**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-KSB**
 
 x
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **For
        the fiscal year ended March 31, 2006**
 
 o
              **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** **.**
 (Name
        of
        Small Business Issuer in its charter)
 
 **Delaware**
              **95-2554669**(State
                  or other jurisdiction of
              (IRS
                  Employerincorporation
                  or organization)
              Identification
                  Number)**11150
                  West Olympic Boulevard, Suite 860, Los Angeles, CA
                  90064**(Address
                  of principal executive offices) (Zip Code)
 
 **Issuer’s
                  telephone number:**
              **(310)
                  235-1727.****Securities
                  registered pursuant to Section 12(b) of the Act:**
              **None.****Name
                  of each exchange on which registered:**
              **None.****Securities
                  registered pursuant to Section 12(g) of the Act:**
              **Common
                  Stock.**
 **Check
        whether the Issuer (1) has filed all reports required to be filed by Section
        13
        or 15(d) of the Exchange Act, as amended, during the preceding 12 months
        (or
        such shorter period of that the Registrant was required to file such reports),
        and (2) has been subject to such filing requirements for the past 90 days.
        Yes** **xNo
o**
  **Check
        if there is no disclosure of delinquent filers to Item 405 of Regulation
        S-B
        contained in this form, and if no disclosure will be contained, to the best
        of
        the Registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K.** o
  **State
        Issuer’s Revenues for its most recent fiscal year:**  **$8,600.00.**
  **The
        number of shares outstanding of the Company’s $.00008 Par Value Common Stock, as
        of March 31, 2006, was 88,397,794. The aggregate number of shares of the
        voting stock held by non-affiliates on March 31, 2006 was
        9,654,787.**
  
  **TABLE
        OF CONTENTS**
 
 PART
                  I
              2ITEM 1.
              DESCRIPTION
                  OF BUSINESS
              
              2ITEM 2.
              DESCRIPTION
                  OF PROPERTIES
              
              11ITEM 3.
              LEGAL
                  PROCEEDINGS
              
              11ITEM 4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              12PART
                  II
              
              
              13ITEM 5.
              MARKET
                  FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER
                  MATTERS
              
              13ITEM 6.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              
              15ITEM 7.
              FINANCIAL
                  STATEMENTS
              
              19ITEM 8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
              
              19ITEM 8A.
              CONTROLS
                  AND PROCEDURES
              
              19ITEM 8B.
              OTHER
                  INFORMATION
              
              20PART
                  III
              
              
              21ITEM 9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                  SECTION
                  16(A) OF THE EXCHANGE ACT
              
              21ITEM 10.
              EXECUTIVE
                  COMPENSATION
              
              23ITEM 11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
              
              25ITEM 12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS
              
              27ITEM 13.
              EXHIBITS
                  AND REPORTS ON FORM 8-K
              
              27ITEM 14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              
              29SIGNATURES
              
              30
  i
  **FORWARD-LOOKING
        STATEMENTS AND ASSOCIATED RISKS**
  Information
        included or incorporated by reference in this filing may contain forward-looking
        statements within the meaning of Section 27A of the Securities Act of 1933,
        as
        amended (the “ Securities
        Act ”)
        and
        Section 21E of the Securities Exchange Act of 1934, as amended (the
“ Exchange
        Act ”).
        This
        information may involve known and unknown risks, uncertainties and other
        factors
        which may cause our actual results, performance or achievements to be materially
        different from the future results, performance or achievements expressed
        or
        implied by any forward-looking statements. Forward-looking statements, which
        involve assumptions and describe our future plans, strategies and expectations,
        are generally identifiable by use of the words “may,” “will,” “should,”
“expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the
        negative of these words or other variations on these words or comparable
        terminology.
  This
        filing contains forward-looking statements, including statements regarding,
        among other things, (a) our projected sales and profitability, (b) our
        growth strategies, (c) our future financing plans and (d) our anticipated
        needs for working capital. These statements may be found under “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations” and
“Business,” as well as in this prospectus generally. Actual events or results
        may differ materially from those discussed in forward-looking statements
        as a
        result of various factors, including, without limitation, the risks outlined
        under “Risk Factors” and matters described in this filing generally. In light of
        these risks and uncertainties, there can be no assurance that the
        forward-looking statements contained in this filing will in fact
        occur.
  1
  **PART
        I**
  **ITEM
        1. DESCRIPTION OF BUSINESS**
  **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.OB.
  **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 83.85% 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. The Company’s 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 the main goals of aeroTelesis 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.
  The
        Company intends to attempt to join forces with major satellite operators
        in some
        form of partnership whereby aeroTelesis provides the USM TM technology
        capability and support and the satellite operators provide the satellite
        capacity, sales, marketing, distribution, installation and customer support
        for
        its clients.
  **USM** **TM** **Technology
        Overview**
  The
        Company’s core wireless technology platform is a unique and proprietary
        modulation technology known as USMTM. USM TM is
        designed to substantially increase bandwidth efficiency. USM TM is
        distinct and unrelated to existing modulations standards, including those
        of
        Global System for Mobile communication (“ GSM ”)
        and
        Code Division Multiple Access (“ CDMA ”).
  In
        contrast to other traditional wireless technologies that rely on conventional
        modulation methods and broad frequency spectrum requirements, USM TM represents
        an original and fundamental shift for wireless technology and the communications
        industry. Specifically, it is designed to greatly increase spectral efficiencies
        in wireless applications and provide for high-speed and high-capacity networks
        at substantially lower costs, relative to existing broadband wireless
        technologies.
  2
  We
        believe that USM TM is
        in the
        development stages of its chipset. Demonstrations have shown that
        USM TM has
        the
        ability to transmit random data at speeds of 5 megabits per second (Mbps)
        through channels as narrow as 50 KHz in bandwidth. This is equivalent to
        100
        bits per second per hertz of data transmission speed. Traditional modulation
        techniques generally transmit data at rates of 1 to 4 bits per second per
        hertz.
        In 50 KHz of bandwidth, this would amount to a maximum data rate of a few
        hundred kilobits per second (Kbps), whereas USM TM is
        5
        Mbps.
  USM TM can
        be
        applied in the satellite communication industry. A typical direct broadcast
        satellite (DBS) operator will utilize geosynchronous satellites with
        transponders transmitting in the Ku-band frequencies with approximately 24
        MHz
        to 27 MHz of bandwidth. With current technology, a Ku-band transponder with
        24
        MHz of bandwidth can support up to 8 standard-definition, digital TV channels,
        each transmitting up to 3 Mbps downstream. Uplink speeds are significantly
        lower. USM TM technology
        could provide at least 80 channels per Ku-band transponder, transmitting
        at
        least 5 Mbps downstream in channels that are as narrow as 50 KHz wide. This
        represents a gain of at least ten times (10x) the typical number of channels
        and
        a doubling of transmission speeds provided on a Ku-band transponder
        today.
  There
        are
        no assurances that the USM TM technology
        will be successfully commercialized in satellite and terrestrial wireless
        communications applications, nor can we assure you that USM TM will
        gain
        the market acceptance required to generate revenue for the Company.
  **USM** **TM** **Technology
        Licenses**
  In
        May
        2006, the Company entered into a term sheet (“ 2006
        License Agreement ”)
        with
        Photron Technologies, Ltd. (“ Photron TM”)
        for
        licensing of the USM TM technology.
        Pursuant to the 2006 License Agreement, the Company has the right to acquire
        the
        license for USM TM ,
        for
        each country or region, in perpetuity, for all services to be offered by
        the
        Company that use the USM TM technology
        in such country or region. The cost per country or region to acquire the
        USM TM license
        is an up front fee per country or region as well as a percentage of net proceeds
        generated from revenue generated by the USM TM technology
        by the Company for that country or region. The 2006 License Agreement gives
        the
        Company, along with Nations, the right of first refusal to acquire the
        USM TM technology
        in all remaining countries or regions that have not already been secured.
        Additionally, the 2006 License Agreement confirms that, upon certain payments
        of
        cash and stock, the Company shall have the license for North America. Although
        the 2006 License Agreement is in term sheet form, the Company intends to
        enter
        into final binding agreements with Photron TM .
  Through
        our acquisition of ATP in October 2003, aeroTelesis acquired the rights to
        deploy USM TM technology
        in the Philippines for wireless telecommunications services, such as wireless
        local loop and mobile cellular networks. As a former wholly-owned subsidiary
        of
        Nations, the initial exclusive licensee of USM, ATP had been assigned the
        rights
        to deploy USM TM technology
        in the Philippines.
  Furthermore,
        it was negotiated in the acquisition of ATP that aeroTelesis would be given
        the
        right of first refusal to make additional acquisitions of telecommunication
        licenses and/or operations from Nations for the following regions: Southeast
        Asia, South and Central America, and the Middle East. Any future acquisition
        would also include the right to utilize and deploy USM TM technology
        in any country that is directly related to the acquisition.
  In
        February 2004, aeroTelesis established a direct licensing relationship and
        agreement (the “ 2004 License
        Agreement ”)
        with
        the developer and manufacturer of the USM TM technology,
        PhotronTM. Pursuant to the terms and conditions of the 2004 License Agreement,
        aeroTelesis was granted an exclusive license to utilize and deploy
        USM TM technology
        for use in wireless telecommunication services (applicable to all international
        markets without restrictions), such as wireless local loop and mobile cellular
        networks. The license to utilize and deploy the USM TM technology
        for these types of wireless telephony services was exclusive to aeroTelesis
        and
        Nations, on a
        country-by-country basis for each country that aeroTelesis enters and is
        able to
        secure the necessary government licenses and rights to deploy wireless telephony
        services. Upon demonstrating the license rights to PhotronTM for each country for
        each such license obtained, aeroTelesis is obligated to make an entry payment
        to
        PhotronTM in order to confirm the exclusive USM TM rights
        for such country. aeroTelesis shall pay Photron for each country/region a
        total
        of USD $2.0 to USD $5.0 million in any combination of cash and stock for
        any
        future licenses for the exclusive use of USM.
  The
        2004
        License Agreement also provided for PhotronTM to exclusively develop and
        manufacture USM-based satellite network products and systems for aeroTelesis.
        Such rights are applicable on a country-by-country basis for each country
        which
        aeroTelesis enters, provided it secures the necessary licenses and government
        rights to deploy satellite
        communication services
        in the target country and it makes an entry payment to PhotronTM to confirm the
        exclusive USM TM rights
        for such country.
  3
  The
        2004
        License Agreement is for a ten-year term and may be renewed for successive
        five
        (5) year terms, subject to terms and conditions, mutually agreed upon by
        the
        parties at the commencement of each new five year term.
  In
        view
        of the semi-exclusive licensing relationship (for the use of USM TM in
        wireless telephony services) that aeroTelesis shares only with Nations, the
        Company and Nations entered into a Non Conflict and Cooperation Agreement
        (the
“ NC&C
        Agreement ”)
        in
        March 2004. Through the NC&C Agreement, the following principles were
        established:
  ·
              Nations
                  reaffirmed its granting of a right of first refusal to aeroTelesis
                  to
                  acquire from Nations any wireless network, operation and/or license
                  that
                  Nations is able to secure or establish in Southeast Asia, South
                  and
                  Central America and the Middle
                  East;
  ·
              However,
                  if aeroTelesis declines to acquire the operation or license, then
                  Nations
                  may offer aeroTelesis the opportunity to participate as a minority
                  partner
                  at a percentage to be negotiated at that
                  time;
  ·
              aeroTelesis
                  has the same rights to USMTMtechnology
                  for the aforementioned territories and can seek to establish strategic
                  partnerships in these territories without being in conflict with
                  Nations;
  ·
              If
                  Nations is able to identify and/or secure wireless telecommunication
                  opportunities in other international territories and can establish
                  a
                  wireless network license to implement services, it may invite aeroTelesis
                  to participate as either the lead or co-developer of the wireless
                  operation; and
  ·
              As
                  aeroTelesis has exclusive license rights from PhotronTM for the deployment
                  of USM-based products and systems for use in satellite network
                  services on
                  a country-by-country basis for each country that aeroTelesis secures,
                  Nations can introduce satellite-related opportunities to aeroTelesis;
                  and
                  if a country license or satellite operation can be secured by aeroTelesis,
                  then Nations will be compensated with a participation fee to be
                  negotiated
                  at that time.
  **USM** **TM** **Technology
        Cooperation & Development**
  In
        conjunction with the 2004 License Agreement, on March 9, 2004, aeroTelesis
        and
        PhotronTM have also entered into a Technology Cooperation and Development
        Agreement (the “ TC&D
        Agreement ”).
        The
        primary focus of the TC&D Agreement is technology cooperation and
        development for USM TM products
        and systems that aeroTelesis intends to deploy in its target markets under
        its
        license from PhotronTM. As each party has its own areas of expertise, aeroTelesis
        and PhotronTM will work in cooperation and collaboration, as necessary and
        subject to the specifications and requirements that aeroTelesis needs for
        its
        wireless networks, to maximize their skills for the development of future
        generations of wireless products and systems based on USM TM .
  Other
        principles established in the TC&D Agreement are as follows:
  ·
              As
                  necessary and appropriate, aeroTelesis will participate in technical
                  discussions and offer its suggestions and views on the commercial
                  development of USMTMtechnology
                  for aeroTelesis’ networks. PhotronTM will also encourage and/or request
                  aeroTelesis’ participation as and when it deems it to be
                  appropriate.
  ·
              The
                  areas for technical cooperation and development will include but
                  not be
                  limited to the following: (a) product definition and design; (b)
                  systems integration; (c) identification of new applications and
                  upgrading
                  existing applications; and, (d) identification of new partnerships
                  with
                  other wireless technology
                  companies.
  ·
              aeroTelesis
                  will be available to provide technical advisory/consulting services
                  for
                  PhotronTM with respect to the development of USMTMnetworks
                  and assisting to make it into a new wireless standard, in the same
                  manner
                  that GSM and CDMA are known as predominant standards in the industry
                  today. Such technical advisory/consulting services include, but
                  are not
                  limited to, the following activities: (a) technology validation; (b)
                  technology analysis and reviews; and, (c) academic research
                  studies.
  4
  **Marketing/Growth
        Strategy**
  At
        the
        present time, we have 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 our exclusively licensed USM TM technology to satellite partners, providing them with a tool that enhances
        their
        bandwidth capacity. One of the main goals of aeroTelesis is to provide major
        satellite operators an ability to lower their ongoing capital expenditures
        by
        increasing the utilization of their current bandwidth. We expect USM TM will
        enable satellite operators to provide more data, voice and video content
        to
        their clients given their current bandwidth capacity.
  We
        intend
        to attempt to join forces with major satellite operators in some form of
        partnership whereby aeroTelesis provides the USM TM technology capability and support and the satellite operators provide the
        satellite capacity, sales, marketing, distribution, installation and customer
        support for its clients.
  **Competition**
  We
        are a
        development stage enterprise and currently do not have any competitors. Upon
        commercialization of USM TM ,
        we will
        potentially compete with existing and future technology companies that enhance
        bandwidth utilization and other providers of chip set solutions for wireless
        and
        broadband applications.
  **Trademarks**
  We
        filed
        an application with the United States Patent Trademark Office (“ USPTO ”)
        for
        the name aeroTelesis, Inc. The application is currently in the registration
        process and we have not yet received a final answer from the USPTO.
  **Employees
        And Consultants**
  As
        of
        March 31, 2006, we had seven full-time (7) employees with the following
        breakdown: one (1) in finance and corporate administration; one (1) business
        development; one (1) in network operations; two (2) in graphic design and
        two
        (2) administrative assistants.
  We
        also
        had four (4) consultants on a part-time basis with the following breakdown:
        one
        (1) in corporate finance; one (1) in corporate communications/investor
        relations; and two (2) in corporate development.
   None
        of
        our employees are covered by a collective bargaining agreement and we have
        never
        experienced any strike or work stoppage. We believe that our relations with
        our
        employees and consultants to be good.
  **RISK
        FACTORS**
  **Risks
        Related To Our Business**
  ***We
        Are An Early-Stage Company With An Unproven Business Model, A New And Unproven
        Technology And A Short Operating History, Which Makes It Difficult To Evaluate
        Our Current Business And Future Prospects***
  We
        have
        only a limited operating history upon which to base an evaluation of our
        current
        business and future prospects and we have yet to commercialize our technology.
        We were inactive and dormant from 1989 to 2000, during which it did not have
        any
        revenues, operating profits or any identifiable assets attributable to any
        industry segment. In 2000, we began limited operations and began seeking
        opportunities to consult to companies interested in establishing telecom
        businesses in the Asia-Pacific region. Our securities resumed trading in
        July
        2003 and we completed a reverse merger in October 2003. Our limited operating
        history makes an evaluation of our business and prospects very difficult
        or
        impossible. There are certain risks and difficulties we encounter as an
        early-stage company in the rapidly evolving market of satellite and terrestrial
        wireless broadband communications. These risks and difficulties include,
        but are
        not limited to, the following:
  5
  ·
              our
                  new and unproven business model and
                  technology;
  ·
              a
                  limited number of future anticipated product and service offerings
                  and
                  risks associated with deploying new product and service
                  offerings;
  ·
              the
                  difficulties we face in managing rapid growth in personnel and
                  operations;
  ·
              the
                  response by customers and strategic partners to our future anticipated
                  products and services;
  ·
              the
                  timing and success of future anticipated new product and service
                  introductions and new technologies by our competitors;
                  and,
  ·
              our
                  ability to build brand awareness in a highly competitive
                  market.
  We
        may
        not be able to successfully address any of these risks or others. Failure
        to
        adequately do so could seriously harm our business and cause our operating
        results to suffer.
  ***We
        Have Been The Subject Of A Going Concern Opinion From Our Independent Auditors,
        Raising A Substantial Doubt About Our Ability To Continue As A Going
        Concern***
  Our
        auditors included an explanatory paragraph in connection with our 2006 audited
        financial statements stating that we have incurred a working capital deficiency
        of $250,051 at March 31, 2006, and there is substantial doubt about our ability
        to continue as a going concern. These factors, along with others, may indicate
        that we will be unable to continue as a going concern for a period of twelve
        months or less. We will have to raise additional funds to meet our current
        obligations and to cover operating expenses through the year ending
        March 31, 2007. If we are not successful in raising additional capital we
        may not be able to continue as a going concern for a period of twelve months
        or
        less.
  ***We
        Expect To Incur Significant Operating Losses In The Future, Which May Adversely
        Impact Our Business***
  Our
        business is not currently profitable and has generated nominal revenues over
        the
        past few years and we may not be profitable in the future or be able to generate
        any significant revenues. In addition, we expect our operating expenses to
        increase in the future as we, among other things:
  ·
              hire
                  additional personnel, including sales and marketing personnel,
                  engineers
                  and other technical staff;
  ·
              hire
                  senior executives and members of our senior management
                  team;
  ·
              expand
                  the number of locations around the world where we plan to conduct
                  business;
  ·
              increase
                  our research and development efforts;
                  and
  ·
              upgrade
                  our operational and financial systems, procedures and
                  controls.
  If
        our
        revenue does not grow to offset these expected increased expenses, we will
        not
        be profitable. You should not consider past revenue and earnings as indicative
        of our future performance. In future quarters, our revenue or earnings could
        decline or fail to grow. Furthermore, if our operating expenses exceed our
        expectations, our financial performance will be adversely affected.
  ***We
        Will Require Additional Capital To Support Business Growth, If This Capital
        Might Not Be Available Or Not Available On Terms Satisfactory To Us, We May
        Be
        Forced To Cease Operations***
  As
        of
        March 31, 2006, our primary business goal requires expenditures of
        approximately $400,000 to $500,000 per quarter. If we raise additional funds
        through further issuances of equity or convertible debt securities, our existing
        stockholders could suffer significant dilution, and any new equity securities
        we
        issue may be sold below the market price and could have rights, preferences
        and
        privileges superior to those of holders of our common stock. Any debt financing
        secured by us in the future could involve restrictive covenants relating
        to our
        capital raising activities and other financial and operational matters, which
        may make it more difficult for us to obtain additional capital and to pursue
        business opportunities, including potential acquisitions. In addition, we
        may
        not be able to obtain additional financing on terms favorable to us, if at
        all.
        If we are unable to obtain adequate financing or financing on terms satisfactory
        to us, or obtain it at all, our ability to continue to support our business
        will
        be significantly limited and we may be forced to curtail or cease
        operations.
  6
  ***We
        May Not Be Able To Successfully Implement Our Business Strategy, Which Is
        Subject To A Number Of Factors That We May Not Be Able To
        Control***
  If
        we do
        not successfully deploy USM TM products
        and services, our revenues will be adversely affected. The USM TM technology
        has been demonstrated in computer simulations and, more recently, in hardware
        with third party assessment; and management believes that USM TM can
        be
        implemented on a large-scale basis for satellite communications as well as
        terrestrial wireless broadband voice and data networks. However, there is
        no
        assurance that USM TM can
        be
        rolled-out in a commercially feasible manner in any of these or any of our
        other
        anticipated applications. In particular, the success of USM TM technology
        depends on the following factors, among others:
  ·
              our
                  capacity to handle growing demands for faster transmission of increasing
                  amounts of data and voice;
  ·
              our
                  cost-effectiveness and performance compared to other broadband
                  technologies;
  ·
              our
                  reliability and security;
  ·
              our
                  suitability for a sufficient number of geographic
                  regions;
  ·
              the
                  availability of sufficient frequencies and site locations for carriers
                  to
                  deploy and install products at commercially reasonable rates;
                  and
  ·
              safety
                  and environmental concerns regarding wireless broadband
                  transmissions.
  Further,
        new technological innovations, such as USM TM ,
        generally require a substantial investment before they are commercially viable.
        Subject to the availability of capital, we intend to make substantial
        investments in developing and
        deploying USM TM products
        and services, but we cannot assure you that we have the resources to fully
        implement our business plan.
  If
        we
        fail in our efforts to commercially deploy our USM TM products
        and services, we will be unable to generate meaningful revenues.
  ***Rapid
        Technological Change May Have An Adverse Effect On The Market Acceptance
        Of Our
        Products And Services***
  The
        markets for our products and the technologies utilized in the industries
        in
        which we intend to operate evolve rapidly. In addition to
        the  proprietary
        USM TM technology,
        we rely on other key technologies, including wireless LAN, wireless packet
        data,
        time division multiplexing, modem and radio technologies and other technologies.
        USM TM and
        the
        technologies upon which we rely may be replaced with alternative technologies
        or
        may otherwise not achieve the wide acceptance that we are seeking. In
        particular, there is substantial risk that the USM TM technology
        may not achieve market acceptance for use in satellite and terrestrial
        wireless communication applications. Market changes could render our products and
        technologies obsolete or subject them to intense competition by alternative
        products or technologies or by improvements in existing products or
        technologies. The market for USM TM technology
        may stop growing as a result of the increased deployment of alternative
        technologies, such as DSL, cable modem, fiber optic, coaxial cable, satellite
        systems, third-generation mobile systems ,
        broadband wireless solutions or
        otherwise. Also, new or enhanced products and services developed by other
        companies may be technologically superior to our products and services and
        render them obsolete. As a result, our revenues would be adversely
        affected.
  ***If
        Our Technology Is Not Widely Accepted Or If Such Acceptance Is Delayed, Our
        Operating Results Will Be Severely Harmed***
  We
        will
        eventually focus our business primarily on the commercial deployment of
        USM TM technology
        for wireless telecommunications applications. Other digital wireless
        communications technologies, particularly CDMA and GSM technologies, have
        been
        more widely deployed than USM TM technology.
        In addition, if future commercial deployments of USM TM systems
        are not commercially successful, or if future commercial deployments of
        USM TM systems
        are delayed or unsuccessful, our business and financial results may be harmed.
        Our business could also be harmed if network service providers deploy competing
        technologies *.*
  7
  We
        may
        incur lower operating margins on USM TM -based
        products than on products using alternative technologies due to the lack
        of
        economies of scale as USM TM -based
        products gain market acceptance, lack of product improvements or other factors.
        If there are unforeseen delays or setbacks by the USM TM handset
        and infrastructure manufacturers, the deployment of USM TM technology
        could be negatively affected, and our business and financial conditions could
        suffer.
  ***We
        Rely On The Services Of Key Personnel, Whose Knowledge Of Our Business And
        Technical Expertise Would Be Difficult To Replace***
  We
        rely
        upon the continued service and performance of a relatively small number of
        key
        technical and senior management personnel. Our future success depends on
        our
        retention of these key employees. None of our key technical or senior management
        personnel or key consultants is bound by any agreement, including any employment
        agreements, and as a result, any of these employees and contracted consultants
        could leave with little or no prior notice. If we lose any of our key technical
        and senior management personnel, our business could be seriously harmed.
        We do
        not have “key person” life insurance policies covering any of our
        employees.
  ***We
        Do Not Have An Adequate History With Our Business Model To Predict Underlying
        Assumptions In Our Business Model And The Impact This Will Have On Our Revenue
        Or Operating Results***
  We
        have
        limited data with respect to the market’s future potential adoption of
        USM TM technology,
        products and services, so we cannot accurately predict revenue. Our future
        revenue may decline or fluctuate as a result of a number of factors, including
        acceptance of our technology, products and services and our ability to continue
        operations and spending levels. If we do not generate revenue from our
        technology, products or services, our business will suffer.
  Our
        future success also depends in part on a sophisticated and costly sales effort
        targeted at senior management of wireless communications, telecommunications
        and
        satellite companies and at large, often government-related, organizations.
        If
        these efforts are not successful, our business may suffer.
  ***We
        Depend On A Network Of Business Relationships For The Successful Implementation
        Of Our Business Strategy, And If This Network Is No Longer Available, Our
        Business Operations Would Be Impaired***
  We
        would
        be adversely affected by the loss of one or more business relationships upon
        which we depend for the successful implementation of our business
        stra t egy.
        In
        addition, if we fail to commercially
        deploy our USM TM products
        and services, our ability to generate revenues from our business
        will be
        greatly impaired. Such business relationships include domestic and international
        strategic partners, equipment manufacturers and vendors, and other key suppliers
        and customers. There can be no assurance that our business relationships
        will be
        sustainable throughout the life of the Company.
  ***The
        Markets In Which We Intend to Participate Are Intensely Competitive, And
        If We
        Do Not Compete Effectively, Our Operating Results Could Be
        Harmed***
  The
        markets for our technology, products and services are intensely competitive.
        With the introduction of new technologies and market entrants, we expect
        competition to intensify. If we are unable to maintain our competitiveness,
        our
        operating results could be negatively impacted. In addition, increased
        competition generally could result in reduced sales, reduced margins or the
        failure of our technology, products and services to achieve or maintain more
        widespread market acceptance, any of which could harm our business.
  We
        face
        competition from larger and more established competitors with access to greater
        financial resources. Many of our potential competitors enjoy substantial
        competitive advantages, such as:
  ·
              greater
                  name recognition, longer operating histories and larger marketing
                  budgets
                  and resources;
  ·
              established
                  marketing relationships and access to larger customer
                  bases;
  ·
              substantially
                  greater financial, technical and other resources;
                  and,
  ·
              major
                  distribution agreements with strategic partners, system integrators
                  and
                  resellers.
  8
  As
        a
        result, our competitors may be able to respond more quickly and effectively
        than
        we can to new or changing opportunities, technologies, standards or customer
        requirements. Furthermore, because of these advantages, even if our technology,
        products and services are more effective than those of our competitors,
        potential customers might accept competitive products and services in lieu
        of
        purchasing ours. For all of these reasons, we may not be able to compete
        successfully against current and future competitors.
  ***Any
        Failure To Protect Our Intellectual Property Rights Could Impair Our Ability
        To
        Implement Our Business***
  Intellectual
        property is critical to our success, and if we or our licensor, PhotronTM, fail
        to protect the USM TM intellectual
        property rights adequately, our competitors might gain access to the technology.
        We rely upon trade secret, licensing trademark and copyright laws in the
        U.S.
        and other jurisdictions as well as confidentiality procedures and contractual
        provisions to protect our proprietary technology. Any of the USM TM intellectual
        property rights may be challenged by others or invalidated through
        administrative process or litigation. We currently have no issued patents
        and
        may be unable to obtain patent protection in the future. **** In
        addition, if any patents are issued in the future, they may not provide us
        with
        any competitive advantages, or may be challenged by third parties. Furthermore,
        legal standards relating to the validity, enforceability and scope of protection
        of intellectual property rights are uncertain. Effective patent, trademark,
        copyright and trade secret protection may not be available to us in every
        country in which our technology, products and services are available. The
        laws
        of some foreign countries may not be as protective of intellectual property
        rights as those in the U.S., and mechanisms for enforcement of intellectual
        property rights may be inadequate. Accordingly, despite our efforts, we may
        be
        unable to prevent third parties from infringing upon or misappropriating
        the
        USM TM intellectual
        property. Any such infringement or misappropriation could have a material
        adverse effect on our business, results of operations and financial
        condition.
  In
        addition, the USM TM technology
        that we will deploy for wireless services is based on a technology license
        from
        PhotronTM. While we believe that we have exclusive license rights for
        USM TM technology
        applications in satellite network services and a shared exclusive license
        arrangement with Nations for wireless telephony, we cannot assure you that
        PhotronTM’s intellectual property rights will be enforceable or that PhotronTM has
        not previously licensed this technology to other third parties. Any defects
        regarding our license rights to the USM TM technology
        patent or the patent itself would significantly affect our ability to generate
        revenues.
  We
        might
        be required to spend significant resources to monitor and protect any future
        intellectual property rights. We may initiate claims or litigation against
        third
        parties for infringement of our proprietary rights or to establish the validity
        of our proprietary rights. Any litigation, whether or not it is resolved
        in our
        favor, could result in significant expense to us and divert the efforts of
        our
        technical and management personnel. In general, any action we take to protect
        our intellectual property rights could be costly and could absorb significant
        management time and attention, which, in turn, could negatively impact our
        operating results. Further, policing unauthorized use of our products and
        technologies is difficult. We cannot be certain that the steps we have taken
        will prevent the misappropriation or unauthorized use of our proprietary
        information and technologies, particularly in foreign countries where the
        laws
        may not protect our proprietary rights as fully as U.S. laws.
  ***Compliance
        With Changing Regulation Of Corporate Governance And Public Disclosure May
        Result In Additional Expenses***
  Changing
        laws, regulations and standards relating to corporate governance and public
        disclosure, including the Sarbanes-Oxley Act of 2002 and Securities and Exchange
        Commission (the “ SEC ”)
        regulations, are creating uncertainty for publicly traded companies such
        as
        ours. We are committed to maintaining high standards of corporate governance
        and
        public disclosure. As a result, we intend to invest all necessary resources
        to
        comply with evolving standards, but this investment may result in increased
        general and administrative expenses and a diversion of management time and
        attention from revenue-generating activities to compliance activities, which
        could harm our operating results and business prospects.
  ***We
        May Be Sued By Third Parties For Alleged Infringement Of Their Proprietary
        Rights, And This May Force Us To Discontinue Operations***
  The
        technology industry is characterized by the existence of a large number of
        patents, trademarks and copyrights and by frequent litigation based on
        allegations of infringement or other violations of intellectual property
        rights.
        As the number of entrants into our market increases, the possibility of an
        intellectual property claim against us grows. Our technologies may not be
        able
        to withstand any third-party claims or rights against their use. Any
        intellectual property claims, with or without merit, could be time-consuming
        and
        expensive to litigate or settle, and could divert management attention from
        executing our business plan. We may not prevail in such litigation given
        the
        complex technical issues and inherent uncertainties in intellectual property
        litigation. If any of our products were found to infringe on protected
        technology, we could be required to redesign or license such technology and/or
        pay damages or other compensation to the infringed party. If we are unable
        to
        license protected technology used in our products, we could be prohibited
        from
        making and selling such products.
  9
  Also,
        other companies may claim to own patents essential to various proposed
        USM TM standards.
        If we are required to obtain additional licenses and/or pay royalties to
        one or
        more patent holders, this could have a material adverse effect on the commercial
        implementation of USM TM technology,
        products and services, and our overall profitability.
  ***The
        Satellite And Terrestrial Wireless Communications Services Industry Is Heavily
        Regulated, Both In The U.S. And Elsewhere, And Such Regulation Could Impede
        Us
        From Executing Our Business Plan***
  We
        are
        not currently an operating company, but once we will become operations, we
        will
        be subject to the regulatory authority of the U.S. government, primarily
        the
        FCC, and the national communications authorities of all countries in which
        we
        operate. We may need to obtain regulatory approval for the operation of any
        of
        our future services and the licenses obtained may impose operational
        restrictions on us, which could affect the utilization of our technology,
        products and services. Our business, financial condition and results of
        operations could be materially adversely affected as a result.
  Because
        the regulatory schemes vary by country, we may be subject to regulations
        in
        foreign countries of which we are not presently aware. If that were to be
        the
        case, we could be subject to sanctions by a foreign government that could
        materially and adversely affect our operations in that country. There can
        be no
        assurance that any current regulatory approvals held by us or our partners
        are,
        or will remain, sufficient in the view of foreign regulatory authorities,
        or
        that any additional necessary approvals will be granted on a timely basis,
        or at
        all, in all jurisdictions in which we wish to deploy our technology, products
        and services, or that applicable restrictions in those jurisdictions will
        not be
        unduly burdensome. The failure to obtain the authorizations necessary to
        deploy
        our technology, products and services internationally could have a material
        adverse effect on our financial condition and results of
        operations.
  **Risks
        Related To Our Relationship With Nations, Our Controlling
        Stockholder**
  ***Due
        To Its Controlling Interest, Nations Controls The Outcome Of Stockholder
        Votes
        And Therefore Other Shareholders Will Not Be Able to Direct Our
        Company***
  The
        majority of our stock, and thus the voting control of the Company, is held
        by a
        single shareholder. Nations owns 83.85% of our fully diluted common stock.
        As
        long as Nations has a controlling interest, it will continue to be able to
        elect
        our entire board of directors and generally be able to determine the outcome
        of
        all corporate actions requiring stockholder approval. As a result, Nations
        will
        be in a position to continue to control all matters affecting us,
        including:
  ·
              a
                  change of control, including a
                  merger;
  ·
              our
                  acquisition or disposition of
                  assets;
  ·
              our
                  future issuances of common stock or other
                  securities;
  ·
              our
                  incurrence of debt; and
  ·
              our
                  payment of dividends on our common
                  stock.
  Nations’
        ability to control us may result in our common stock trading at a price lower
        than the price at which it would trade if Nations did not have a controlling
        interest in us. Such concentration of ownership would also have an impact
        any
        potential changes in control of the Company, either by preventing or delaying
        such change in control.
  **Risks
        Related To Our Common Stock**
  ***Our
        Stock Price Is Volatile Due To Various Factors, Including Limited Market
        Liquidity Of Our Common Stock***
  The
        market for our common shares is characterized by significant price volatility
        when compared to seasoned issuers, and we expect that our share price will
        continue to be volatile for the indefinite future. The volatility in our
        share
        price is attributable to a number of factors. First, as noted above, our
        common
        shares are thinly traded. Furthermore, we have relatively few common shares
        outstanding in the public float, since approximately 83.85%
        (77,543,807)  of
        our
        shares (diluted by stock options and debt conversion) are restricted stock
        held
        by less than twenty shareholders. The trading of relatively small quantities
        of
        shares by our shareholders has, and will probably continue to,
        disproportionately influence the price of our common stock in either direction.
        For example, the price for our common stock could decline significantly in
        the
        event that a large number of our shares are sold on the market without
        commensurate demand, as compared to a seasoned issuer which could better
        absorb
        those sales without adverse impact on its share price.
  10
  Finally,
        we will remain subject to a variety of internal and external factors that
        generally will affect our stock price. Examples of internal factors, which
        can
        generally be described as factors that are directly related to our operating
        performance or financial condition, would include the release of reports
        by
        securities analysts and announcements we may make from time-to-time relative
        to
        contracts or other arrangements we may enter into, our operating performance,
        including fluctuations in our operating results, or other business developments
        specific to us. Examples of external factors, which can generally be described
        as factors that are unrelated to the operating performance or financial
        condition of any particular company, include changes in interest rates and
        worldwide economic and market conditions and trends, as well as changes in
        industry conditions. Changes in the market price of our common stock may
        have no
        connection with our operating results, financial condition or
        prospects.
  We
        cannot
        make any predictions or projections as to what the prevailing market price
        for
        our common stock will be at any time, or as to what effect, if any, that
        the
        availability or sale of our common stock will have on the prevailing market
        price.
  **Our
        Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For
        Investors To Sell Their Shares Due To Suitability
        Requirements**
  Our
        common stock is deemed to be “penny stock” as that term is defined in Rule
        3a51-1 promulgated under the Exchange. Penny stocks are stocks:
  ·
              With
                  a price of less than $5.00 per
                  share;
  ·
              That
                  are not traded on a “recognized” national
                  exchange;
  ·
              Whose
                  prices are not quoted on the Nasdaq automated quotation
                  system;
  ·
              Nasdaq
                  stocks that trade below $5.00 per share are deemed a “penny stock” for
                  purposes of Section 15(b)(6) of the 1934
                  Act;
  ·
              In
                  issuers with net tangible assets less than $2.0 million (if the
                  issuer has
                  been in continuous operation for at least three years) or $5.0
                  million (if
                  in continuous operation for less than three years), or with average
                  revenues of less than $6.0 million for the last three
                  years.
  Broker/dealers
        dealing in penny stocks are required to provide potential investors with
        a
        document disclosing the risks of penny stocks. Moreover, broker/dealers are
        required to determine whether an investment in a penny stock is a suitable
        investment for a prospective investor. These requirements may reduce the
        potential market for our common stock by reducing the number of potential
        investors. This may make it more difficult for investors in our common stock
        to
        sell shares to third parties or to otherwise dispose of them. This could
        cause
        our stock price to decline.
  **ITEM
        2. DESCRIPTION OF PROPERTIES**
  We
        presently occupy 3,050  square
        feet of leased office space at 11150 W. Olympic Blvd., Suite 860, Los Angeles,
        CA 90064. The lease expires on December 31, 2008 at a monthly rent of $6,405.
        We
        anticipate that this office space is sufficient for its operations for the
        immediate future.
  **ITEM
        3. 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.
  11
  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. As of
        March 31, 2006, the Company continues its litigation with Jagan
        Narayanan.
  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.
  ***Neil
        Sloane v. aeroTelesis and William H.B. Chan.*** (Los
        Angeles Superior Court Case No. BC337219) - Settled May 9, 2006.
  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. The settlement was expensed for the fiscal year ended March 31,
        2006.
  **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  During
        the year ended March 31, 2006, the Company did not submit any matters to a
        vote of its shareholders.
  12
  **PART
        II**
  **ITEM
        5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER
        MATTERS**
  In
        July,
        2003, the Company’s common stock began trading on the “pink sheets” and was
        listed on the Over-The-Counter Bulletin Board (“ OTCBB ”)
        in
        September 2003 under the symbol “PCR.PK”. After the Company’s name change became
        effective, the Company’s common stock traded under “AOTS” and currently trades
        under the symbol “AOTL.OB”. As of March 31, 2006, there were 200,000,000 shares
        of common stock authorized, par value $.00008, of which 88,397,794 are issued
        and outstanding. Out of these, 9,654,787 were held by non-affiliates. The
        Company has authorized a total of 2,000,000 shares of preferred stock, par
        value
        $.001 per share, and presently has no shares of preferred stock issued and
        outstanding.
  In
        May
        2004, the Company’s Board of Directors approved a two percent (2%) stock
        dividend on its common stock. The dividend was issued on June 16,
        2004.
  The
        following table reflects high and low quarterly bid prices for the fiscal
        year
        ended March 31, 2006. This information has been provided to the Company by
        the National Association of Securities Dealers, Inc. (the “ NASD ”)
        and
        the Internet. These quotations reflect inter-dealer prices, without retail
        mark-ups or mark-downs or commissions. These quotations may not necessarily
        reflect actual transactions.
  **YEAR
                  2004**
              
              **High
                  Bid**
              
              **Low
                  Bid**1stQuarter Ended June 30*(after
                  a 2% stock dividend)*
              
              
              —
              
              
              —2ndQuarter Ended September 30
              
              $
              2.00
              
              $
              0.253rdQuarter Ended December 31
              
              $
              5.50
              
              $
              0.314thQuarter Ended March 31
              
              $
              8.50
              
              $
              4.70**YEAR
                  2005**
              
              
              **High
                  Bid**
              
              
              **Low
                  Bid**1stQuarter Ended June 30
              
              $
              8.25
              
              $
              4.352ndQuarter Ended September 30
              
              $
              7.10
              
              $
              2.853rdQuarter Ended December 31
              
              $
              9.00
              
              $
              3.004thQuarter Ended March 31
              
              $
              4.00
              
              $
              2.30**YEAR
                  2006**
              
              
              **High
                  Bid**
              
              
              **Low
                  Bid**1stQuarter Ended June 30
              
              $
              3.20
              
              $
              1.032ndQuarter Ended September 30
              
              $
              1.80
              
              $
              0.803rdQuarter Ended December 31
              
              $
              1.40
              
              $
              0.534thQuarter Ended March 31
              
              $
              1.01
              
              $
              0.20
 The
        Company estimates that as of March 31, 2006, there are approximately 2000
        holders of the Company’s common stock.
  **Dividend
        Policy**
  We
        have
        not paid any cash dividends to date, and do not anticipate or contemplate
        paying
        cash dividends in the foreseeable future.
  **Recent
        Sales Of Unregistered Securities**
  During
        the past three years, we have sold the following securities without registering
        the securities under the Securities Act.
  ***2006***
  On
        February 8, 2006, we entered into a Securities Purchase Agreement with Cornell
        Capital Partners whereby we agreed to amend and restate the secured convertible
        debentures we previously issued to Cornell Capital Partners and Highgate
        House
        Funds, Ltd. Prior to entering into the Securities Purchase Agreement, we
        issued
        secured convertible debentures to Cornell Capital Partners 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. Pursuant to the
        Securities Purchase Agreement of February 8, 2006, Cornell Capital Partners
        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 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. The debenture is secured by substantially all our assets.
  13
  In
        connection with the Securities Purchase Agreement, we issued Cornell Capital
        Partners three warrants, each of which is exercisable for a period of five
        years. The first warrant allows Cornell Capital Partners to purchase 500,000
        shares of our common stock at an exercise price of $1.00. The second warrant
        allows Cornell Capital Partners to purchase 700,000 shares of our common
        stock
        at an exercise price of $0.75. The third warrant allows Cornell Capital Partners
        to purchase 1,000,000 shares of our common stock at an exercise price of
        $0.50.
  ***2005***
  During
        the year ended March 31, 2005 a total of 417,698 shares of common stock was
        issued for Nations’ debt conversion. The conversion rate was $1.00 per share for
        the first 390,761 shares of stock and $3.25 for the 26,937 shares issued.
        The
        conversion rate was increased to reflect the fair value of the shares at
        the
        renewal date of the revolving line of credit.
  During
        the year ended March 31, 2005, a total of 79,425 shares of stock were
        issued for legal and other services. The shares were valued at $356,524,
        which
        represented the value of the services rendered or the fair value of the stock
        issued.
  In
        March
        2005, a total of 25,451 shares of stock were issued to The Nutmeg Group LLC
        for
        $30,000 cash pursuant to a private placement. The proceeds were net of the
        cost
        of selling the stock of $1,500.
  In
        May
        2005, a total of 25,393 shares of common stock were issued to The Nutmeg
        Group
        LLC for $14,550 cash pursuant to a private placement.
  In
        May
        2005, a total of 10,000 shares of common stock were issued to Claudia Zaman
        for
        services with a total expense recognized of $20,000.
  In
        May
        2005, the Company also issued a warrant to PhotronTM to purchase 5,000,000 shares
        of the Company’s common stock at $4 per share. The warrant expires in four years
        if not exercised sooner. This was subsequently cancelled in July
        2005.
  On
        July
        27, 2005, a total of 6,713,212 shares of stock were issued in escrow for
        delivery upon exercise of the convertible debt. These shares are not considered
        as outstanding at September 30, 2005.
  In
        July
        2005, a total of 300,000 shares of common stock was issued to Claudia Zaman
        pursuant to the 2003 Stock Option Plan. The option price of $.02 per share
        ($6,000) was used to reduce outstanding payables.
  In
        July
        2005, a total of 300,000 share of common stock were issued pursuant to the
        2003
        Stock Option Plan. The option price of $.02 per share ($6,000) was used to
        reduce outstanding payables to Joseph Gutierrez, the Company’s
        President.
  In
        July
        2005, a total of 1,000,000 shares of common stock were issued to Cornell
        Capital
        Partners as a fee for the Standby Equity Distribution Agreement. The stock
        was
        recorded at $1.40 per share and recorded in the other asset section of the
        balance sheet as a deferred offering cost.
  In
        July
        2005, a total of 7,332 shares of common stock was issued to a consultant
        with a
        total expense recognized of $9,165.
  14
  In
        September 2005, a total of 520,000 shares of common stock were issued to
        various
        employees and consultants pursuant to the 2003 Stock Option Plan. The shares
        were expensed under legal and professional fees for $416,000, the market
        price
        at the time of issuance.
  In
        September 2005, a total of 79,750 shares of common stock were issued to The
        Nutmeg Group LLC for exercise of warrant for a total of $26,500 pursuant
        to a
        private placement.
  In
        November 2005, a total of 2,650,000 shares of common stock were issued pursuant
        to the exercise of options granted under the 2003 Stock Option Plan. Upon
        the
        exercise of the options, we forgave the exercise price of the option totaling
        $1,404,500 which has been charged against operations.
  In
        December 2005, a total of 35,000 shares of common stock were issued to a
        related
        party and has been recorded as a reduction of debt from a related party at
        $.70 per share.
  ***2004***
  In
        March
        2004, we issued 200,000 shares of common stock for the license to use the
        USM TM technology for wireless telephony services and satellite communication services
        in the Republic of Philippines. These shares were valued at $5.00 ($1,000,000)
        which represents the fair value at the date of issuance.
  On
        March
        31, 2004, we issued 613,832 shares of common stock to Nations to convert
        the
        outstanding balance of the advances on the line of credit along with accrued
        interest to equity. At the time of the $1,000,000 revolving line of credit
        commitment, the fair value of the Company’s common stock was $1.00, therefore,
        the conversion rate was $1.00 per share.
  On
        May
        25, 2004, we approved a two percent (2%) stock dividend for all shareholders
        of
        record as of May 31, 2004 with a mandatory delivery of each shareholder’s old
        stock certificate to get a new stock certificate, which includes the stock
        dividend. A total of 1,626,469 shares of common stock were issued, including
        fractional shares.
  **Equity
        Compensation Plan Information**
  The
        following table provides information as of March 31, 2006 with respect to
        the shares of our common stock that may be issued under our existing equity
        compensation plans.
  **A**
              
              **B**
              
              **C****Number
                  of Securities to be Issued Upon Exercise of**
                **Outstanding
                  Options**
              
              
              **Weighted
                  Average Exercise Price of**
                  **Outstanding
                    Options**
              
              
              **Number
                    of Securities Remaining Available for Future Issuance Under Equity
                    Compensation Plans (Excluding Securities Reflected in Column
                    A)****Equity
                  Compensation Plans Approved by Shareholders**
              
              
              5,000,000
              
              $
              0.62
              
              
              7,000,000**Equity
                  Compensation Plans Not Approved by Shareholders**
              
              
              0
              
              
              0
              
              
              0**Total**
              
              
              5,000,000
              
              $
              0.62
              
              
              7,000,000
 
 On
        April
        29, 2005 the Company issued 1,230,000 stock options to purchase the Company’s
        common stock.
 
 In
        November 2005, a total of 2,650,000 shares of common stock were issued pursuant
        to the exercise of options granted under the 2003 Stock Option Plan. Upon
        exercise of the options, the Company forgave the exercise price of the option
        totaling $1,404,500 which has been charged against operations.
  **ITEM
        6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION**
  *When
        used in this Form 10-KSB, the words “anticipated”, “estimate”, “expect”, and
        similar expressions are intended to identify forward-looking statements.
        Such
        statements are subject to certain risks, uncertainties and assumptions including
        the possibility that the Company will fail to generate projected revenues.
        Should one or more of these risks or uncertainties materialize, or should
        underlying assumptions prove incorrect, actual results may vary materially
        from
        those anticipated, estimated or projected.*
  15
  *The
        following discussion of the financial condition, changes in financial condition
        and results of operation of the Company for the fiscal years ended
        March 31, 2006 and March 31, 2005 should be read in conjunction with
        the financial statements of the Company and related notes included
        therein.*
  **Overview**
  aeroTelesis
        is a start-up, technology-driven communications company dedicated to offering
        our customers voice, data and video services. Our targeted application markets
        include fixed and mobile wireless broadband, and satellite
        communications.
  Our
        core
        wireless technology platform is a modulation technique known as USM TM which we
        license from PhotronTM under certain license agreements. USM TM is
        a
        technology that we believe increases frequency bandwidth efficiency for wireless
        applications (such as wireless local loop, cellular, satellite, and others)
        to
        produce what we believe will be faster data transmission rates and higher
        data
        capacity while requiring less frequency spectrum allocation in comparison
        to
        other traditional wireless technologies in the market today. We believe the
        implementation of this USM TM technology
        has far reaching implications for the wireless communications industry. We
        believe USM TM holds
        the
        promise to deliver quality broadband-like services through more narrow frequency
        channels than conventional wireless technologies. Through the frequency
        efficiency provided by USM TM ,
        we
        believe we will be able to reduce the cost of deployment for wireless networks
        and, therefore, allow us to price services at more cost competitive rates
        for
        USM TM users.
        We
        believe these cost advantages should enable us to capture a share of customers,
        especially in developing countries where we believe there are lower penetration
        rates for communication services. Currently, PhotronTM is developing a chipset
        which will be used in the commercialization of products which utilize
        USM TM technology.
        PhotronTM intends to complete the chip set by the end of 2006. If PhotronTM has a
        chipset, we will begin producing products for sale to customers using that
        chipset.
  *To
        date, we have not received any revenues from any USM* *TM* *technology
        and we currently have no other sources of revenues.* If
        PhotronTM is unable to develop a chipset, we may not have a product to
        sell.
  In
        May
        2006, we entered into the 2006 License Agreement with Photron, which is binding
        term sheet whereby we have the right to acquire the license for USM TM ,
        for
        each country or region, in perpetuity, for all services to be offered by
        us that
        use the USM TM technology
        in such country or region. The cost per country or region to acquire the
        USM TM license
        is an up front fee per country or region as well as a percentage of net proceeds
        generated from revenue generated by the USM TM technology
        by the Company for that country or region. The 2006 License Agreement gives
        us
        along with Nations, the right of first refusal to acquire the USM TM technology
        in all remaining countries or regions that have not already been secured.
        Additionally, the 2006 License Agreement confirms that, upon certain payments
        of
        cash and stock, the Company shall have the license for North America.
  As
        of
        March 2006, we have paid to Photron an amount of $1,260,000 for the license
        to
        North America. This fee was expensed for the fiscal year ended March 31,
        2006.
  In
        the
        future, we intend to attempt to implement both satellite and terrestrial-based
        wireless broadband services, using USM TM technology
        upon its commercialization. It is anticipated that the chipset development
        process will be completed by the end of 2006. In contrast to traditional
        wireless technologies that we believe rely on conventional modulation methods
        and broad frequency spectrum requirements, we believe USM TM represents
        an original and fundamental shift in modulation technology which can create
        a
        new breed of next generation networks.
  ***Results
        Of*** **Operations**
  ***Results
        Of Operations For Year Ended March 31, 2006 Compared To The Year Ended March
        31,
        2005***
  **Revenues**
  For
        the
        year ended March 31, 2006, we had revenues of $8,600, which consisted of
        consulting income, with expenses of $7,627,714, resulting in a net loss for
        the
        year of $7,619,114. For the year ended March 31, 2005, we had revenues of
        $409,490 which consisted of consulting income and sales of goods consisting
        of
        equipment to a field trial customer, and total expenses of $1,470,080, resulting
        in a net loss for the period of $1,060,590. The decrease in 2006 revenues
        of
        $400,890, or 97.9% is attributable to decrease in consulting revenues.
  16
  **Expenses**
  Our
        expenses for the year ended March 31, 2006, were composed of depreciation
        expense of $30,260, insurance expense of $31,332, options/warrants expense
        of
        $1,762,808, consulting fees of $248,443, non cash consulting fees of $1,345,900,
        amortization of loan costs of $1,333,286, payroll expenses of $242,943, rent
        expense of $111,775, travel expenses of $137,298, legal and professional
        fees of
        $564,340, operating expenses of $183,705, interest expense of $188,045, and
        other expenses of $187,579. Our expenses for the year ended March 31, 2005
        consisted of legal and professional fees of $885,543, payroll expenses of
        $245,316, rent expense of $123,184, operating expenses of $99,291, travel
        expense of $73,624, depreciation expense of $14,638, costs of revenue of
        $17,349
        and interest expense of $11,135. The increase in expenses for the fiscal
        year
        ended March 31, 2006 as compared to the expenses for the previous fiscal
        year was 418.9% and is primarily due to our issuance of stock options to
        employees and consultants, the issuance of warrants in connection with financing
        transactions, travel expenses, interest expense and other expense related
        to a
        one-time non-recurring expense.
  **Net
        Income (Loss)**
  Our
        net
        loss from operations before income taxes for the year ended March 31, 2006
        was $7,619,114 compared to a net loss of $1,060,590 for the year ended
        March 31, 2005. This represents an increase in net loss of 618.3%, and is
        primarily due to our issuance of stock options to employees and consultants,
        the
        issuance of warrants in connection with financing transactions, travel expenses,
        interest expense and other expense related to a one-time non-recurring expense
        and decrease in revenues in 2006, including the fee of $1,260,000 spent and
        expensed for the license.
  The
        net
        loss per share for the periods ended March 31, 2006 and 2005 was ($.09) and
        ($.01), respectively.
  **Shareholders’
        Equity**
  At
        March 31, 2006, shareholders’ equity was $1,621,923 compared to
        shareholders’ equity of $2,501,460 at March 31, 2005. This decrease in
        shareholders’ equity resulted from our increase in deficit accumulated during
        the development stage during the fiscal year ended March 31,
        2006.
  **Liquidity
        And Capital Resources**
  ***2006***
  As
        of
        March 31, 2006, we had negative working capital of approximately $250,051,
        which consisted of current assets of approximately $96,316 and current
        liabilities of approximately $346,367.
  Our
        current assets are composed of $67,823 in cash and prepaid insurance of $28,493.
        Our current liabilities of $346,367 represent accounts payable and accrued
        expenses of $312,677, notes payable of $21,360, and the current portion of
        capital lease payable of $12,330. Our assets, in addition to its current
        assets,
        consists of furniture and fixtures of $103,995, net of depreciation, deposits
        of
        approximately $26,784 and its net licenses of $2,698,781, which consists
        of
        three licenses listed under other assets. The three licenses are the ATP
        license
        for approximately $1,700,000 and two licenses from PhotronTM to utilize and
        deploy USM TM -based
        products and systems for satellite communication services and wireless telephony
        service in the Philippines. The Company paid $500,000 in 2004 for each PhotronTM
license, respectively. The Company has long term liabilities of $922,939,
        the
        difference between the Convertible Debenture and the Loan Costs, net of
        amortization and long term liabilities, net of the current portion, of
        $34,647.
  In
        2003,
        we entered into an agreement with Nations Mobile, pursuant to which we opened
        a
        revolving line of credit of $1,000,000 from the affiliate. The funds drawn
        under
        the line of credit were used for working capital. The line of credit was
        terminated in October 2005 and renewed on July 12, 2006 for a period of a
        year,
        under the same terms as the Loan Agreement dated September 25,
        2003.
  In
        order
        to continue on its proposed business plan, we will require additional capital
        and plans to seek financing during the fiscal year which ends March 31,
        2007. We are attempting to increase its operating liquidity by considering
        the
        availability of outside debt and equity financing, to the extent that such
        funding is available of which there can be no assurance of such availability
        of
        either debt or equity financing.
  On
        February 8, 2006, we entered into a Securities Purchase Agreement (the
“ 2006
        Securities Purchase Agreement ”)
        with
        Cornell Capital Partners and Highgate House Funds, Ltd., whereby we agreed
        to
        amend and restate the secured convertible debentures we previously issued
        to
        Cornell Capital Partners and Highgate House Funds, Ltd. in July 2005 under
        a
        Securities Purchase Agreement, dated July 25, 2005 (the “ 2005
        Securities Purchase Agreement ”).
        Under
        the 2006 Securities Purchase Agreement, Cornell Capital Partners and Highgate
        House Funds, Ltd. are obligated to purchase from us secured convertible
        debentures in the principal amount of $3,500,000. Prior to entering into
        the
        2006 Securities Purchase Agreement, we issued secured convertible debentures
        to
        Cornell Capital Partners and Highgate House Funds in the principal aggregate
        amount equal to $3,000,000 which was funded on July 25, 2005. Pursuant to
        2006 Securities Purchase Agreement, Cornell Capital Partners provided us
        an
        additional $500,000 in secured convertible debentures. 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 of $56,665. 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 5 trading
        days
        immediately proceeding the conversion date. The debentures are secured by
        substantially all our assets.
  17
  In
        connection with the Securities Purchase Agreement, we issued to Cornell Capital
        Partners three warrants, each of which is exercisable for a period of five
        years. The first warrant allows Cornell Capital Partners to purchase 500,000
        shares of our common stock at an exercise price of $1.00. The second warrant
        allows Cornell Capital Partners to purchase 700,000 shares of our common
        stock
        at an exercise price of $0.75. The third warrant allows Cornell Capital Partners
        to purchase 1,000,000 shares of our common stock at an exercise price of
        $0.50.
  During
        the fiscal year ended March 31, 2006, we issued 2,650,000 shares of common
        stock pursuant to the exercise of options granted under the 2003 Stock Option
        Plan. Upon the exercise of the options, we forgave the exercise price of
        the
        option totaling $1,404,500 which has been charged against operations. We
        also
        issued 35,000 shares of common stock to a related party and recorded it as
        a subscription receivable from a related party. We granted 900,000 stock
        options
        at an exercise price of $2.00, to various employees, consultants and advisors.
        One half of the options vest on March 31, 2006 and the balance vests on
        March 31, 2007. On September 30, 2005, we agreed to cancel the 900,000 of
        the $2.00 options and to immediately vest the remaining 250,000 options which
        were granted on October 18, 2003. None of the options cancelled were vested.
        On
        April 29, 2005, the Company granted 1,230,000 stock options, at an exercise
        price of $1.00, to various employees, consultants and advisors. In November
        of
        2005, a total of 2,650,000 shares of stock were issued pursuant to the exercise
        of options granted under the 2003 Stock Option Plan.
  ***2005***
  At
        March
        31, 2005, we had negative working capital of approximately $287,500 which
        consisted of current assets of approximately $5,500 and current liabilities
        of
        approximately $293,000. Our current assets were composed of approximately
        $2,000
        in cash and accounts receivable of approximately $3,500. Our current liabilities
        of approximately $293,000 represented accounts payable and accrued expenses
        of
        approximately $281,000, related party payable of $8,600 and the current portion
        of long-term debt of approximately $3,000. Total shareholders’ deficit
        accumulated in the development stage increased from $1,642,274 at March 31,
        2005
        to $8,029,045 at December 31, 2005. The increase in deficit of $6,386,771
        is due
        primarily to the net loss of $6,386,771 incurred for the nine month period
        ended
        December 31, 2005.
  On
        July
        25, 2005, we entered into the 2005 Securities Purchase Agreement with Cornell
        Capital Partners and Highgate House Funds, LTD, whereby they purchased
        $3,000,000 of convertible debenture from us. The 2005 Securities Purchase
        Agreement was subsequently amended and restated in February 2006. Pursuant
        to
        the terms of the agreement, the convertible debentures had a one-year term,
        accrued 10% annual interest, and were secured by all of our assets. We received
        the initial amount at closing on July 25, 2005, and the second amount of
        funding, in the amount of $1,500,000, was received on October 27, 2005. In
        connection with the 2005 Securities Purchase Agreement, we issued four warrants.
        The first warrant issued to Cornell Capital Partners for 150,000 shares of
        our
        common stock had an exercise price equal to $3.00 or as adjusted under the
        terms
        of the warrant. The second warrant to Cornell Capital Partners for 75,000
        shares
        of our common stock had an exercise price equal to $4.00 or as adjusted under
        the terms of the warrant. The third warrant issued to Highgate House Funds,
        Ltd.
        for 150,000 shares of our common stock has an exercise price equal to $3.00
        or
        as adjusted under the terms of the warrant. The fourth warrant issued to
        Highgate House Funds, Ltd. for 75,000 shares of our common stock has an exercise
        price equal to $4.00 or as adjusted under the terms of the warrant. The warrants
        expire five years from July 25, 2005.
 
 On
        July
        25, 2005, we entered into an Equity Distribution Agreement with Cornell Capital
        Partners. Under the Equity Distribution Agreement, we would have been able
        to
        issue and sell to Cornell Capital Partners common stock for a total purchase
        price of up to $100,000,000. The amount of each cash advance was subject
        to a
        maximum advance amount of $1,500,000, with no cash advance occurring within
        seven trading days of a prior advance. Cornell Capital Partners received
        1,000,000 shares of common stock issued as a one-time commitment fee under
        the
        Equity Distribution Agreement on July 25, 2005. On July 25, 2005, we entered
        into a Placement Agent Agreement with Monitor Capital, Inc., a registered
        broker-dealer. Pursuant to the Placement Agent Agreement, we paid Monitor
        Capital, Inc. a one-time placement agent fee of 7,143 restricted shares of
        common stock equal to approximately $10,000 based on the market price of
        the
        stock at the time of issuance. On November 9, 2005, we and Cornell Capital
        Partners entered into a Termination Agreement, whereby we mutually agreed
        to
        terminate the Equity Distribution Agreement and all agreements related to
        the
        Equity Distribution Agreement.
  18
  On
        October 18, 2005, we issued 35,000 shares of our common stock at $1.00 per
        share
        price as a loan to Nations Mobile Networks, Ltd.
  On
        November 17, 2005, we granted options to employees and consultants to purchase
        2,650,000 shares of our stock at $.53 per share (which vested immediately).
        In
        addition, we granted options to an employee and a consultant to purchase
        200,000
        shares of our common stock at $1.00 per share (which vests 100,000 shares
        on
        January 6, 2006 and 100,000 shares on January 6, 2007). The fair value of
        the
        1,400,000 options granted to consultants ($916,000) has been included in
        options
        expense during the three months ended December 31, 2005.
  On
        November 17, 2005, we allowed the exercise of the 2,650,000 options and forgave
        the exercise price of the option ($1,404,500) which has been included ($397,500)
        in legal and professional fees and ($1,007,000) in salaries during the three
        months ended December 31, 2005.
  **ITEM
        7. FINANCIAL STATEMENTS**
  Financial
        statements are audited and included in Appendix A and are incorporated in
        this Item 7 by this reference.
  **ITEM
        8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
  There
        were no disagreements with accountants on accounting and financial disclosure
        during the relevant period.
  In
        June
        2006, the Company changed auditors from its previous auditor Killman, Murrell
        & Co., P.C. to Rose, Synder, & Jacobs.
  **ITEM
        8A. CONTROLS AND PROCEDURES**
  **(a)**  **Evaluation
        of Disclosure Controls and Procedures:**
  As
        of the
        end of the period covered by this Report, the Company carried out an evaluation,
        under the supervision and with the participation of the Company’s Principal
        Executive Officer and Principal Accounting Officer, of the effectiveness
        of the
        design and operation of the Company’s disclosure controls and procedures. The
        Company’s disclosure controls and procedures are designed to produce a
        reasonable level of assurance of achieving the Company’s disclosure control
        objectives. The Company’s Principal Executive Officer and Principal Accounting
        Officer have concluded that the Company’s disclosure controls and procedures
        were, in fact, 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 rules of the
        SEC
        and accumulated and communicated to the Company’s management, including its
        Principal Executive Officer and Principal Accounting Officer, to allow timely
        decisions regarding required disclosure.
  **(b)**  **Changes
        In Internal Controls Over Financial Reporting:**
  In
        connection with the evaluation of the Company’s internal controls during the
        Company’s last fiscal year, 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 has materially
        affected, or is reasonably likely to materially effect, the Company’s internal
        controls over financial reporting.
  19
  **ITEM
        8B. OTHER INFORMATION**
  None.
  20
  **PART
        III**
  **ITEM
        9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH
        SECTION 16(A) OF THE EXCHANGE ACT**
  The
        following table sets forth the names and ages of all directors and executive
        officers of the Company and all persons nominated or chosen to become a
        director, indicating all positions and offices with the Company held by each
        such person and the period during which he has served as a
        director:
  **Executive
        Officers And Directors**
  The
        principal executive officers and directors of the Company are as
        follows:
  **Name**
              
              **Age**
              
              **Positions
                  Held and Tenure**Milton
                  Hahn*
              
              35
              
              Chairman
                  and Chief Executive Officer -since
                  April 2006Maral
                  Ajemian
              
              44
              
              Director
                  - since February 2005Joseph
                  Gutierrez
              
              50
              
              President,
                  Chief Financial Officer and Director -since
                  February 2002Kenneth
                  T. Hern
              
              68
              
              Director
                  - since December 2005
 
 *Mr.
        Hahn
        was appointed Chief Executive Officer in April 2006.
 
 The
        Directors named above will serve until the next annual meeting of our
        stockholders. Thereafter, Directors will be elected for one-year terms at
        the
        annual stockholder’s meeting. Officers will hold their positions at the pleasure
        of the Board of Directors. There is no arrangement or understanding between
        us
        and our Directors and Officers and any other person pursuant to which any
        Director or Officer was or is selected as a Director or Officer of the
        Company.
  Below
        are
        the biographies of our executive officers and directors:
  **Ms.
        Maral Ajemian**
  Ms.
        Ajemian is a Certified Public Accountant for the firm of Cooper, Moss, Resnick
        & Klein, LLP in Encino, California, where she is presently a manager. Ms.
        Ajemian has worked at Cooper, Moss, Resnick & Klein since 1999. Prior to her
        tenure at Cooper, Moss, she was a partner at Klein, Schneider & Company,
        also in Encino, California.
  Ms.
        Ajemian’s area of expertise is in tax issues and she represents clients before
        the Internal Revenue Service. Ms. Ajemian became a CPA in 1986 and has worked
        as
        a CPA since that time. Ms. Ajemian graduated from California State University
        Northridge with a degree in accounting and became a CPA in 1985.
  **Mr.
        Joseph Gutierrez**
  Mr.
        Gutierrez has served as President, CFO and Director for the Company since
        2002.
        Mr. Gutierrez is also responsible for coordinating, maintaining, supervising
        all
        international business activities in Latin American countries, which includes
        direct interfacing with local representatives and governmental
        agencies.
  Mr.
        Gutierrez has an extensive background in technology-based public entities,
        as
        well as management and consolidated accounting reporting for international
        corporations. He received his Masters in Business Taxation from Golden Gate
        University and his Bachelor of Science in Business
        Administration-Accounting/Finance from the California State University at
        Northridge.
  21
  From
        1999
        to 2002, Mr. Gutierrez served as CFO of WebCapital Ventures, with operations
        in
        Florida and California.
  **Mr.
        Milton S. Hahn**
  Mr.
        Hahn
        recently became Chairman and Chief Executive Officer of aeroTelesis. Prior
        to
        becoming Chairman and CEO, Mr. Hahn was engaged by aeroTelesis in December
        2004
        as a strategic advisor and was the Director of Corporate Finance. Mr.
        Hahn
        has an extensive background in investment banking, in corporate finance,
        mergers
        and acquisitions, private equity, and private placements for public and private
        companies.  He is the founder and managing member of Pacific Greystoke
        Partners LLC (“ PGP ”),
        a
        boutique investment bank and consulting firm formed in June 2001. Mr. Hahn
        is
        the sole managing member and funded the startup costs and costs of operations
        with his own capital.  He is responsible for the overall development,
        management and operations of PGP. Mr. Hahn also takes the lead position as
        the
        advisor on all projects that PGP is involved in and in certain cases takes
        a
        co-lead position in performing various advisory services. Prior to
        founding PGP, Mr. Hahn joined Direct Capital Markets (“ DCM ”)
        in
        2000, a portfolio company of Putnam Lovell Capital Partners, where he served
        as
        Managing Director, and was responsible for managing and developing the private
        equity placement division.  He initially joined as the head of Direct
        Capital Securities (“ DCS ”),
        the
        broker-dealer division of DCM and was responsible for recruiting and managing
        a
        team of 10 professionals. Prior to joining DCM, Mr. Hahn was with Putnam
        Lovell,
        an investment bank in various positions . 
        Putnam Lovell managed $150 million in private equity funds for several
        institutional and high net worth investors. Mr. Hahn led or participated
        in the
        analysis and structuring of numerous investments made by Putnam Lovell’s private
        equity funds, and served on the Board of Directors, as an Observer on the
        Board
        of Directors  and Advisory Boards for several portfolio companies. Mr. Hahn
        began his career with Putnam Lovell in 1993  as an Analyst in the mergers
& acquisitions group and has participated in numerous transactions with an
        aggregate transaction value of over $4 billion.  From 1995 to
        1997, Mr. Hahn was an Associate and subsequently was promoted in 1999 to
        Vice President in the investment banking division. In 1998, Mr. Hahn also
        served
        as Principal in Putnam Lovell Capital Partners, a subsidiary of Putnam
        Lovell. Mr. Hahn graduated magna cum laude from the Marshall School of
        Business at the University of Southern California with a Bachelor of Science
        Degree in Business Administration and Finance.
  **Mr.
        Kenneth T. Hern**
  Mr.
        Hern
        has been actively involved in several business ventures since his retirement
        from Texaco Corporation (acquired by Chevron Corporation NYSE:CVX) after
        having a distinguished career that spanned for 25 years. Mr. Hern was the
        former
        President of Texaco Brazil, the former Vice Chairman and Managing Director
        of
        Texaco Nigeria and former President of Texaco Saudi Arabia. Mr. Hern was
        nominated to serve as the United States Ambassador to Saudi Arabia and Nigeria,
        which he respectfully declined to continue to manage his family enterprises.
        During his tenure at Texaco, Mr. Hern actively acted as an advisor or
        participated in various counsels to the heads of state and other senior
        government officials in Brazil, Nigeria and Saudi Arabia. He received his
        Masters in Business Administration from Carnegie Mellon University, his Master
        of Science degree in Organic Chemistry from North Texas State University,
        his
        Bachelor of Arts degree in Chemistry from Austin College and his Associates
        Degree from the Wharton School of Business at the University of
        Pennsylvania.
  **Family
        Relationships**
  There
        is
        no family relationship between or among any Officer and Director. However,
        Ms.
        Ajemian’s brother is the President and director of Nations, the controlling
        shareholder of the Company. Ms. Ajemian disclaims any ownership interest,
        directly or beneficially, in the shares of our common stock held by
        Nations.
  **Term
        Of Office**
  The
        directors named above will serve until the next annual meeting of our
        stockholders. In absence of an employment agreement, officers hold their
        positions at the pleasure of the Board of Directors.
  **Committees
        of the Board of Directors**
  During
        the year ended March 31, 2006, the Company did not establish any committees.
        Subsequent to March 31, 2006, the Company established an Audit Committee
        in May
        2006. Ms. Ajemian currently serves as a member of the Audit Committee.
  22
  The
        Company’s ability to create committees depends in large part on the Company
        being able to interest and attract independent directors willing to serve
        on the
        Board, of which there can be no assurances.
  **Compensation
        Of Directors**
  The
        Directors do not receive or accrue any compensation for his services as a
        Director, including committee participation and/or special assignments, except
        Ms. Ajemian received unvested options to purchase 100,000 shares of the
        Company’s common stock that vest in April, 2006.
  In
        the
        future, it is anticipated that outside directors will be compensated for
        their
        service to us through the issuance of (i) shares of common stock; or (ii)
        grants
        of options to purchase common stock; or (iii) cash, or a combination of all
        three. No such compensation plan is currently in effect but as we attempt
        to
        attract outside directors to serve on its Board, it is likely that we will
        institute such a plan.
  Directors
        are entitled to reimbursement for reasonable travel and other out-of-pocket
        expenses incurred in connection with attendance at meeting of the Board of
        Directors.
  We
        have
        no material bonus or profit-sharing plans pursuant to which cash or non-cash
        compensation is or may be paid to the Company’s directors or executive officers
        except as described above.
  We
        have
        no compensatory plan or arrangements, including payments to be received from
        us,
        with respect to any executive officer or director, where such plan or
        arrangement would result in any compensation or remuneration being paid
        resulting from the resignation, retirement or any other termination of such
        executive officer’s employment or from a change-in-control of the Company or a
        change in such executive officer’s responsibilities following a change in
        control and the amount, including all periodic payments or installments where
        the value of such compensation or remuneration exceeds $100,000 per executive
        officer.
  During
        the last completed fiscal year, no funds were set aside or accrued by us
        to
        provide pension, retirement or similar benefits for Directors or Executive
        Officers.
  **Legal
        Proceedings**
  To
        our
        knowledge, none of the Company’s directors have been involved in legal
        proceedings.
  **Section
        16(a) Beneficial Ownership Reporting Compliance**
  Section
        16(a) of the Exchange Act requires our directors and executive officers,
        and
        person who own more than 10% of a registered class of our equity securities
        to
        file with the SEC initial reports of ownership and reports of changes in
        ownership of common stock and other of our equity securities. Officers,
        directors and greater-than-10% shareholders are required by SEC regulations
        to
        furnish us copies of all Section 16(a) forms they file.
  Based
        on
        available information, we believe that the following persons have not complied
        with Section 16(a): Joseph Gutierrez; Kenneth T. Hern; Maral Ajemian and
        Nations
        Mobile Networks Ltd.
  **Code
        Of Ethics**
  In
        June
        2004, our Board of Directors adopted a Code of Business Conduct and Ethics
        that
        applies to all of our officers, directors and employees.
  **ITEM
        10. EXECUTIVE COMPENSATION**
  The
        following table sets forth the compensation awarded by the Company for the
        fiscal years ended March 301 2004, 2005 and 2006 to the following
        executives (the “ Named
        Executive Officers ”):
  23
  **SUMMARY
        COMPENSATION TABLE**
 
 **LONG-TERM
                  COMPENSATION****ANNUAL
                  COMPENSATION**
              
              
              
              **AWARDS**
              
              **PAYOUTS****NAME
                  AND PRINCIPAL POSITION**
              
              
              **YEAR**
              
              
              **SALARY**
                **($**)****
              
              
              **BONUS**
                **($**)****
              
              
              **OTHER
                  ANNUAL COMPENSATION**
                **($**)****
              
              
              **RESTRICTED
                  STOCK AWARD(S**)******($**)****
              
              
              **SECURITIES
                  UNDERLYING OPTIONS/SARS**
                **(#**)****
              
              
              **LTIP
                  PAYOUTS**
                **($**)****
              
              
              **ALL
                  OTHER COMPENSATION**
                **($**)****Joseph
                  Gutierrez
              
              
              2006
              
              $
              88,000
              
              
              0
              
              
              0
              
              
              0
              
              
              —
              
              
              —
              
              
              —President,
                  Chief Financial Officer
              
              
              2005
              
              $
              72,000
              
              
              0
              
              
              0
              
              
              0
              
              
              800,000(1)
              
              
              0
              
              
              0And
                  Principal Accounting Officer
              
              
              2004
              
              $
              72,000
              
              
              0
              
              
              0
              
              
              0
              
              
              550,000
              
              
              0
              
              
              0
 
 (1)
              Mr.
                  Gutierrez has received options to purchase 300,000 Common Shares
                  at $0.02
                  per share that became exercisable in March, 2005. He also received
                  options
                  to purchase 250,000 Common Shares at $2.00 per share that begin
                  to vest in
                  2006. He was also granted options to purchase 250,000 shares at
                  $1.00 per
                  share in April, 2005, which vested on June 1, 2005. Mr. Gutierrez
                  exercised 300,000 options at an option price of $.02 in July,
                  2005.
  ***Stock
        Option Plans.*** The
        Company has three stock options plans. Under the 2003 Stock Option Plan,
        dated
        July 1, 2003, (the “ July
        2003 Plan ”),
        the
        Company reserved for issuance a total of 5,000,000 shares for issuance to
        officers, directors, advisors and consultants. Some of these options were
        returned to the July 2003 Plan because they had not vested prior to certain
        employees leaving the Company, which resulted in the options being canceled.
        Some options were re-issued in 2005. Presently, no options remain available
        for
        issuance under the July 2003 Plan.
  Under
        the
        October 2003 Plan, the Company reserved for issuance a total of 7,000,000
        shares
        for issuance to officers, directors, consultants and advisors of which no
        options have been issued. These options range in price from $.02 to $2.00
        per
        share. As of March 31, 2006, 250,000 options have been issued under the October
        2003 Plan
  Under
        the
        2004 Stock Option Plan, dated August 1, 2004 (the “ 2004
        Plan ”),
        the
        Company issued 50,000 shares for issuance to a consultant. The number of
        shares
        that are authorized for issuance under the Plan shall not exceed 50,000 shares.
        The share price at which each share may be purchased shall be determined
        in each
        case by the Board of Directors and set forth in the Stock Option Agreement,
        but
        in no event shall the price be less than 100% of the Fair Market value of
        the
        shares on the date of grant. As of March 31, 2006, 50,000 shares have been
        issued under the 2004 Plan.  As
        of
        March 31, 2006, there remain 6,750,000 shares, which can be issued under
        all the Stock Option Plans, after giving effect to stock splits and shares
        issued under the Plans.
  **Option/SAR
        Grants Table**
  The
        following table sets forth information concerning individual grants of stock
        options in 2005 to the Named Executive Officers:
  **OPTION/SAR
        GRANTS IN LAST FISCAL YEAR** **(1)**
 
 **NAME**
              
              **NUMBER
                  OF SECURITIES UNDERLYING OPTIONS/SARS GRANTED (#)**(2)
              
              **%
                  TOTAL OPTIONS/SARS GRANTED TO EMPLOYEES IN FISCAL YEAR****(_)**
              
              **EXERCISE
                  OR BASE PRICE ($/SH)**
              
              **EXPIRATION
                  DATE****(_)**Joseph
                  Gutierrez
              
              
              1,550,000
              
              
              31
              %
              
              0.77
              
              
              4/28/2014
  **Aggregated
        Option; Fiscal Year-End Value**
  The
        following table provides information, with respect to the executive officers,
        concerning unexercised options held by them at the end of the fiscal year
        ended
        March 31, 2006. None of the executive officers exercised any stock
        appreciation rights during the 2005 fiscal year and no stock appreciation
        rights
        were held by the named executive officers at the end of such
        year.
  24
  **AGGREGATED
        FISCAL YEAR-END OPTION VALUES**
 
 **Number
                  of Unexercised Options**
                **at
                  Fiscal Year End 3-31-06**
              
              **Value
                  of Unexercised**
                **In-the-Money
                  Options**
                **at
                  Fiscal Year End****(1)****Name**
              
              **Exercisable**
              
              **Unexercisable**
              
              **Exercisable**
              
              **Unexercisable**Joseph
                  Gutierrez
              
              
              600,000
              
              
              0
              
              $
              0
              
              $
              0
 
 (1)
              Based
                  on a market value of $0.35 per Common Share on March 31,
                  2006.
  **Compensation
        of Directors**
  Our
        Directors are entitled to reasonable reimbursement for their travel expenses
        in
        attending meetings of the Board of Directors. It is expected that compensation
        plans will be established for outside directors that the Company plans to
        engage
        in the coming months. Such compensation plan is likely to be comprised of
        quarterly cash payments and/or stock options.
  **Employment
        Contracts and Termination of Employment, and Change-in-Control
        Arrangements**
  ***Employment
        Agreements.*** We
        did
        not enter into any employment agreements during the year ended March 31,
        2006.
        Subsequent to March 31, 2006, the Company entered on April 5, 2006, into
        a
        Memorandum of Terms with Milton Hahn. Milton Hahn was appointed as Chief
        Executive Officer and Chairman of the Board of Directors. Mr. Hahn’s tenure is
        for a term of one year, renewable on an annual basis. Mr. Hahn’s compensation is
        $360,000 per annum, payable on a semi-monthly basis. Mr. Hahn has also been
        awarded options to acquire 2,000,000 shares of the Company’s common stock under
        the 2003 Stock Option Plan, dated October 15, 2004 (the “ October
        2003 Plan ”).
        Mr.
        Hahn will be awarded 3,000,000 shares of restricted common stock issuable
        upon
        the execution of a final employment agreement between him and the Company.
        Additionally, Mr. Hahn is entitled to receive up to 10,000,000 restricted
        common
        stock upon the Company reaching several milestones, including listing on
        a
        national exchange and reaching a certain market capitalization.
  **ITEM
        11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
        MANAGEMENT**
  There
        were 88,397,794 shares of our common stock issued and outstanding on
        March 31, 2006 and 92,473,684 shares of the Company’s common stock issued
        and outstanding on a fully-diluted basis as of March 31, 2006. No preferred
        shares were issued and outstanding at March 31, 2006.
  The
        table
        below sets forth information with respect to the beneficial ownership of
        our
        common stock as of the date of filing of this Annual Report for (i) any person
        who we know is the beneficial owner of more than 5% of our outstanding common
        stock; (ii) each of our directors or those nominated to be directors, and
        executive officers; and (iii) all of our directors and executive officers
        as a
        group.
  25
  **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS****Title
                  of Class**
              
              
              **Name
                  and Address**
                **of
                  Beneficial Owner**
              
              
              **Amount
                  and Nature of Beneficial Ownership**
              
              
              **Percentage**
                **of
                  Class****(1)**Common
              
              
              Nations
                  Mobile Networks Ltd.
                Level
                  31
                Six
                  Battery Road
                Singapore
                  049909
              
              
              77,543,807
              
              
              87.72
              %TOTAL:
              
              
              77,543,807
              
              
              87.72
              %
 
 (1)
              Applicable
                  percentage of ownership is based on 88,397,794 shares of common
                  stock
                  outstanding as of March 31, 2006 for each stockholder. Beneficial
                  ownership is determined in accordance with the rules of the SEC
                  and
                  generally includes voting of investment power with respect to securities.
                  Shares of common stock subject to securities exercisable or convertible
                  into shares of common stock that are currently exercisable or exercisable
                  within 60 days of March 31, 2006 are deemed to be beneficially
                  owned by
                  the person holding such options for the purpose of computing the
                  percentage of ownership of such persons, but are not treated as
                  outstanding for the purpose of computing the percentage ownership
                  of any
                  other person.
  **Title
                  of Class**
              
              **Name
                  and Address**
              
              **Number
                  of Shares Beneficially Owned**
              
              **Percent
                  of Shares Owned****(1)**Joseph
                  Gutierrez*(2)
                11150
                  W. Olympic Blvd., Suite 860
                Los
                  Angeles CA 90064
              
              1,550,000
              
              1.75%Milton
                  Hahn
                11150
                  W. Olympic Blvd., Suite 860
                Los
                  Angeles CA 90064
              
              120,000
              
              0.14%Kenneth
                  T. Hern
                12
                  Bristol Court
                Montgomery,
                  TX 77356
              
              0
              
              0%Maral
                  Ajemian*(3)
                11150
                  W. Olympic Blvd., Suite 860
                Los
                  Angeles CA 90064
              
              139,718
              
              0.16%Nations
                  Mobile Networks Ltd.
                Level
                  31
                Six
                  Battery Road
                Singapore
                  049909
              
              77,543,807
              
              87.72%All
                  Directors and Officers as a group (3 persons)
              
              1,809,718
              
              2.05%
 
 *
              Denotes
                  officer and director.
  (1)
              Applicable
                  percentage of ownership is based on 88,397,794 shares of common
                  stock
                  outstanding as of March 31, 2006 for each stockholder. Beneficial
                  ownership is determined in accordance with the rules of the SEC
                  and
                  generally includes voting of investment power with respect to securities.
                  Shares of common stock subject to securities exercisable or convertible
                  into shares of common stock that are currently exercisable or exercisable
                  within 60 days of March 31, 2006 are deemed to be beneficially
                  owned by
                  the person holding such options for the purpose of computing the
                  percentage of ownership of such persons, but are not treated as
                  outstanding for the purpose of computing the percentage ownership
                  of any
                  other person.
  26
  (2)
              On
                  October 15, 2003, Mr. Gutierrez received options to purchase 250,000
                  Common Shares at $2.00 per share that have no been exercised. On
                  April 29,
                  2005, he received options to purchase 350,000 Common Shares at
                  $1.00 per
                  share that have not been exercised. On July 1, 2005, Mr. Gutierrez
                  has
                  received options to purchase 300,000 Common Shares at $0.02 per
                  share that
                  were exercised. On November 17, 2005, he received options to purchase
                  650,000 Common Shares at $0.53 per share that were exercised. The
                  Company
                  forgave the exercise price of the option totaling $344,500 which
                  has been
                  expensed.
  (3)
              The
                  beneficial ownership of securities listed for Ms. Ajemian, Director
                  of the
                  Company, represents 100,000 options. Ms. Ajemian also disclaims
                  any direct
                  or beneficial interest in shares owned by Nations Mobile Networks,
                  Ltd., a
                  company in which her brother, Jhano Ajemian, is the President and
                  Director.
  ***Changes
        in Control.*** There
        are
        no arrangements known to us, including any pledge by any person of securities
        of
        the Company, the operation of which may at a subsequent date result in a
        change
        of control of the Company.
  **ITEM
        12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
  Maral
        Ajemian is the sister of Jhano Ajemian, an officer and director of Nations
        Mobile Networks, Ltd., the majority shareholder of the Company. Ms. Ajemian
        disclaims any beneficial or direct ownership interest in the shares owned
        by
        Nations Mobile Networks, Ltd.
  On
        October 20, 2005, the Company and Milton Hahn entered into a Settlement
        Agreement and General Mutual Release (the “ Settlement
        Agreement ”),
        whereby both parties agreed to terminate that certain Letter Agreement, dated
        December 6, 2004, relating to a financing of the Company. Pursuant to the
        Settlement Agreement, the parties further agreed that Company is obligated
        to
        pay Hahn (i) a total cash settlement amount of $72,700 representing certain
        fees
        in connection with a convertible debenture financing with Cornell Capital
        Partners; and (ii) a total cash settlement of 6.5% fees for the second tranche
        of $1.5 million under the secured debenture financing with Cornell Capital
        Partners. As of March 31, 2006 Company paid Milton Hahn, a total of $72,700
        under the Settlement Agreement.
  **ITEM
        13. EXHIBITS AND REPORTS ON FORM 8-K**
  **(a)**  **Financial
        Statements and Schedules:**
  The
        following financial statements and schedules are filed as part of this
        report:
  ·
              Independent
                  Auditors’ Report dated June 30,
                  2006
  ·
              Balance
                  Sheet for the Fiscal Year Ended March 31,
                  2006
  ·
              Statements
                  of Operations for the Fiscal Years Ended March 31, 2006 and
                  2005
  ·
              Statement
                  of Stockholders’ Equity
  ·
              Statements
                  of Cash Flows For the Years Ended March 31, 2006 and
                  2005
  ·
              Notes
                  to Financial Statements
  **(b)**  **Exhibits:**
  The
        following exhibits are filed as part of this report.
  **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,
                  2005
  27
 
 **EXHIBIT
                  NO.**
              
              **DESCRIPTION**
              
              **LOCATION**10.1
              
              Registration
                  Rights Agreement dated as of July 25, 2005 between the Company and
                  Cornell Capital Partners, LP
              
              Filed
                  as an exhibit to the Company’s 8-K filed on July 27,
                  200510.2
              
              Placement
                  Agent Agreement dated as of July 25, 2005 by and among the Company,
                  Cornell Capital Partners, LP and Monitor Capital, Inc.
              
              Filed
                  as an exhibit to the Company’s 8-K filed on July 27,
                  200510.3
              
              Warrant
                  dated as of July 25, 2005 issued to Cornell Capital Partners,
                  LP
              
              Filed
                  as an exhibit to the Company’s 8-K filed on July 27,
                  200510.4
              
              Warrant
                  dated as of July 25, 2005 issued to Cornell Capital Partners,
                  LP
              
              Filed
                  as an exhibit to the Company’s 8-K filed on July 27,
                  200510.5
              
              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,
                  200610.6
              
              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,
                  200610.7
              
              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,
                  200610.8
              
              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,
                  200610.9
              
              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,
                  200610.10
              
              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,
                  200610.11
              
              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,
                  200610.12
              
              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,
                  200610.13
              
              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,
                  200610.14
              
              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
  28
  **EXHIBIT
                  NO.**
              
              **DESCRIPTION**
              
              **LOCATION**10.16
              
              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
  **ITEM
        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
  The
        following table sets forth fees billed to us by Clyde Bailey P.C. and Killman
        Murrel & Co., P.C. during the fiscal years ended March 31, 2006 and
        March 31, 2005 for: (i) services rendered for the audit of our annual
        financial statements and the review of our quarterly financial statements,
        (ii)
        services by our auditor that are reasonably related to the performance of
        the
        audit or review of our financial statements and that are not reported as
        Audit
        Fees, (iii) services rendered in connection with tax compliance, tax advice
        and
        tax planning, and (iv) all other fees for services rendered.
  **March 31,
                  2006**
              
              
              **March
                  31, 2005**(i)
              
              Audit
                  Fees
              
              $
              71,885
              
              $
              14,536(ii)
              
              Audit
                  Related Fees
              
              $
              6,522
              
              $
              3,523(iii)
              
              Tax
                  Fees
              
              $
              0
              
              $
              0(iv)
              
              All
                  Other Fees
              
              $
              26,008
              
              $
              0
 
 ***Audit
        Fees.*** Consists
        of fees billed for professional services rendered for the audit of aeroTelesis,
        Inc.’s financial statements and review of the interim consolidated financial
        statements included in quarterly reports and services that are normally provided
        by our auditors in connection with statutory and regulatory filings or
        engagements.
  ***Audit-Related
        Fees.*** Consists
        of fees billed for assurance and related services that are reasonably related
        to
        the performance of the audit or review of aeroTelesis, Inc. financial statements
        and are not reported under “ Audit
        Fees .”
  ***Tax
        Fees.*** Consists
        of fees billed for professional services for tax compliance, tax advice and
        tax
        planning. There were no tax services provided in fiscal 2006 or
        2005.
  ***All
        Other Fees.*** Consists
        of fees for products and services other than the services reported above.
        There
        were $26,008 fees paid related to the review and filing of an SB-2 Registration
        Statement.
  **Policy
        On Audit Committee Pre-Approval Of Audit And Permissible Non-Audit Services
        Of
        Independent Auditors**
  We
        established an Audit Committee in May 2006. For the year ended March 31,
        2006,
        we did not have a designated Audit Committee, and accordingly, our Board
        of
        Directors pre-approved all audit and permissible non-audit services provided
        by
        the independent auditors. These services included audit services, audit-related
        services, tax services and other services. Pre-approval was generally provided
        for up to one year and any pre-approval is detailed as to the particular
        service
        or category of services and is generally subject to a specific budget. The
        independent auditors and management were required to periodically report
        to our
        Board of Directors regarding the extent of services provided by the independent
        auditors in accordance with this pre-approval, and the fees for the services
        performed to date. The Board of Directors also pre-approved particular services
        on a case-by-case basis.
  29
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  Date:July
                  13, 2006
              **AEROTELESIS,
                INC.**By:
              */s/
                  Milton Hahn*Milton
                  HahnChief
                  Executive Officer
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this Amended
        Report
        has been signed below by the following persons on behalf of the Registrant
        and
        in the capacities and on the dates indicated.
  **Date:**
              
              **AEROTELESIS,
                  INC.***/s/
                  Milton Hahn***July
                  13, 2006**
              
              Milton
                  Hahn, Chief Executive Officer and Chairman of the Board of
                  Directors*/s/
                  Joseph Gutierrez***July
                  13, 2006**
              
              Joseph
                  Gutierrez, President, CFO, Director*/s/**Kenneth
                  T. Hern***July
                  13, 2006**
              
              Kenneth
                  T. Hern, Director*/s/
                  Maral Ajemian***July
                  13, 2006**
              
              Maral
                  Ajemian, Director
  30
  APPENDIXA
 **INDEX
          TO FINANCIAL STATEMENTS AND SCHEDULES**
  Report
                    of Independent Registered Public Accounting Firm
                F-iBalance
                    Sheet as of March 31, 2006
                F-2Statements
                    of Operationsfortheyearsended
                    March 31, 2006 and 2005
                F-2Statement
                    of Stockholders' Equity
                F-3Statements
                    of Cash Flows for the years ended March 31, 2006 and 2005
                F-4Notes
                    to Financial Statements
                F-5
  i
  **FINANCIAL
        STATEMENTS**
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        The
        Board of Directors and Stockholders
 aeroTelesis,
        Inc.
 
 We
        have
        audited the accompanying balance sheet of aeroTelesis, Inc. (a development
        stage
        company) (the “Company”) as of March 31, 2006 and the related statements of
        operations, stockholders’ equity and cash flows for the year then ended and for
        the period from when the Company re-emerged as a development stage company
        (October 3, 2003) through March 31, 2006. These financial statements are
        the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these financial statements based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
 
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of aeroTelesis, Inc. as
        of
        March 31, 2006, and the results of its operations and cash flows for the
        year
        then ended and for the period from when the Company reemerged as a development
        stage company (October 3, 2003) through March 31, 2006, in conformity with
        accounting principles generally accepted in the United States of America.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 1 to the
        financial statements, the Company has no significant revenue, has sustained
        operating losses since it re-emerged as a development stage company and has
        negative working capital at March 31, 2006. These conditions raise substantial
        doubt about the Company's ability to continue as a going concern. Management's
        plans regarding those matters also are described in Note 1. The financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.
  /s/ *Rose,
                Snyder & Jacobs*Rose,
                Snyder & Jacobs
                A
                  Corporation of Certified Public AccountantsEncino,
                  California
                June
                  15, 2006, except for note 13, for which the date is July 12,
                  2006
  F-i




**aeroTelesis
      Inc.**


**(A
      Development Stage Enterprise)**


**Balance
      Sheet**


**As
      of March 31, 2006**





**ASSETS**Current
                AssetsCash
            
            $
            67,823Prepaid
                Insurance
            
            
            28,493Total
                Current Assets
            
            
            
            
            
            96,316Fixed
                Assets:Equipment
                under Capital Lease
            
            
            30,832Furniture
                & Fixtures
            
            
            120,022Accumulated
                Depreciation
            
            
            (46,859
            )Total
                Fixed Assets
            
            
            
            
            
            103,995Other
                Assets:Deposits
            
            
            26,784Licenses,
                net
            
            
            2,698,781Total
                Other Assets
            
            
            
            
            
            2,725,565Total
                Assets
            
            
            
            
            $
            2,925,876**LIABILITIES**Current
                LiabilitiesAccounts
                Payable and Accrued Expenses
            
            $
            312,677Notes
                Payable
            
            
            21,360Capital
                Lease Payable - Current
            
            
            12,330Total
                Current Liabilities
            
            
            346,367Long-Term
                LiabilitiesConvertible
                Debenture
            
            
            3,556,665Loan
                Costs, net of accumulated amortization
            
            
            (2,633,726
            )Calpital
                Lease Payable - Non-Current
            
            
            34,647Total
                Long-Term Liabilities
            
            
            957,586Total
                Liabilities
            
            
            
            
            
            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 $.0000888,397,794
                shares issued and outstanding
            
            
            7,072Additional
                Paid-in-Capital
            
            
            10,876,239Deficit
                accumulated during the development stage
            
            
            (9,261,388
            )Total
                Stockholders' Equity
            
            
            
            
            
            1,621,923Total
                Liabilities and Stockholders' Equity
            
            
            
            
            $
            2,925,876





The
      accompanying notes are integral part of the financial statements





F-1




**aeroTelesis
        Inc.**
 **(A
        Development Stage Enterprise)**
 **Statements
        of Operations**





Year
                Ended
              March
                31
              2006
            
            Year
                Ended
              March
                31
              2005
            
            Cumulative
                During the Development Stage Through 3/31/06**Revenues:**Revenues
            
            $
            8,600
            
            $
            409,490
            
            $
            478,090Total
                Revenues
            
            $
            8,600
            
            $
            409,490
            
            $
            478,090**Expenses:**Cost
                of Revenues
            
            $
            —
            
            $
            17,349
            
            $
            17,349Options/Warrants
                Expense - Non Cash
            
            
            1,762,808
            
            
            —
            
            
            1,762,808Non
                Cash Consulting Fees
            
            
            1,345,900
            
            
            —
            
            
            1,345,900Research
                & Development
            
            
            1,260,000
            
            
            
            
            
            1,260,000Legal
                & Professional Fees
            
            
            564,340
            
            
            885,543
            
            
            1,726,188Payroll
                Expenses
            
            
            242,943
            
            
            245,316
            
            
            488,259Travel
            
            
            137,298
            
            
            73,624
            
            
            449,313Operating
                Expenses
            
            
            183,705
            
            
            99,291
            
            
            351,902Rent
            
            
            111,775
            
            
            123,184
            
            
            291,081Consulting
                Fees
            
            
            248,443
            
            
            —
            
            
            248,443Depreciation
                Expense
            
            
            30,260
            
            
            14,638
            
            
            46,858Insurance
            
            
            31,332
            
            
            —
            
            
            31,332Total
                Expenses
            
            
            5,918,804
            
            
            1,458,945
            
            
            8,019,433Net
                Loss from Operations
            
            $
            (5,910,204
            )
            $
            (1,049,455
            )
            $
            (7,541,343
            )**Other
                Expenses:**Amortization
                of Loan Costs
            
            $
            1,333,286
            
            $
            —
            
            $
            1,333,286Interest
                Expense
            
            
            188,045
            
            
            —
            
            
            188,045Other
                Expenses
            
            
            187,579
            
            
            11,135
            
            
            198,714Total
                Other Expenses
            
            
            1,708,910
            
            
            11,135
            
            
            1,720,045Loss
                Before Income Tax Expense
            
            
            (7,619,114
            )
            
            (1,060,590
            )
            
            (9,261,388
            )**Provision
                for Income Taxes:**Provision
                for Income Taxes
            
            
            —
            
            
            —
            
            
            —Net
                Loss
            
            $
            (7,619,114
            )
            $
            (1,060,590
            )
            $
            (9,261,388
            )Basic
                and Diluted Loss Per Common Share
            
            
            (0.09
            )
            
            (0.01
            )
            
            (0.11
            )Weighted
                Average number of Common Shares used in per share
                calculations
            
            
            85,928,700
            
            
            82,750,094
            
            
            81,858,337





The
      accompanying notes are integral part of the financial
      statements


F-2


**aeroTelesis
      Inc.**


**(A
      Development Stage Enterprise)**


**Statement
      of Stockholders' Equity**





**Common**
              **Shares**
            
            **Preferred**
              **Shares**
            
            **Preferred**
              **$0.001**
              **Par
                Value**
            
            **Common**
              **$0.00008**
              **Par
                Value**
            
            **Paid-In**
              **Capital**
            
            **Deficit**
              **Accumulated**
              **During
                the**
              **Development**
              **Stage**
            
            **Stock**
              **Subcription**
              **Receivable**
            
            **Accumulated**
              **Deficit**
            
            **Stockholders'**
              **Equity**Balance,
                April 1, 2002
            
            
            5,474,826
            
            
            —
            
            
            —
            
            
            438
            
            
            973,017
            
            
            
            
            
            
            
            
            (979,515
            )
            
            (6,060
            )Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            82,946
            
            
            82,946Balance,
                March 31, 2003
            
            
            5,474,826
            
            
            —
            
            
            —
            
            
            438
            
            
            973,017
            
            
            
            
            
            
            
            
            (896,569
            )
            
            76,886Prior
                capital replaced by aeroTelesis
                Philippines
                  capital under reverse takeover
                  accounting
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (16,540
            )
            
            (16,540
            )Transferred
                to Additional Paid in Capital
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (913,109
            )
            
            
            
            
            
            
            
            913,109
            
            
            —Shares
                issued in relation to reverse
                merger
            
            
            75,000,000
            
            
            
            
            
            
            
            
            6,000
            
            
            1,606,225
            
            
            
            
            
            
            
            
            
            
            
            1,612,225March
                1, 2004Stock
                Issued for License Agreements
            
            
            200,000
            
            
            
            
            
            
            
            
            16
            
            
            999,984
            
            
            
            
            
            
            
            
            
            
            
            1,000,000March
                31, 2004Stock
                Issued for Debt
            
            
            613,832
            
            
            
            
            
            
            
            
            49
            
            
            613,783
            
            
            
            
            
            
            
            
            
            
            
            613,832Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (581,684
            )
            
            
            
            
            —
            
            
            (581,684
            )Balance,
                March 31, 2004
            
            
            81,288,658
            
            
            
            
            
            
            
            
            6,503
            
            
            3,279,900
            
            
            (581,684
            )
            
            
            
            
            —
            
            
            2,704,719June
                16, 2004Stock
                Dividend
            
            
            1,626,469
            
            
            
            
            
            
            
            
            130
            
            
            (130
            )
            
            
            
            
            
            
            
            
            
            
            —Stock
                Issued for Debt
            
            
            417,698
            
            
            
            
            
            
            
            
            33
            
            
            478,274
            
            
            
            
            
            
            
            
            
            
            
            478,307Stock
                Issued for Services
            
            
            79,425
            
            
            
            
            
            
            
            
            7
            
            
            356,517
            
            
            
            
            
            
            
            
            
            
            
            356,524Stock
                Issued for Cash
            
            
            25,451
            
            
            
            
            
            
            
            
            2
            
            
            29,998
            
            
            
            
            
            (7,500
            )
            
            
            
            
            22,500Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,060,590
            )
            
            
            
            
            —
            
            
            (1,060,590
            )Balance,
                March 31, 2005
            
            
            83,437,701
            
            
            
            
            
            
            
            $
            6,675
            
            $
            4,144,559
            
            $
            (1,642,274
            )
            $
            (7,500
            )
            
            —
            
            $
            2,501,460Stock
                Options Exercised
            
            
            3,770,000
            
            
            
            
            
            
            
            
            302
            
            
            1,426,596
            
            
            
            
            
            
            
            
            
            
            
            1,426,898Issuance
                of Stock Options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,762,808
            
            
            
            
            
            
            
            
            
            
            
            1,762,808Issuance
                of Stock Warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,487,675
            
            
            
            
            
            
            
            
            
            
            
            2,487,675Beneficial
                Conversion Feature
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            880,038
            
            
            
            
            
            
            
            
            
            
            
            880,038Stock
                Issued for Services, net of 1.4 millionfor
                raising capital
            
            
            1,049,950
            
            
            
            
            
            
            
            
            84
            
            
            109,024
            
            
            
            
            
            
            
            
            
            
            
            109,108Stock
                Subcription Receivable-Collection
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,500
            
            
            
            
            
            7,500Stock
                Issued for Cash
            
            
            140,143
            
            
            
            
            
            
            
            
            11
            
            
            65,539
            
            
            
            
            
            
            
            
            
            
            
            65,550Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,619,114
            )
            
            
            
            
            —
            
            
            (7,619,114
            )Balance,
                March 31, 2006
            
            
            88,397,794
            
            
            
            
            
            
            
            $
            7,072
            
            $
            10,876,239
            
            $
            (9,261,388
            )
            
            —
            
            
            —
            
            $
            1,621,923





The
      accompanying notes are integral part of the financial
      statements.


F-3


**aeroTelesis
        Inc.**


**(A
      Development Stage Enterprise)**


**Statement
      of Cash Flows**




Year
                Ended
              March
                31
              2006
            
            Year
                Ended
              March
                31
              2005
            
            Cumulative
              During
                the Development
              StageCash
                Flows from Operating Activities:Net
                Loss
            
            $
            (7,619,114
            )
            $
            (1,060,590
            )
            $
            (9,261,388
            )Adjustment
                  to reconcile net income(loss) to net cashprovided
                  by (used in) operating activitiesDepreciation
            
            
            30,261
            
            
            14,638
            
            
            46,859Shares
                for Services
            
            
            1,426,433
            
            
            356,524
            
            
            1,782,957Options
                for Services
            
            
            1,762,808
            
            
            —
            
            
            1,762,808Amortization
                of Loan Cost
            
            
            1,333,286
            
            
            —
            
            
            1,333,286Other
                Non-Cash Expenses
            
            
            109,024
            
            
            73,730
            
            
            182,754Changes
                in operating assets and liabilities:Receivables
            
            
            3,535
            
            
            (3,535
            )
            
            54,000Deposits
            
            
            (8,631
            )
            
            (321
            )
            
            (26,784
            )Prepaid
                Insurance
            
            
            (28,492
            )
            
            1,463
            
            
            (10,387
            )Related
                Party Payable
            
            
            —
            
            
            8,600
            
            
            8,600Accounts
                Payable and Accrued Expenses
            
            
            79,423
            
            
            220,036
            
            
            348,703Net
                Cash Used In Operating Activities
            
            $
            (2,911,467
            )
            $
            (389,455
            )
            $
            (3,778,592
            )Cash
                Flows from Investing Activities:Capital
                Expenditures
            
            
            (33,795
            )
            
            (16,442
            )
            
            (89,436
            )Licenses
            
            
            —
            
            
            —
            
            
            (67,613
            )Net
                Cash Used in Investing Activities
            
            $
            (33,795
            )
            $
            (16,442
            )
            $
            (157,049
            )Cash
                Flows from Financing Activities:Common
                Stock
            
            
            73,540
            
            
            22,500
            
            
            96,040Convertible
                Debenture
            
            
            2,900,758
            
            
            —
            
            
            2,900,758Note
                Payable
            
            
            28,176
            
            
            
            
            
            28,176Capital
                Leases Paid
            
            
            (12,662
            )
            
            (488
            )
            
            (13,150
            )Revolving
                Line of Credit Advance
            
            
            1,491
            
            
            375,111
            
            
            990,434Note
                Payable Directors
            
            
            19,869
            
            
            —
            
            
            19,869—
            
            
            
            
            
            —Net
                Cash Provided from Financing Activities
            
            $
            3,011,172
            
            $
            397,123
            
            $
            4,022,127Net
                Increase (Decrease) in Cash
            
            $
            65,910
            
            $
            (8,774
            )
            $
            86,486Cash
                Balance, Begin Period
            
            
            1,913
            
            
            10,687
            
            
            —Cash
                Balance, End Period
            
            $
            67,823
            
            $
            1,913
            
            $
            67,823Supplemental
                Disclosures:Cash
                Paid for interest
            
            $
            106,196
            
            $
            7,015
            
            $
            113,475Cash
                Paid for income taxes
            
            $
            —
            
            $
            —
            
            $
            —Non-Cash
                Transaction:Stock
                Issued for Services
            
            $
            1,426,433
            
            $
            356,524
            
            $
            1,782,957Stock
                Issued for Debt
            
            $
            0
            
            $
            478,307
            
            $
            1,092,139Subcription
                Receivable
            
            $
            (7,500
            )
            $
            7,500
            
            $
            —Long
                Term Debt Used to Acquire Equipment
            
            $
            24,824
            
            $
            36,594
            
            $
            61,418Accounts
                Payable
            
            $
            57,541
            
            $
            —
            
            $
            57,541Stock
                issued as fees to raise capital
            
            $
            1,400,000
            
            $
            0
            
            $
            1,400,000




The
      accompanying notes are integral part of the financial
      statements


F-4




**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




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




**Organization**




AEROTELESIS
      INC., formerly Pacific Realm Inc., (“ the
      Company ”)
      was
      incorporated under the laws of the State of Delaware in 1968 for the purpose
      to
      promote and carry on any lawful business for which a corporation may be
      incorporated under the laws of the State of Delaware. The Company has a total
      of
      200,000,000 authorized common shares with a par value of $.00008 and 2,000,000
      preferred shares with a par value of $.001 per share and with 88,397,794 common
      shares issued and outstanding and no preferred shares issued and outstanding
      as
      of March 31, 2006. The Company filed an amendment of its Certificate of
      Incorporation with the State of Delaware to increase the authorized shares
      from
      20,000,000 authorized common shares to 200,000,000 authorized shares and to
      change its par value from $.0001 to $.00008 in March 2003. Also, on
      September 12, 2003, the Company approved a two-for-one forward stock split
      of
      the common stock shares. Additionally, the Company, on October 22, 2003, filed
      an amendment to the Articles of Incorporation with the State of Delaware to
      change the name of the Company to AEROTELESIS INC.




**Principles
      of Consolidation**




The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries, Aerotelesis Philippines Inc. (a British Virgin
      Islands company), Aerotelesis IP Networks Inc.(a Delaware Company), and
      Aerotelesis Satellite Networks Inc.(a Delaware Company). All material
      inter-Company balances and transactions have been eliminated, as necessary,
      in
      consolidation. All subsidiaries are inactive as of March 31,
      2006.




**Development
      Stage Enterprise**




We
      have
      only a limited operating history upon which to base an evaluation of our current
      business and future prospects and we have yet to commercialize our technology.
      The Company will continue to be considered to be in a development stage until
      it
      has begun significant operations and is generating significant
      revenues.




**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, or order to raise sufficient capital on order 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.
  The
        company renewed its revolving line of credit of $1,000,000 from Nations Mobile
        on July 12, 2006 (note 13). Our additional sources of financing will come
        from a
        private placement, which we are in the process of completing and expect to
        complete during the 3 rd calendar
        quarter of 2006.


(Continued)


F-5





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




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




**Federal
      Income Tax**




The
      Company has adopted the provisions of Financial Accounting Standards Board
      Statement No. 109, Accounting for Income Taxes. The Company accounts for
      income taxes pursuant to the provisions of the Financial Accounting Standards
      Board Statement No. 109, “Accounting for Income Taxes”, which requires an
      asset and liability approach to calculating deferred income taxes. The asset
      and
      liability approach requires the recognition of deferred tax liabilities and
      assets for the expected future tax consequences of temporary differences between
      the carrying amounts and the tax basis of assets and liabilities.




**Licenses**





The
      Company has decided to treat the ATP License as having a useful life of fifteen
      years while its two licenses with Photron, are being treated as having useful
      lives of ten years, all of which will be amortized over their useful lives
      once
      the Company begins to produce revenue from the license.




**Use
      of Estimates**




The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure on
      contingent assets and liabilities at the date of the financial statements,
      and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates.




**Accounting
      Method**




The
      Company’s financial statements are prepared using generally accepted accounting
      principles (United States). Revenues are recognized when persuasive evidence
      of
      an arrangement exists, delivery has occurred, the sales price is fixed or
      determinable and collectibility is probable and expenses when incurred on the
      related consulting engagements. Fixed assets are stated at cost.




**Earnings
      per Common Share**




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 is the same as basic earnings per share as common stock
      equivalent.




**Cash
      and Cash Equivalents**




The
      Company considers all highly liquid investments with an original maturity of
      three months or less to be cash equivalents for purposes of preparing its
      Statement of Cash Flows.




**Fair
      Value of Financial Instruments**




Management
      estimates that the carrying value of financial instruments reported in the
      financial statements approximates their fair values.




(Continued)


F-6





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




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




**Comprehensive
      Income**




Statement
      of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive
      Income,” establishes standards for reporting and display of comprehensive
      income, its components and accumulated balances. Comprehensive income is defined
      to include all changes in equity except those resulting from investments by
      owners and distributions to owners. Among other disclosures, SFAS No.130
      requires that all items that are required to be recognized under current
      accounting standards as components of comprehensive income be reported in a
      financial statement that is displayed with the same prominence as other
      financial statements. The Company does not have any items requiring disclosure
      of comprehensive income.




**Impairment
      of Long-Lived Assets**




The
      Company follows SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”. The Statement requires that long-lived assets, liabilities
      and certain identifiable intangibles to be held and used by an entity be
      reviewed for impairment whenever events of changes in circumstances indicate
      that the carrying amount of an asset may not be recoverable.




Long-lived
      assets consist primarily of property and equipment and the license agreements.
      The recoverability of long-lived assets is evaluated at the operating unit
      level
      by an analysis of operating results and consideration of other significant
      events or changes in the business environment. If an operating unit has
      indications of impairment, such as current operating losses, the Company will
      evaluate whether impairment exists on the basis of undiscounted expected future
      cash flows from operations before interest for the remaining amortization
      period. If impairment exists, the carrying amount of the long-lived assets
      is
      reduced to its estimated fair value, less any costs associated with the final
      settlement. As of March 31, 2006, there was no impairment of the Company’s
      long-lived assets based on the net present value of future cash flow projections
      by management.




**Stock
      Purchase Warrants Issued with Notes Payable**




The
      Company granted warrants in connection with the issuance of certain notes
      payable and convertible debentures. Under Accounting Principles Board Opinion
      No.14 “Accounting for Convertible Debt and Debt Issued with Stock Purchase
      Warrants”, the relative estimated fair value of such warrants represents a
      discount from the face amount of the notes payable.




**Stock-Based
      Compensation**




The
      Company accounts 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, is
      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 allows an entity to continue
      to
      measure compensation for those plans using the intrinsic value method of
      accounting prescribed by APB Opinion No. 25. The Company has elected to
      continue to measure compensation under the APB Opinion No. 25, and has
      adopted the disclosure requirements of SFAS No. 123 and SFAS
      No. 148.




(Continued)


F-7





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




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




**Stock-Based
      Compensation (Continued)**




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, stock-based compensation costs would have impacted our
      net
      income and earnings per common share for the fiscal years ended March 31 as
      follows:




**2006**
            ****
            **2005**Net
                Income (Loss) as Reported
            
            $
            (7,619,114
            )
            $
            (1,060,590
            )Deduct:
                Stock Based Compensation
              Costs,
                Net of Taxes Under SFAS 123
            
            
            (707,500
            )
            
            (
                54,245
            )Pro
                Forma Net Income (Loss)
            
            $
            (8,326,614
            )
            $
            (1,114,835
            )Per
                Share Information:Basic,
                as Reported
            
            $
            (0.09
            )
            $
            (0.01
            )Basic,
                Pro Forma
            
            $
            (0.10
            )
            $
            (0.01
            )Diluted,
                as Reported
            
            $
            (0.09
            )
            $
            (0.01
            )Diluted,
                Pro Forma
            
            $
            (0.10
            )
            $
            (0.01
            )





The
      fair
      value of the stock-based awards was estimated using the Black-Scholes model
      with
      the following weighted average assumptions for fiscal years ended
      March 31:




**2006**
            ****
            **2005**Expected
                Life (Years)
            
            
            2.00
            
            
            2.96Risk
                Free Interest Rate
            
            
            4.08
            %
            
            3.82
            %Volatility
            
            
            208.00
            %
            
            108.00
            %Dividend
                Yield
            
            
            —
            %
            
            —
            %




**Newly
      Issued Accounting Pronouncements**




In
      December 2004, the FASB issued Statement 123R, *Share-Based
      Payment, an Amendment of FASB Statement No. 123* ,
      which
      requires all companies to measure compensation cost for all share-based payments
      (including employee stock options) at fair value and is effective all for public
      companies for annual periods beginning after December 15, 2005. This statement
      eliminates the ability to account for stock-based compensation transactions
      using APB 25 and, generally, requires instead that such transactions be
      accounted for using a fair-value based method. Had the Company adopted
      SFAS 123R in prior periods, the impact of the standard would have
      approximated the impact of SFAS No. 123 as described in the disclosure
      of pro-forma net income and earnings per share as set forth below. The Company
      adopted SFAS 123R on April 3, 2006 using the modified prospective
      transition method and will begin expensing stock options in the first quarter
      of
      fiscal year 2007.





(Continued)


F-8





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




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




**Newly
      Issued Accounting Pronouncements (Continued)**




In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections.* This
      statement is a replacement of APB Opinion No. 20, *Accounting
      Changes* ,
      and
      SFAS No. 3, *Reporting
      Accounting Changes in Interim Financial Statements* ,
      and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. This statement applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      in
      the unusual instance that the pronouncement does not include specific transition
      provisions. This statement requires retrospective application to prior periods’
financial statements of changes in accounting principle, unless it is
      impracticable to determine period-specific effects of an accounting change
      on
      one or more individual prior periods presented. In such circumstances the new
      accounting principle would be applied to the balances of assets and liabilities
      as of the beginning of the earliest period for which retrospective application
      is practicable with a corresponding adjustment made to the opening balance
      of
      retained earnings for that period rather than being reported in an income
      statement. Further, the accounting principle is to be applied prospectively
      from
      the earliest date when it is impracticable to determine the effect to all prior
      periods. This statement is effective for the Company as of April 3, 2006.
      Adoption of this statement could have an impact if there are future voluntary
      accounting changes and correction of errors.




SFAS No. 143, *Accounting
      for Asset Retirement Obligations* ,
      requires the recording of liabilities for all legal obligations associated
      with
      the retirement of long-lived assets that result from the normal operations
      of
      those assets. These liabilities are required to be recorded at fair value in
      the
      period in which they are incurred with the associated asset retirement costs
      capitalized as part of the carrying amount of the long-lived asset. The
      statement was effective for the Company on March 31, 2003. In 2005, FASB
      issued Interpretation No. 47, “Accounting for Conditional Asset Retirement
      Obligations,” (FIN 47) to further clarify that such asset retirement
      obligations should be recognized for conditional obligations in which the timing
      and/or method of settlement are conditional on a future event that may or may
      not be within the control of the entity. FIN 47 was effective at
      December 31, 2005. The Company evaluated its leased and owned properties
      for potential asset retirement obligations under SFAS No. 143, as
      amended and interpreted by FIN 47. Based on this review, the Company
      determined that such liabilities were deemed to be immaterial to the financial
      position, results of operations or cash flows of the Company.




(Continued)


F-9




**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




**NOTE
      2: COMMON STOCK**




On
      September 12, 2003, the Board of Directors authorized a 2 to 1 forward split
      of
      the Company’s common stock. The result of this forward split increased the
      outstanding shares from to 2,737,413 outstanding common shares to 5,474,826
      outstanding common shares after adjusting for fractional shares. These financial
      statements reflect this forward split of common shares.




On
      October 3, 2003, the Company issued 75,000,000 shares of its common stock to
      Nations Mobile Networks Ltd. (“ Nations ”)
      pursuant to the Agreement and Plan of Reorganization to acquire the subsidiary
      Aerotelesis Philippines, Inc. The value of these shares was approximately $0.02
      per share ($1,612,225) which amount represents the historical cost of the
      licenses acquired in the acquisition.




On
      May
      25, 2004, the Company approved a two percent (2%) stock dividend for all
      shareholders of record as of May 31, 2004 with a mandatory delivery of each
      shareholder’s old stock certificate to get a new stock certificate, which
      includes the stock dividend. A total of 1,626,469 shares of common stock were
      issued, including fractional shares.





During
      the year ended March 31, 2005 a total of 417,698 shares of common stock was
      issued for Nations’ debt conversion. The conversion rate was $1.00 per share for
      the first 390,761 shares of stock and $3.25 for the 26,937 shares issued. The
      conversion rate was increased to reflect the fair value of the shares at the
      renewal date of the revolving line of credit.




During
      the year ended March 31, 2005, a total of 79,425 shares of stock were
      issued for legal and other services. The shares were valued at $356,524, which
      represented the value of the services rendered or the fair value of the stock
      issued.




In
      March of 2005, a total of 25,451 shares of stock were issued to The Nutmeg
      Group LLC for $30,000 cash pursuant to a private placement. The proceeds were
      net of the cost of selling the stock of $1,500.




In
      May
      2005, a total of 25,393 shares of common stock were issued to The Nutmeg Group
      LLC for $14,550 cash pursuant to a private placement.




In
      May
      2005, a total of 10,000 shares of common stock were issued to Claudia Zaman
      for
      services with a total expense recognized of $20,000.




In
      May
      2005, the Company also issued a warrant to PhotronTM to purchase 5,000,000 shares
      of the Company’s common stock at $4 per share. The warrant expires in four years
      if not exercised sooner. This was subsequently cancelled in July
      2005.




On
      July
      27, 2005, a total of 6,713,212 shares of stock were issued in escrow for
      delivery upon exercise of the convertible debt. These shares are not considered
      as outstanding at September 30, 2005.




In
      July
      2005, a total of 300,000 shares of common stock were issued to Claudia Zaman
      pursuant to the 2003 Stock Option Plan. The option price of $.02 per share
      ($6,000) was used to reduce outstanding payables.




In
      July
      2005, a total of 300,000 share of common stock were issued pursuant to the
      2003
      Stock Option Plan. The option price of $.02 per share ($6,000) was used to
      reduce outstanding payables to Joseph Gutierrez, the Company’s
      President.




In
      July
      2005, a total of 1,000,000 shares of common stock were issued to Cornell Capital
      Partners as a fee for the Standby Equity Distribution Agreement. The stock
      was
      recorded at $1.40 per share and recorded in the other asset section of the
      balance sheet as a deferred offering cost.




In
      July
      2005, a total of 7,332 shares of common stock were issued to a consultant with
      a
      total expense recognized of $9,165.


F-10




**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




**NOTE
      2: COMMON STOCK (CONTINUED)**




In
      September 2005, a total of 520,000 shares of common stock were issued to various
      employees and consultants pursuant to the 2003 Stock Option Plan. The shares
      were expensed under legal and professional fees for $10,400, the market price
      at
      the time of issuance.




In
      September 2005, a total of 79,750 shares of common stock were issued to The
      Nutmeg Group LLC for exercise of warrant for a total of $26,500 pursuant to
      a
      private placement.




In
      November of 2005, a total of 2,650,000 shares of common stock were issued
      pursuant to the exercise of options granted under the 2003 Stock Option Plan.
      Upon the exercise of the options, we forgave the exercise price of the option
      totaling $1,404,500, which has been charged against operations.




In
      December 2005, a total of 35,000 shares of common stock were issued to a related
      party and has been recorded as a reduction of debt from a related party at
      $.70 per share.




Stock
      options that were issued to consultants and advisors were valued at $1,761,581
      as of March 31, 2006 using the Black-Scholes valuation method and included
      as an expense to the statement of operations based on the vesting
      schedule.




The
      option shares were not included in the EPS computation since they would be
      anti-dilutive.





(Continued)


F-11





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




**NOTE
      3: MERGER/LICENSE AGREEMENT**




On
      October 2, 2003, the Company entered into an Agreement and Plan of
      Reorganization (the “ Agreement ”)
      with
      Nations Mobile Networks Ltd. (“ Nations ”),
      a
      British Virgin Islands company, whereby the Company issued 75,000,000 shares
      of
“restricted securities” (common stock) to Nations in exchange for, among other
      things, all assets and operations of Nations’ wholly-owned subsidiary
      Aerotelesis Philippines, Inc. (“ ATP ”),
      a
      British Virgin Islands company, in consideration of the exchange of 100% of
      the
      issued and outstanding shares of ATP. Nations also gave a right of first refusal
      to the Company to acquire operations in other developing nations, primarily
      in
      Southeast Asia, Central and South America and the Middle East. The shares issued
      to Nations amount to approximately 92% in the aggregate of the post-Agreement
      outstanding voting securities of the Company.




Assets
      of
      ATP consists of an exclusive license from PhotronTM Technologies Ltd. To utilize
      the USM TM technology
      for the deployment of wireless telephony services in the Republic of the
      Philippines as well as a partnership with a local Philippine partner that owns
      a
      franchise license to deploy wireless telecommunication services in the
      Philippines. An appraisal on the market share of the license in the Philippines
      was prepared and the value was appraised at substantially more than the
      $1,612,225 valued for the license in the Company’s financial statements. Also,
      the agreement was initially agreed to in July of 2003 when the common stock
      was
      not being traded. Per EITF 95-19, the “measurement date” should be based on the
      market price of the stock over a reasonable period of time before and after
      the
      parties have reached an agreement. The value of the stock issued was arrived
      at
      by reviewing the “costs” that had been spent on the license and technology by
      Nations. Since the Company had placed a value of the stock at $.02 per share
      for
      stock options issued to consultants and directors in July 2003, the valuation
      for the stock issued for the assets seems to be a fair value for the stock
      issued.




The
      useful life of this ATP License was determined by reviewing the franchise
      granted to its joint venture partner in the Philippines (“ the
      Philippine Partner ”).
      The
      Philippine Partner was granted a communications franchise (the “ Franchise ”)
      in the
      Philippines in September 1995. Pursuant to that Franchise, Section 7, provides
      for a twenty-five (25) year term. As of today, the Franchise has a remaining
      term of slightly less than fifteen years. The useful life of the ATP License
      is
      measured by the life of the Franchise which has approximately 15 years
      remaining. When the Franchise expires, or at some time prior to that, the
      Philippine Partner would presumably apply for a new franchise or a renewal.
      However, since there is not any explicit provision in the Franchise for a
      renewal and it cannot be predicted what the government of the Philippines will
      do in fifteen years regarding the issuance of telecommunication franchises
      in
      the Philippines, it appears that the Company’s ability to work with the
      Philippine Partner in the Philippines may not last more than fifteen
      years.




On
      March 1, 2004 the Company agreed to issue 200,000 shares of common stock to
      PhotronTM Technologies Ltd. For the license the use and deployment of the
      USM TM technology
      for wireless telephony service and satellite communication services in the
      Republic of the Philippines. The value of the licenses has been placed at $5
      per
      share (average fair value of stock) or $1,000,000. The Company has determined
      that the useful life for the two licenses acquired in 2004 for total
      consideration of $1,000,000 should be ten (10) years based upon the term of
      the
      licenses in both agreements. Although these licenses provide for renewal for
      successive five (5) year terms after the initial ten-year term, the renewals
      are
      not automatic and provide for additional negotiations between the parties to
      both license agreements.




The
      Company has decided to treat the ATP License as having a useful life of fifteen
      years while its other two licenses, the licenses acquired in 2004, are being
      treated as having useful lives of ten years and amortized over the useful life
      once the Company begins to produce revenue from the license.




In
      March
      of 2006, the Company made a deposit to Photron for the license for North America
      in the amount of $1,260,000. Such a deposit was fully expensed as development
      cost.





(Continued)


F-12





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




**NOTE
      4: INCOME TAXES**




The
      provision for income taxes has been calculated based on federal and state
      statutory rates of 34% and 8.85%, respectively. Net operating losses expire
      twenty years from the time they are incurred for federal tax
      purposes.




**Years
                Ended March 31,****2006**
            ****
            ****
            **2005**Income
                Tax Benefit Calculated Using the Statutory Rates
            
            $
            3,035,531
            
            $
            422,115Non-Deductible
                Expenses
            
            
            (5,036
            )
            
            (14,651
            )Changes
                in Valuation Allowance
            
            
            (3,030,495
            )
            
            (407,464
            )$
            —
            
            $
            —




Temporary
      differences, which give rise to deferred tax assets and liabilities are as
      follows:




**Years
                Ended March 31,**Deferred
                Tax Asset (Credit)
            
            
            **2006**
            ****
            ****
            **2005**Depreciation
            
            $
            (15,003
            )
            $
            (15,876
            )Net
                Operating Loss
            
            
            3,643,260
            
            
            607,729Valuation
                Allowance
            
            
            (3,628,257
            )
            
            (591,853
            )$
            —
            
            $
            —




Net 
        operating  losses expire twenty years from the time they are incurred for
        federal tax purposes and will begin to expire in 2023. The
        net
        operating losses will begin to expire in the following years and are
        approximately:
   Incured
                March 31,
              
              Will
                  expire March 31,2003
              
              2023
              $  
577,6772004
              
              2024
              $  
462,0002005
              
              2025
              $1,485,2022006
              
              2026
              $7,619,114




**NOTE
      5: FIXED ASSETS**




Property
      is stated at cost. Additions, renovations, and improvements are capitalized.
      Maintenance and repairs, which do not extend asset lives, are expensed as
      incurred. Depreciation is provided on a straight-line basis over the estimated
      useful life of 5 - 7 years on furniture and equipment.




**Year
                Ended March 31,****2006**
            ****
            **2005**Office
                Equipment
            
            $
            80,936
            
            $
            79,318Copier
            
            
            53,000
            
            
            -0-Office
                Furniture
            
            
            12,918
            
            
            12,918Auto
            
            
            4,000
            
            
            -0-Less
                Accumulated Depreciation
            
            
            (46,859
            )
            
            (16,598
            )NET
                PROPERTY AND EQUIPMENT
            
            $
            103,995
            
            $
            75,637




Depreciation
      for the year ending March 31, 2006 and 2005 is $30,260 and $14,638,
      respectively.





(Continued)


F-13





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




**NOTE
      6: RELATED PARTY TRANSACTIONS**




The
      major
      shareholder, Nations Mobile Networks Ltd. (“ Nations ”)
      has
      entered into a Loan Agreement dated September 25, 2003 to advance the
      Company up to $1,000,000 for operations for a twelve-month period and the
      agreement was renewed for an additional twelve months on October 1, 2004. The
      Loan Agreement expired in October 2005 and was renewed on July 12, 2006 for
      a
      period of one year under the same terms as the Loan Agreement dated September
      25, 2003.




The
      loan
      activity was as follows:




**2006**
            ****
            **2005**Cash
                advances
            
            $
            141,986
            
            $
            375,111Equipment
                Acquisitions
            
            
            -0-
            
            
            29,466Cash
                Payments
            
            
            140,495
            
            
            -0-Expenses
                Paid
            
            
            -0-
            
            
            73,730$
            1,491
            
            $
            478,307




These
      loan advances were converted into the Company’s common stock as
      follows:




Number
                of Shares
            
            -0-
            
            417,698




In
      2004,
      the Company purchased licenses from PhotronTM Technologies Ltd. (“ PhotronTM ”)
      to use
      certain technology, valued at $1,000,000, by issuing 200,000 shares of its
      common stock. On April 1, 2004, PhotronTM engaged the Company to provide research
      assistance for a twelve-month period at $30,000. The Company recognized $360,000
      of revenue under this contract in 2005. On May 1, 2005, the Company executed
      a
      warrant agreement With PhotronTM whereby PhotronTM may purchase 5,000,000 shares
      of the Company’s common stock at $4.00 per Share. The exercise period ends April
      30, 2009. These warrants were cancelled in July 2006.




In
      fiscal
      year ended March 31, 2005, the Company issued 6,000 shares of its
      common stock, valued at $30,000 to an attorney, who is considered to be a
      related party. In fiscal year ended March 31, 2006, the attorney was issued
      10,000 shares that were valued at $19,000. The attorney was granted options
      to
      purchase shares of the Company’s common stock as follows:




**Grant
                Date**
            ****
            ****
            **Vesting
                Date**
            ****
            ****
            **Number
                of Shares**
            ****
            ****
            **Price
                Per Share**July
                2, 2003
            
            
            March
                31, 2005
            
            
            300,000
            
            $
            0.02




In
      June
      2005, these options were exercised.





(Continued)


F-14





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




**NOTE
      7: EARNINGS PER SHARE**




The
      following table sets forth the computation of basic and diluted earnings per
      common share (EPS) for the years ended March 31, 2006 and
      2005.




**Year
                Ended March 31,**
            ********
            ****
            **2006**
            ****
            **2005**Numerator:Net
                Income (Loss) From Continuing Operations
            
            $
            (7,619,114
            )
            $
            (1,060,590
            )Denominator:Basic
                Weighted Average Shares Outstanding
            
            
            85,928,700
            
            
            82,750,094Potentially
                Dilutive Options
            
            
            -0-
            
            
            -0-Denominator
                for Diluted EPS
            
            
            85,928,700
            
            
            82,750,094Earnings
                (Loss) Per Share:Basic
                and Diluted
            
            $
            (0.09
            )
            $
            (0.01
            )





The
      option shares and warrants were not included in the computation since they
      would
      be anti-dilutive.




**NOTE
      8: STOCK OPTION PLANS**




The
      Company’s July 1, 2003 stock option plan, October 15, 2003 stock option plan and
      the 2004 Stock Compensation Plan (the “ Plans ”)
      provide for options and other stock-based awards that may be granted to eligible
      employees, officers, consultants, and non-employee directors of the Company
      or
      its subsidiaries. The Company had reserved 5,000,000 shares of common stock
      for
      future issuance under these Plans. As of March 31, 2005, there remain
      1,230,000 shares, which can be issued under the Plans, after giving effect
      to
      stock splits and shares issued under the Plans.




Awards
      of
      4,877,000 options granted to employees under the Plans were primarily, intended
      to qualify as “incentive stock options” within the meaning of Section 422 of the
      Internal Revenue Code (the “ Code ”).
      The
      Plan also permits stock awards, stock appreciation rights, performance units,
      and other stock-based awards, all of which may or not be subject to the
      achievement of one or more performance objectives.




The
      purposes of the Plans generally are to retain and attract persons of training,
      experience and ability so serve as employees of the Company and it subsidiaries
      and to serve as non-employee directors of the Company, to encourage the sense
      of
      proprietorship of such persons and to stimulate the active interest of such
      persons in the development and financial success of the Company and its
      subsidiaries.





(Continued)


F-15





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




**NOTE
      8: STOCK OPTION PLANS (CONTINUED**




The
      Plans
      are administered by the Board of Directors (the “ Board ”).
      The
      Board has the power to determine which eligible employees will receive awards,
      the timing and manner of the grant of such awards, the exercise price of stock
      options (which may not be less than market value on the date of grant), the
      number of shares, and all of the terms of the awards. The Company may, at any
      time, amend or terminate the Plans. However, no amendment that would impair
      the
      rights of any participant, with respect to outstanding grants, can be made
      without the participant’s prior consent. Stockholder approval of an amendment to
      the Plans is necessary only when required by applicable law or stock exchange
      rules.




The
      following summarizes stock option activity and related information:




**Years
                Ended March 31,**
            ********
            ****
            **2006**
            ****
            **2005**
            ********
            ****
            **Shares**
            ****
            **Weighted
                    Average Exercise Price**
            ****
            **Shares**
            ****
            **Weighted
                    Average Exercise Price**Outstanding,
                Beginning of Year:
            
            
            850,000
            
            $
            0.60
            
            
            850,000
            
            $
            0.60Granted
            
            
            5,350,000
            
            
            1.00
            
            
            -0-
            
            
            0.60Exercised
            
            
            (3,770,000
            )
            
            0.38
            
            
            —
            
            
            —Canceled
            
            
            (1,200,000
            )
            
            2.00
            
            
            —
            
            
            —Outstanding,
                End of Year
            
            
            1,230,000
            
            $
            0.59
            
            
            850,000
            
            $
            0.60Exercisable,
                End of Year
            
            
            906,734
            
            $
            1.00
            
            
            600,000
            
            $
            0.02




The
      following summarizes information related to stock options outstanding at
      March 31, 2006:




**Options
                Outstanding**
            ****
            **Options
                Exercisable**
            ******Exercise
                Prices**
            ****
            **Shares**
            ****
            **Weighted
                          Average Remaining Contractual Life
                          (Years)**
            ****
            **Weighted
                        Average Exercise
                        Price**
            ****
            **Shares**
            ****
            **Weighted
                        Average Exercise
                        Price**$1.00
            
            
            1,230,000
            
            
            0.5
            
            $
            1.00
            
            
            906,734
            
            $
            1.001,230,000
            
            
            0.5
            
            $
            1.00
            
            
            906,734
            
            $
            1.00




The
        following table summarizes the warrants outstanding and exercisable at March
        31,
        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
              
              
              2/07/07
 
 (continued)


F-16





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




**NOTE
      9: LONG TERM DEBT PAYABLE**




On
      September 25, 2003, the Company entered into a loan agreement with 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 Company issued warrants (at fair value on the commitment
      date) to Nations for 1,000,000 shares to be used to convert the debt to common
      stock at the rate of $1.00 per share. These warrants were cancelled during
      fiscal year 2005. The $1.00 per share represents the fair value of the share
      at
      the date of the loan commitment. On March 31, 2005, the Company converted
      $390,761 of advances were converted to common stock at $1.00 per
      share.




On
      October 1, 2004, the loan agreement with Nations was renewed and the fair value
      of the common for one year the stock on that date was $3.25 per share. During
      the year ended March 31, 2006, $141,986 of advances and $ 140,495 in
      payments were made. The line of credit expired in October 2005 but was renewed
      for twelve months on July 12, 2006.




In
      2006,
      the Company financed $30,443 of equipment. The future payments on the equipment
      finance notes are:




**Year**
            
            **Amount**2007
            
            $
            16,4852008
            
            
            13,3562009
            
            
            13,3562010
            
            
            13,356Thereafter
            
            
            0$
            56,553Less
                Interest
            
            
            9,576Principal
            
            
            46,977Less:
                Current Portion
            
            
            12,330Long
                Term Balance
            
            $
            34,647




**NOTE
      10: OPERATING LEASES**




Future
      minimum payments, by year and in the aggregate, under an operating lease for
      office space and an equipment lease with a remaining term in excess of one
      year
      as of March 31, 2006, is as follows:




**YEAR**2007
            
            $
            77,7602008
            
            
            76,860Thereafter
            
            
            76,860Total
                Minimum Lease Payment
            
            $
            231,480




Rent
      expense was $111,775 and $123,184 for the years ended March 31, 2006 and
      2005, respectively.





(Continued)


F-17





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




**NOTE
      11: LEGAL PROCEEDINGS**




The
      Company filed suit in Los Angeles County against its former CEO and Director,
      Jagan Narayanan, on January 13, 2005, alleging breach of contract, fraud,
      breach if fiduciary duty and seeking equitable relief in the form of a
      declaratory judgment that the Company owes him no salary or any stock options.
      The Los Angeles County case was Case No. AC084087, filed in Los Angeles
      Superior Court in Santa Monica, California.




Mr.
      Narayanan has filed a 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 County (where the defendant lives) so
      the
      Company’s case has been transferred there. The Alameda County Case is
      No. HG05-199556 and was filed on February 19, 2005. The cases are now at
      the discovery stage.




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 claim against Mr. Narayanan. The effect of unfavorable outcome, if any,
      cannot be estimated.





(Continued)


F-18





**AEROTELESIS
      INC.**


**(A
      DEVELOPMENTAL STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**MARCH 31,
      2006 AND 2005**




**NOTE
      12 - CONVERTIBLE DEBT**




On
      May
      10, 2005, the Company entered into a bridge debenture agreement, whereby an
      investor committed to purchase $3,000,000 of convertible debentures from the
      Company. The agreement included various terms, including the
      following:




l
            $1,500,000
                disbursed at closing




l
            $1,500,000
                disbursed immediately prior to the Company filing a registration
                statement




l
            10%
                Interest rate




l
            12
                Month maturity




l
            Secured
                by all assets of the Company




l
            30%
                Warrant coverage at an exercise price of $3.00, 20% warrant coverage
                at an
                exercise price of $4.00




The
      following table summarizes the warrants outstanding and exercisable at March
      31,
      2006.




**Number
                of Warrants Outstanding**
            ****
            **Exercise
                Price**
            ****
            **Maturity
                Date**300,000
            
            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
            
            2/07/07




The
      Company received the initial amount at closing on July 25, 2005. The Company
      received the second amount of funding of the bridge debenture agreement on
      October 27, 2005 in the amount of $1,500,000.




On
      February 8, 2006 the Company received an additional $500,000 and reached an
      agreement to restructure the original agreement to contain a variable conversion
      price equal to 75% of the volume weighted average price and to have a 36 month
      maturity. The modified agreement also called for the issuance of 2,200,000
      at
      prices of $.50, $.75, and $1.00.




The
      beneficial conversion of the debenture was computed as $880,036 and was
      expensed.




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 $1,333,286, including $800,036 above, has been amortized for the period
      ended March 31, 2006.




The
      convertible debenture is convertible into shares of the Company’s common stock
      at 75% of the asking price in the OTCBB on the date of conversion. Interest
      in
      the amount of $176,849 has been charged to interest expense during the year
      ended March 31, 2006.




**NOTE
      13 - SUBSEQUENT EVENTS**




On
      May
      18, 2006, the Company signed an agreement with Photron for the licensing rights
      for the USM North America for $4.0 million payable in $3.0 million in cash
      and
      $1.0 million in the Company’s restricted stock at market value. As March 31,
      2006, the Company has paid $1,260,000 towards this USM TM license,
      which was expensed as development cost. On July 14, 2006, the Company renewed
      its revolving line of credit of $1,000,000 from Nations Mobile.


F-19