UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549




**FORM
      10-QSB**




(Mark
                One)ý
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
              for
                the quarterly period ended June 30, 2006o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934
              for
                the transition period from to





COMMISSION
      FILE NUMBER: 0-5014





aeroTelesis,
                  Inc.(Exact
                  Name of Small Business Issuer as
                  Specified in its Charter)




Delaware
            
            95-2554669(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            
            (I.R.S.
                Employer
              Identification
                No.)


11150
                    W. Olympic Blvd., Suite 860, Los Angeles,
                    CA 90064(Address
                    of Principal Executive
                    Offices)(310)
                    235-1727(Issuer’s
                    Telephone Number, Including Area
                    Code)(Former
                    Name, Former Address and Former Fiscal
                    Year, if Changed Since Last Report)


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 the filing requirements for the past 90 days.  Yes ý No o





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





APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS





Check
      whether the registrant filed all documents and reports required to be filed
      by
      Sections 12, 13 or 15(d)of the Exchange Act subsequent to the distribution
      of
      securities under a plan confirmed by a court.  o Yes o No


APPLICABLE
      ONLY TO CORPORATE ISSUERS:





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date:


Class
            
            Outstanding
                as of June 30, 2006Common
                stock, $0.00008 par value
            
            89,255,931




Transitional
      Small Business Disclosure Format (check one): o Yes ý No










**TABLE
      OF CONTENTS**







**PAGE**PART
                I: FINANCIAL INFORMATION
            3ITEM
                1. FINANCIAL STATEMENTS
            3BALANCE
                SHEETS AS OF JUNE 30, 2006 (UNAUDITED) AND MARCH 30, 2006
            3STATEMENTS
                OF OPERATIONS
            4STATEMENTS
                OF CASH FLOWS
            5NOTES
                TO FINANCIAL STATEMENTS
            6ITEM
                2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            11ITEM
                3. CONTROLS AND PROCEDURES
            13PART
                II: OTHER INFORMATION
            14ITEM
                1. LEGAL PROCEEDINGS
            14ITEM
                2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS
            14ITEM
                3. DEFAULTS UPON SENIOR SECURITIES
            14ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            14ITEM
                5. OTHER INFORMATION
            14ITEM
                6. EXHIBITS AND REPORTS ON FORM 8-K
            15SIGNATURES
            16







**PART
      I: FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**aeroTelesis
                Inc.****A
                Development Stage Enterprise****Balance
                Sheets****A
                S S E T S****June
                  30**
            
            **March
                  31****2006**
            
            **2006****(Unaudited)**Current
                AssetsCash
            
            $
            1,190
            
            $
            67,823Prepaid
                Insurance
            
            
            16,281
            
            
            28,493Total
                Current Assets
            
            
            17,471
            
            
            96,316Fixed
                Assets:Equipment
                under Capital Lease
            
            
            30,832
            
            
            30,832Furniture
                & Fixtures
            
            
            120,022
            
            
            120,022Accumulated
                Depreciation
            
            
            (54,402
            )
            
            (46,859
            )Total
                Fixed Assets
            
            
            96,452
            
            
            103,995Other
                Assets:Deposits
            
            
            26,784
            
            
            26,784Licenses,
                net
            
            
            2,698,781
            
            
            2,698,781Total
                Other Assets
            
            
            2,725,565
            
            
            2,725,565Total
                Assets
            
            $
            2,839,488
            
            $
            2,925,876**L
                I A B I L I T I E S**Current
                LiabilitiesAccounts
                Payable and Accrued Expenses
            
            $
            523,394
            
            $
            312,677Notes
                Payable - Current
            
            
            11,999
            
            
            21,360Capital
                Lease Payable - Current
            
            
            9,272
            
            
            12,330Total
                Current Liabilities
            
            
            544,665
            
            
            346,367Long-Term
                LiabilitiesConvertible
                Debenture
            
            
            3,430,000
            
            
            3,556,665Loan
                Costs, net of accumulated amortization
            
            
            (2,389,160
            )
            
            (2,633,726
            )Notes
                Payable - Non-Current
            
            
            151,194
            
            
            -Capital
                Lease Payable - Non-Current
            
            
            34,647
            
            
            34,647Total
                Long-Term Liabilities
            
            
            1,226,681
            
            
            957,586Total
                Liabilities
            
            
            1,771,346
            
            
            1,303,953Commitments
                and Contingencies**S
                T O C K H O L D E R S '   E Q U I T
                Y**Preferred
                Stock
            
            
            -
            
            
            -2,000,000
                authorized, par value $.001no
                shares issued and outstandingCommon
                Stock
            
            
            7,140
            
            
            7,072200,000,000
                authorized, par value $.00008
              89,255,931
                and 88,397,794 shares issued and
              outstandingAdditional
                Paid-in-Capital
            
            
            11,104,119
            
            
            10,876,239Deficit
                accumulated during the development stage
            
            
            (10,043,117
            )
            
            (9,261,388
            )Total
                Stockholders' Equity
            
            
            1,068,142
            
            
            1,621,923Total
                Liabilities and Stockholders' Equity
            
            $
            2,839,488
            
            $
            2,925,876






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






3





**aeroTelesis
                  Inc.****A
                  Development Stage Enterprise****Statements
                  of Operations****(Unaudited)****Cumulative****During
                the****Three
                Months Ended**
            
            **Development****June
                30**
            
            **June
                30**
            
            **Stage****2006**
            
            **2005**
            
            **Through
                6/30/06****Revenues:**Revenues
            
            $
            -
            
            $
            8,600
            
            $
            478,090Total
                Revenues
            
            $
            -
            
            $
            8,600
            
            $
            478,090**Expenses:**Cost
                of Revenues
            
            $
            -
            
            $
            -
            
            $
            17,349Options/Warrants
                Expense - Non Cash
            
            
            101,283
            
            
            478,575
            
            
            1,864,091Non
                Cash Consulting Fees
            
            
            -
            
            
            -
            
            
            1,345,900Research
                & Development
            
            
            28,000
            
            
            -
            
            
            1,288,000Legal
                & Professional Fees
            
            
            122,646
            
            
            176,101
            
            
            1,848,834Payroll
                Expenses
            
            
            52,154
            
            
            26,598
            
            
            540,413Travel
            
            
            5,695
            
            
            1,642
            
            
            455,008Operating
                Expenses
            
            
            21,839
            
            
            25,910
            
            
            373,741Rent
            
            
            22,340
            
            
            33,460
            
            
            313,421Consulting
                Fees
            
            
            99,503
            
            
            -
            
            
            347,946Depreciation
                Expense
            
            
            7,542
            
            
            7,335
            
            
            54,400Insurance
            
            
            14,223
            
            
            -
            
            
            45,555Total
                Expenses
            
            
            475,225
            
            
            749,621
            
            
            8,494,658Net
                Loss from Operations
            
            $
            (475,225
            )
            $
            (741,021
            )
            $
            (8,016,568
            )**Other
                Income (Expenses):**Reimbursement
                of Expenses
            
            $
            30,000
            
            $
            -
            
            $
            30,000Amortization
                of Loan Costs
            
            
            (244,566
            )
            
            -
            
            
            (1,577,852
            )Interest
                Expense
            
            
            (91,938
            )
            
            (4,520
            )
            
            (279,983
            )OtherIncome
                (Expenses)
            
            
            -
            
            
            628
            
            
            (198,714
            )Total
                OtherIncome
                (Expenses)
            
            
            (306,504
            )
            
            (3,892
            )
            
            (2,026,549
            )Loss
                Before Income Tax Expense
            
            
            (781,729
            )
            
            (744,913
            )
            
            (10,043,117
            )**Provision
                for Income Taxes:**Provision
                for Income Taxes
            
            
            -
            
            
            -
            
            
            -Net
                Loss
            
            $
            (781,729
            )
            $
            (744,913
            )
            $
            (10,043,117
            )Basic
                and Diluted Loss Per Common Share
            
            
            (0.01
            )
            
            (0.01
            )Weighted
                Average number of Common Shares
            
            
            88,991,294
            
            
            83,546,411used
                in per share calculations






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






4




**aeroTelesis
                    Inc.****A
                    Development Stage Enterprise****Statements
                    of Cash Flows****(Unaudited)****Cumulative****Three
                    Months Ended**
                
                **During
                    the****June
                    30**
                
                **June
                    30**
                
                **Development****2006**
                
                **2005**
                
                **Stage**Cash
                    Flows from Operating Activities:Net
                    Loss
                
                $
                (781,729
                )
                $
                (744,913
                )
                $
                (10,043,117
                )Adjustment
                    to reconcile net income (loss) to net cashprovided
                    by (used in) operating activitiesDepreciation
                
                
                7,542
                
                
                7,335
                
                
                54,401Shares
                    for Services
                
                
                -
                
                
                -
                
                
                1,782,957Options
                    for Services
                
                
                101,283
                
                
                478,575
                
                
                1,864,091Amortization
                    of Loan Cost
                
                
                (244,566
                )
                
                -
                
                
                1,577,852Other
                    Non-Cash Expenses
                
                
                -
                
                
                20,000
                
                
                182,754Changes
                    in operating assets and liabilities:Receivables
                
                
                -
                
                
                3,535
                
                
                54,000Deposits
                
                
                -
                
                
                (165
                )
                
                (26,784
                )Prepaid
                    Insurance
                
                
                12,211
                
                
                -
                
                
                1,824Related
                    Party Payable
                
                
                -
                
                
                (8,600
                )
                
                8,600Accounts
                    Payable and Accrued Expenses
                
                
                210,719
                
                
                113,728
                
                
                559,422Net
                    Cash Used In Operating Activities
                
                $
                (694,540
                )
                $
                (130,505
                )
                $
                (3,984,000
                )Cash
                    Flows from Investing Activities:Capital
                    Expenditures
                
                
                -
                
                
                (3,937
                )
                
                (89,436
                )Licenses
                
                
                -
                
                
                -
                
                
                (67,613
                )Net
                    Cash Used in Investing Activities
                
                $
                -
                
                $
                (3,937
                )
                $
                (157,049
                )Cash
                    Flows from Financing Activities:Common
                    Stock
                
                
                -
                
                
                14,548
                
                
                96,040Convertible
                    Debenture
                
                
                -
                
                
                -
                
                
                2,900,758Note
                    Payable
                
                
                (7,870
                )
                
                -
                
                
                20,306Capital
                    Leases Paid
                
                
                (3,058
                )
                
                -
                
                
                (16,208
                )Revolving
                    Line of Credit Advance
                
                
                149,703
                
                
                118,120
                
                
                1,121,474Note
                    Payable Directors
                
                
                -
                
                
                -
                
                
                19,869Stock
                    Subscrition Receivable
                
                
                -
                
                
                7,500
                
                
                -Net
                    Cash Provided from Financing Activities
                
                $
                138,775
                
                $
                140,168
                
                $
                4,142,239Net
                    Increase (Decrease) in Cash
                
                $
                (555,765
                )
                $
                5,726
                
                $
                1,190Cash
                    Balance, Begin Period
                
                
                67,823
                
                
                1,913
                
                
                -Cash
                    Balance, End Period
                
                $
                1,190
                
                $
                7,639
                
                $
                1,190Supplemental
                    Disclosures:Cash
                    Paid for interest
                
                $
                4,224
                
                $
                -
                
                $
                117,699Cash
                    Paid for income taxes
                
                $
                -
                
                $
                -
                
                $
                -Non-Cash
                    Transaction:Stock
                    Issued for Services
                
                $
                -
                
                $
                20,000
                
                $
                1,782,957Stock
                    Issued for Debt
                
                $
                -
                
                $
                -
                
                $
                1,092,139Accounts
                    Payable
                
                $
                -
                
                $
                -
                
                $
                57,541Stock
                    Issued as fees to raise capital
                
                $
                -
                
                $
                -
                
                $
                1,400,000Long
                    Term Debt Used to Acquire Equipment
                
                $
                -
                
                $
                50,680
                
                $
                61,418Stock
                    Issued for Convertible Debt
                
                $
                126,666
                
                $
                -
                
                $
                126,666
   The
        accompanying notes are an integral part of
        the financial statements.
   
 5






**AEROTELESIS,
      INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
      30, 2006**


**(UNAUDITED)**





**NOTE
      1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**General**





The
      unaudited interim financial statements of aeroTelesis, Inc. (the “Company”) as
      of June 30, 2006 and for the three months ended June 30, 2006 and 2005, included
      herein have been prepared in accordance with the instructions for Form 10-QSB
      under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
      Article 10 of Regulation S-X under the Securities Act of 1933, as amended.
      The
      March 31, 2006 Consolidated Balance Sheet was derived from audited financial
      statements, but does not include all disclosures required by generally accepted
      accounting principles. Certain information and note disclosures normally
      included in financial statements prepared in accordance with generally accepted
      accounting principles have been condensed or omitted pursuant to such rules
      and
      regulations relating to interim consolidated financial statements.





In
      the
      opinion of management, the accompanying unaudited interim financial statements
      reflect all adjustments, consisting only of normal recurring adjustments,
      necessary to present fairly the financial position of the Company at June 30,
      2006, and the results of its operations for the three months ended June 30,
      2006
      and 2005 and the developmental period, and its cash flows for the three months
      ended June 30, 2006 and 2005 and during the developmental period.





The
      results of operations for such periods are not necessarily indicative of results
      expected for the full year or for any future period. These financial statements
      should be read in conjunction with the audited financial statements as of March
      31, 2006 and related notes included in the Company's Annual Report on Form
      10-KSB filed with the Securities and Exchange Commission (the
“SEC”).





**Organization**





The
      Company was incorporated in Delaware on August 26, 1968 and until 1989 was
      involved in a number of different businesses. Those operations were ultimately
      unsuccessful and terminated. The Company was inactive and dormant from 1989
      through 2000. During this period, the Company did not have revenues, operating
      profits or any identifiable assets attributable to any industry segment. In
      2000, the Company began limited operations and began seeking opportunities
      to
      act as a consultant to companies interested in establishing telecom businesses
      in the Asia-Pacific region.




In
      October 2003, the Company acquired all issued and outstanding shares of
      Aerotelesis Philippines, Inc. (“ ATP ”),
      a
      British Virgin Islands company, in exchange for the issuance of 75,000,000
      shares of the Company’s common stock to the sole **** shareholder
      of ATP, Nations Mobile Networks Ltd. (“ Nations ”),
      formerly known as Aerotelesis Ltd. (“ ATL ”).
      As a
      result of this transaction, ATP became a wholly-owned subsidiary of the Company.
      Nations holds 57,010,945 shares (63.9%) of the 89,255,931 fully diluted
      outstanding shares of common stock of the Company as of June 30,
      2006.




In
      addition to ATP, the Company has two other subsidiaries: Aerotelesis IP
      Networks, Inc. and Aerotelesis Satellite Networks Inc., both Delaware
      corporations.




**Going
      Concern**




The
      accompanying financial statements have been prepared on a going concern basis
      of
      accounting which contemplates continuity of operations, realization of assets,
      liabilities, and commitments in the normal course of business. The accompanying
      financial statements do not reflect any adjustments that might result if the
      Company is unable to continue as a going concern. We have a working capital
      deficit with no revenues anticipated for the near term. Management believes
      we
      will need to raise capital in order to operate over the next 12 months. As
      shown
      in the accompanying financial statements, we also have incurred significant
      losses since inception. Our continuation as a going concern is dependent upon
      our ability to generate sufficient cash flow to meet our obligations on a timely
      basis and ultimately to attain profitability. We have limited capital with
      which
      to pursue our business plan. There can be no assurance that our future
      operations will be significant and profitable, or that we will have sufficient
      resources to meet our objectives. We may pursue either debt or equity financing
      or a combination of both, in order to raise sufficient capital to meet our
      financial requirements over the next twelve months and to fund our business
      plan. There is no assurance that we will be successful in raising additional
      funds.




(continued)




6


**AEROTELESIS,
      INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
      30, 2006**


**(UNAUDITED)**





**NOTE
      1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Basis
      of preparation and presentation**





The
      accompanying financial statements have been prepared to reflect the legal
      acquisition on October 2, 2003 of aeroTelesis Philippines Inc ("ATP") by
      aeroTelesis Inc., formerly Pacific Realm Inc. ("Company") (the "Acquisition").
      The financial statements of the Company give effect to the Acquisition under
      which the shareholders of ATP exchanged all of their common shares of ATP for
      common shares of the Company.





Notwithstanding
      its legal form, the Acquisition has been accounted for as a reverse takeover,
      as
      the former shareholders of ATP own in aggregate approximately 63.9% of the
      common shares of the Company, and so are now the majority shareholders of the
      Company. Also, as the Company was a company with nominal net non-monetary
      assets, the Acquisition has been accounted for as an issuance of stock by the
      Company accompanied by a recapitalization





**Stock-Based
      Compensation**





The
      Company adopted the provisions of Statement of Financial Accounting Standards
      (“SFAS”) No. 123 (R), “Share-Based Payment” during the quarter ended June
      30, 2006. Please refer to Note 3.





**Accounting
      Method**





The
      Company's financial statements are prepared using generally accepted accounting
      principles (United States). Revenues are recognized when consulting engagements
      have been earned and completed and expenses when incurred on the related
      consulting engagements.





**Earnings
      per Common Share**





The
      Company adopted Financial Accounting Standards (SFAS) No. 128, "Earnings Per
      Share," which simplifies the computation of earnings per share requiring the
      restatement of all prior periods. Basic earnings per share are computed on
      the
      basis of the weighted average number of common shares outstanding during each
      year.





Diluted
      earnings per share are computed on the basis of the weighted average number
      of
      common shares and dilutive securities outstanding. Dilutive securities having
      an
      anti-dilutive effect on diluted earnings per share are excluded from the
      calculation.




**NOTE
      2: COMMON STOCK**





The
      company has a total of 200,000,000 authorized common shares, with a par value
      of
      $0.00008 and 2,000,000 preferred shares, with a par value of $.001 per share
      and
      with 89,255,931 common shares issued and outstanding and no preferred shares
      issued and outstanding as of June 30, 2006.





During
      the quarter ended June 30, 2006, the Company issued the following shares of
      its
      common stock:





•
            In
                May and June 2006, a total of 858,137 shares of stock were issued
                to
                Cornell Capital pursuant to the convertible debenture agreement at
                80% of
                the lowest daily VWAP (Volume Weight Average Price) of the common
                stock
                during the five trading days prior to the conversion date. No cash
                was
                received and the convertible debenture liability was
                reduced.




(continued)




7


**AEROTELESIS,
      INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
      30, 2006**


**(UNAUDITED)**





**NOTE
      3: STOCK-BASED COMPENSATION**




During
      the quarter ended June 30, 2006, the Company adopted the provisions of Statement
      of Financial Accounting Standards (“SFAS”) No. 123 (R), “Share-Based
      Payment.” Prior to the adoption of SFAS 123(R), the Company accounted for
      stock-based compensation to employees using the intrinsic value method
      prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees"
      and
      related interpretations. Compensations cost, if any, was measured as the excess
      of the fair value of the Company's stock at the date of grant over the amount
      an
      employee must pay to acquire the stock. Statement of Financial Accounting
      Standards ("SFAS") 123, Accounting for Stock-Based Compensation, amended by
      SFAS
      148, Accounting For Stock-Based Compensation - Transition and Disclosure,
      established accounting and disclosure requirements using a fair value based
      method of accounting for stock-based employee compensation; however, it allowed
      an entity to continue to measure compensation for those plans using the
      intrinsic value method of accounting prescribed by APB Opinion No. 25.




If
      the
      fair value of the stock options granted to employees during a fiscal year had
      been recognized as compensation expense on straight-line basis over the vesting
      period of the grants, the following table illustrated how stock-based
      compensation costs would have impacted our net income and earnings per common
      share for the quarter ended June 30, 2005:




Three
                Months Ended
              June
                30, 2005(Unaudited)Net
                Income (Loss) as Reported
            
            $
            (744,913
            )Deduct:
                Stock Based CompensationCosts,
                Net of Taxes Under SFAS 123
            
            
            (49,914
            )Pro
                Forma Net Income (Loss)
            
            $
            (794,827
            )Per
                Share Information:Basic,
                as Reported
            
            $
            (0.01
            )Basic,
                Pro Forma
            
            $
            (0.01
            )Diluted,
                as Reported
            
            $
            (0.01
            )Diluted,
                Pro Forma
            
            $
            (0.01
            )


The
      fair
      value of the stock-based awards was estimated using the Black-Scholes model
      with
      the following weighted average assumptions for the quarter ended June 30,
      2005:


Three
                  Months Ended
                June
                  30, 2005(Unaudited)Expected
                    Life (Years)
              
              
              2.96Risk
                    Free Interest Rate
              
              
              3.82
              %Volatility
              
              
              108
              %Dividend
                  Yield
              
              
              –
              %




There
      were no options issued during the quarter ended June 30, 2006.





(continued)




8


**AEROTELESIS,
      INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
      30, 2006**


**(UNAUDITED)**





**NOTE
      4: LONG TERM DEBT**





On
      July
      12, 2006, the Company renewed a loan agreement the Company’s majority
      stockholder with Nations Mobile Networks, LTD. (“Nations”) for a line of credit
      up to $1,000,000 for a period of twelve months as a working capital loan. The
      loan agreement contained an interest provision of 7% to be accrued quarterly.





**NOTE
      5: CONVERTIBLE DEBT**





On
      May
      10, 2005, the Company entered into a Securities Purchase Agreement with Cornell
      Capital Partners, LP and Highgate House Funds, Ltd., pursuant to which they
      committed to purchase $3,000,000 of convertible debentures from the Company.





On
      February 8, 2006, the Company entered into an Amended and Restated Securities
      Purchase Agreement with Cornell Capital Partners, LP whereby the Company agreed
      to amend and restate the secured convertible debentures the Company previously
      issued to Cornell Capital Partners, LP and Highgate House Funds, Ltd. on May
      10,
      2005. Prior to entering into the Securities Purchase Agreement, the Company
      issued secured convertible debentures to Cornell Capital Partners, LP and
      Highgate House Funds, Ltd. in the principal aggregate amount equal to $3,000,000
      which was funded on July 25, 2005. On February 8, 2006, Highgate House Funds,
      Ltd. assigned all of its interests in its debentures to Cornell Capital
      Partners, LP. Pursuant to the Securities Purchase Agreement, dated February
      8,
      2006, Cornell Capital Partners, LP provided the Company an additional $500,000
      in secured convertible debentures which was funded on February 8, 2006. The
      $3,000,000 in secured convertible debentures and the additional $500,000 in
      secured convertible debentures were consolidated into new secured convertible
      debentures along with the accrued and unpaid interest. The debentures are
      secured by substantially all of the Company’s assets. Cornell Capital Partners,
      LP has the ability to foreclose on our assets if an event of default occurs
      pursuant to the underlying documents and is not remedied by the Company or
      waived by Cornell Capital Partners, LP. The secured convertible debentures
      have
      a 36-month term and accrue annual interest of 10%. The secured convertible
      debentures may be redeemed by the Company at any time, in whole or in part.
      The
      Company will pay a redemption premium of 20% of the amount redeemed in addition
      to the principle amount being redeemed plus interest. The secured convertible
      debentures are convertible at the holder’s option at a conversion price equal to
      80% of the lowest volume weighted average price of our common stock for the
      five
      trading days immediately proceeding the conversion date.





In
      connection with the Securities Purchase Agreement, the Company issued Cornell
      Capital Partners, LP three warrants, each of which is exercisable for a period
      of five years. The first warrant is for the purchase 500,000 shares of our
      common stock at an exercise price of $1.00. The second warrant is for to
      purchase 700,000 shares of our common stock at an exercise price of $0.75.
      The
      third warrant is for the purchase 1,000,000 shares of our common stock at an
      exercise price of $0.50.





The
      following table summarizes the warrants outstanding and exercisable at June
      30,
      2006.




Number
                of Warrants Outstanding
            
            Exercise
                Price
            
            Maturity
                Date300,000
            
            
            3.00
            
            
            7/27/06600,000
            
            
            4.00
            
            
            7/27/06500,000
            
            
            1.00
            
            
            2/07/07700,000
            
            
            0.75
            
            
            2/07/071,000,000
            
            
            0.50
            
            
            2/07/07TOTAL
            
            
            3,100,000




The
      Company received $1,500,000 at closing on July 25, 2005. October 27, 2005,
      the
      Company received a second tranche in the amount of $1,500,000.




(continued)





9


**AEROTELESIS,
      INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**JUNE
      30, 2006**


**(UNAUDITED)**





**NOTE
      5: CONVERTIBLE DEBT (CONTINUED)**




The
      warrants were valued at $2,355,000 and recorded as a part of the debt issue
      cost
      as a reduction of the liability and to be amortized over the 36 months. A total
      of $551,197 was paid for commissions and expenses and shown as a reduction
      of
      the debt and is being amortized over 36 months or the length of the debt. A
      total of $244,566 has been amortized for the quarter ended June 30,
      2006.




In
      May
      and June 2006, a total of 858,137 shares of common stock were issued to Cornell
      Capital Partners, LP. The 858,137 shares of common stock were issued at a 20%
      discount to the lowest weighted average price of our common stock for the five
      trading days immediately proceeding the conversion date. The convertible
      debenture liability was reduced by $126,665, from $3,556,665 to $3,430,000.
      Interest in the amount of $ 87,714 has been charged to interest expense during
      the quarter ended June 30, 2006.




**NOTE
      6: LEGAL PROCEEDINGS**





On
      January 13, 2005, the Company filed suit in Los Angeles County against its
      former CEO and Director, Jagan Narayanan, alleging breach of contract, fraud,
      breach of fiduciary duty and seeking equitable relief in the form of a
      declaratory judgment that the Company owes him no salary or any stock options.
      On February 18, 2005, Mr. Narayanan filed a counter-lawsuit against the Company
      in Alameda County, in Northern California. Mr. Narayanan’s case seeks damages
      and penalties for unpaid wages in an amount of $70,000 and seeks specific
      performance for the sale of shares pursuant to a stock option. Consolidation
      of
      the matters was sought and the court ruled in late May 2005 that venue was
      proper in Alameda Country (where the defendant lives). The case was subsequently
      transferred to Alameda Country (Alameda County Case is No. HG05-199556). The
      Company has engaged legal counsel to represent it in these matters and intends
      to vigorously defend itself against Mr. Narayanan’s allegations and to pursue
      its claims against Mr. Narayanan. As of June 30, 2006, the Company continues
its
      litigation with Jagan Narayanan. There have been no material developments for
      the period ended June 30, 2006.




10


**Item
      2. Management’s Discussion and Analysis or Plan of
      Operations**




**Overview**




aeroTelesis
      Inc. (“ aeroTelesis ”
or
      “ Company ”)
      is an
      emerging technology-driven service provider that will potentially enable
      satellite and wireless companies to maximize their bandwidth utilization.
      aeroTelesis’ technology partner, PhotronTM Technologies Ltd. (“ PhotronTM ”)
      is the
      developer of a proprietary technology platform called Ultra Spectral
      Modulation (“ USM TM ”). USM TM is
      a
      proprietary modulation technique that increases spectral efficiency in satellite
      and wireless applications. aeroTelesis has the exclusive license from PhotronTM
to distribute USM-related products and services. Upon the completion of the
      development of USM, aeroTelesis intends to offer USM-related products and
      services to major satellite operators, system integrators and wireless service
      providers on a global basis.




aeroTelesis
      is a Delaware corporation and is currently trading on the OTCBB under the symbol
      AOTL.




**Organizational
      History**




The
      Company was incorporated in Delaware on August 26, 1968 and until 1989 was
      involved in a number of different businesses. Those operations were ultimately
      unsuccessful and terminated. The Company was inactive and dormant from 1989
      through 2000. During this period, the Company did not have revenues, operating
      profits or any identifiable assets attributable to any industry segment. In
      2000, the Company began limited operations and began seeking opportunities
      to
      act as a consultant to companies interested in establishing telecom businesses
      in the Asia-Pacific region.




In
      October 2003, the Company acquired all issued and outstanding shares of
      Aerotelesis Philippines, Inc. (“ ATP ”),
      a
      British Virgin Islands company, in exchange for the issuance of 75,000,000
      shares of the Company’s common stock to the sole **** shareholder
      of ATP, Nations Mobile Networks Ltd. (“ Nations ”),
      formerly known as Aerotelesis Ltd. (“ ATL ”).
      As a
      result of this transaction, ATP became a wholly-owned subsidiary of the Company.
      Nations holds approximately 63.9% of the fully diluted outstanding shares of
      common stock of the Company.




In
      addition to ATP, the Company has two other subsidiaries: Aerotelesis IP
      Networks, Inc. and Aerotelesis Satellite Networks Inc., both Delaware
      corporations.




**Business
      Strategy**




At
      the
      present time, aeroTelesis has streamlined and focused its business model to
      align it with others in the satellite industry value chain, including satellite
      operators, system integrators, application developers and equipment
      manufacturers. Our initial strategy is to offer their exclusively licensed
      USM TM technology
      to satellite partners, providing them with a tool that enhances its bandwidth
      capacity. One of our main goals is to provide major satellite operators an
      ability to lower their ongoing capital expenditures by increasing the
      utilization of their current bandwidth by a factor of 25 times or
      more.




We
      intend
      to attempt to join forces with major satellite operators in some form of
      partnership whereby we provide the USM TM technology
      capability and support and the satellite operators provide the satellite
      capacity, sales, marketing, distribution, installation and customer support
      for
      our clients.




We
      renewed our revolving line of credit of $1,000,000 from Nations Mobile on
      July 12, 2006. We believe that additional sources of financing will come from
      private placements of common stock.




**Results
      of Operations For The Three Months Ended June 30, 2006 Compared To The Three
      Months Ended June 30, 2005**




***Revenues***




For
      the
      three months ended June 30, 2006, we had no revenues compared to revenues of
      $8,600 for three months ended June 30, 2005. Our lack of revenues for the three
      months ended June 30, 2006 is due to the expiration of a consulting agreement
      and our focus on the development of USM with our licensor,
      PhotronTM.




11


***Expenses***




Our
      expenses for the quarter ended June 30, 2006, were composed of depreciation
      expense of $7,542, insurance expense of $14,223, consulting fees of $99,503,
      amortization of loan costs of $244,566, payroll expenses of $52,154, rent
      expense of $22,340, travel expenses of $5,695, legal and professional fees
      of
      $122,646, operating expenses of $21,839, interest expense of $91,938, research
      and development expense of $28,000, non cash options/warrants expense of
      $101,283 and reimbursement of expenses of $30,000. Our expenses for the quarter
      ended June 30, 2005 consisted of legal and professional fees of $176,101,
      payroll expenses of $26,598, rent expense of $33,460, operating expenses of
      $25,910, travel expense of $1,642, depreciation expense of $7,335, non cash
      options/warrants expense of $478,575, interest expense of $4,520, and other
      income (expenses) of $628. The decrease in expenses of 3.7% for the quarter
      ended June 30, 2006 as compared to the expenses for the quarter ended June
      30,
      2005 is primarily due to decrease in non cash options/warrants expense and
      decrease in legal and professional fees.




***Net
      Loss***




We
      realized a net loss of $781,729 from operations for the three month period
      ended
      June 30, 2006 compared to a net loss of $744,913 for the three month period
      ended June 30, 2005. The increase in net loss of 4.9% for the three month period
      ended June 30, 2006 was due to the decrease in expenses described above. The
      net
      loss per share for the three month period ended June 30, 2006 was $0.01 per
      share compared to a net loss per share of $0.01 for the three month period
      ended
      June 30, 2005.




**Liquidity
      And Capital Resources**




As
      of
      June 30, 2006, we had negative working capital of $527,194 consisting of $17,471
      in current assets and $544,665 in current liabilities.




Our
      assets as of June 30, 2006 were $2,839,488 compared to total assets of
      $2,925,876 as of March 31, 2006. The difference is due to the increase in
      accumulated depreciation, decrease in cash, and decrease in prepaid insurance.
      As of June 30, 2006, our current assets were comprised of $1,190 of cash, and
      $16,281 or prepaid insurance. Our assets, in addition to our current assets,
      consisted of furniture and fixtures of approximately $65,620, net of
      depreciation, deposits of $26,784 and net licenses of approximately $2,698,781,
      which consists of three licenses listed under Other Assets. The three licenses
      are the AeroTelesis Philippines Inc. license for approximately $1,700,000 and
      two licenses from PhotronTM to utilize and deploy USM-based products and systems
      for satellite communication services in the Philippines. We paid $500,000 in
      2004 for each Photron license, respectively. The two Photron licenses are
      treated as having a useful life of ten years based upon the agreements we have
      with Photron which are for ten years with renewal provisions that are not
      automatic. The useful life of the AeroTelesis Philippines, Inc. license has
      been
      set at 15 years which is the term of years remaining on the franchise held
      by
      our local partner in the Philippines.




Our
      total
      liabilities as of June 30, 2006 were $1,771,346 compared to liabilities as
      of
      March 31, 2006 of $1,303,953. This increase of total liabilities of $467,393
      from the prior fiscal year ended March 31, 2006 is primarily due to an increase
      in accounts payable and accrued expenses of $210,717 and an increase in notes
      payable-non current portion of $151,194.




Total
      shareholders’ deficit accumulated in the development stage increased to
      $10,043,117 as of June 30, 2006 from $9,261,388 as of March 31, 2006. The
      increase in deficit of $781,729 is due to the net loss of $781,729 for the
      three
      month period ended June 30, 2006.




On
      February 8, 2006, we entered into a Securities Purchase Agreement with Cornell
      Capital Partners, LP whereby we agreed to amend and restate the secured
      convertible debentures we previously issued to Cornell Capital Partners, LP
      and
      Highgate House Funds, Ltd. Prior to entering into the Securities Purchase
      Agreement, we issued secured convertible debentures to Cornell Capital Partners,
      LP and Highgate House Funds, Ltd. in the principal aggregate amount equal to
      $3,000,000 which was funded on July 25, 2005. On February 8, 2006, Highgate
      House Funds, Ltd. assigned all of its interests in its debentures to Cornell
      Capital Partners, LP. Pursuant to the Securities Purchase Agreement, dated
      February 8, 2006, Cornell Capital Partners, LP provided us an additional
      $500,000 in secured convertible debentures which was funded on February 8,
      2006.
      The $3,000,000 in secured convertible debentures and the additional $500,000
      in
      secured convertible debentures were consolidated into new secured convertible
      debentures along with the accrued and unpaid interest. The debenture is secured
      by substantially all our assets. Cornell Capital Partners, LP has the ability
      to
      foreclose on our assets if an event of default occurs pursuant to the underlying
      documents and is not remedied by us or waived by Cornell Capital Partners,
      LP.  The
      secured convertible debentures have a 36-month term and accrue annual interest
      of 10%. The secured convertible debentures may be redeemed by us at any time,
      in
      whole or in part. We will pay a redemption premium of 20% of the amount redeemed
      in addition to the principle amount being redeemed plus interest. The secured
      convertible debentures are convertible at the holder’s option at a conversion
      price equal to 80% of the lowest volume weighted average price of our common
      stock for the five trading days immediately proceeding the conversion date.




12


In
      May
      and June 2006, a total of 858,137 shares of stock were issued to Cornell Capital
      pursuant to the Securities Purchase Agreement at a 20% discount to the lowest
      daily VWAP (Volume Weight Average Price) of the common stock during the 5
      trading days prior to the conversion date. No cash was received and the
      convertible debenture liability was reduced.




**Going
      Concern**




The
      accompanying financial statements have been prepared on a going concern basis
      of
      accounting which contemplates continuity of operations, realization of assets,
      liabilities, and commitments in the normal course of business. The accompanying
      financial statements do not reflect any adjustments that might result if the
      Company is unable to continue as a going concern. We have
      a working capital deficit with no revenues anticipated for the near term.
      Management believes we will need to raise approximately $2,000,000 in order
      to
      operate over the next 12 months. As shown in the accompanying financial
      statements, we also have incurred significant losses since inception. Our
      continuation as a going concern is dependent upon our ability to generate
      sufficient cash flow to meet our obligations on a timely basis and ultimately
      to
      attain profitability. We have limited capital with which to pursue our business
      plan. There can be no assurance that our future operations will be significant
      and profitable, or that we will have sufficient resources to meet our
      objectives. We may pursue either debt or equity financing or a combination
      of
      both, in order to raise sufficient capital to meet our financial requirements
      over the next twelve months and to fund our business plan. There is no assurance
      that we will be successful in raising additional funds.




**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet arrangements that have or are reasonably likely
      to
      have a current or future effect on our financial condition, changes in financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources that are material to investors.





**Item
      3. Controls and Procedures**





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





The
      Company’s Principal Executive Officer and Principal Accounting Officer, after
      evaluating the effectiveness of the Company’s disclosure controls and procedures
      (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
      the
      end of the period covered by this Report, have concluded that as of such date,
      the Company’s disclosure controls and procedures were adequate and effective to
      ensure that material information relating to the Company that is required to
      be
      disclosed by the Company in reports that it files or submits under the Exchange
      Act, is recorded, processed, summarized and reported within the time periods
      specified in the SEC rules and accumulated and communicated to the Company’s
      management, including its Principal Executive Officer and Principal Accounting
      and Financial Officer, to allow timely decisions regarding required
      disclosure.





**(b)**  **Changes
      in Internal Controls:**




In
      connection with the evaluation of the Company’s internal controls during the
      Company’s last fiscal quarter, the Company’s Principal Executive Officer and
      Principal Accounting Officer have determined that there are no changes to the
      Company’s internal controls over financial reporting that have materially
      affected, or are reasonably likely to materially effect, the Company’s internal
      controls over financial reporting.




13


**PART
      II**


**OTHER
      INFORMATION**




**Item
      1. Legal Proceedings**




On
      January 13, 2005, the Company filed suit in Los Angeles County against its
      former CEO and Director, Jagan Narayanan, alleging breach of contract, fraud,
      breach of fiduciary duty and seeking equitable relief in the form of a
      declaratory judgment that the Company owes him no salary or any stock options.
      On February 18, 2005, Mr. Narayanan filed a counter-lawsuit against the Company
      in Alameda County, in Northern California. Mr. Narayanan’s case seeks damages
      and penalties for unpaid wages and seeks specific performance for the sale
      of
      shares pursuant to a stock option. Consolidation of the matters was sought
      and
      the court ruled in late May 2005 that venue was proper in Alameda Country (where
      the defendant lives) so the Company’s case has been transferred there. The
      Company has engaged legal counsel to represent it in these matters and intends
      to vigorously defend itself against Mr. Narayanan’s allegations and to pursue
      its claims against Mr. Narayanan. As of June 30, 2006, the Company continues
      its
      litigation with Jagan Narayanan. There have been no material developments for
      the period ended June 30, 2006.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.**




On
      February 8, 2006, we entered into a Securities Purchase Agreement with Cornell
      Capital Partners, LP whereby we agreed to amend and restate the secured
      convertible debentures we previously issued to Cornell Capital Partners, LP
      and
      Highgate House Funds, Ltd. Prior to entering into the Securities Purchase
      Agreement, we issued secured convertible debentures to Cornell Capital Partners,
      LP and Highgate House Funds in the principal aggregate amount equal to
      $3,000,000 which was funded on July 25, 2005. On February 8, 2006, Highgate
      House Funds assigned all of its interests in its debentures to Cornell Capital
      Partners, LP. Pursuant to the Securities Purchase Agreement, dated February
      8,
      2006, Cornell Capital Partners, LP provided us an additional $500,000 in secured
      convertible debentures which was funded on February 8, 2006. The $3,000,000
      in
      secured convertible debentures and the additional $500,000 in secured
      convertible debentures were consolidated into new secured convertible debentures
      along with the accrued and unpaid interest. The debenture is secured by
      substantially all our assets. Cornell Capital Partners, LP has the ability
      to
      foreclose on our assets if an event of default occurs pursuant to the underlying
      documents and is not remedied by us or waived by Cornell Capital Partners,
      LP.
      The secured convertible debentures have a 36-month term and accrue annual
      interest of 10%. The secured convertible debentures may be redeemed by us at
      any
      time, in whole or in part. We will pay a redemption premium of 20% of the amount
      redeemed in addition to the principle amount being redeemed plus interest.
      The
      secured convertible debentures are convertible at the holder’s option at a
      conversion price equal to 80% of the lowest volume weighted average price of
      our
      common stock for the five trading days immediately proceeding the conversion
      date.




In
      May
      and June 2006, a total of 858,137 shares of stock were issued to Cornell Capital
      Partners, LP pursuant to the Securities Purchase Agreement, at a 20% discount
      to
      the lowest daily VWAP (Volume Weight Average Price) of the common stock during
      the 5 trading days prior to the conversion date. No cash was received and the
      convertible debenture liability was reduced.





**Item
      3. Defaults Upon Senior Securities.**




None.




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




None.




**Item
      5. Other Information.**




None.




14


**Item
      6. Exhibits.**




**(a)**  **The
      following exhibits are filed as part of this filing:**




**Exhibit
                No**
            
            **Description**
            
            **Location**3.1
            
            Certificate
                of Incorporation of aeroTelesis, Inc.
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on November 15,
                20053.2
            
            Amended
                By-Laws of aeroTelesis, Inc.
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on November 15,
                200510.1
            
            Amended
                and Restated Secured Convertible Debenture dated as of February 8,
                2006
                issued to Cornell Capital Partners, LP
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on February 21,
                200610.2
            
            Amended
                and Restated Secured Convertible Debenture dated as of February 8,
                2006
                issued to Cornell Capital Partners, LP
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on February 21,
                200610.3
            
            Secured
                Convertible Debenture dated as of July 25, 2005 issued to Cornell
                Capital
                Partners, LP
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on February 21,
                200610.4
            
            Amended
                and Restated Securities Purchase Agreement dated as of February 8,
                2006
                between the Company and Cornell Capital Partners, LP
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on February 21,
                200610.5
            
            Amended
                and Restated Security Agreement dated as of February 8, 2006 between
                the
                Company and Cornell Capital Partners, LP
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on February 21,
                200610.6
            
            Amended
                and Restated Pledge and Escrow Agreement dated February 8, 2006 among
                the
                Company, Cornell Capital Partners, LP and David Gonzalez,
                Esq.
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on February 21,
                200610.7
            
            Subsidiary
                Security Agreement dated as of February 8, 2006 between AeroTelesis
                Philippines, Inc. and Cornell Capital Partners, LP
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on February 21,
                200610.8
            
            Subsidiary
                Security Agreement dated as of February 8, 2006 between AeroTelesis
                Satellite Networks, Inc. and Cornell Capital Partners, LP
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on February 21,
                200610.9
            
            Subsidiary
                Security Agreement dated as of February 8, 2006 between AeroTelesis
                IP
                Networks, Inc. and Cornell Capital Partners, LP
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on February 21,
                200610.10
            
            Assignment
                Agreement dated as of February 8, 2006 between Cornell Capital Partners,
                LP and Highgate House Funds, Ltd.
            
            Filed
                as an exhibit to the Company’s Form 10-QSB filed on February 21,
                200610.11
            
            Warrant
                issued to Nutmeg Group, LLC
            
            Filed
                as an exhibit to the Company’s Form SB-2 filed on March 15,
                200631.1
            
            Certification
                by Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as
                adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
            
            Provided
                herewith31.2
            
            Certification
                by Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as
                adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
            
            Provided
                herewith32.1
            
            Certification
                by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
            
            Provided
                herewith32.2
            
            Certification
                by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
            
            Provided
                herewith


**(b)**  Reports
      of Form 8-K: None




15


**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, the
      Registrant has duly caused this Report to be signed in its behalf by the
      undersigned, thereunto duly authorized.


AEROTELESIS,
                INCAugust
                14, 2006
            By:
            /s/ Milton
              HahnMilton Hahn
              Chief
                  Executive Officer


August
                14, 2006
            By:
            /s/ Joseph
              GutierrezJoseph Gutierrez
              President,
                  Chief Financial Officer and PrincipalAccounting
                  Officer






16