UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549




**FORM
      10-QSB**




(Mark
                One)x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
              for
                the quarterly period ended December 31, 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 December 31, 2006Common
                stock, $0.00008 par value
            98,616,294




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 DECEMBER 31, 2006 (UNAUDITED) AND MARCH 31,
                2006
            3STATEMENTS
                OF OPERATIONS
            4STATEMENTS
                OF CASH FLOWS
            5NOTES
                TO FINANCIAL STATEMENTS
            6ITEM
                2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            12ITEM
                3. CONTROLS AND PROCEDURES.
            14PART
                II: OTHER INFORMATION
            15ITEM
                1. LEGAL PROCEEDINGS
            15ITEM
                2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS
            15ITEM
                3. DEFAULTS UPON SENIOR SECURITIES
            15ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            16ITEM
                5. OTHER INFORMATION
            16ITEM
                6. EXHIBITS AND REPORTS ON FORM 8-K
            16SIGNATURES
            18




2





**PART
      I: FINANCIAL INFORMATION**




**Item
      1. Financial Statements**




**AEROTELESIS,
      INC.**


**A
      DEVELOPMENT STAGE ENTERPRISE**


**BALANCE
      SHEETS**


**December
                  31**
              
              **March
                  31****2006**
              
              **2006****(Unaudited)****ASSETS**Current
                  AssetsCash
              
              $
              1,273
              
              $
              67,823Other
                  Receivable
              
              
              162
              
              
              -Prepaid
                  Insurance
              
              
              -
              
              
              28,493Total
                  Current Assets
              
              
              1,435
              
              
              96,316Fixed
                  Assets:Equipment
                  under Capital Lease
              
              
              30,832
              
              
              30,832Furniture
                  & Fixtures
              
              
              120,022
              
              
              120,022Accumulated
                  Depreciation
              
              
              (69,486
              )
              
              (46,859
              )Total
                  Fixed Assets
              
              
              81,368
              
              
              103,995Other
                  Assets:Deposits
              
              
              26,784
              
              
              26,784Licenses,
                  net
              
              
              2,698,781
              
              
              2,698,781Total
                  Other Assets
              
              
              2,725,565
              
              
              2,725,565Total
                  Assets
              
              $
              2,808,368
              
              $
              2,925,876**LIABILITIES**Current
                  LiabilitiesAccounts
                  Payable and Accrued Expenses
              
              $
              956,025
              
              $
              312,677Deposits
                  for common stock
              
              
              492,000
              
              
              -Notes
                  Payable - Current
              
              
              206,031
              
              
              21,360Capital
                  Lease Payable - Current
              
              
              9,273
              
              
              12,330Total
                  Current Liabilities
              
              
              1,663,329
              
              
              346,367Long-Term
                  LiabilitiesConvertible
                  Debenture
              
              
              3,240,000
              
              
              3,556,665Loan
                  Costs, net of accumulated amortization
              
              
              (1,900,028
              )
              
              (2,633,726
              )Capital
                  Lease Payable - Non-Current
              
              
              30,641
              
              
              34,647Total
                  Long-Term Liabilities
              
              
              1,370,613
              
              
              957,586Total
                  Liabilities
              
              
              3,033,942
              
              
              1,303,953Commitments
                  and Contingencies**STOCKHOLDERS'
                  EQUITY**Preferred
                  Stock2,000,000
                  authorized, par value $.001no
                  shares issued and outstanding
              
              
              -
              
              
              -Common
                  Stock200,000,000
                  authorized, par value $.0000898,616,294
                  and 88,397,794 shares issued andoutstanding
              
              
              7,889
              
              
              7,072Additional
                  Paid-in-Capital
              
              
              11,546,042
              
              
              10,876,239Deficit
                  accumulated during the development stage
              
              
              (11,779,505
              )
              
              (9,261,388
              )Total
                  Stockholders' Equity
              
              
              (225,574
              )
              
              1,621,923Total
                  Liabilities and Stockholders' Equity
              
              $
              2,808,368
              
              $
              2,925,876


*See
      accompanying notes.*


3





**AEROTELESIS,
      INC.**


**A
      DEVELOPMENT STAGE ENTERPRISE**


**STATEMENTS
      OF OPERATIONS**


**(UNAUDITED)**


**Cumulative****During
                  the****Three
                  Months Ended**
              
              **Nine
                  Months Ended**
              
              **Development**
                  **Stage****December
                  31**
              
              **December
                  31**
              
              **Through****2006**
              
              **2005**
              
              **2006**
              
              **2005**
              
              **12/31/06****Revenues:**Revenues
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              8,600
              
              $
              478,090Total
                  Revenues
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              8,600
              
              $
              478,090**Expenses:**Cost
                  of Revenues
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              17,349Options/Warrants
                  Expense - Non Cash
              
              
              96,873
              
              
              1,349,467
              
              
              290,619
              
              
              1,706,697
              
              
              2,053,427Non
                  Cash Consulting Fees
              
              
              28,000
              
              
              -
              
              
              48,000
              
              
              -
              
              
              1,393,900Research
                  & Development
              
              
              320,000
              
              
              460,297
              
              
              348,000
              
              
              1,010,297
              
              
              1,608,000Legal
                  & Professional Fees
              
              
              45,680
              
              
              595,138
              
              
              224,307
              
              
              1,405,813
              
              
              1,953,122Payroll
                  Expenses
              
              
              44,414
              
              
              1,076,825
              
              
              133,968
              
              
              1,177,357
              
              
              622,227Travel
              
              
              -
              
              
              47,144
              
              
              5,871
              
              
              87,214
              
              
              455,184Operating
                  Expenses
              
              
              7,794
              
              
              30,717
              
              
              44,028
              
              
              79,183
              
              
              393,295Rent
              
              
              19,585
              
              
              31,325
              
              
              61,866
              
              
              96,010
              
              
              352,953Consulting
                  Fees
              
              
              95,000
              
              
              -
              
              
              294,503
              
              
              -
              
              
              542,946Depreciation
                  Expense
              
              
              7,543
              
              
              7,492
              
              
              22,628
              
              
              22,319
              
              
              69,486Insurance
              
              
              -
              
              
              -
              
              
              26,494
              
              
              -
              
              
              57,826Total
                  Expenses
              
              
              664,889
              
              
              3,598,405
              
              
              1,500,284
              
              
              5,584,890
              
              
              9,519,715Net
                  Loss from Operations
              
              $
              (664,889
              )
              $
              (3,598,405
              )
              $
              (1,500,284
              )
              $
              (5,576,290
              )
              $
              (9,041,625
              )**Other
                  Income (Expenses):**Reimbursement
                  of Expenses
              
              $
              -
              
              $
              -
              
              $
              (10,000
              )
              $
              -
              
              $
              (10,000
              )Amortization
                  of Loan Costs
              
              
              (244,566
              )
              
              -
              
              
              (733,698
              )
              
              -
              
              
              (2,066,984
              )Interest
                  Expense
              
              
              (87,456
              )
              
              (545,601
              )
              
              (274,355
              )
              
              (814,044
              )
              
              (462,401
              )Other
                  Income (Expenses)
              
              
              217
              
              
              751
              
              
              219
              
              
              3,564
              
              
              (198,495
              )Total
                  Other Income (Expenses)
              
              
              (331,805
              )
              
              (544,850
              )
              
              (1,017,834
              )
              
              (810,480
              )
              
              (2,737,880
              )Loss
                  Before Income Tax Expense
              
              
              (996,694
              )
              
              (4,143,255
              )
              
              (2,518,118
              )
              
              (6,386,770
              )
              
              (11,779,505
              )**Provision
                  for Income Taxes:**Provision
                  for Income Taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  Loss
              
              $
              (996,694
              )
              $
              (4,143,255
              )
              $
              (2,518,118
              )
              $
              (6,386,770
              )
              $
              (11,779,505
              )Basic
                  and Diluted Loss Per Common Share
              
              
              (0.01
              )
              
              (0.05
              )
              
              (0.03
              )
              
              (0.07
              )Weighted
                  Average number of Common Shares used
                  in per share calculations
              
              
              94,735,586
              
              
              87,514,461
              
              
              91,378,557
              
              
              85,468,912





*See
      accompanying notes.*




4





**AEROTELESIS,
      INC.**


**A
      DEVELOPMENT STAGE ENTERPRISE**


**STATEMENTS
      OF CASH FLOWS**


**(UNAUDITED)**


**Cumulative****During
                  the****Nine
                  Months Ended**
              
              **Development**
                  **Stage****December
                  31**
              
              **December
                  31**
              
              **Through****2006**
              
              **2005**
              
              **12/31/06**Cash
                  Flows from Operating Activities:Net
                  Loss
              
              $
              (2,518,118
              )
              $
              (6,386,770
              )
              $
              (11,779,505
              )Adjustment
                  to reconcile net income(loss) to net cashprovided
                  by (used in) operating activitiesDepreciation
              
              
              22,628
              
              
              22,319
              
              
              69,487Shares
                  for Services
              
              
              48,000
              
              
              1,621,320
              
              
              1,802,957Options
                  for Services
              
              
              290,619
              
              
              1,706,697
              
              
              2,053,427Amortization
                  of Loan Cost
              
              
              733,698
              
              
              754,996
              
              
              2,066,984Other
                  Non-Cash Expenses
              
              
              -
              
              
              -
              
              
              182,754Changes
                  in operating assets and liabilities:Receivables
              
              
              (162
              )
              
              3,535
              
              
              53,838Deposits
              
              
              -
              
              
              (26,949
              )
              
              (26,784
              )Prepaid
                  Insurance
              
              
              28,492
              
              
              -
              
              
              18,095Related
                  Party Payable
              
              
              -
              
              
              (8,600
              )
              
              8,600Related
                  Party Receivable
              
              
              -
              
              
              (25,000
              )
              
              -Other
                  Current Assets
              
              
              -
              
              
              (44,978
              )
              
              -Accounts
                  Payable and Accrued Expenses
              
              
              658,685
              
              
              94,875
              
              
              1,009,572Net
                  Cash Used In Operating Activities
              
              $
              (736,158
              )
              $
              (2,288,555
              )
              $
              (4,540,575
              )Cash
                  Flows from Investing Activities:Capital
                  Expenditures
              
              
              -
              
              
              (58,618
              )
              
              (89,436
              )Licenses
              
              
              -
              
              
              -
              
              
              (67,613
              )Net
                  Cash Used in Investing Activities
              
              $
              -
              
              $
              (58,618
              )
              $
              (157,049
              )Cash
                  Flows from Financing Activities:Common
                  Stock
              
              
              -
              
              
              53,050
              
              
              96,040Deposits
                  for Common Stock
              
              
              492,000
              
              
              -
              
              
              492,000Convertible
                  Debenture
              
              
              -
              
              
              2,519,550
              
              
              2,900,758Note
                  Payable
              
              
              -
              
              
              (43,302
              )
              
              20,306Capital
                  Leases Paid
              
              
              (7,063
              )
              
              (136,500
              )
              
              (20,213
              )Revolving
                  Line of Credit Advance
              
              
              184,671
              
              
              141,986
              
              
              1,326,637Revolving
                  Line of Credit Payments
              
              
              -
              
              
              -
              
              
              (136,500
              )Note
                  Payable Directors
              
              
              -
              
              
              -
              
              
              19,869Stock
                  Subscrition Receivable
              
              
              -
              
              
              7,500
              
              
              -Net
                  Cash Provided from Financing Activities
              
              $
              669,608
              
              $
              2,542,284
              
              $
              4,698,897Net
                  Increase (Decrease) in Cash
              
              $
              (66,550
              )
              $
              195,111
              
              $
              1,273Cash
                  Balance, Begin Period
              
              
              67,823
              
              
              1,913
              
              
              -Cash
                  Balance, End Period
              
              $
              1,273
              
              $
              197,024
              
              $
              1,273Supplemental
                  Disclosures:Cash
                  Paid for interest
              
              $
              9,337
              
              $
              42,100
              
              $
              127,036Cash
                  Paid for income taxes
              
              $
              -
              
              $
              -
              
              $
              -Non-Cash
                  Transaction:Stock
                  Issued for Services
              
              $
              48,000
              
              $
              467,567
              
              $
              1,830,957Stock
                  Issued for Debt
              
              $
              -
              
              $
              -
              
              $
              1,092,139Stock
                  Issued to Pay for Accounts Payable
              
              $
              15,336
              
              $
              -
              
              $
              72,877Stock
                  Issued as Fees to Raise Capital
              
              $
              -
              
              $
              -
              
              $
              1,400,000Long
                  Term Debt Used to Acquire Equipment
              
              $
              -
              
              $
              50,680
              
              $
              61,418Stock
                  Issued for Convertible Debt
              
              $
              316,666
              
              $
              -
              
              $
              316,666




*See
      accompanying notes.*


5





**AEROTELESIS,
      INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**


**(UNAUDITED)**





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





**General**





The
      unaudited interim financial statements of aeroTelesis, Inc. (the “Company”) as
      of December 31, 2006 for the three and nine months ended December 31, 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 December
      31, 2006, and the results of its operations for the three and nine months ended
      December 31, 2006 and 2005 and the developmental period, and its cash flows
      for
      the nine months ended December 31, 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 58,872,445 shares (59.7%) of the 98,616,294 fully diluted
      outstanding shares of common stock of the Company as of December 31,
      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**


**DECEMBER
      31, 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 59.7% of the
      common shares of the Company, and are 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 98,616,294 common shares issued and outstanding and no preferred shares
      issued and outstanding as of December 31, 2006.





During
      the quarter ended December 31, 2006, the Company issued the following shares
      of
      its common stock:




**·**
            On
                October 11, 2006, a total of 294,118 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.





**·**
            On
                November 3, 2006, a total of 4,207,921 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.





**·**
            On
                November 30, 2006, a total of 4,074,074 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**


**DECEMBER
      31, 2006**


**(UNAUDITED**




**NOTE
      2: COMMON STOCK (CON’T)**





**·**
            On
                December 21, 2006, a total of 576,000 shares of common stock were
                cancelled for consulting services. The shares were cancelled because
                a
                consulting contract was cancelled.




**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. Compensation 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 a straight-line basis over the
      vesting period of the grants, the following table illustrates how stock-based
      compensation costs would have impacted our net income and earnings per common
      share for the three months and nine months ended December 31, 2005:




Three
                Months Ended
              December
                31, 2005
            
            Nine
                Months Ended
              December
                31, 2005(Unaudited)
            
            (Unaudited)Net
                Income (Loss) as Reported
            
            $
            (4,143,255
            )
            $
            (6,386,770
            )Deduct:
                Stock Based CompensationCosts,
                Net of Taxes Under SFAS 123
            
            
            (669,000
            )
            
            (1,376,568
            )Pro
                Forma Net Income (Loss)
            
            $
            (4,812,255
            )
            $
            (7,763,338
            )Per
                Share Information:Basic,
                as Reported
            
            $
            (0.05
            )
            $
            (0.07
            )Basic,
                Pro Forma
            
            $
            (0.05
            )
            $
            (0.09
            )Diluted,
                as Reported
            
            $
            (0.05
            )
            $
            (0.07
            )Diluted,
                Pro Forma
            
            $
            (0.05
            )
            $
            (0.09
            )




There
      were no options issued during the quarter ended December 31, 2006.





(continued)


8





**AEROTELESIS,
      INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 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.
      The balance of the note as of December 31, 2006 is $206,031 with


$8,630
      in
      accrued interest.





**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
      of which $1,500,000 was funded on July 25, 2005 and $1,500,000 was funded on
      October 27, 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 December
      31, 2006.




Number
                of Warrants Outstanding
            
            Exercise
                Price
            
            Maturity
                Date300,000
            
            3.00
            
            7/27/10150,000
            
            4.00
            
            7/27/10500,000
            
            1.00
            
            2/07/11700,000
            
            0.75
            
            2/07/111,000,000
            
            0.50
            
            2/07/11TOTAL
            
            
            2,650,000




The
      Company received $1,500,000 at closing on July 25, 2005. On October 27, 2005,
      the Company received a second tranche in the amount of $1,500,000. On
      February 7, 2006, the Company received a third tranche in the amount of
      $500,000.




(continued)


9





**AEROTELESIS,
      INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**


**(UNAUDITED)**





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




The
      warrants were valued at $1,231,606 and the conversion feature was valued at
      $2,120,773, both of which were 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 December 31,
      2006.




During
      the quarter ended December 31, 2006, a total of 8,576,113 shares of common
      stock
      were issued to Cornell Capital Partners, LP. These 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 $165,000, from $3,405,000 to
      $3,240,000. Interest in the amount of $81,870 has been charged to interest
      expense during the quarter ended December 31, 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 December 31, 2006, the Company continues
      its litigation with Jagan Narayanan. There have been no material developments
      for the quarter ended December 31, 2006.




***Neil
      Sloane v. aeroTelesis (f/k/a Pacific Realm, Inc.) and William H.B.
      Chan.*** (Los
      Angeles Superior Court, County of Orange, Case No. BC337219)




In
      July
      of 2005, Plaintiff Neil Sloane filed suit against us seeking damages of $135,000
      and seeking an action for declaratory and injunctive relief, conversion,
      conspiracy and negligence against us and William H.B. Chan. The parties settled
      on March 9, 2006 in Century City, California, which settlement was expensed
      by
      the Company for the fiscal year ended March 31, 2006. On August 14, 2006,
      Plaintiff obtained a judgment against the Company in connection with the
      Company’s non-performance of certain conditions of the Settlement Agreement,
      entered into on March 9, 2006. Pursuant to the terms of the Stipulation for
      Judgment granted to Plaintiff, the court awarded Plaintiff a judgment of $95,000
      and ordered the turn-over of certain collateral held in the possession of
      defendant’s counsel.




**NOTE
      7: RECENT ACCOUNTING PRONOUNCEMENTS**





In
      June 2006, the Financial Accounting Standards Board ratified EITF Issue
      No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental
      Authorities Should be Presented in the Income Statement.” The EITF provides
      guidance on the proper presentation of tax assessed by a governmental authority
      that is directly imposed on a revenue-producing transaction between a seller
      and
      a customer and requires disclosure of the Company’s accounting policy decision.
      The consensus becomes effective for periods beginning after December 15,
      2006. The Company is evaluating the impact of this interpretation and does
      not
      anticipate a significant impact to its financial statements upon implementation.





In
      June 2006, the Financial Accounting Standards Board issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes.” Interpretation
      No. 48 prescribes a recognition threshold and measurement attribute for
      financial statement recognition and measurement of a tax position taken, or
      expected to be taken, in a tax return. The Interpretation also provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. This Interpretation is effective for fiscal
      years beginning after December 15, 2006. The Company is evaluating the
      impact of this interpretation and does not anticipate a significant impact
      to
      its financial statements upon implementation.





(continued)


10





**AEROTELESIS,
      INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**


**(UNAUDITED)**





**NOTE
      7:** **RECENT
      ACCOUNTING PRONOUNCEMENTS** **(CONTINUED)**





In
      September 2006, the Financial Accounting Standards Board issued Staff
      Accounting Bulletin No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements.” SAB 108 requires registrants to quantify misstatements using both
      the balance sheet and income-statement approaches and to evaluate whether either
      approach results in quantifying an error that is material in light of relevant
      quantitative and qualitative factors. The requirements are effective for annual
      financial statements covering the first fiscal year ending after
      November 15, 2006. The Company is evaluating the impact of this
      interpretation and does not anticipate a significant impact to its financial
      statements upon implementation.





In
      September 2006, the Financial Accounting Standards Board issued Statement
      of Financial Accounting Standard (“SFAS”) No. 158 “Employer’s Account for
      Defined Benefit Pension and Other Post-retirement Plans.” SFAS 158 requires
      employers to recognize on their balance sheets the funded status of pension
      and
      other post-retirement benefit plans as of December 31, 2006, for the
      calendar-year public companies. SFAS 158 will also require fiscal-year-end
      measurements of plan assets and benefit obligations, eliminating the use of
      earlier measurement dates currently permissible. The Company does not have
      a
      defined benefit pension plan, nor does it have any other post-retirement plans
      and therefore does not anticipate a significant impact to its financial
      statements upon implementation.





In
      September 2006, the Financial Accounting Standards Board issued Statement
      of Financial Accounting Standard (“SFAS”) No. 157 “Share-Based Payment.”
SFAS 157 establishes a single authoritative definition of fair value, sets
      out a
      framework for measuring fair value, and requires additional disclosures about
      fair-value measurements. SFAS 157 applies only to fair-value measurements that
      are already required or permitted by other accounting standards. The Statement
      is effective for fair-value measures already required or permitted by other
      standards for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      Company is evaluating the impact of this interpretation and does not anticipate
      a significant impact to its financial statements upon implementation.





In
      March 2006, the FASB issued FAS 156, “Accounting for Servicing of Financial
      Assets — an Amendment of FASB Statement No. 140.” This standard clarifies
      when to separately account for servicing rights, requires servicing rights
      to be
      separately recognized initially at fair value, and provides the option of
      subsequently accounting for servicing rights at either fair value or under
      the
      amortization method. The standard is effective for fiscal years beginning after
      September 15, 2006 but can be adopted early as long as financial statements
      for
      the fiscal year in which early adoption is elected, including interim
      statements, have not yet been issued. The Company is evaluating the impact
      of
      this interpretation and does not anticipate a significant impact to its
      financial statements upon implementation.





In
      February 2006, the FASB issued FAS 155, “Accounting for Certain Hybrid
      Financial Instruments — an amendment of FASB Statements No. 133 and 140.”
This statement permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that would otherwise have to
      be
      accounted for separately. The new statement also requires companies to identify
      interests in securitized financial assets that are freestanding derivatives
      or
      contain embedded derivatives that would have to be accounted for separately,
      clarifies which interest-and principal-only strips are subject to Statement
      No. 133, and amends Statement No. 140 to revise the conditions of a
      qualifying special purpose entity due to the new requirement to identify whether
      interests in securitized financial assets are freestanding derivatives or
      contain embedded derivates. This statement is effective for all financial
      instruments acquired or issued after the beginning of an entity’s first fiscal
      year that begins after September 15, 2006. The Company is evaluating the
      impact of this interpretation and does not anticipate a significant impact
      to
      its financial statements upon implementation.


11




**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 59.7% 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. There is no assurance that we will be successful
      in
      raising additional funds.




**Results
      of Operations For The Three and Nine Months Ended December 31, 2006 Compared
      To
      The Three and Nine Months Ended December 31, 2005**




***Revenues***




For
      the
      quarter ended December 31, 2006, we had no revenues compared to no revenues
      for
      the quarter ended December 31, 2005. For the nine months ended December 31,
      2006, we had no revenues compared to $8,600 in revenues for the nine months
      ended December 31, 2005. Our lack of revenues for the three and nine months
      ended December 31, 2006 is due to the discontinuation of consulting services
      and
      our focus on the development of USM with our licensor,
      PhotronTM.


12




***Expenses***




Our
      expenses for the quarter ended December 31, 2006 consisted of non-cash
      options/warrants expense of $96,873, non-cash consulting fees of $28,000,
      research and development fees of $320,000, legal and professional fees of
      $45,680, payroll expenses of $44,414, operating expenses of $7,794, rent expense
      of $19,585, consulting fees of $95,000, depreciation expense of $7,543,
      amortization of loan costs of $244,566 and interest expense of $87,456. The
      decrease in expenses of $3,146,561 for the quarter ended December 31, 2006
      as
      compared to the expenses for the quarter ended December 31, 2005 is primarily
      due to decreases in non-cash options/warrants expenses, legal and professional
      fees, and payroll expenses.




We
      had
      total expenses of $2,518,118 for the nine months ended December 31, 2006
      compared to total expenses of $6,395,370 for the nine months ended December
      31,
      2005. The decrease in expenses of 60.6% is primarily due to the decreases in
      non-cash options/warrants expense, research and development expenses, legal
      and
      professional fees, and payroll expenses.




***Net
      Loss***




We
      realized a net loss of $996,694 for the three month period ended December 31,
      2006 compared to a net loss of $4,143,255 for the three month period ended
      December 31, 2005. The decrease in net loss of 75.9% for the three month period
      ended December 31, 2006 was due to the decrease in expenses described above.
      The
      net loss per share for the three month period ended December 31, 2006 was $0.01
      per share compared to a net loss per share of $0.05 for the three month period
      ended December 31, 2005.




We
      realized a net loss of $2,518,118 for the nine month period ended December
      31,
      2006 compared to a net loss of $6,386,770 for the nine month period ended
      December 31, 2005. The decrease in net loss of 60.6% for the nine month period
      ended December 31, 2006 was due to the decrease in expenses described above.
      The
      net loss per share for the nine month period ended December 31, 2006 was $0.03
      per share compared to a net loss per share of $0.07 for the nine month period
      ended December 31, 2005.




**Liquidity
      And Capital Resources**




As
      of
      December 31, 2006, we had negative working capital of $1,661,894 consisting
      of
      $1,435 in current assets and $1,663,329 in current liabilities.




Our
      assets as of December 31, 2006 were $2,808,368 compared to total assets of
      $2,925,876 as of March 31, 2006. The difference is primarily due to the increase
      in accumulated depreciation, decrease in cash, and decrease in prepaid
      insurance. As of December 31, 2006, our current assets were comprised of $1,273
      in cash and $162 of other receivables. Our assets, in addition to our current
      assets, consisted of fixed assets of approximately $81,368, net of depreciation,
      deposits of $26,784 and net licenses of $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 December 31, 2006 were $3,033,942 compared to liabilities
      as
      of March 31, 2006 of $1,303,953. This increase of total liabilities of
      $1,729,989 from the prior fiscal year ended March 31, 2006 is primarily due
      to
      an increase in accounts payable and accrued expenses of $643,348, an increase
      in
      deposits for common stock of $492,000, an increase in related party payable
      of
      $184,671 and an increase in total long term liabilities of $413,027.




Total
      shareholders’ deficit accumulated in the development stage increased to
      $11,779,505 as of December 31, 2006 from $9,261,388 as of March 31, 2006. The
      increase in deficit of $2,518,117 is due to the net loss of $2,518,118 for
      the
      six month period ended December 31, 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.


13




On
      October 11, 2006, a total of 294,118 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.




On
      November 3, 2006, a total of 4,207,921 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.




On
      November 30, 2006, a total of 4,074,074 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.




**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.


14





**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 December 31, 2006, the Company continues
      its litigation with Jagan Narayanan. There have been no material developments
      for the period ended December 31, 2006.




***Neil
      Sloane v. aeroTelesis (f/k/a Pacific Realm, Inc.) and William H.B.
      Chan*** **.
      (Los Angeles Superior Court, County of Orange, Case No. BC337219)**




In
      July
      of 2005, Plaintiff Neil Sloane filed suit against us seeking damages of $135,000
      and seeking an action for declaratory and injunctive relief, conversion,
      conspiracy and negligence against us and William H.B. Chan. The parties settled
      on March 9, 2006 in Century City, California, which settlement was expensed
      by
      the Company for the fiscal year ended March 31, 2006. On August 14, 2006,
      Plaintiff obtained a judgment against the Company in connection with the
      Company’s non-performance of certain conditions of the Settlement Agreement,
      entered into on March 9, 2006. Pursuant to the terms of the Stipulation for
      Judgment granted to Plaintiff, the court awarded Plaintiff a judgment of $95,000
      and ordered the turn-over of certain collateral held in the possession of
      defendant’s counsel.




**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 of which $1,500,000 was funded on July 25, 2005 and $1,500,000 on
      October 27, 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.




On
      October 11, 2006, a total of 294,118 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.




On
      November 3, 2006, a total of 4,207,921 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.




On
      November 30, 2006, a total of 4,074,074 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.




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




None.


15




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




None.




**Item
      5. Other Information.**




None.




**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,
                2006




16





**Exhibit
                No**
            
            **Description**
            
            **Location**10.11
            
            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




17




**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,
                INCFebruary
                16, 2007
            By:
            */s/
              Milton Hahn*Milton
                Hahn
              Chief
                  Executive Officer


February
                16, 2007
            By:
            */s/
              Joseph Gutierrez*Joseph
                  Gutierrez
                  President,
                    Chief Financial Officer and Principal
                  Accounting
                      Officer






18