompleted contract                                        1,409,142
                                                                          -----------

          Total current assets                                              1,503,076
                                                                          -----------

PROPERTY AND EQUIPMENT, net                                                   211,345
                                                                          -----------

OTHER ASSETS
  Investment in Bio Moda, Inc.                                                207,335
  Other assets                                                                 75,787
  Note receivable from officer and shareholder                                 44,493
  Intangible assets, net                                                       36,368
                                                                          -----------

          Total other assets                                                  363,983
                                                                          -----------

          Total assets                                                    $ 2,078,404
                                                                          ===========

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
  Accounts payable                                                        $   158,622
  Accrued liabilities                                                         190,592
  Current portion of long-term debt                                            34,109
  Allowance for loss on contract                                              690,000
                                                                          -----------

          Total current liabilities                                         1,073,323
                                                                          -----------

LONG-TERM PORTION OF LONG-TERM DEBT                                            21,029
                                                                          -----------

CONVERTIBLE DEBENTURES                                                      1,492,774
                                                                          -----------

STOCKHOLDERS' DEFICIT
  Capital stock - Preferred Series A, 7.5% cumulative, convertible into
    common stock at a rate determined by dividing the purchase price of
    the preferred shares by the conversion price of the common stock;
    $.001 par value; authorized 10,000,000 shares, no shares
    issued or outstanding                                                          --
  Common stock -  Authorized  150,000,000  shares,  $.001 par value;  70,628,617
    shares issued and 70,346,817
    shares outstanding                                                         70,629
  Additional paid-in capital                                                8,646,051
  Deficit accumulated during the development stage                         (8,962,694)
  Treasury stock, at cost                                                     (69,281)
  Notes receivable from officer for exercise of stock options                (193,427)
                                                                          -----------

          Total stockholders' deficit                                        (508,722)
                                                                          -----------

          Total liabilities and stockholders' deficit                     $ 2,078,404
                                                                          ===========
</TABLE>

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

                                       -2-


<PAGE>

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

                            STATEMENTS OF OPERATIONS
                                   (Unaudited)

               For the Quarters ended September 30, 2001 and 2000

<TABLE>
<CAPTION>

                                                                           2000
                                                          2001          (Restated)
                                                       ------------    ------------
<S>                                                    <C>             <C>
Revenues
  Contract revenue                                     $         --    $         --
                                                       ------------    ------------

Costs and expenses
  General and administrative                                210,411         295,340
  Research and development                                   78,380         178,821
  Asset impairment                                               --              --
                                                       ------------    ------------

          Total costs and expenses                          288,791         474,161

Estimated loss on contract                                       --          72,000
                                                       ------------    ------------

Operating loss                                             (288,791)       (546,161)
                                                       ------------    ------------

Other income (expenses)
  Interest income                                             5,511           5,113
  Unrealized gain (loss) on marketable
    equity securities                                            --           2,352
  Loss on Bio Moda, Inc.                                         --         (18,193)
  Interest expense                                          (70,206)         (4,833)
                                                       ------------    ------------

          Total other income (expenses)                     (64,695)        (15,561)
                                                       ------------    ------------

          Net loss                                     $   (353,486)   $   (561,722)
                                                       ============    ============

Net loss per share                                             (.01)           (.01)
                                                       ============    ============

Weighted average shares outstanding                      68,260,388      60,627,342
                                                       ============    ============

</TABLE>

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

                                       -3-

<PAGE>

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

                      STATEMENTS OF OPERATIONS - CONTINUED
                                   (Unaudited)

           Forthe Nine-Month Periods ended September 30, 2001 and 2000
                           and the Period from May 22,
                                1996 (Inception)
                           through September 30, 2001

<TABLE>
<CAPTION>

                                                                                           May 22, 1996
                                                                                            (Inception)
                                                                                             Through
                                                                               2000        September 30,
                                                              2001          (Restated)         2001
                                                           ------------    ------------    ------------
<S>                                                        <C>             <C>             <C>
Revenues
  Contract revenue                                         $         --    $         --    $         --
                                                           ------------    ------------    ------------

Costs and expenses
  General and administrative                                    771,725       2,092,687       5,709,435
  Research and development                                      230,982         447,448       1,391,158
  Asset impairments                                             227,570              --         227,570
                                                           ------------    ------------    ------------

          Total costs and expenses                            1,230,277       2,540,135       7,328,163

Estimated loss on contract                                     (125,000)       (269,847)       (690,000)
                                                           ------------    ------------    ------------

Operating loss                                               (1,355,277)     (2,809,982)     (8,018,163)
                                                           ------------    ------------    ------------

Other income (expenses)
  Interest income                                                20,827          10,813          51,157
  Unrealized gain (loss) on marketable equity securities             --           4,194         (29,368)
  Other investment gains                                             --              --          59,784
  Loss on Bio Moda, Inc.                                             --         (50,637)       (176,510)
  Gain (loss) on disposal of assets                               6,000              --          (4,306)
  Interest expense                                             (126,806)       (153,310)       (782,268)
                                                           ------------    ------------    ------------

          Total other income (expenses)                         (99,979)       (188,940)       (881,511)
                                                           ------------    ------------    ------------

          Net loss before cumulative effect of
            change in accounting principle                   (1,455,256)     (2,998,922)     (8,899,674)

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

          Net loss                                         $ (1,455,256)   $ (2,998,922)   $ (8,962,694)
                                                           ============    ============    ============

Net loss per share before cumulative effect
  of change in accounting principle                                (.02)           (.06)           (.26)

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

Net loss per share                                         $       (.02)   $       (.06)   $       (.26)
                                                           ============    ============    ============

Weighted average shares outstanding                          66,278,396      53,921,575      34,725,565
                                                           ============    ============    ============
</TABLE>

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

                                       -4-

<PAGE>

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

                  STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
                                   (Unaudited)

     For the Period from May 22, 1996 (inception) through September 30, 2001

<TABLE>
<CAPTION>

                                                               Common Stock                 Preferred Stock
                                                          --------------------------    --------------------------
                                                                             Par                           Par
                                                            Shares          Value         Shares          Value
                                                          -----------    -----------    -----------    -----------
<S>                                                        <C>           <C>             <C>           <C>
Balance, May 22, 1996                                              --    $        --             --    $        --
Stock issued to incorporators for cash                        500,000            500             --             --
Stock issued for the net assets of PLZ Tech, Inc.           4,500,000          4,500             --             --
Net loss                                                           --             --             --             --
                                                          -----------    -----------    -----------    -----------
Balance, December 31, 1996                                  5,000,000          5,000             --             --
Stock issued for cash and services                          2,281,212          2,281             --             --
Net loss                                                           --             --             --             --
                                                          -----------    -----------    -----------    -----------
Balance, December 31, 1997                                  7,281,212          7,281             --             --
Stock issued for cash                                      10,979,275         10,979             --             --
Stock issued for services                                   2,751,000          2,751             --             --
Stock issued in exchange for note receivable                  315,000            315             --             --
Purchase and retirement of treasury stock                    (472,200)          (472)            --             --
Net loss                                                           --             --             --             --
                                                          -----------    -----------    -----------    -----------
Balance, December 31, 1998                                 20,854,287         20,854             --             --
Stock issued for cash                                       8,681,624          8,682             --             --
Stock issued for services                                  17,094,313         17,094             --             --
Intrinsic value of beneficial conversion feature of                --             --             --             --
notes payable
Fair value of warrants related to notes payable                    --             --             --             --
Purchase and retirement of treasury stock                    (489,251)          (489)            --             --
Purchase of treasury stock                                         --             --             --             --
Sale of treasury stock                                             --             --             --             --
Net loss                                                           --             --             --             --
                                                          -----------    -----------    -----------    -----------
Balance, December 31, 1999                                 46,140,973         46,141             --             --
Stock issued for cash                                         782,000            782            710              1
Stock issued for services                                   3,955,202          3,955             --             --
Purchase of treasury stock                                         --             --             --             --
Sale of treasury stock                                             --             --             --             --
Exercise of stock options for notes receivable              1,850,000          1,850             --             --
Amortization of discount on convertible preferred stock            --             --             --             --
Exercise of preferred stock conversion feature              9,200,000          9,200             --             --
Issuance of convertible debentures                                 --             --             --             --
Exchange of preferred stock for convertible debentures             --             --           (710)            (1)
Net loss                                                           --             --             --             --
                                                          -----------    -----------    -----------    -----------
Balance, December 31, 2000                                 61,928,175         61,928             --             --
Stock issued for services                                   1,475,000          1,475             --             --
Purchase of treasury stock                                         --             --             --             --
Net loss                                                           --             --             --             --
                                                          -----------    -----------    -----------    -----------
Balance, March 31, 2001                                    63,403,175         63,403             --             --
Stock issued for services                                   1,835,000          1,835             --             --
Stock issued for cash                                         652,778            653             --             --
Stock issued upon debt conversion                             301,205            301             --             --
Purchase of treasury stock                                         --             --             --             --
Cancellation of shares                                       (300,000)          (300)            --             --
Net loss                                                           --             --             --             --
                                                          -----------    -----------    -----------    -----------
Balance, June 30, 2001                                     65,892,158         65,892             --             --
Stock issued for services                                   3,081,749          3,082             --             --
Stock issued for cash                                         730,000            730             --             --
Stock issued upon debt conversion                             924,710            925             --             --
Purchase of treasury stock                                         --             --             --             --
Issuance of convertible debentures                                 --             --             --             --
Net loss                                                           --             --             --             --
                                                          -----------    -----------    -----------    -----------
Balance, September 30, 2001                                70,628,617    $    70,629             --    $        --
                                                          ===========    ===========    ===========    ===========

</TABLE>

<TABLE>
<CAPTION>

                 Treasury Stock
        ---------------------------------  Equity (Deficit)  Notes
                               Additional    During the      Receivable       Total
                                Paid-In      Development        From       Stockholders'
  Shares         Cost           Capital         Stage         Officer        Deficit
-----------    -----------    -----------    -----------    -----------    -----------
<S>            <C>            <C>            <C>            <C>            <C>
         --             --    $    24,500    $        --    $        --    $    25,000
         --             --        281,096             --             --        285,596
         --             --             --        (76,902)            --        (76,902)
-----------    -----------    -----------    -----------    -----------    -----------
         --             --        305,596        (76,902)            --        233,694
         --             --        362,720             --             --        365,001
         --             --             --        (84,690)            --        (84,690)
-----------    -----------    -----------    -----------    -----------    -----------
         --             --        668,316       (161,592)            --        514,005
         --             --      1,281,728             --             --      1,292,707
         --             --        293,719             --             --        296,470
         --             --         28,685             --             --         29,000
         --             --        (39,913)            --             --        (40,385)
         --             --             --       (752,111)            --       (752,111)
-----------    -----------    -----------    -----------    -----------    -----------
         --             --      2,232,535       (913,703)            --      1,339,686
         --             --        855,101             --             --        863,783
         --             --      1,469,320             --             --      1,486,414
         --             --        174,610             --             --        174,610
         --             --        125,000             --             --        125,000
         --             --        (10,643)            --             --        (11,132)
   (229,000)       (41,760)            --             --             --        (41,760)
     85,000         11,130         24,334             --             --         35,464
         --             --             --     (2,725,804)            --     (2,725,804)
-----------    -----------    -----------    -----------    -----------    -----------
   (144,000)       (30,630)     4,870,257     (3,639,507)            --      1,246,261
         --             --      1,012,710             --             --      1,013,493
         --             --      1,726,197             --             --      1,730,152
    (63,500)       (46,486)            --             --             --        (46,486)
    142,400         22,542         54,771             --             --         77,313
         --             --        220,150             --       (193,427)        28,573
         --             --        159,677             --             --        159,677
         --             --        533,678             --             --        542,878
         --             --        263,830             --             --        263,830
         --             --       (701,363)            --             --       (701,364)
         --             --             --     (3,867,931)            --     (3,867,931)
-----------    -----------    -----------    -----------    -----------    -----------
    (65,100)       (54,574)     8,139,907     (7,507,438)      (193,427)       446,396
         --             --        174,773             --             --        176,248
    (17,300)        (3,207)            --             --             --         (3,207)
         --             --             --       (531,071)            --       (531,071)
-----------    -----------    -----------    -----------    -----------    -----------
    (82,400)       (57,781)     8,314,680     (8,038,509)      (193,427)        88,366
         --             --        131,203             --             --        133,038
         --             --         39,347             --             --         40,000
         --             --         19,699             --             --         20,000
    (13,900)        (2,012)            --             --             --         (2,012)
         --             --        (46,950)            --             --        (47,250)
         --             --             --       (570,699)            --       (570,699)
-----------    -----------    -----------    -----------    -----------    -----------
-----------    -----------    -----------    -----------    -----------    -----------
    (96,300)       (59,793)     8,457,979     (8,609,208)      (193,427)      (338,557)
         --             --         64,722             --             --         67,804
         --             --         27,497             --             --         28,227
         --             --         26,978             --             --         27,903
   (185,500)        (9,488)            --             --             --         (9,488)
         --             --         68,875             --             --         68,875
         --             --             --       (353,486)            --       (353,486)
-----------    -----------    -----------    -----------    -----------    -----------
$  (281,800)   $   (69,281)   $ 8,646,051    $(8,962,694)   $  (508,722)   $  (193,427)
===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

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

                                      -5-

<PAGE>

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

                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)

               For the Quarters ended September 30, 2001 and 2000

<TABLE>
<CAPTION>

                                                                             2000
                                                               2001       (Restated)
                                                             ---------    ---------
<S>                                                          <C>          <C>
Cash flows from operating activities
  Net loss                                                   $(353,486)   $(561,722)
  Adjustments to reconcile net loss to net cash
    used in operating activities
      Interest on convertible debentures                            --           --
      Intrinsic value of conversion features                    68,875           --
      Amortization and depreciation expense                     23,411       26,578
      Amortization of discounts on convertible notes                --           --
      Unrealized (gain) loss on marketable securities               --           --
      Loss on Bio Moda, Inc.                                        --           --
      Asset impairment                                              --           --
      Issuance of common stock for services                     67,804       90,560
      Issuance of notes for services                                --       20,000
      Marketable equity securities                                  --         (132)
      Increase in costs in excess of billings on
        uncompleted contract                                   (88,333)     (12,460)
      (Increase) in other assets                                (6,374)          --
      Increase in other receivables                                 --       45,524
      Increase in allowance for loss on contract                    --           --
      Increase in accrued liabilities and accounts payable      80,568      158,606
                                                             ---------    ---------
          Net cash used in operating activities               (207,535)    (233,046)
                                                             ---------    ---------
</TABLE>

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

                                      -6-

<PAGE>

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

                      STATEMENTS OF CASH FLOWS - CONTINUED
                                   (Unaudited)

               For the Quarters ended September 30, 2001 and 2000

<TABLE>
<CAPTION>

                                                                  2001          2000
                                                                ---------    ---------
<S>                                                                <C>         <C>
Cash flows from investing activities
  Purchase of equipment                                            (4,149)     (13,873)
  Sale of marketable securities                                        --       66,825
  (Increase) in certificate of deposits                                --       (3,504)
  Purchase of marketable securities                                    --      (30,759)
                                                                ---------    ---------

          Net cash (used in) provided by investing activities      (4,149)      18,689
                                                                ---------    ---------

Cash flows from financing activities
  Additions to notes payable                                           --      430,000
  Payments on notes payable and capital lease obligations          (8,160)     (13,107)
  Issuance of capital stock                                        28,227           --
  Sale of treasury stock                                               --       27,543
  Purchase of treasury stock                                       (9,488)      (4,986)
  Proceeds from issuance of preferred stock                            --      160,000
  Proceeds from issuance of convertible debenture                 200,000           --
                                                                ---------    ---------

          Net cash provided by financing activities               210,579      599,450
                                                                ---------    ---------

          NET (DECREASE) INCREASE IN CASH                          (1,105)     385,093

Cash and cash equivalents, beginning of period                     95,039      393,127
                                                                ---------    ---------

Cash and cash equivalents, end of period                        $  93,934    $ 778,220
                                                                =========    =========
</TABLE>

                  NON CASH INVESTING AND FINANCING TRANSACTIONS

      During the quarter ended  September 30, 2001,  $27,903 of debentures  were
      converted into 924,710 shares of the Company's common stock.

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

                                      -7-

<PAGE>

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

                      STATEMENTS OF CASH FLOWS - CONTINUED
                                   (Unaudited)

                 For the Nine-Month Periods ended September 30,
                    2001 and 2000 and the Period from May 22,
                                1996 (Inception)
                           through September 30, 2001

<TABLE>
<CAPTION>

                                                                                           May 22, 1996
                                                                                           (Inception)
                                                                                             Through
                                                                                           September 30,
                                                                2001            2000           2001
                                                             -----------    -----------    -----------
<S>                                                          <C>            <C>            <C>
Cash flows from operating activities
  Net loss                                                   $(1,455,256)   $(2,998,922)   $(8,962,694)
  Adjustments to reconcile net loss to net cash
    used in operating activities

      Interest on convertible debentures                          50,000             --         50,000
      Intrinsic value of conversion features                      68,875             --        535,603
      Amortization and depreciation expense                       94,561        128,958        421,202
      Write off of organization costs                                 --             --         63,020
      Amortization of discounts on convertible notes                  --        138,155        295,209
      Unrealized (gain) loss on marketable securities                 --         (4,194)        29,368
      (Loss) gain on disposal of assets                           (6,000)            --          4,306
      Loss on Bio Moda, Inc.                                          --         50,637        176,510
      Asset impairment                                           227,570             --        227,570
      Issuance of common stock for services                      329,640      1,596,222      3,842,676
      Issuance of notes for services                                  --         20,000         50,000
      Increase in costs in excess of billings on
        uncompleted contract                                    (263,653)       (48,087)    (1,409,142)
      Marketable equity securities                                    --           (421)            --
      (Increase) in other assets                                  (1,745)            --        (81,620)
      Increase (decrease) in inventory                                --          6,000        (35,293)
      Increase in allowance for loss on contract                 125,000         56,712        690,000
      Increase in other receivables                                   --         76,554             --
      Increase in accrued liabilities and accounts payable       133,188         88,422        349,414
      Other non-cash expenses                                         --             --         33,447
      Accrued interest                                                --             --         30,667
                                                             -----------    -----------    -----------

          Net cash used in operating activities                 (697,820)      (889,964)    (3,689,757)
                                                             -----------    -----------    -----------
</TABLE>

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

                                      -8-

<PAGE>

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

                      STATEMENTS OF CASH FLOWS - CONTINUED
                                   (Unaudited)

                 Forthe  Nine-Month  Periods  ended  September 30, 2001 and 2000
                    and the Period from May 22,
                                1996 (Inception)
                           through September 30, 2001

<TABLE>
<CAPTION>

                                                                                              May 22, 1996
                                                                                               (Inception)
                                                                                                 Through
                                                                                              September 30,
                                                                   2001           2000            2001
                                                                -----------    -----------    -----------
<S>                                                                 <C>            <C>           <C>
Cash flows from investing activities
  Purchase of equipment                                             (27,885)       (60,835)      (380,128)
  Investment in Bio Moda, Inc.                                           --             --       (383,845)
  Sale of marketable securities                                          --        100,642         40,665
  Purchase of marketable securities                                      --        (59,642)       (70,034)
  Decrease (increase) in certificate of deposits                    107,426         (2,102)            --
  Proceeds from sale of equipment                                    23,800             --         23,800
  Purchase of other assets                                           (6,653)            --       (239,785)
  Redemption of sale of Wizard Technologies, Inc.                        --         65,000             --
                                                                -----------    -----------    -----------

          Net cash provided by (used in) investing activities        96,688         43,063     (1,009,327)
                                                                -----------    -----------    -----------

Cash flows from financing activities
  Additions to notes payable                                             --        430,000        622,776
  Payments on notes payable and capital lease obligations           (42,741)       (39,586)      (214,849)
  Issuance of capital stock                                          68,227        853,493      3,628,211
  Collection of officer notes                                            --             --         28,573
  Sale of treasury stock                                                 --         77,313        112,777
  Purchase of treasury stock                                        (14,707)       (46,486)      (144,470)
  Proceeds from issuance of convertible
    preferred stock                                                      --        160,000        485,000
  Proceeds from issuance of convertible debenture                   275,000             --        275,000
                                                                -----------    -----------    -----------

          Net cash provided by financing activities                 285,779      1,434,734      4,793,018
                                                                -----------    -----------    -----------

          NET (DECREASE) INCREASE IN CASH                          (315,353)       587,833         93,934

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

Cash and cash equivalents, end of period                        $    93,934    $   778,220    $    93,934
                                                                ===========    ===========    ===========
</TABLE>

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

                                      -9-

<PAGE>

                  NON CASH INVESTING AND FINANCING TRANSACTIONS

      During  the  nine-month  periods  ended  September  30,  2001,  $47,903 of
      debentures  were converted into 1,225,915  shares of the Company's  common
      stock.

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

                                      -10-

<PAGE>

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

                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

                               September 30, 2001


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Notes to Interim Financial Statements

The interim  financial data is unaudited,  however in the opinion of management,
the interim  data  includes  all  adjustments,  consisting  of normal  recurring
adjustments,  necessary  for a fair  statement  of the  results  for the interim
period.  The  financial  statements  included  herein have been  prepared by the
Company  pursuant to the rules and  regulations  of the  Securities and Exchange
Commission.  The organization and business of the Company,  accounting  policies
followed by the Company and other  information are contained in the notes to the
Company's financial  statements filed as part of the Company's December 31, 2000
Form 10-KSB.  This  quarterly  report  should be read in  conjunction  with such
annual report.

Description of Business

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

The  Company  has  obtained  a  contract  to  produce  two  outdoor  advertising
billboards using its flat panel display technology. This is the first commercial
application of the Company's technology.  The success of the Company will depend
on its ability to commercialize its technology and complete this contract. As of
September 30, 2001, completion of this contract was behind schedule.

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

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

                                      -11-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)
                               September 30, 2001

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Description of Business - Continued

The  accompanying  financial  statements  have been prepared in conformity  with
generally accepted  accounting  principles which are based on certain underlying
assumptions,  including the assumption that the Company will continue as a going
concern.  The Company is a development  stage  enterprise and has not yet earned
revenues from its planned principal operations and has a net capital deficiency.
The Company's  entry into its intended  operational  stage is dependent upon its
ability to  continue  to generate  sufficient  working  capital and to develop a
market  accepted  product line.  The  accompanying  financial  statements do not
include  any  adjustments   that  might  result  from  the  resolution  of  this
uncertainty.

Cash and Cash Equivalents

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

Revenue and Cost Recognition

The Company  recognizes  revenue on its contract in process  using the completed
contract method, under which contract revenues and costs are recognized when the
contract is completed,  with estimated losses recognized when it becomes evident
that contract costs will exceed  contract  revenues.  Contract costs include all
direct  material and labor costs and those  indirect  costs  related to contract
performance, such as indirect labor, supplies, overhead, equipment depreciation,
and interest.

The contract to produce two outdoor advertising  billboards totals $1.7 million,
with  $885,000  assigned to the first unit. An estimated  loss of  approximately
$690,000 from production of the first unit has been recognized through September
30, 2001.  The Company's  estimated cost to complete as of September 30, 2001 is
$164,299,  which is expected to be funded with cash,  billings on the  contract,
and contributed capital.

In accordance  with the contract  terms,  the  anticipated  delivery date of the
first unit is October  15,  2001.  During the  contract  period,  the Company is
entitled to bill the customer as the following milestones are met:

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

                                      -12-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Revenue and Cost Recognition - Continued

Completion of board design                  $ 65,000
Production                                   265,000
Completion                                   265,000
Acceptance after installation                290,000

Billings and collections through September 30, 2001 have totaled $89,873.

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

Investment

As of September  30, 2001,  the Company  owned 16.4% of the  outstanding  common
stock of Bio Moda, Inc., an  unconsolidated  investment  accounted for using the
cost method.  Prior to December 31, 1999, the Company's ownership was sufficient
for the investment to be accounted for using the equity method.

The carrying  value of the  investment  as of September 30, 2001 is the original
investment  cost  adjusted  by the  Company's  proportionate  interest in losses
reported by the investee through December 31, 1999.

Property, Plant and Equipment

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

Other Assets

Intangible   assets  are  carried  at  historical   cost,   net  of  accumulated
amortization.  Patents  are  amortized  on  a  straight-line  basis  over  their
estimated  useful lives of 8 years.  Goodwill is amortized  over 10 years.  Debt
origination costs are amortized over 3 years.

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

                                      -13-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Other Assets - Continued

In the second quarter of 2001, the Company recorded an impairment  write-down of
patents in the amount of $227,570, based on an uncertainty regarding the amounts
and timing of future cash flows.  As of September 30, 2001 the carrying value of
patents is $1.

Certain  assets  previously  classified  as inventory  are no longer used in the
Company's  on-going  production  processes,  and are held for  sale.  Management
estimates  that the net  realizable  value of these items exceeds their carrying
value as of September 30, 2001.

Research and Development Costs

Research and development costs are expensed as incurred.

Income Taxes

The Company accounts for income taxes using the liability  method,  under which,
deferred  tax  liabilities  and assets are  determined  based on the  difference
between the financial statement carrying amounts and the tax bases of assets and
liabilities  using  enacted  tax  rates in  effect  in the  years  in which  the
differences are expected to reverse.

Loss Per Share

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

Use of Estimates

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

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

                                     -14-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Stock-Based Compensation

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

Comprehensive Income

In 2001 and  2000,  the  Company  had no  changes  in equity  which  constituted
components of other comprehensive income.

NOTE 2.  NOTES RECEIVABLE

Notes receivable at September 30, 2001, consist of the following:

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

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

NOTE 3.  INVESTMENTS

As of September  30, 2001,  the Company  owned 879,707 or 16.4% of the 5,373,858
outstanding  shares of Bio Moda,  Inc.  The  Company's  interest in Bio Moda has
declined  from  22% in  1998  to its  present  level,  as Bio  Moda  has  issued
additional shares in the course of its financing activities. As of September 30,
2001, the Company had options to purchase an additional 187,000 shares at $0.485
cents per share.

Bio  Moda,  Inc.  is a  development  stage  company  involved  primarily  in the
development  of  technology  for  the  early  detection  of  lung  cancer.  As a
development  stage company,  Bio Moda,  Inc. has not had any revenues and, as of
September 30, 2001, was in the process of conducting clinical trials.

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

                                      -15-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 3.  INVESTMENTS - CONTINUED

There is currently no active  market for the common stock of Bio Moda,  Inc. The
ultimate value of the Company's  investment in Bio Moda, Inc. will depend on its
ability  to  complete  its  research  and  either   commercialize  or  sell  its
proprietary  technology.  The recoverability of the investment in Bio Moda, Inc.
is supported by two recent  private  placements  that were  completed at a share
price greater than the carrying value of the asset.

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

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

NOTE 4.  LONG-TERM OBLIGATIONS

As of September 30, 2001, the Company's long-term obligations were as follows:

Notes  payable to a  financial  institution,  due in  monthly  payments
  aggregating  $3,221 through  October 2003,  bearing  interest at bank
  prime rate plus 1.5%, collateralized by operating equipment
  and a vehicle                                                          $55,138

Less:  Current portion                                                    34,109
                                                                         -------
                                                                         $21,029
                                                                         =======

     Future  principal  payments on long-term  obligations  for the years ending
September 30, are as follows:

                2002            $34,109
                2003             20,811
                2004                218
                                -------
                                $55,138
                                =======

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

                                      -16-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001

NOTE 5.  CONVERTIBLE DEBENTURES

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

The  intrinsic  value of the  conversion  feature of the  principal  and accrued
interest was  estimated to be $174,610.  This entire amount has been recorded as
an increase in paid-in capital and a charge to interest expense. The convertible
notes also include detachable  warrants for the purchase of 12,500,000 shares of
common  stock at the lower of 75 percent of the  closing bid price of a share of
common stock at the time of exercise or September 1, 1999.  The warrants  expire
on June 3, 2002.  Management estimates that approximately half the warrants will
be exercised prior to expiration.

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

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

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

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

                                      -17-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 5.  CONVERTIBLE DEBENTURES - CONTINUED

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

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

The  intrinsic  value of the  conversion  feature of the  principal  and accrued
interest was estimated to be $238,830.  This has been recorded as an increase in
paid-in capital and a charge to interest  expense.  The  convertible  notes also
include detachable  warrants for the purchase of 500,000 shares of common stock.
Management  has estimated the fair market value of these warrants at $25,000 and
recorded  this amount as an  increase  in paid-in  capital and a discount to the
convertible  notes payable.  The discount is being amortized over the three-year
life of the notes.

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

On November 7, 2000,  the Company  entered into an agreement  that  modified the
outstanding  convertible  preferred agreements entered into on March 8, 2000 and
August 2, 2000.  The new  agreement  resulted  in the  exchange  of  outstanding
preferred  stock plus  additional  consideration  for the  Company's 7.5 percent
convertible  debentures due November 7, 2003. The total amount of the debentures
is  $740,677,   including  accrued  interest  of  $30,677.  The  debentures  are
convertible  into  shares of common  stock at the lesser of the  stocks  closing
price on  March 8,  2000 and 77.5  percent  of the  average  of the five  lowest
closing bid prices for 20 days before November 2, 2000.

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

                                      -18-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 5.  CONVERTIBLE DEBENTURES - CONTINUED

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

During the  quarters  ended  September  30,  2001 and June 30,  2001,  debenture
holders converted  convertible  debentures in the amount of $27,903 and $20,000,
respectively into shares of the Company's common stock. This conversion  reduces
the convertible debenture liability and increases equity.


NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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

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

                                      -19-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

The carrying amounts and fair values of the Company's  financial  instruments as
of September 30, 2001 are as follows:

                                                             Estimated
                                                 Carrying       Fair
                                                  Amount       Value
                                                ----------   ----------

Cash and cash equivalents                       $   93,934   $   93,934
Costs in excess of billings on
  uncompleted contract                           1,409,142    1,409,142
Notes receivable                                    44,493       44,493
Accounts payable                                   158,622      158,622
Long-term obligations                               55,138       55,138
Convertible debentures                           1,492,774    1,492,774
Notes receivable from officer                      193,427      193,427


NOTE 7.  INCOME TAXES

As of September 30, 2001, the Company had a net operating loss  carryforward  of
approximately  $9 million which expires in varying  amounts between 2011 through
2016.  Realization  of  this  potential  future  tax  benefit  is  dependent  on
generating   sufficient   taxable   income  prior  to  expiration  of  the  loss
carryforward.  The  deferred  tax asset  related  to this  potential  future tax
benefit has been offset by a valuation  allowance in the same amount. The amount
of the deferred tax asset  ultimately  realizable could be increased in the near
term if estimates of future  taxable income during the  carryforward  period are
revised.


NOTE 8. OPERATING LEASES

The Company occupies administrative,  engineering,  and manufacturing facilities
under  operating  leases  which  expire in  February  2002.  The leases call for
aggregate  minimum  monthly  lease  payments of $4,225.  Lease  expense  totaled
$12,675  and  $11,200  for the  quarters  ended  September  30,  2001 and  2000,
respectively, $38,025 and $33,600 for the nine-month periods ended September 30,
2001 and 2000,  respectively,  and  $135,234  in the  period  from May 22,  1996
(inception) through September 30, 2001.

Future minimum lease payments  under the long-term  operating  lease are $21,125
through February 2002.

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

                                      -20-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 9.  EQUITY TRANSACTIONS

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

During 1997, the Company issued 2,281,212 shares of stock for cash and services.

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

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

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

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

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

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

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

                                      -21-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 9.  EQUITY TRANSACTIONS - CONTINUED

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

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

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

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

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

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

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

                                      -22-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 9.  EQUITY TRANSACTIONS - CONTINUED

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

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

During the quarter ended December 31, 2000, the Company issued 615,500 shares of
common  stock for services  from  contractors,  officers  and others,  valued at
$130,275.

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

During the quarter ended June 30, 2001, the Company issued  1,835,000  shares of
common  stock for services  from  contractors,  officers  and others,  valued at
$133,038.  The Company canceled 300,000 shares of common stock originally issued
for  services  during the quarter  ended March 31, 2001 for  services  valued at
$47,250.  The value of the services is included in the costs and expenses on the
Statements of Operations.  The Company issued 676,205 shares of common stock for
$40,000.

Also, during this quarter, the Company repurchased 13,900 shares of common stock
for $2,012. The repurchased shares have been recorded at cost.

During the quarter ended September 30, 2001, the Company issued 3,081,749 shares
of common stock for services from  contractors,  officers and others,  valued at
$67,804.  The value of the services is included in the costs and expenses on the
Statements of Operations.  The Company issued 730,000 shares of common stock for
$28,227.

Also,  during this quarter,  the Company  repurchased  185,500  shares of common
stock for $9,488. The repurchased shares have been recorded at cost.

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

                                      -23-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 10.  STOCK PLANS

On January 4, 1999,  the Company  established  the Incentive  Stock Option Plan.
Pursuant to the Plan, up to 10,000,000  shares of the Company's common stock may
be granted as options to key  employees.  The shares issued upon exercise of the
options may be authorized  and unissued  shares or shares held by the Company in
its treasury. The exercise date of the options is based on the related agreement
as approved by the Board of Directors.  The Incentive  Stock Option Plan expires
on January 4, 2009. Options awarded under the Plan have four-year terms and vest
ratably  over one to two year  periods.  As of September  30,  2001,  there were
6,175,000  shares  available under the Plan for future awards.  No stock options
were issued during the nine-month periods ended September 30, 2001.

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

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

Loss per share, as reported                   (0.055)           (0.072)         (0.055)
Proforma loss per share                       (0.061)           (0.078)         (0.055)
</TABLE>

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

Total stock options granted and  unexercised  were 3,825,000 as of September 30,
2001.  The shares  issued upon  exercise of the  options may be  authorized  and
unissued shares or shares held by the Company in its treasury. The exercise date
of options granted is based upon the related  agreement as approved by the Board
of Directors.

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

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

                                      -24-

<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                   (Unaudited)

                               September 30, 2001


NOTE 10.  STOCK PLANS - CONTINUED

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

<TABLE>
<CAPTION>

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

<S>                                              <C>                 <C>                <C>
Balance, December 31, 1997                          153,954      $       0.58               153,954
Balance, December 31, 1998                          153,954              0.58               153,954

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

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

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

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


Balance, September 30, 2001                      11,100,000              0.27            10,361,250
                                             ==============     =============       ===============
</TABLE>

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


NOTE 11.  ACCOUNTING CHANGES

The financial  statements for the quarter and nine-month  periods ended June 30,
2000 have been  retroactively  restated to give effect to a change in accounting
for the Company's  long-term  contract and changes in estimated  useful lives of
intangible  assets. The effect of these changes was to increase net loss for the
three and  nine-month  periods  ended  September 30, 2000 by $6,199 and $12,398,
respectively, and to increase net loss per share for both periods by a deminimus
amount.

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

                                      -25-

<PAGE>

                        ADVANCED OPTICS ELECTRONICS, INC.


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                  FINANCIAL CONDITION AND RESULTS OF OPERATION
 .

Forward - Looking Statements

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

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

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

                                    OVERVIEW

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

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

                                      -26-

<PAGE>

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

The major advantages and features of the Display are:

     o    Brightest display ever available (35,000 nits)

     o    Widest viewing angle available

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

     o    High definition picture quality

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

     o    True Color (24 bit)

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

     o    Transportable for mobile operations

     o    Weather resistant for outdoor applications

     o    Modest power requirements

     o    Minimum 5 year continual use lifetime

     o    Real-time live video feeds

     o    Broadcast/simulcast applications

     o    Supports streaming video

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

     o    Satellite linkable

Proprietary Billboard software capabilities are:

     o    Manage and update display content remotely

     o    Works with all image file formats and digital video editors

     o    Secure Internet or WAN communications

     o    WEB-based status monitoring

     o    Provides time, temperature and other dynamic content inserts

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

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

                                      -27-

<PAGE>

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

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

Our operating expenses have increased significantly since our inception, and the
rate of increase has risen since last year. This is due to increased engineering
and  management  staff and  investments in operating  infrastructure.  Since our
inception we have incurred significant losses and, as of September 30, 2001, had
an accumulated deficit of $8,331,638.

RESULTS OF CONTINUING OPERATIONS

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

Comparison of the Nine-Month Periods Ended September 30, 2001 and 2000

Revenue.  During the quarter  ended  March 31,  2001,  the  Company  changed the
accounting for our contract to the completed contract method.  According to this
way of accounting for contracts,  we are booking no revenue until the completion
of the  contract.  Please  note that the revenue for the same period in 2000 has
been restated and is now $0. Billings and collections through September 30, 2001
have totaled $89,873.

Product Development. Product development expenses consist primarily of personnel
expenses,  consulting fees and depreciation of the equipment associated with the
development and enhancement of our flat panel displays. Research development and
technical  costs  decreased  to  $230,982  in the first nine months of 2001 from
$447,448  in the  first  nine  months  of  2000.  This  reduction  reflects  our
transition  from  development  to  production  and  manufacturing.  We  believe,
however,  that  continued  investment  in product  development  is  critical  to
attaining our strategic objectives and, as a result,  expect product development
expenses  to  increase  significantly  in future  periods.  We  expense  product
development costs as they are incurred.

General and  Administrative.  General  and  administrative  expenses  consist of
expenses for executive and administrative  personnel,  facilities,  professional
services,  travel,  general  corporate  activities,  and  the  depreciation  and
amortization  of  office  furniture  and  leasehold  improvements.

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

                                      -28-

<PAGE>

General and administrative  costs decreased to $771,725 in the first nine months
of 2001 from  $2,092,687  in the first nine  months of 2000.  The  decrease  was
primarily due to increased duties handled by in-house  personnel and a reduction
in professional service fees and expenses. Due to the growth of our business and
anticipated  expansion of our staff, we expect general and administrative  costs
to increase in the future.  The costs  associated  with being a publicly  traded
company  and  anticipated   future  strategic   acquisitions   will  also  be  a
contributing factor to increases in this expense.

Patents.  In the second  quarter of 2001,  the Company  recorded  an  impairment
write-down  of  patents  in the  amount  of  $227,570,  based on an  uncertainty
regarding the amounts and timing of future cash flows.  As of September 30, 2001
the carrying value of patents is $1.

Other Income  (Expense).  Other income (expense)  consists of interest and other
income  and  expense.  Interest  income  increased  to $20,827 in the first nine
months of 2001 from  $10,813 in the first nine months of 2000.  The  increase in
interest  income  was due to an  increase  in our  average  net  cash  and  cash
equivalents balance over the previous nine month period.

                         LIQUIDITY AND CAPITAL RESOURCES

Since  inception,  we have funded our operations  primarily  through the private
placement of debt and equity securities. As of September 30, 2001 we have raised
net proceeds of $4,795,200.

Advanced  Optics  Electronics,  Inc.  filed  a  registration  statement,  and  a
subsequent  amendment,  on form SB2  related  to common  shares  underlying  the
Company's convertible  debenture  financings.  The SB2 was declared effective on
November 6, 2001.

We have  also  utilized  equipment  loans and  capital  lease  financing.  As of
September  30, 2001 we have a balance of $55,138 on the  equipment  loans and no
remaining balance on the capital lease.

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

The Company's holding in BioModa, Inc will provide additional liquidity. BioModa
is a biomedical  development  company. The Company's ownership of BioModa, as of
September  30,  2001 was  approximately  16%.  No  immediate  family  members of
officers or  directors  of Advanced  Optics  Electronics,  Inc.  are  securities
holders of BioModa  with the  exception of Harold  Herman,  who is a director of
Advanced Optics Electronics,  Inc. and a small minority  shareholder in BioModa.
The  recoverability  of the  investment  in Bio Moda,  Inc. is  supported by two
recent private  placements that were completed at a share price greater than the
carrying value of the asset.

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

                                      -29-

<PAGE>

During the first nine months ended  September 30, 2001 $39,437 was spent for the
purchase of equipment.  Product  development  expenditures  were $78,380 for the
quarter ended September 30, 2001. Funds for operations,  product development and
capital  expenditures  were  provided  from  the  sale of  securities  and  cash
reserves.  As of September  30, 2001, we had  approximately  $93,934 of cash and
cash equivalents.

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


                           PART II. OTHER INFORMATION

Item 1.  Legal proceedings

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

Item 2.  Changes in securities

During the second quarter of fiscal year 2001 there was a 4,736,459  increase in
shares of common stock.

Item 3.  Defaults upon senior securities - Not applicable

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

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

Item 5.  Other Information - Not applicable

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

None

(b) Reports on Form 8-K

A report was filed on Form 8-K  related to the  Company's  Change of  Certifying
Accountant. The date of the report was September 26, 2001.

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

                                      -30-
<PAGE>

                                   SIGNATURES

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


                                            Dated: November 19, 2001

                                            ADVANCED OPTICS ELECTRONICS, INC.



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



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


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

                                      -31-