U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2005       Commission file No. 0-24511


                        ADVANCED OPTICS ELECTRONIC, INC.
                 (Name of small business issuer in its charter)


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

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

Issuer's telephone number, including area code:                (505) 797-7878

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered under Section 12(g) of the Exchange Act:
   Common Stock, $.001 par value
         (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes X  No
                                                             ---   ---

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. ____

The issuer's revenues for its most recent fiscal year were $0.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
issuer on March 31,  2006 was  approximately  $5,938,000  based upon the closing
price of such stock on that date of approximately $ 0.001. The number of
issuer's  shares  of  Common  Stock  outstanding   including  shares  issued  to
affiliates as of March 31, 2006 was 7,433,836,349.

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


<PAGE>


                                TABLE OF CONTENTS

Forward Looking Statements

                                     PART I

Item 1.   Description of Business..............................................3
Item 2.   Description of Property..............................................9
Item 3.   Legal Proceedings...................................................10
Item 4.   Submission of Matters to a Vote of Security Holders.................10

                                     PART II

Item 5.   Market for Common Equity and Related Stockholder Matters............10
Item 6.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations...............................12
Item 7.   Financial Statements.......................................F-1 to F-36
Item 8.   Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure...............................16
Item 8A.  Evaluation of Controls and Procedures...............................17

                                    PART III

Item 9.   Directors and Executive Officers of the Registrant..................17
Item 10.  Executive Compensation..............................................19
Item 11.  Security Ownership of Certain Beneficial Owners and
            Management and Related Stockholder Matters........................20
Item 12.  Certain Relationships and Related Transactions......................21
Item 13.  Exhibits List.......................................................22
Item 14.  Principal Accountant Fees and Services..............................23


                                   SIGNATURES




                                       2
<PAGE>



Forward - Looking Statements
----------------------------

This  Form  10-KSB  contains  forward-looking  statements  about  the  business,
financial  condition and prospects of the Company that reflect  assumptions made
by management and management's beliefs based on information  currently available
to it. The Company can give no assurance that the expectations indicated by such
forward-looking  statements will be realized. If any of management's assumptions
should prove incorrect, or if any of the risks and uncertainties underlying such
expectations  should  materialize,  the  Company's  actual  results  may  differ
materially from those indicated by the forward-looking statements.

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

There may be other risks and circumstances that management is unable to predict.
When used in this Form 10-KSB, words such as, "believes,"  "expects," "intends,"
"plans,"  "anticipates"  "estimates"  and similar  expressions  are  intended to
identify   forward-looking   statements,   although   there   may   be   certain
forward-looking   statements   not   accompanied   by  such   expressions.   All
forward-looking statements are intended to be covered by the safe harbor created
by Section 21E of the Securities Exchange Act of 1934.

                                     PART I

ITEM 1.   DESCRIPTION OF BUSINESS

GENERAL

Advanced Optics Electronics, Inc. (ADOT-OTC BB) is a technology company based in
Albuquerque,  New Mexico.  Its primary focus is in image display and recognition
technology.  The company maintains an R&D facility and manufacturing  plant, and
is engaged in building  large-scale flat panel displays,  utilizing its patented
technology, and production of color recognition optical devices.

The Company was organized as a Nevada  corporation  on May 22, 1996. On November
7, 1996,  the Company  acquired the  business and patents of PLZTech,  a company
involved in the development of flat panel displays.

COMPANY OVERVIEW

We are a developmental  stage technology company with our primary focus on image
display and recognition  technology.  Two products that are in development  from
this technology are large-scale flat panel displays,  which utilize our patented
technology,  and color recognition optical devices. We are currently  continuing
our research,  development,  prototyping,  and manufacturing of our products and
the underlying technology. We are in the process of making the transition from a
developmental stage company to producing and selling our product lines.



We plan to focus on producing and selling our  large-scale  flat panel  displays
for the outdoor advertising billboard industry,  which represents the first time
that our technology is available to this  industry.  We are in  negotiations  to
acquire a  billboard  location  in Florida  and intend to  retrofit  it with our
technology  in order to learn  more  about  the  outdoor  billboard  market  and
advertising customer needs and industry requirements.

In  addition,   there  are  other  markets  and   applications   that  represent
opportunities  for  additional  sources of  business,  and we are  beginning  to
explore  these markets and  applications,  such as e-cinema,  lighting  sources,
stadium and sports applications and systems, control and status monitoring,  and
environmental warning systems.

                                       3
<PAGE>


Initially,  we  plan  to  sell  our  color  recognition  optic  devices  through
e-commerce  and retail  locations  to the blind and  visually  impaired.  We are
exploring  additional  markets for these devices for industrial,  scientific and
manufacturing applications.


COMPANY BACKGROUND

We were incorporated as a Nevada  corporation on May 22, 1996. In November 1996,
we acquired all the assets of PLZTech,  Inc.,  including  all of its patents and
research and  development  activities.  The  transaction  was accounted for as a
purchase, and all assets acquired and liabilities assumed were recorded at their
fair market  values,  as  determined in accordance  with  accounting  principles
generally accepted in the United States of America. Intangible assets of PLZTech
acquired in the purchase  transaction  were carried at  historical  book values.
Research and development costs of PLZTech were expensed as incurred. PLZTech was
incorporated  in November  1992 in the state of Colorado  and was engaged in the
business  of  research  and  development  of flat panel  displays.  Prior to our
acquisition  of the  business  and patents of PLZTech,  we had minimal  business
activities  and had  essentially  just started our own research and  development
activities.

INDUSTRY BACKGROUND

Our flat  panel  displays  fit into a  growing  niche  that is part of the broad
visual communications market, which includes printing, photography,  television,
billboard, etc. In particular,  our flat panel displays fit within the billboard
sub-category  of the broad  visual  communications  market.  Billboards  include
various  niches  commonly  identified as painted signs,  architectural  signage,
electric signs,  programmable  signs and large video displays.  According to the
Outdoor  Advertising  Association  of America,  outdoor  advertising  was a $5.8
billion  industry  in 2004,  which was 6% higher  than the  previous  year.  The
billboard  segment of the outdoor  advertising  market  represents  62% of total
outdoor  expenditures  and topped  $3.62  billion in 2004.  We believe  that the
advantages  of our flat panel  displays  for the outdoor  advertising  billboard
industry  will be  significant.  Our flat  panel  displays  have the  benefit in
comparison to traditional printed billboards of providing dynamic,  eye-catching
ads and rapid change of display images from a remote site.  Billboard  companies
could  benefit by  increasing  revenues  per sign by being able to sell the same
space to  different  advertisers  at different  times  during the day,  with the
ability  to  immediately  access  and  change  each  sign via the  remote  site.
Advertisers  could  benefit  substantially  because  they would be able to reach
their target audience with greater precision.

The market  for our color  recognition  optical  device,  ("Color-Chek")  is the
population of the visually  impaired,  industrial  manufacturing  and in thermal
imaging  applications  for  the  military.  We plan to  initially  focus  on the
visually impaired.  The company's unique and novel conception and implementation
of hardware  and firmware  determines  the color  optically  and  expresses  the
results with vocal responses.  The company will establish marketing arrangements
for the  distribution to retail  locations after a supply has been  manufactured
and inventoried.

STRATEGY

After  conducting  extensive  research in various  industries,  including laptop
computers,  high definition  televisions and outdoor  advertising  billboards to
determine  which market would be best suited for producing and selling  products
utilizing our technology,  we decided to concentrate our complete  attention and
efforts on marketing to the outdoor electronic  advertising  billboard industry.
According to the Outdoor Advertising  Association of America,  advertising space
was sold on  approximately  390,000  billboards in 2004. Our goal is to create a
line of products utilizing our technology that is scalable both in terms of size
and  resolution  to meet a wide  range  of  requirements  related  to  potential
customers' economics, billboard locations and intended use.

We believe that, due to the Highway Beautification Act, the number of billboards
nationwide  will not  increase  dramatically  but  should  remain  stable in the
future.  We expect that  advertisers  will increase  their focus on securing and
developing  prime  billboard  locations.  The customer  base for  billboards  is
diversifying  as more  advertisers  are  attracted  to this  medium.  Our market
penetration  analysis is based on capturing and  converting  existing sites in a
stable market and expanding the indoor market.

The first phase will be targeting the prime  billboard  locations  that generate
monthly advertising revenues of approximately  $25,000 or more per location.  It
is estimated that there are  approximately  700 of these locations in the United
States and another 1,500 outside of the United States.

                                       4
<PAGE>


Long-term  contracts  could  potentially  limit our access to the desired  prime
location sites during our start-up period. However, we believe that the trend is
to use shorter-term  contracts with significant  turnover of advertisers,  which
favors  the use of our flat  panel  displays  because of the ease and speed with
which images can be changed from a remote site.  Revenues will be derived from a
combination  of direct sales of flat panel  displays,  owned and  operated  flat
panel displays, leasing, licensing, and partnerships.

PRODUCTS AND MARKETS

Our  primary  initial  product  that will be  marketed  to users of the  outdoor
advertising  industry is the flat panel  display.  Our flat panel  displays will
provide an image measuring  approximately three meters by eight meters, which is
similar  in size to  existing  printed  billboards.  We  believe  that the major
advantages  of  our  flat  panel  displays   include  better  viewing   quality,
affordability,  customer system  integrity,  and an almost  immediate  change of
display  images from a remote site. We believe that our flat panel  displays and
underlying  software system represent an innovative approach to advertising that
takes  advantage of the recent  technological  convergence  of billboard  media,
broadcast media and the Internet.

Our  principal  product  market  consists of the outdoor  advertising  billboard
industry, which until now has primarily relied on printed billboards for outdoor
advertising.   We  believe  that  the  user  base  for  outdoor   billboards  is
diversifying  and growing as more  advertisers  are  attracted to this medium of
advertising,  and this  industry is  experiencing  rapid  consolidation  through
mergers and acquisitions driven by the larger billboard  companies.  Our product
and marketing  strategy includes  leveraging the underlying growth and excellent
fundamentals of the existing outdoor advertising market. We anticipate that this
strategy  will also create a new segment of the  outdoor  advertising  billboard
market  for our flat  panel  displays.  We have  completed  a film that is being
distributed as a marketing tool  throughout  the outdoor  advertising  billboard
industry to potential  purchasers of our flat panel  displays both in the United
States and internationally.

In  addition,   there  are  other  markets  and   applications   that  represent
opportunities  for  additional  sources of  business,  and we are  beginning  to
explore  these markets and  applications,  such as e-cinema,  lighting  sources,
stadium and sports applications and systems, control and status monitoring.

The  other  product  that is in  development  is the color  recognition  optical
sensing device (Color-Chek).  We believe the major advantages of our product are
a cheaper  cost for the level of  resolution  and  flexibility  relative  to our
competitors.  The market for this product will  primarily be to the  color-blind
and visually  impaired.  However,  we are  exploring  other  markets where color
recognition may be beneficial such as in underwater and space applications.

SUPPLIERS AND AVAILABILITY OF RAW MATERIALS

We have identified several suppliers of the basic components of our systems.  We
anticipate this technology to continue to develop and mature,  which will create
more  suppliers,  lower  prices and  greater  availability.  We are  continually
evaluating   suppliers  of   subassemblies   and  components   and   researching
alternatives. We are sensitive not only to the quality and cost of the parts and
pieces  supplied  but  also  the  strategic   importance  of  multiple  supplier
relationships.

MANUFACTURING, DISTRIBUTION, INSTALLATION AND MAINTENANCE OF OUR PRODUCTS

We have established relationships with contract manufacturing facilities for the
production  of our  flat  panel  displays.  We  intend  to  establish  a  larger
manufacturing facility for assembling our flat panel displays in preparation for
larger scale  operations.  Our flat panel displays will be shipped directly from
our manufacturing  facilities to our customers, and we intend to promote, market
and sell our products through direct sales channels.

We plan to outsource manufacturing of Color-Chek out to facilities in the US and
Mexico.

We also plan to maintain and repair our products for a specific  warranty period
and offer  maintenance  contracts  beyond the warranty period.  In addition,  we
intend to investigate  the  possibility  of  contracting  with United States and
international   third  party  service   providers   for  on-site   installation,
maintenance and repair of our flat panel displays.


                                       5
<PAGE>

CUSTOMERS

Panels
------

According  to  the  Outdoor  Advertising  Association  of  America,  there  were
approximately  151,000 30-sheet billboards that measure approximately 12 feet by
24 feet and approximately  106,000 8-sheet billboards that measure approximately
6 feet by 12 feet in the United  States in 2004.  We believe  that many of these
billboards  represent  potential retrofit sites for the installation of our flat
panel displays.

It is estimated that the four leaders in this industry account for approximately
half of the  outdoor  advertising  billboard  market  and the top ten  billboard
owners  represent  61% of this  market.  The balance of the outdoor  advertising
billboard market is composed of smaller  individual  companies that nevertheless
control  prime  high-traffic  billboard  locations  and, as such,  represents  a
significant  component of our target market.  We consider these  companies to be
our potential primary customers.  In addition to upgrading their billboard sites
to attract higher revenue generating advertising accounts, we believe that these
potential  customers are considering  new potential  outdoor venues in locations
such as Times Square in New York City,  which would be an  additional  source of
revenue for us. Media companies have been acquiring billboard owners in order to
offer  packages  of  television,  radio  and  newly  acquired  outdoor  space to
advertisers.  We believe that the concentration of ownership and the convergence
of media are beneficial trends to market and sell our flat panel.

We intend to initiate customer contact by directly  communicating with potential
customers,  including  the four  leaders of the  outdoor  advertising  billboard
industry,  and providing them the marketing film that we have produced about our
flat panel  displays.  We are  developing  a  marketing  department  to initiate
contact,   process  each  transaction  and  coordinate  with  our  manufacturing
department for production and delivery of our flat panel displays.

Color-Chek
----------

There are approximately  8,000,000  visually impaired  individuals in the United
States according to the 2000 US Census.  These  individuals would be the initial
target  market  for this  product  to  assist  them in day to day life  that may
require color  recognition.  Other potential  customer bases include  industrial
manufacturing  for color  recognition  on assembly  lines and military sales for
application in low-light environments.

COMPETITION

Panels
------

We will  compete  with the  existing  billboard  techniques  of hand  painted or
printed and pasted signs.  Recently,  there has been a trend toward creating the
art digitally, but these images are still printed on large sheets and pasted up.
We believe  these forms of  billboard  presentations  will only be viable in low
density, low traffic areas. In comparison,  our flat panel displays include high
brightness,  full  color,  superior  image  quality,  wide  viewing  angle  with
excellent  outdoor  readability,  relatively  low cost compared  with  competing
electronic billboard technologies,  high reliability and rapid change of display
images from a remote site.
We  will  compete  against  other  established   forms  of  electronic   display
technology,  and we believe that our products and technologies  will continue to
face substantial competition as the market and technologies evolve. Existing and
potential  competitors such as Toshiba,  Sharp,  Hitachi and Mitsubishi  possess
substantially greater product development capabilities and financial, technical,
marketing or human resources than we do. These companies manufacture  electronic
displays that utilize liquid crystal displays, or passive LCD technology such as
lap-top  computer  screens,  and  cathode ray tubes such as  traditional  TV set
display  technology,  which currently dominate the electronic  billboard market.
However,  we believe that the products based on these  technologies  are limited
and new technologies being developed, including ours, will significantly improve
the  performance  of  electronic  displays in the future and  displace  existing
products  in  the  electronic   billboard  market.  Many  companies,   including
Daktronics,  Inc., SI Diamond Technology, Inc. and Universal Display Corporation
have, or are developing,  other  technologies  utilizing carbon field emissions,
incandescent  lamps,  inorganic  electroluminescence,   organic  light  emitting
diodes,  polymeric  light  emitting  diodes,  gas plasma and vacuum  fluorescent
lamps.  Furthermore,  although  we believe  our  products  will be  superior  to
established  advertising  billboard products, we cannot assure you that business
customers will prefer our technology sufficiently to be willing to pay for it at
the price at which it will be offered.  We recently  set the sales prices of our
flat panel displays measuring approximately three meters by two meters and three
meters by eight meters at $395,000 and $1,490,000, respectively.


                                       6
<PAGE>

We believe that the  technologies  that we have  developed are superior to other
existing technologies when combining the issues of brightness, image quality and
cost required for electronic  billboards.  Other existing  technologies  that we
compete with include:

     o   Low  resolution  devices  which have a grainy  picture and do not allow
         certain colors to be viewed in direct  sunlight and have a high initial
         cost;

     o   Incandescent bulbs that are high maintenance and offer poor graphics;

     o   Electromechanical  systems that have poor image  qualities  and limited
         colors; and

     o   CRT's and  passive  LCD's that have a long  useful life and an existing
         manufacturing base, but are expensive to produce.

We believe that our flat panel displays  utilizing our display technology offers
numerous  advantages and features in comparison to the existing  products of our
competitors currently available, including:

     o   The  brightest  electronic  billboard  display  at 35,000  nits and the
         widest viewing angle;

     o   The  smallest  dot  pitch for  outdoor  large-scale  displays  at eight
         millimeter dot pitch,  providing  high  definition  television  picture
         quality;

     o   24-bit true color and full motion video at up to 120 frames per second;

     o   Broadcast and simulcast applications including real-time live video and
         streaming video feeds with operation from a remote site;

     o   Use of digital visual interface, or DVI, industry standard protocol for
         high speed data linking and digital video interfacing;

     o   Satellite  linkage  for the  ability  to  operate  multiple  flat panel
         displays from a single remote site;

     o   Modular  assembly in one meter  increments  for scaleable and shapeable
         architectures  and ease of  transportability  for mobile operations and
         use; and

     o   Weather resistance for outdoor applications and a continual use life of
         at least five years.

Color-Chek
----------

There are a number of  competitors  in the optical  recognition to speech device
market.  At least 11 of these  companies  have products on the market  currently
with several more that have announced plans to release  products in the next few
years. All of the competitors products are more expensive and in some cases less
functional that the Company's product Color-Chek.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS (STATUS)

Advanced Optics holds the following patents and patents pending:

o Patent  #5,198,920  relating to a Transverse Pixel Formation for Spatial Light
Modulator.

o Patent  pending for  COLOR-CHEK,  a hand-held  color check optical
recognition device.

Our success will depend on our ability to protect our proprietary technology and
other  intellectual  property  rights.  We acquired  the patent  relating to the
transverse  pixel  format  when we acquired  all the assets of PLZTech,  Inc. in
November  1996.  Although  we have been  awarded  the  patent  and have filed an
application for a patent,  the degree of protection  offered by these patents or
the  likelihood  that  pending   patents  will  be  issued  is  uncertain.   Any
unauthorized  use of our  proprietary  technology  could  result in  costly  and
time-consuming litigation to enforce our proprietary rights.

RESEARCH AND DEVELOPMENT ACTIVITIES

In the year  ended  December  31,  2005,  $ 26,528  was  spent on  research  and
development  activities.  In 2004 $362,638 was spent on research and development
activities.  We believe that  continued  investment  in product  development  is
critical to attaining our strategic objectives and, as a result,  expect product
development  expenses to increase  significantly  in future periods.  We expense
product development costs as they are incurred.


                                       7
<PAGE>

EMPLOYEES

As of December 31, 2005, the Company has 9 full-time employees. The Company also
contracted with other personnel and  subcontractors  for various  projects on an
as-needed  basis.  The Company hired a full time  controller in 2005 in order to
support our efforts in meeting new reporting requirements. The Company has hired
two  additional  technicians  in  2005.  There  are no  explicit  plans  to hire
additional personnel at this time but, from time to time, the Company expects to
hire additional personnel in order to carry out its business strategy.

The Company  files  annual  reports on Form  10-KSB,  quarterly  reports on Form
10-QSB,  current  reports on Form 8-K and proxy and  information  statements and
amendments to reports files or furnished pursuant to Sections 13(a) and 15(d) of
the  Securities  Exchange Act of 1934, as amended.  The public may read and copy
these  materials  at  the  SEC's  Public  Reference  Room  at 450  Fifth  St NW,
Washington,  DC 20549. The public may obtain information on the operation of the
public  reference  room by  calling  the  SEC at  1-800-SEC-0330.  The SEC  also
maintains  a  website  (http://www.sec.gov)  that  contains  reports,  proxy and
information  statements  and other  information  regarding the Company and other
companies that file materials  with the SEC  electronically.  The Company's main
office is located at 8301 Washington St NE, Suite 5, Albuquerque,  NM 87113. The
Company's phone number at that address is 505-797-7878.

BIOMODA
-------

Beginning  with  its  2004  annual  report  on  form  10-KSB,  the  Company  has
consolidated  its financial  statements with Biomoda,  Inc.'s (Biomoda) This has
been done in order to comply with FIN 46, a pronouncement  that became effective
for years ending after  December 15, 2004.  The nature of Biomoda's  business is
substantially  different  from that of Advanced  Optics  Electronics,  Inc. More
information  about  Biomoda is  available  in  Biomoda's  2005  10-KSB  which is
accessible from the SEC website. The SEC website  (http://www.sec.gov)  contains
reports and information  statements and other information  regarding Biomoda and
other companies that file materials with the SEC electronically.

Biomoda's  plan for the next  twelve  months is to verify  and refine its assay,
design its kit, prepare for clinical  studies,  and initiate a dialogue with the
FDA  relative  to our  approval  submission.  Biomoda  is  relying  on a  bridge
financing  arrangement  with Advanced  Optics  Electronics,  Inc., an affiliated
public company,  and also intends to raise  additional  funds from its effective
Form  SB-2  Registration  Statement  during  the next  six  months.  Biomoda  is
currently leasing Laboratory equipment from Advanced Optics Electronics, Inc. on
a month to month basis and  intends to purchase  this  equipment  when  adequate
funds are raised.  Its initial product is a diagnostic test for lung cancer that
will be performed  out of body by using a sputum  sample from the  patient.  The
test does not require any invasive  sample taking.  The sample will be sent to a
clinical lab where a procedure  will be performed to determine the presence,  or
not, of lung cancer or precancerous  cells.  The diagnostic test can be used for
other cell  samples and the intent is to create and market  products to diagnose
and  screen  for  other  prevalent  cancers  such  as  cervical,   bladder,  and
colorectal. Management has determined that the initial markets will be among the
developed  nations of Europe,  North  America,  and Japan.  We are also pursuing
markets in India,  Russia,  and Eastern Europe.  This has been determined on the
basis of  available  healthcare  delivery  and  payer  infrastructure.  Japan is
leading  the  world  in  this  area  and  has   instituted  a  nationwide   lung
cancer-screening program.

BIOMODA PRODUCT DEVELOPMENT AND REGULATORY STRATEGY

Management  of Biomoda  expects to continue  assay  validation  work and seek to
register its product with the FDA in 2005.  There are several  business  models,
product types and regulatory routes that Biomoda is evaluating  including:  ASR,
510K, PMA and IVD kits

Research Use Only (RUO) or  Investigational  Use Only (IUO):  An RUO test can be
sold to  organizations  that are conducting  research in a particular  area. The
product  cannot  be used to make  any  diagnostic  or  clinical  decision  for a
patient.  An IUO test is a complete kit that is used in a formal clinical trial.
The results can be used in the clinical trial only.

ASR:  This is the FDA  designation  for  Analyte  Specific  Reagent.  There  are
generally  two classes:  Class I & Class II. Class I is considered to the lowest
risk.  Biomoda's  ASR product is a Class I and only  requires  registration  and
meeting the FDA  standards.  This  product is viewed as a component  for a assay
developed in-house by Medical Reference Laboratories.

510K:  This is the FDA  designation for approvals that are based on "Substantial
Equivalence"  with previously  approved products and does require approval prior
to marketing. There are generally three classes: Class I, Class II, & Class III.
Depending on the indication  established  with the FDA,  Biomoda's  product will


                                       8
<PAGE>

either be Class I or Class II, if Biomoda  proceeds  with this product  approval
route.  This  product  will be a kit  developed  to  determine  the  presence of
abnormal cells in a body fluid sample.

PMA: This is the FDA designation  for approvals for new product  indications (no
Substantial Equivalence) and does require approval prior to marketing. There are
generally  two  classes:  Class II, & Class III. If Biomoda  proceeds  with this
approval route, Biomoda's expects this product to be Class III due to indication
of diagnostic for a specific cancer.

IVD: This is an industry  designation for In Vitro  Diagnostic.  Products in the
industry  are either  reagents or kits.  Kits would  include the key  components
required to conduct the assay for the specific  indication stated in the package
insert.  Reagents are single  components used in assays developed by a Reference
Labs.  The lab  will be  required  to have met the FDA  CLIA  (current  Clinical
Laboratory  Improvement  Act)  regulations  to market a  diagnostic.  Biomoda is
evaluating several cancers with a focus on large markets that are in need of the
most immediate  diagnostic support.  These include:  lung, bladder and cervical.
The products are subject to FDA  registration  or approval and to  post-approval
FDA reporting requirements.

Costs in complying with regulatory and legislative  matters such as the Clinical
Laboratory Improvement Amendment of 1988 (CLIA), which regulates the quality and
reliability of medical testing in the U.S.,  adverse changes in zoning laws, tax
laws, or other laws affecting the medical and  diagnostic  industry may prove to
be a major  obstacle,  both in respect of time and costs,  in our  research  and
development.

The timing of  regulatory  filings  and  approvals,  if any,  for the  Company's
products are made less certain by the Company's  strategy of seeking one or more
collaborative  arrangements with development and marketing  partners,  which may
require that a  collaborative  partner be responsible  for seeking and obtaining
regulatory  approvals either in foreign countries or in the U.S. Biomoda intends
to market its  products  throughout  the world.  There are  numerous  regulatory
agencies that  regulate the sale of diagnostic  and  therapeutic  products,  and
these  agencies may be affected or influenced by criteria  materially  different
than those of the FDA. The sale of Biomoda's products may be materially affected
by the policies of these  regulatory  agencies or the  domestic  politics of the
countries  involved.  Biomoda  has not  applied  for and  does  not now have the
approval  of any  foreign  country  to  sell  its  products  for  diagnostic  or
therapeutic use.

Biomoda's lung cancer product validation is projected to be complete by year-end
and a contract  manufacturing  relationship  is projected to be  established  by
year-end. Based on these benchmarks, ASR registration and product listing can be
completed by that time also. At that juncture  reagent sales can begin.  This is
estimated to cost an additional $500,000.

Class I/II 510K can be completed as judged appropriate for the business and will
require  approximately 6 to 9 months effort to prepare documentation and receive
FDA  approval.  During that time kit  manufacturing  can be  initiated.  Partial
funding will be provided from reagent sales revenue. It is estimated  additional
funding of $300,000 will be required.

PMA will require  clinical studies to be completed and will be initiated when it
is viewed as appropriate for the business.  This will require on the order of 18
months to plan, execute, and document. During that time kit manufacturing can be
initiated. FDA approval will require 6 to 9 months.

Biomoda's current intention regarding regulatory strategy is to initiate product
introductions via an ASR registration and potentially  migrate up the regulatory
spectrum as markets require.

Biomoda's   products  are  subject  to  FDA  registration  or  approval  and  to
post-approval FDA reporting requirements.  Biomoda's current intention regarding
regulatory strategy is to initiate product introductions via an ASR registration
and potentially migrate up the regulatory spectrum as markets require.

Biomoda's  management  expects to continue  assay  validation  work and commence
registration  of its product  with the FDA in 2006.  There are several  business
models,   product  types  and  regulatory  routes  that  Biomoda  is  evaluating
including:  licensing,  ASR,  510K,  PMA for IVD kits and  reagents.  Biomoda is
evaluating several cancers with a focus on large markets that are in need of the
most immediate  diagnostic support.  These include:  lung, bladder and cervical.
See item 6,  below,  for  discussion  of  estimated  costs  and  timetables  for
development of these tests.

ITEM 2.   DESCRIPTION OF PROPERTY

The company leases its headquarters  facility of approximately 7,500 square feet
at 8301  Washington NE, Suite 5 in  Albuquerque,  New Mexico.  This includes the

                                       9
<PAGE>

executive offices,  research and development  facility and manufacturing  plant,
approximately  500 square feet of which is sublet to Biomoda,  Inc. The facility
is in good  condition  with no  material  defects or deferred  maintenance.  The
facility  is  leased  from  unaffiliated  third  parties  under a lease  that is
currently on month to month status.

ITEM 3.   LEGAL PROCEEDINGS

On December  10,  2004,  the Company and another  entity  filed a lawsuit in the
State  of  New  Mexico  against  an  individual  ("the  DEFENDANT")  to  recover
$13,500,000 for damages and injunctive  relief arising out of the  intentionally
tortuous  conduct of the  Defendant.  On December 23, 2004,  instead of filing a
counterclaim,  the Defendant  filed a lawsuit against the Company and others for
alleged malicious abuse of process,  defamation,  civil conspiracy,  prima facie
tort, and intentional  infliction of emotional distress,  but did not allege any
amount of damages.  On January 26, 2005,  the Company  filed a motion to dismiss
that lawsuit. Because of the inherent uncertainties,  a favorable or unfavorable
outcome  could not be  determined as of this date as well as the amount or range
of potential  recovery by the Company in the event of favorable  outcome or loss
to the Company in the event of an unfavorable outcome.
On April 5, 2005 an insurance  carrier for the Company  confirmed  that it would
provide  legal  counsel for the Company in the defense of the claims  brought by
the above referenced Defendant. On April 8, 2005 the Company was awarded damages
in the sum of  $13,500,269 as a result of a two separate  judgments  against two
former co-defendants of the above referenced  Defendant.  The Court's order also
provides  that the  defendants  must pay the Company an  additional  $905,794 as
pre-judgment interest.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None



                                     PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The  Company's  Common Stock began trading on the NASDAQ  Bulletin  Board Market
("OTC") under the symbol "ADOT" during the first quarter of 1997.  Prior to that
time the stock was not  listed or traded on any  organized  market  system.  The
holders of the  Company's  Common Stock are entitled to one vote per share.  The
Common Stock holders do not have preemptive  rights to purchase,  subscribe for,
or otherwise acquire any shares of Common Stock.

The table below sets forth the high and low bid prices for the Common  Stock for
each quarter  within the last two fiscal years as reported by Prophet  Financial
Systems.  These  over-the-counter  market  quotations  may reflect  inter-dealer
prices without retail  mark-up,  markdown or commission and may not  necessarily
represent actual transactions.

                                Common Stock Bid
-------------------------- -------------------------- --------------------------
                                     High                         Low
-------------------------- -------------------------- --------------------------
Fiscal 2005:
-------------------------- -------------------------- --------------------------
              1st Quarter                      $.002                      $.001
-------------------------- -------------------------- --------------------------
              2nd Quarter                       .001                      .0005
-------------------------- -------------------------- --------------------------
              3rd Quarter                       .001                      .0002
-------------------------- -------------------------- --------------------------
              4th Quarter                       .001                      .0002
-------------------------- -------------------------- --------------------------
Fiscal 2004:
-------------------------- -------------------------- --------------------------
              1st Quarter                       .007                       .001
-------------------------- -------------------------- --------------------------
              2nd Quarter                       .003                       .001
-------------------------- -------------------------- --------------------------
              3rd Quarter                       .051                       .002
-------------------------- -------------------------- --------------------------
              4th Quarter                       .086                       .004
-------------------------- -------------------------- --------------------------

As of  December  31, 2005 the Company  estimates  that there were  approximately
10,000  shareholders  and the closing  price of the  Company's  common stock was
$.0003.  The Company has never paid cash  dividends on its Common Stock and does
not anticipate paying cash dividends in the near future.


                                       10
<PAGE>

PENNY STOCK

Until the  Company's  shares  qualify for  inclusion in the NASDAQ  system,  the
public  trading,  if  any,  of the  Company's  Common  Stock  will be on the OTC
Bulletin Board.  As a result,  an investor may find it more difficult to dispose
of, or to obtain  accurate  quotations  as to the  price,  of the  Common  Stock
offered.  The  Company's  Common Stock is subject to provisions of Section 15(g)
and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"),  commonly  referred to as the "penny stock rule."  Section 15(g) sets for
the certain  requirements  for  transactions in penny stocks,  and Rule 15g-9(d)
incorporates the definition of "penny stock" that is found in Rule 3a51-1 of the
Exchange Act. The SEC generally  defines "penny stock" to be any equity security
that  has a  market  price  less  than  $5.00  per  share,  subject  to  certain
exceptions. If the Company's Common Stock is deemed to be a penny stock, trading
in the shares  will be subject to  additional  sales  practice  requirements  on
broker-dealers who sell penny stock to persons other than established  customers
and  accredited  investors.  "Accredited  investors"  are persons with assets in
excess of $1,000,000 or annual income  exceeding  $200,000 or $300,000  together
with their spouse. For transactions covered by these rules,  broker-dealers must
make a special  suitability  determination for the purchase of such security and
must  have the  purchaser's  written  consent  to the  transaction  prior to the
purchase.  Additionally,  for any  transaction  involving a penny stock,  unless
exempt the rules require the delivery,  prior to the first transaction of a risk
disclosure document,  prepared by the SEC, relating to the penny stock market. A
broker-dealer   also  must  disclose  the   commissions   payable  to  both  the
broker-dealer and the registered  representative  and current quotations for the
securities.  Finally,  monthly  statements must be sent disclosing  recent price
information  for the penny  stocks  held in an account  and  information  to the
limited  market in penny  stocks.  Consequently,  these rules may  restrict  the
ability of  broker-dealer  to trade  and/or  maintain a market in the  Company's
Common Stock and may affect the ability of the  Company's  shareholders  to sell
their shares.

RECENT SALES OF UNREGISTERED SECURITIES

During  October 2004,  the Company sold  118,000,000  shares of common stock for
$161,970 in cash; all shares were sold for less than $0.01.

During  November 2004, the Company sold  160,000,000  shares of common stock for
$2,777,200 in cash; all shares were sold for less than $0.01.

During  December 2004, the Company sold  145,000,000  shares of common stock for
$224,350 in cash; all shares were sold for less than $0.01.

During October 2004, the Company  issued  27,400,000  shares of common stock for
services, which were valued at $57,540 (based on the closing market price on the
date of grant,  which was less than $0.01). The Company recorded such amounts in
the accompanying statement of operations.

During  October 2004 the Company  purchased a net of 2,225,000  shares of common
stock  (based on the fair market  value on the date of  transaction,  which were
less than $0.01) held as treasury stock.

During December 2004, the Company purchased a net of 11,000,000 shares of common
stock  (based on the fair market  value on the date of  transaction,  which were
less than $0.01) held as treasury stock.

As of December  31,  2005,  the status of the common  stock of the Company  was:
7,000,000,000 shares authorized and 6,023,836,349 shares issued and outstanding.

During the year ended December 31, 2005, the Company issued 2,634,700,000 shares
for cash of $1,147,474 and  21,000,000  shares of common stock for debentures in
the amount of $31,122.

All investors are "Accredited Investors" within the meaning of Regulation D.

All the investors who acquired the common stock and the debenture  investors had
a pre-existing  relationship  of a business  nature with ADOT for a considerable
period of time prior to acquiring the securities.

No media advertising  (advertisements,  articles,  notice or other communication
published  in any  newspaper,  magazine  or  similar  media  or  broadcast  over
television  on radio) or general  solicitation  was  employed  in  reaching  the
investors or used to bring ADOT to the attention of the investors.

The Company claims exemption from registration  pursuant to Section 4 (2) of the
Securities  Act of 1933 which exempts a transaction  not  constituting  a public
offering.

                                       11
<PAGE>


EQUITY COMPENSATION PLANS
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------
                            EQUITY COMPENSATION PLANS
----------------------------------------------------------------------------------------------------------
<S>                     <C>                      <C>                         <C>
Plan Category           Number of Securities to   Weighted-Average           Remaining available for
                        be issued upon exercise   Exercise Price of          future issuance under equity
                        of outstanding Options,   outstanding Options,       compensation plans
                        Warrants and Rights (#)   Warrants and Rights  ($)   (excluding securities
                                                                             reflected in column (A)) (#)
----------------------- ------------------------- -------------------------- -----------------------------
Equity Compensation     400,000                   $0.02                      9,600,000
Plans approved by
security holders
----------------------- ------------------------- -------------------------- -----------------------------
Equity Compensation     800,000                   $0.03                      N/A
Plans not approved by
security holders
----------------------- ------------------------- -------------------------- -----------------------------
Total                   800,000                                              9,600,000
----------------------- ------------------------- -------------------------- -----------------------------
</TABLE>


ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS

ADVANCED OPTICS
---------------

LIQUIDITY AND CAPITAL RESOURCES

The Company  relies  upon the current  placement  of its  securities  to provide
capital for its development of prototype units and manufacturing operations. The
Company's  holding  in its  subsidiary,  Biomoda,  Inc  may  provide  additional
liquidity. Overall, the Company had negative cash flows of $520,134 for the year
ended  December  31,  2005  resulting  from  $1,734,071  used  in the  Company's
operating  activities,  $119,855 provided by the Company's investing  activities
and $1,094,082 of cash provided by financing activities.

Net cash used in operating  activities of $1,734,071 for the year ended December
31,  2005 was  primarily  due to  $2,105,065  in  operating  expenses,  of which
$1,027,087  is General and  administrative  and  $900,424 is Payroll and related
expense.

Net cash  provided  by  investing  activities  of  $119,855  for the year  ended
December  31, 2005 was  primarily  due to  proceeds of sale of GenoMed  stock of
184,046. In 2004, a significantly  greater amount of cash was used in investing,
primarily $900,000 used to purchase stock in GenoMed, Inc.

During the first quarter of 2004,  Advanced Optics  Electronics,  Inc. purchased
33,354,230 shares of GenoMed, Inc., for $900,000. This represented 17.09% of the
outstanding  shares of  GenoMed,  Inc. at that time.  At  December  31, 2005 the
Company held  27,350,821  shares.  GenoMed,  Inc. is a publicly  traded  biotech
company working in genomics based disease management.

Net cash  provided by  financing  activities  of  $1,094,082  for the year ended
December 31, 2005 was primarily due to the proceeds of $1,147,173, from the sale
of 2,655,700,000 shares of common stock.

The Company is actively pursuing all potential  financing options as it looks to
secure  additional  funds to both  stabilize  and grow its business  operations.
Management will review any financing options at its disposal and will judge each
potential  source of funds on its individual  merits.  There can be no assurance
that the  Company  will be able to secure  additional  funds from debt or equity
financing,  or if they can, that it will be on terms favorable to the Company or
existing stockholders.

During  the year ended  December  31,  2004 in  accordance  with the  applicable
convertible  debentures  agreement,  the Company  issued  103,000,000  shares of
common stock at a conversion  price of  approximately  $0.011 in connection with
the conversion of notes payable approximating $505,000,  including approximately
$160,000  of accrued  interest,  and  recorded a loss on  settlement  of debt of
$620,000.  In 2005,  21,000,000  shares  were  issued in  conversion,  valued at
$31,122.

                                       12
<PAGE>

RESULTS OF CONTINUING OPERATIONS

As of December  31,  2005,  The Company had a  marketable  securities  portfolio
valued  at  $902,027.   The  Companies'   combined  monthly  cash  burn-rate  is
approximately  $165,000.  This represents  approximately six months of operating
funds. The Company is actively pursuing potential  financing options as it looks
to secure  additional funds to both stabilize and grow its business  operations.
Management will review any financing options at its disposal and will judge each
potential  source of funds on its individual  merits.  There can be no assurance
that the  Company  will be able to secure  additional  funds from debt or equity
financing,  or if they can, that it will be on terms favorable to the Company or
existing stockholders.

The  Company is  currently  in the  process of final  assembly,  test and system
integration of approximately 1500 of its display subassemblies. This will create
a 2 meter by 3 meter display.  It is anticipated that this work can be completed
in  the  fourth  quarter  of  2006.   Additional  research  and  development  is
anticipated and planned in electrical and mechanical  realms.  These include but
are not limited  to:  power  systems and  distribution,  heat  dissipation,  and
weatherproofing.

There are no expected sales of significant equipment.

The Company  had been  developing  and  manufacturing  electronic  signs under a
contract to deliver two signs. At December 31, 2004, the contract was terminated
by mutual consent of both parties and a 100%  provision for contract  losses was
provided.  During  2004,  the Company  expensed  the balance of its  contract to
deliver  two flat panel  displays  resulting  in a charge of  $1,000,944  in the
Consolidated  Statements  of  Operations.  The  cancellation  of the contract to
purchase  two signs was  negotiated  to the  satisfaction  of both  parties  and
memorialized in a Settlement Agreement and Mutual Release.

Although  the  contract  to  purchase  two  signs  has been  canceled  through a
Settlement  Agreement,  we continue to work on completing  this initial sign and
the associated  development work. We currently employ four full-time  electronic
technicians  and a supervisor  working  specifically  on this  project.  We have
completed  20 panels that create a five  square  meter sign.  We are working out
issues  of  electrical  power  and  distribution.  We will  also  need to  solve
technical details surrounding cooling and weather-proofing.

We have  encountered  many  development and engineering  hurdles  throughout the
course  of this  project.  The  underlying  factors  related  to  cost  overruns
associated  with the  project  are:  changes in  engineering  staff;  inadequate
transition documentation; faulty parts; manufacturing and assembly problems both
internal and outsourced;  and expense allocation  decisions relative to Research
and Development.

Operating  expenses  decreased by $1,179,930 to $2,105,065 during the year ended
December 31, 2005 compared to $3,284,995  for the year ended  December 31, 2004.
Asset impairment  decreased by $365,314  professional  fees decreased by $51,044
and research and development  decreased by $632,331,  general and administrative
decreased  by  $466,058  from  $1,493,145  to  $1,027,087  and  payroll  expense
increased by $352,253 from $548,171 to $900,424 from 2004 to 2005.  This was due
to changes in classification of research related payroll costs in 2005.  General
and administrative expenses consist of expenses for executive and administrative
personnel,   facilities,   professional  services,   travel,  general  corporate
activities,  and the  depreciation  and  amortization  of office  furniture  and
leasehold  improvements.  Product  development  expenses  consist  primarily  of
consulting  fees  associated  with the  development  and enhancement of our flat
panel  displays and  continued  testing of disease  detection  protocol(s).  R&D
decreased  primarily  because of a lower  level of  activity.  We  believe  that
continued  investment  in product  development  is  critical  to  attaining  our
strategic  objectives and, as a result,  expect product development  expenses to
increase  significantly in future periods.  We expense product development costs
as they are incurred.  Two of the largest  changes were in asset  impairment and
inventory,  approximately $395,000,  which decreased to zero in 2005 and general
and  administrative,  largely  due to a decrease  of  approximately  $427,000 in
financial consulting and investor relations.  Asset impairment included removing
from  the  balance  sheet  investments  in  the  stock  of  Beaver   Information
Technology,  Inc., a foreign corporation, of $273,000 and Electronic Film Market
Online, Inc., of $88,000.

As  a  consolidated  entity,   Advanced  Optics'  operating  expenses  decreased
substantially in 2005, from approximately $3,300,000 to $2,100,000, as explained
above, by classification. Loss on contract, had been over $1,000,000 in 2004 and
was zero in 2005. Other income (expense) consists primarily of interest, gain or
loss on marketable  securities and debt settlement  losses.  This item increased
from $(762,128) to $49,286, largely because extinguishment of debt resulted in a
gain of $620,980 in 2004.


                                       13
<PAGE>


BIOMODA, INC.
-------------

Biomoda is a biomedical  development  company. The Company's direct ownership of
Biomoda,  as of December  31, 2005,  was  approximately  16.0%.  Two officers of
Advanced Optics Electronics,  Inc. are securities holders of Biomoda in addition
to the ADOT ownership.  Biomoda has filed a revised SB2  registration  statement
with the Securities and Exchange  Commission,  which has been declared effective
February 11, 2005.  Biomoda is offering 6,000,000 shares at $3.00 per share (for
an aggregate  offering of  $18,000,000).  It is anticipated that a public market
for Biomoda's securities will be created in the second quarter of 2006. A market
for Biomoda's shares has not been established;  therefore the potential value of
the Company's  investment cannot be measured.  There can be no assurance that if
the  Company  were to sell  such  investment  that it  would be able to on terms
favorable  to the Company or for the initial  offering  price.  Factors  such as
dilution, blockage and a lack of a market may be encountered.

Biomoda has been in the development  stage since it began  operations on January
3, 1990 and has not  generated  any  revenues  from  operations  and there is no
assurance  of  any  future  revenues.  As of  December  31,  2005,  Biomoda  had
accumulated deficit of approximately $3,091,000 and a working capital deficit of
approximately  $1,956,000.  In addition,  Biomoda did not generate any cash from
operations and had no cash reserve dedicated to fund expenditures. These factors
create an uncertainty as to Biomoda's ability to continue as a going concern.

LIQUIDITY AND CAPITAL RESOURCES

Since  inception,  Biomoda  has  funded  operations  primarily  through  private
placement  of equity  securities  to third  parties  and to ADOT and loans  from
Advanced  Optics  Electronics,  Inc. As of  December  31, 2005 it had raised net
proceeds of  approximately  $2,762,000,  of which  approximately  $1,391,000 was
loaned by ADOT. On May 1, 2002,  Biomoda entered into a line of credit agreement
(the "Agreement") with Advanced Optics Electronics,  Inc., an affiliated entity,
("Advanced  Optics")  with an  annual  interest  rate of 5%.  On May 1, 2003 the
agreement was extended.

Biomoda had negative  cash flows of $1,336 for the year ended  December 31, 2005
resulting from $496,325 used in Biomoda's operating activities,  $35,383 used in
Biomoda's  investing  activities  and  $530,372 of cash  provided  by  financing
activities.  Cash  used  in  operating  activities  was  primarily  $538,555  in
operating expenses, of which $141,284 is General and Administrative, $278,050 is
Research  and  Development  and  $83,174  is  professional  fees.  Cash  used in
investing activities was for payments for patents and intangibles. Cash provided
by financing  activities  was due to the proceeds  from a line of credit from an
affiliated entity.

Biomoda's  total assets are $241,691 at December 31, 2005. Of this,  $225,853 is
patent costs,  net of accumulated  amortization  of $71,900.  Its liabilities of
1,972,240  primarily  consist of its debt to Advanced  Optics of $1,491,523  and
payables  and  accrued  liabilities  of  $331,715.  Stockholders'  deficit as of
December 31, 2005 is $1,730,549.

RESULTS OF CONTINUING OPERATIONS

Biomoda has been in the development  stage since it began  operations on January
3, 1990 and has not  generated  any  revenues  from  operations  and there is no
assurance  of  any  future  revenues.  As of  December  31,  2005,  Biomoda  had
accumulated deficit of approximately $3,101,000 and a working capital deficit of
approximately  $1,966,000.  In addition,  Biomoda did not generate any cash from
operations and had no cash reserve dedicated to fund expenditures. These factors
create an uncertainty as to Biomoda's ability to continue as a going concern.

Biomoda has recorded no revenue from its inception through December 31, 2005. In
2005, the net loss was $624,726.  The loss from  operations was $538,555 in 2005
and  $2,874,849  since  inception.  Most of its  expense  is  related to product
development.   Product  development  expenses  consist  primarily  of  personnel
expenses,  consulting fees and lab expenses.  Research development and technical
costs were $278,050 in 2005 and $1,698,750 since inception. Management believes,
however,  that  continued  investment  in product  development  is  critical  to
attaining our strategic objectives and, as a result,  expect product development
expenses to increase  significantly in future periods.  Biomoda expenses product
development costs as they are incurred.

Operating  expenses  decreased  by $169,825  or 24% to $538,555  during the year
ended  December 31, 2005  compared to $708,380  for the year ended  December 31,
2004. This was due largely to a decrease of $159,000 in research and development
costs.

General and  administrative  expenses  consist of  expenses  for  executive  and

                                       14
<PAGE>

administrative personnel, facilities,  professional services, travel and general
corporate  activities.  General and administrative costs decreased to $83,174 in
2005 from $134,218 in 2004 due to decreases in salary expense. We expect general
and  administrative  costs to increase in the future as our business matures and
develops.


The  following  is a  discussion  of costs  and  time  factors  associated  with
developing products for these cancers:

     a.   Lung:  Validation  is  projected  to be  complete  by  year-end  and a
          contract manufacturing  relationship is projected to be established by
          year-end.  Based on these  benchmarks,  ASR  registration  and product
          listing can be completed by that time also. At that  juncture  reagent
          sales can begin. This is estimated to cost an additional $500,000.

         Class I/II 510K can be completed as judged appropriate for the business
         and  will  require  approximately  6  to 9  months  effort  to  prepare
         documentation   and  receive  FDA   approval.   During  that  time  kit
         manufacturing  can be initiated.  Partial funding will be provided from
         reagent sales revenue.  It is estimated  additional funding of $300,000
         will be required.

         PMA will require clinical studies to be completed and will be initiated
         when it is viewed as appropriate for the business. This will require on
         the order of 18 months to plan, execute, and document. During that time
         kit  manufacturing  can be initiated.  FDA approval will require 6 to 9
         months.  Partial  funding will be provided  from reagent  sales.  It is
         estimated  additional  funding of a minimum of $2 to $3 million will be
         required

     b.   Bladder:  Validation  is projected to be complete by 4th quarter 2006.
          The  formulation  is  expected  to be  identical  to  that  for  lung;
          therefore manufacturing will be in place. Based on this benchmark, FDA
          product listing and registration will only require an update.  Funding
          will be provided by reagent sales revenue.

          Class  I/II  510K  can be  completed  as  judged  appropriate  for the
          business  and  will  require  approximately  6 to 9 months  effort  to
          prepare  documentation and receive FDA approval.  During that time kit
          manufacturing can be initiated.  Partial funding will be provided from
          reagent sales revenue. It is estimated  additional funding of $100,000
          will be required  based on the  assumption  that a 510K of lung cancer
          has been approved.

          PMA  will  require  clinical  studies  to be  completed  and  will  be
          initiated when it is viewed as appropriate for the business. This will
          require  on the  order of 18 months to plan,  execute,  and  document.
          During that time kit manufacturing can be initiated. FDA approval will
          require 6 to 9 months.  Partial  funding will be provided from reagent
          sales.  It is  estimated  additional  funding  of $2  million  will be
          required.

     c.   Cervical:  Validation is projected to be complete by 3rd quarter 2007.
          The  formulation  is  expected  to be  identical  to  that  for  lung;
          therefore manufacturing will be in place. Based on this benchmark, FDA
          product listing and registration will only require an update.  Funding
          will be provided by reagent sales revenue.

          Class  I/II  510K  can be  completed  as  judged  appropriate  for the
          business  and  will  require  approximately  6 to 9 months  effort  to
          prepare  documentation and receive FDA approval.  During that time kit
          manufacturing can be initiated.  Partial funding will be provided from
          reagent sales revenue. It is estimated  additional funding of $100,000
          will be required  based on the  assumption  that a 510K of lung cancer
          has been approved.

          PMA  will  require  clinical  studies  to be  completed  and  will  be
          initiated when it is viewed as appropriate for the business. This will
          require  on  the  order  of  18  months   planning,   executing,   and
          documenting.  During that time kit manufacturing can be initiated. FDA
          approval will require 6 to 9 months.  Partial funding will be provided
          from reagent sales. It is estimated  additional  funding of $2 million
          will be required.

Costs in complying with regulatory and legislative  matters such as the Clinical
Laboratory Improvement Amendment of 1988 (CLIA), which regulates the quality and
reliability of medical testing in the U.S.,  adverse changes in zoning laws, tax
laws, or other laws affecting the medical and  diagnostic  industry may prove to
be a major  obstacle,  both in respect of time and costs,  in our  research  and
development.

                                       15
<PAGE>

INFLATION

Management  believes  that  inflation  has  not  had a  material  effect  on the
Company's results of operations.

ACCOUNTING MATTERS

Critical Accounting Policies
----------------------------

In December 2001, the SEC requested  that all  registrants  list their "three to
five most critical  accounting  policies" in the MD&A.  The SEC indicated that a
'critical  accounting policy" is one which is both important to the portrayal of
the Company's  financial condition and results,  and requires  management's most
difficult,  subjective  or complex  judgments,  often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.



<PAGE>


Consolidation of variable interest entities
-------------------------------------------

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are
to provide  guidance  on the  identification  of entities  for which  control is
achieved through means other than voting rights (variable  interest  entities or
"VIEs")  and  how  to  determine  when  and  which  business  enterprise  should
consolidate the VIE. This new model for  consolidation  applies to an entity for
which  either:  (1) the equity  investors  do not have a  controlling  financial
interest;  or (2) the equity  investment at risk is insufficient to finance that
entity's activities without receiving additional  subordinated financial support
from other  parties.  In  addition,  FIN No. 46  requires  that both the primary
beneficiary and all other enterprises with a significant  variable interest in a
VIE make  additional  disclosures.  As amended in December  2003,  the effective
dates of FIN No. 46 for public  entities  that are small  business  issuers,  as
defined ("SBIs"), are as follows: (a) For interests in special-purpose entities:
periods  ended after  December  15,  2003;  and (b) For all other VIEs:  periods
ending after  December 15, 2004.  The December 2003 amendment of FIN No. 46 also
includes  transition  provisions that govern how an SBI which previously adopted
the  pronouncement  (as it was originally  issued) must account for consolidated
VIEs.

As disclosed in Note 7 of the notes to consolidated  financial  statements,  the
Company is associated with Biomoda, Inc. Because of common ownership between the
Company and Biomoda and other factors  discussed in FIN No. 46R, the Company has
complied with the  pronouncement  and consolidated the two companies'  financial
statements. See note 7 for the impact of adoption of the standard.

Estimates
---------

Critical  estimates made by management are, among others,  estimates for current
and  deferred  taxes,  deferred  tax  valuation  allowances,  recoverability  of
intangible  assets,  realization  of costs in excess of billings on  uncompleted
contract,  collectibility  of  contract  receivable,  estimation  of  costs  for
long-term  contracts,  allowance  for  loss  on  contracts,   recoverability  of
investment in and advances to Biomoda, Inc., valuation of marketable securities,
and the valuation of other assets.  Actual results could materially  differ from
those estimates.

ITEM 7.   CONSOLIDATED FINANCIAL STATEMENTS

The  consolidated  financial  statements  and  notes to  consolidated  financial
statements thereto, together with the report thereon of Malone & Bailey, PC (the
Company's principal accountants) dated March 30, 2006 included elsewhere in this
report, are incorporated by reference in answer to this Item 7.

Following the above referenced report are the consolidated  financial statements
and notes to consolidated financial statements thereto, together with the report
thereon of Malone & Bailey, PC (Biomoda's principal accountants) dated March 22,
2006 included  elsewhere in this report, are incorporated by reference in answer
to this Item 7.

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.

In a Current  Report on Form 8-K filed on February  6, 2006,  we  dismissed  our

                                       16
<PAGE>

former auditor, Kabani & Co., Inc. and retained Malone & Bailey, PC in a Current
Report on Form 8-K filed on February 10, 2006,  The decision to change  auditors
was approved by our board of directors.  We did not have any disagreements  with
our  former  auditor  on any  matter  of  accounting  principles  or  practices,
disclosure, or auditing scope or procedure.

ITEM 8A.  EVALUATION OF CONTROLS AND PROCEDURES

Under the supervision and with the  participation  of our management,  including
our Chief  Executive  Officer ("CEO") and Chief Financial  Officer  ("CFO"),  we
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls  and  procedures  (as defined in Rule  13a-15(e)  and  15d-15(e) of the
Exchange Act as of the end of the period covered by the annual report,  which is
December 31, 2005. Based upon that  evaluation,  the CEO and CFO concluded that,
as of December 31, 2005, our disclosure  controls and procedures  were effective
in  timely  alerting  management  to the  material  information  relating  to us
required to be included in our  periodic  filings  with the SEC.  Based on their
most recent  evaluation as of the Evaluation Date, the CEO and the CFO have also
concluded that there are no significant  deficiencies in the design or operation
of internal  controls over financial  reporting  which are reasonably  likely to
adversely affect the Company's ability to record, process,  summarize and report
financial information,  and such officers have identified no material weaknesses
in the Company's internal controls over financial reporting.

However, during the year ended December 31, 2005, the Company hired a Controller
to evaluate and revise its existing control  policies and procedures,  including
our  disclosure  controls and  procedures,  and to implement  more effective and
efficient controls and procedures.

CHANGES IN CONTROLS AND PROCEDURES

There were no significant  changes made in our internal  controls over financial
reporting  during the nine months ended  September 30, 2005 that have materially
affected or are  reasonably  likely to  materially  affect these  controls.  The
Company,  however,  is  evaluating  changes to its  existing  controls or adding
controls to improve the design effectiveness of its system.

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROL

The Company's management, including the CEO, does not expect that our disclosure
controls and procedures or our internal  control over  financial  reporting will
necessarily  prevent all fraud and material errors.  An internal control system,
no matter how well  conceived and  operated,  can provide only  reasonable,  not
absolute,  assurance that the objectives of the control system are met. Further,
the design of a control  system must  reflect  the fact that there are  resource
constraints,  and the benefits of controls must be considered  relative to their
costs.  Because of the inherent  limitations on all internal control systems, no
evaluation of controls can provide  absolute  assurance  that all control issues
and instances of fraud,  if any,  within the Company have been  detected.  These
inherent limitations include the realities that judgments in decision-making can
be faulty,  and that  breakdowns  can occur  because of simple error or mistake.
Additionally,  controls  can be  circumvented  by the  individual  acts  of some
persons,  by collusion of two or more people,  and/or by management  override of
the control.  The design of any system of internal control is also based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance  that any design will  succeed in achieving  its stated goals under
all  potential  future  conditions.  Over time,  controls may become  inadequate
because of changes in  circumstances,  and/or the degree of compliance  with the
policies and procedures may deteriorate.  Because of the inherent limitations in
a cost-effective internal control system,  financial reporting misstatements due
to error or fraud may occur and not be detected on a timely basis.

                                    PART III

ITEM 9.   DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

The following sets forth  information,  as of December 31, 2005,  concerning the
Company's directors and executive officers:

Name                 Age      Position                             Since
Michael Pete         62       President, Director                  July 1994
Leslie S. Robins     68       Exec. Vice Pres., Secretary,         November 1992
                                Chairman
John J. Cousins      49       Vice President, Treasurer            June 1999
Dr. Linda Obenour    63       Director                             June 2004

The Company  elects its Board of Directors at meetings of  shareholders.  In the
event of a vacancy due to  resignation,  removal or death,  the  remaining  duly
elected  Directors  may  fill  such  vacancy  until  the  next  meeting  of  the
shareholders.  Officers of the  Company  are elected by the Board of  Directors,

                                       17
<PAGE>

which shall at a minimum elect a president,  a secretary and a treasurer to hold
office for one year and thereafter until their successors are elected. The Board
of Directors  may,  from time to time, by  resolution,  appoint one or more vice
presidents,  assistant secretaries,  assistant treasurers and transfer agents of
the Company as it may deem  advisable,  prescribe  their  duties;  and fix their
compensation.

MICHAEL PETE has been  President  and a director of the Company  since May 1996,
and prior to joining  us, he served in the same  capacities  with the  Company's
predecessor,  PLZ  Tech,  since  July  1994.  From  1990 to 1994,  Mr.  Pete was
President of SEES New Mexico Inc., working with federal research and development
labs in Los Alamos and Sandia to create  and  implement  information  management
systems.  From  1982 to 1990,  Mr.  Pete was  President  of  Phoenix  Filtration
Systems, and from 1979 to 1981, he was a technical management  consultant in the
Office of the Secretary for the United States Department of Energy. From 1977 to
1979, Mr. Pete was a project manager for the consulting firm of Booz,  Allen and
Hamilton,  and from  1975 to 1977,  he was  Office  Director  of the Low  Income
Weatherization Federal Energy Administration in Washington,  D.C. Mr. Pete has a
B.A. from Williams College and attended Stanford  University  Graduate School of
Business and Political Science.

LESLIE S. ROBINS has been  Executive Vice  President,  Secretary and Chairman of
the Board of the Company  since May 1996,  and prior to joining us, he served in
the same capacities  with the Company's  predecessor,  PLZ Tech,  since November
1992.  From November 1989 to December 1992,  Mr. Robins was Managing  Partner of
Coronado Group, performing analyses of small technology companies,  and from May
1986 to June 1989, he was Executive  Vice President of Triton  Productions  Inc.
From September 1978 to October 1987, Mr. Robins was Managing Partner of Longview
Management;  serving as investment managers for individuals in the entertainment
industry.  Mr.  Robins  has a B.S.  from the  University  of Miami and  attended
Harvard Business School.

JOHN J. COUSINS, Vice President of Finance and Treasurer - Mr. Cousins began his
business   career  as  a  design  engineer  for  Ampex  Corp  and  the  American
Broadcasting  Company.  After  receiving his MBA from the Wharton School he held
several senior financial  management  positions  focusing on capital markets and
business   development.   He  is  also  President  of  Biomoda,  Inc.  He  holds
undergraduate  degrees from Boston University and the Lowell Institute School at
MIT.

LINDA C. OBENOUR, MD, Director has been a member of our Board of Directors since
June 2004 .Dr. Obenour has had a private  practice in Ophthalmology  for over 30
years. Dr. Obenour has spent the majority of her career in Houston,  Texas after
graduating  from Duke  University  Medical  School and taking her  residency  at
Baylor College of Medicine. In the late 1990's she was personal  ophthalmologist
of George H. W. Bush.  Since 1972, Dr. Obenour has been certified Board Eligible
by the  American  Academy  of  Ophthalmology.  She  has  extensive  postgraduate
training, teaching and research experience, and numerous publications.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
directors and executive  officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the SEC initial
reports of  ownership  and reports of changes in  ownership  of common stock and
other equity securities of the Company. Officers, directors and greater than ten
percent shareholders are requited by SEC regulations to furnish the Company with
copies of all Sections 16(a) forms they file. To the Company's knowledge,  based
solely on the review of copies of such  reports  furnished  to the  Company  and
written  representations  that no other reports were required and to the best of
its knowledge, during the year ended December 31, 2005, all Section 16(a) filing
requirements  applicable to the Company's  officers,  directors and greater than
ten percent shareholders were complied with.

FAMILY RELATIONSHIPS

There are no family  relationships  between  or among the  directors,  executive
officers or persons  nominated or charged by the Company to become  directors or
executive officers.

INVOLVEMENT IN LEGAL PROCEEDINGS

To the best of the Company's knowledge,  during the past five years, none of the
following  occurred  with  respect to a present or former  director or executive
officer of the  Company:  (1) Any  bankruptcy  petition  filed by or against any
business of which such person was a general partner or executive  officer either
at the time of the  bankruptcy  or within two years prior to that time;  (2) Any
conviction  in a criminal  proceeding  or being  subject  to a pending  criminal
proceeding  (excluding traffic  violations and other minor offenses);  (3) Being
subject to any order, judgment or decree, not subsequently  reversed,  suspended
or  vacated,  of  any  court  of  any  competent  jurisdiction,  permanently  or
temporarily enjoining barring, suspending or other wise limiting his involvement
in any type of business,  securities or banking activities;  and (4) Being found
by a  court  of  competent  jurisdiction  (in a  civil  action),  the SEC or the
Commodities  Futures  Trading  Commission  to have  violated  a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.

                                       18
<PAGE>



CODE OF ETHICS

For the year ended  December 31, 2005,  the Company did not have formal  written
values and ethical standards.  However,  the Company management does communicate
values and ethical standards during company wide meetings.

AUDIT COMMITTEE FINANCIAL EXPERT

The Company does not have an independent  audit committee.  Since our securities
are not currently listed on or with a national  securities  exchange or national
securities  association,  we are  not  required  to have  an  independent  audit
committee.  Therefore,  the  Company  has  not  designated  an  audit  committee
financial  expert.  The  Company  currently  is in the  process  of  identifying
independent  audit committee  members,  including a financial expert to serve on
our audit committee and we expect to continue this process in 2005.

ITEM 10.  EXECUTIVE COMPENSATION

The following table discloses the annual and long-term  compensation  earned for
services  rendered in all capacities by the Company's  Chairman of the Board and
President and the Company's other most highly compensated executive officers for
2002, 2003 and 2004:

<TABLE>
<CAPTION>

                           Summary Compensation Table
-------------------------- ---------- --------------------------------------- ------------------------- --------- --------------
                                               Annual Compensation             Long-Term Compensation
                                                                                       Awards
-------------------------- ---------- --------------------------------------- ------------------------- --------- --------------
                                                               Other Annual   Restricted Securities     LTIP      All Other
                                                               Compensation   Stock      Underlying     Payouts   Compensation
                                                               (1)            Award(s)   Options
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
<S>                        <C>        <C>           <C>        <C>            <C>        <C>            <C>       <C>
Name and Principal         Year       Salary ($)    Bonus ($)  ($)               ($)     (#)            ($)       ($)
Position
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
Michael Pete, President,
Director
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
                           2005           $ 24,000          --             --         --             --        --             --
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
                           2004           $ 38,500          --             --         --             --        --             --
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
                           2003           $ 13,325          --             --         --             --        --             --
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
Leslie S. Robins,
Chairman of the Board
and Exec. VP
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
                           2005           $222,767          --  $  7,932 (1)          --             --        --             --
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
                           2004           $356,331          --  $  7,932 (1)          --             --        --             --
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
                           2003           $552,444          --  $  8,500 (1)          --             --        --             --
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
John J. Cousins,
VP Finance
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
                           2005           $109,406          --             --         --             --        --             --
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
                           2004           $112,335          --             --         --             --        --             --
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
                           2003           $113,965          --             --         --             --        --             --
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
Dr. Linda Obenour,         2005           $      0              $ 16,000 (2)
Director
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
                           2004                  --         --  $ 12,000 (3)          --             --        --             --
-------------------------- ---------- ------------- ---------- -------------- ---------- -------------- --------- --------------
</TABLE>


                                       19
<PAGE>

(1) Represents the value of an automobile used by Mr. Robins. (2) Directors Fee
OPTION GRANTS IN FISCAL YEAR 2005

None.

Aggregated  Option  Exercises In Fiscal Year 2005 And Option  Values At December
31, 2005

The following table provides summary information concerning the shares of common
stock  represented  by  outstanding  stock  options held by our Chief  Executive
Officer and two other executive officers as of December 31, 2005.

<TABLE>
<CAPTION>
                             Year-End Option Values
                                                  Number of Securities Underlying              Value of Unexercised
                                                     Unexercised Options                       In-the-Money Options
               Shares Acquired    Value              December 31, 2005                          December 31, 2005
Name           on Exercise (#)    Realized ($)   Exercisable (#)   Unexercisable (#)     Exercisable ($)   Unexercisable ($)
----           ---------------    ------------  ----------------   -----------------     ----------------   -----------------
<S>            <C>                <C>            <C>               <C>                   <C>                <C>
Michael Pete         --              --                150,000           --                 $3,000               --
John Cousins         --              --                250,000           --                 $5,000               --
Total                --              --                400,000           --                 $8,000               --
</TABLE>

On January 4, 1999, the Company established the Incentive Stock Option Plan (the
"Plan").  Pursuant to the Plan, up to 10,000,000  shares of the Company's common
stock may be  granted as options to key  employees.  The  exercise  dates of the
options  are  based  on the  related  agreement,  as  approved  by the  Board of
Directors.  The Plan expires on January 4, 2009.  Options awarded under the Plan
mature  four years from the date of the grant and vest  ratably  over one to two
year periods.

LONG-TERM INCENTIVE PLANS


As of December 31, 2005 there is no long-term incentive plan.

DIRECTOR COMPENSATION

Non-employee  directors of the Company  received  $16,000 in 2005 for  Directors
Fees.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENIFICIAL OWNERS AND MANAGEMENT

The  following  table sets forth certain  information  known to the Company with
respect to beneficial  ownership of the  Company's  Common Stock as of March 25,
2006 by (a) each person known to the Company to beneficially  own more than five
percent  of the  Company's  Common  Stock,  (b)  each  Director,  (c) the  Named
Executive  Officers,  and (d) all Directors  and executive  officers as a group.
Unless otherwise  indicated in the footnotes to the table, the beneficial owners
named have, to the knowledge of the Company,  sole voting and  investment  power
with respect to the shares  beneficially  owned,  subject to community  property
laws where applicable.  As of December 31, 2005 there were 6,023,836,349  shares
outstanding.


                                       20
<PAGE>



                                                                     Percent
                                          Number of Shares         Beneficially
     Name of Beneficial Owner (1)        Beneficially Owned           Owned
     -----------------------------      --------------------      -------------
Leslie Robins*......................          10,831,546               *
Michael Pete*.......................             325,000(2)            *
John Cousins*.......................             400,000(3)            *
*All directors and executive
    officers as a group                        1,556,546               *

------------------
     *Less than 1.0%.

     (1)  The address of all persons who are executive  officers or directors of
          the  Company is in care of the  Company,  8301  Washington  Street NE,
          Suite 5, Albuquerque New Mexico 87113.
     (2)  Includes  150,000  shares of common stock  issuable  upon  exercise of
          options which are currently exercisable.
     (3)  Includes  250,000  shares of common stock  issuable  upon  exercise of
          options, which are currently exercisable.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

The Company  believes that the  beneficial  owners of  securities  listed above,
based on information  furnished by such owners,  have sole investment and voting
power with respect to such  shares,  subject to  community  property  laws where
applicable.  Beneficial  ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with respect to
securities. Shares of stock subject to options or warrants currently exercisable
or exercisable  within 60 days, are deemed outstanding for purposes of computing
the  percentage  of the person  holding such  options or  warrants,  but are not
deemed outstanding for purposes of computing the percentage of any other person.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

NOTES RECEIVABLE

As  of  December  31,  2004,   the  Company  had  net  advances  to  an  officer
approximating $67,300. The advances accrued interest at rates ranging from 5% to
6% and were due on demand. As these notes receivable were with a shareholder and
a Company  officer,  the Company had  classified  these amounts as a decrease to
stockholders' equity at December 31, 2004.

During 2005, the Company advanced approximately $472,000 to Biomoda under a line
of credit agreement (see below).  The advances accrue interest at 5% and are due
on demand.

Investment In Biomoda, Inc

As of December 31, 2005, the Company owned  1,132,285 or 15.75% of the 7,187,282
outstanding shares of Biomoda, a development stage company involved primarily in
the  development  of  technology  for the early  detection of lung cancer.  As a
development  stage company,  Biomoda has not had any revenues as of December 31,
2005. In compliance  with FASB FIN 46,  Advanced  Optics  Electronics,  Inc. has
consolidated its financial statements with those of Biomoda at December 31, 2005
and 2004.

Biomoda has filed a SB-2 registration statement with the Securities and Exchange
Commission, in which they are offering 6,000,000 shares of its common stock. The
initial offering price is $3.00 per share,  however the price that Biomoda,  and
the Company,  will be able to sell the shares is not determinable.  A market for
Biomoda's shares has not been established;  therefore the potential value of the
Company's  investment cannot be measured.  There can be no assurance that if the
Company was to sell such  investment that it would be able to on terms favorable
to the Company or for the initial  offering  price.  Factors  such as  dilution,
blockage and a lack of market may be encountered.

For the year ended December 31, 2001, the Company  reported its investment under
the cost method since its ownership was not  sufficient for the investment to be
accounted for using the equity method. During 2002, the Company's influence over
Biomoda  increased such that the investment  qualified for accounting  under the
equity method.  The Company  recognized the proportionate  interest in Biomoda's
net loss for the year ended  December  31,  2005 and 2004 until such time as the
net investment without regard to the advance was reduced to zero.

                                       21
<PAGE>

ITEM 13.  EXHIBITS,  FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, AND
          REPORTS ON FORM 8-K

FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Indexes to financial  statements  appear after the  signature  page to this Form
10-KSB.

--------------------------------------------------------------------------------
Exhibits
--------------------------------------------------------------------------------
2         Plan of Acquisition, Reorganization,        None
          arrangement liquidation, or succession
--------- ------------------------------------------- --------------------------
3.1       Articles of Incorporation                   Incorporated by reference
                                                      to Exhibit 3(I) of the
                                                      Company's Registration
                                                      Statement No.1000-24511 on
                                                      Form10-SB filed
                                                      June 23,1998.
--------- ------------------------------------------- --------------------------
3.2       By-Laws                                     Incorporated by reference
                                                      to Exhibit 3(ii) of the
                                                      Company's Registration
                                                      Statement No.1000-24511 on
                                                      Form 10-SB filed
                                                      June 23,1998.
--------- ------------------------------------------- --------------------------
4         Instruments defining the rights of          Incorporated by reference
          holders, including Indentures               to Exhibit 3.2
--------- ------------------------------------------- --------------------------
7         Opinion re: liquidation preference          Incorporated by reference
                                                      to Exhibit 3.2
--------- ------------------------------------------- --------------------------
10.1      Incentive Stock Option Plan                 Incorporated by reference
                                                      to Exhibit 10.1
--------- ------------------------------------------- --------------------------
10.2      Lease Agreement Advanced Optics             Incorporated by reference
          Electronics, Inc. and JMP Company Inc       to Exhibit 10.2 of the
                                                      Company's Registration
                                                      Statement No.1000-24511 on
                                                      Form10-SB filed
                                                      June 23,1998.
--------- ------------------------------------------- --------------------------
10.3      State of Nevada Corporate Charter           Incorporated by reference
                                                      to Exhibit 10.3 of the
                                                      Company's Registration
                                                      Statement No.1000-24511 on
                                                      Form 10-SB filed
                                                      June 23,1998.
--------- ------------------------------------------- --------------------------
24        Power of Attorney                           Incorporated by reference
                                                      to Exhibit 3.2
--------- ------------------------------------------- --------------------------
31.1      Certification of Chief Executive Officer    Filed Herewith
          pursuant to Section 302 of the Sarbanes
          Oxley Act of 2002
--------- ------------------------------------------- --------------------------
31.2      Certification of Chief Financial Officer    Filed Herewith
          pursuant to Section 302 of the Sarbanes
          Oxley Act of 2002
--------- ------------------------------------------- --------------------------
32.1      Certification Pursuant To 18 U.S.C.         Filed Herewith
          ss.1350, As Adopted Pursuant To Section
          906 Of The SARBANES-OXLEY ACT OF 2002
--------- ------------------------------------------- --------------------------
32.2      Certification Pursuant To 18 U.S.C.         Filed Herewith
          ss.1350, As Adopted Pursuant To Section
          906 Of The SARBANES-OXLEY ACT OF 2002
--------- ------------------------------------------- --------------------------

REPORTS ON FORM 8-K

In a Current  Report on Form 8-K filed on January 13,  2005,  we  dismissed  our
former  auditor,  Squar  Milner Reehl &  Williamson,  LLP and hired Singer Lewak
Greenbaum & Goldstein,  LLP. The decision to change auditors was approved by our
board of directors. We did not have any disagreements with our former auditor on
any matter of accounting principles or practices,  disclosure, or auditing scope
or procedure.

                                       22
<PAGE>

In a Current  Report on Form 8-K filed on March 4, 2005, we dismissed our former
auditor,  Singer, Lewak, Greenbaum & Goldstein LLP. On March 4, 2005, we engaged
Kabani & Co.,  Inc. as our new  auditor.  The  decision to change  auditors  was
approved by our board of directors.  We did not have any disagreements  with our
former auditor on any matter of accounting principles or practices,  disclosure,
or auditing scope or procedure.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

The aggregate fees billed by our auditors for professional  services rendered in
connection with the audit of our annual  consolidated  financial  statements for
the fiscal  years  ended  December  31,  2004 and 2005 were  $45,000 and $60,300
respectively.

AUDIT-RELATED FEES

Our auditors did not bill any additional fees for assurance and related services
that are  reasonably  related to the  performance  of the audit or review of our
financial statements.

TAX FEES

The  aggregate  fees billed by our  auditors for  professional  services for tax
compliance,  tax advice, and tax planning were  approximately  $3,000 and $2,500
for the fiscal years ended December 31, 2004 and 2005.

ALL OTHER FEES

The aggregate fees billed by our auditors for all other non-audit services, such
as attending  meetings and other  miscellaneous  financial  consulting,  for the
fiscal years ended December 31, 2004 and 2005 were $0 and $0 respectively.

POLICY  ON AUDIT  COMMITTEE  PRE-APPROVAL  OF AUDIT  AND  PERMISSIBLE  NON-AUDIT
SERVICES OF INDEPENDENT AUDITOR


The Company does not have an audit committee.  Therefore, the Board of Directors
is responsible for pre-approving all audit and permitted  non-audit  services to
be performed for us by our independent auditor.

                                       23
<PAGE>




                                   SIGNATURES


In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  registrant
caused this report on Form 10KSB to be signed on its behalf by the  undersigned,
thereunto duly authorized.


Dated:    April 6, 2006

ADVANCED OPTICS ELECTRONICS, INC.

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



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


                                       24
<PAGE>


            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            -------------------------------------------------------

To the Board of Directors
  Advanced Optics Electronics, Inc.
  (A Development Stage Company)
  Albuquerque, New Mexico

We have audited the accompanying  consolidated  balance sheet of Advanced Optics
Electronics, Inc. (a development stage company) as of December 31, 2005, and the
related consolidated  statements of operations,  stockholder's  deficit and cash
flows for the year then ended and the period  from May 22, 1996  (inception)  to
December 31, 2005. These financial statements are the responsibility of Advanced
Optics  Electronics,  Inc.'s  management.  Our  responsibility  is to express an
opinion on these  financial  statements  based on our audits.  The  consolidated
financial  statements  for the  period  from May 22,  1996  (inception)  through
December  31,  2004 were  audited  by other  auditors  whose  reports  expressed
unqualified opinions on those statements.  The consolidated financial statements
for the period from May 22, 1996  (inception)  through December 31, 2004 include
total revenues and net loss of $0 and $19,825,110,  respectively. Our opinion on
the consolidated statements of operations,  stockholders' deficit and cash flows
for the period from May 22, 1996 (inception)  through December 31, 2005, insofar
as it relates to amounts for prior periods  through  December 31, 2004, is based
solely on the reports of other auditors.

We conducted  our audits in  accordance  with  standards  of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits 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
audits provide 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 Advanced  Optics
Electronics, Inc. as of December 31, 2005, and the results of its operations and
its cash flows for the year then ended 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
consolidated  financial  statements,  the Company is a development stage company
which  experienced  significant  losses  since  inception  with  no  significant
revenues.  Also discussed in Note 1 to the consolidated financial statements,  a
significant  amount of  additional  capital  will be  necessary  to advance  the
development  of the  Company's  products  to the point at which  they may become
commercially  viable.  Those conditions,  among others,  raise substantial doubt
about the Company's ability to continue as a going concern.  Management's  plans
regarding  these  matters  are  also  described  in  Note  1.  The  accompanying
consolidated  financial  statements  do not include any  adjustments  that might
result from the outcome of this uncertainty.


Malone & Bailey, PC
Houston, Texas
www.malone-bailey.com

March 30, 2006



                                       25
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------

To the Stockholders and Board of Directors
Advanced Optics Electronics, Inc.

We  have  audited  the  accompanying   consolidated  statements  of  operations,
consolidated   stockholders'  equity  (deficit)  and  comprehensive  income  and
consolidated  statements of cash flows of Advanced Optics  Electronics,  Inc., a
Nevada  Corporation  (the "Company") for the year ended December 31, 2004. 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 of these  statements 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 provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the results of  Advanced  Optics  Electronics,  Inc.'s
operations  and its  cash  flows  for the  year  ended  December  31,  2004,  in
conformity with accounting principles generally accepted in the United States of
America.

The Company's  financial  statements are prepared  using the generally  accepted
accounting  principles  applicable to a going concern,  which  contemplates  the
realization  of assets and  liquidation  of  liabilities in the normal course of
business.  The Company had deficit  accumulated  during the development stage of
$19,825,110  at December 31, 2004,  which  included a net loss of $5,048,067 for
the year ended  December 31, 2004.  These  factors as discussed in Note 1 to the
financial  statements,  raises  substantial doubt about the Company's ability to
continue as a going concern.  Management's  plans in regard to these matters are
also  described  in  Note  1.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.


KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS


Huntington Beach, California
April 13, 2005


                                       26
<PAGE>


                    ADVANCED OPTICS ELECTRONICS, INC.
                      (A Development Stage Company)
                       CONSOLIDATED BALANCE SHEET
                            December 31, 2005


                                 ASSETS


Current Assets
           Cash and cash equivalents                           $       92,518
           Marketable securities                                      902,027
           Other current assets                                        24,252
                                                                 -------------

                Total current assets                                1,018,797

Intangibles, net of accumulated
  amortization of $71,900                                             194,576

Property and Equipment, net of accumulated
  depreciation of $438,380                                            120,328

Other Assets
           Notes receivable and deposits                               54,406
                                                                 -------------
                                                               $    1,388,107
                                                                 =============


                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
           Accounts payable                                    $      165,546
           Accrued expenses                                           363,658
           Advances from shareholders                                 149,002
           Advances from officer                                            -
           Convertible debenture                                       88,574
                                                                 -------------

                Total current liabilities                             766,780
                                                                 -------------

Commitments and Contingencies

Stockholders' Equity
           Preferred stock, $0.001 par value, 10,000,000
             shares authorized; no shares issued and
             outstanding                                                    -
           Common stock, $0.001 par value, 7,000,000,000
             shares authorized; 6,023,836,349 shares
             issued and outstanding                                 6,023,836
           Treasury stock, at cost                                    (12,660)
           Additional paid in capital                              16,326,251
           Accumulated other comprehensive gain                       164,789
           Deficit accumulated during the development stage       (21,880,889)
                                                                 -------------

                Total stockholders' equity                            621,327
                                                                 -------------

                                                               $    1,388,107
                                                                 =============

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

F-1
<PAGE>

                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 For the Years Ended December 31, 2005 and 2004
             From May 22, 1996 (Inception) Through December 31, 2005

<TABLE>
<CAPTION>
                                                                                             May 22, 1996
                                                                                              (Inception)
                                                                                                Through
                                                                                              December 31
                                                                 2005            2004            2005
                                                             ------------    ------------    ------------
<S>                                                          <C>             <C>             <C>
REVENUES                                                     $       --      $       --      $       --

OPERATING EXPENSES
      General and administrative                                1,027,087       1,493,145      11,632,050
      Payroll and related                                         900,424         548,171       2,433,221
      Research and development                                     26,528         658,859       2,128,177
      Professional Fees                                            83,174         134,218         253,555
      Depreciation & amortization                                  52,727          40,219         178,207
      Licensing Fees                                               15,125          15,776          53,101
      Inventory write-off                                            --            29,293          29,293
      Asset impairment                                               --           365,314         592,884
                                                             ------------    ------------    ------------
                           Total operating expenses             2,105,065       3,284,995      17,300,488

LOSS ON CONTRACT                                                     --         1,000,944       2,255,944
                                                             ------------    ------------    ------------

OPERATING LOSS                                                 (2,105,065)     (4,285,939)    (19,556,432)
                                                             ------------    ------------    ------------

OTHER INCOME (EXPENSES)
      Interest income                                               4,572           3,397          84,953
      Realized gain (loss) on marketable equity securities         84,099         (98,560)        (43,829)
      Other investment gains                                         --              --            59,784
      Loss from investment in Biomoda, Inc.                          --              --          (289,750)
      Gain (loss) on disposal of assets                              --               786          (3,520)
      Gain (loss) on settlement of debts                             --          (620,980)       (556,088)
      Interest expense                                            (39,385)        (47,322)     (1,324,258)
      Other income                                                   --               551             551
                                                             ------------    ------------    ------------
                     Total other income (expenses)                 49,286        (762,128)     (2,072,157)
                                                             ------------    ------------    ------------

NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS                   (2,055,779)     (5,048,067)    (21,628,589)

EXTRAORDINARY LOSS                                                   --              --          (189,280)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE                                                            --              --           (63,020)
                                                             ------------    ------------    ------------
NET LOSS                                                     $ (2,055,779)   $ (5,048,067)   $(21,880,889)
                                                             ============    ============    ============

OTHER COMPREHENSIVE (LOSS) GAIN
      Unrealized loss on marketable securities                    174,480         (27,140)        164,789

                                                             ------------    ------------    ------------
COMPREHENSIVE LOSS                                             (1,881,299)     (5,075,207)    (21,716,100)
                                                             ============    ============    ============


Basic and diluted net loss per common share                  $     (0.000)   $     (0.002)
                                                             ============    ============

Basic and diluted weighted average common shares
  outstanding                                               4,379,768,678   2,887,373,986
                                                             ============    ============
</TABLE>

-------------------------------------------------------------------------------
                See accompanying notes to the consolidated financial statements.
 F-2
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
    COMPREHENSIVE INCOME For The Period From May 22, 1996 (Inception) Through
                                December 31, 2005

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                     Preferred Stock                  Common Stock
                                              ----------------------------    ----------------------------

                                                 Shares          Amount          Shares         Amount
                                              ------------    ------------    ------------    ------------
<S>                                           <C>             <C>             <C>             <C>
Balance at May 22, 1996 (Inception)                   --      $       --              --      $       --
Stock issued to incorporators for cash                --              --           500,000             500
Stock issued for the net assets of
  PLZ Tech, Inc.                                      --              --         4,500,000           4,500
Net loss                                              --              --              --              --
                                              ------------    ------------    ------------    ------------

Balance, December 31, 1996                            --              --         5,000,000           5,000
Stock issued for cash and services                    --              --         2,281,212           2,281
Net loss                                              --              --              --              --
                                              ------------    ------------    ------------    ------------

Balance, December 31, 1997                            --              --         7,281,212           7,281
Stock issued for cash                                 --              --        10,979,275          10,979
Stock issued for services                             --              --         2,751,000           2,751
Stock issued in exchange for
  note receivable                                     --              --           315,000             315
Purchase and retirement of treasury stock             --              --          (472,200)           (472)
Net loss                                              --              --              --              --
                                              ------------    ------------    ------------    ------------

Balance, December 31, 1998                            --              --        20,854,287          20,854
Stock issued for cash                                 --              --         8,681,624           8,682
Stock issued for services                             --              --        17,094,313          17,094
Intrinsic value of beneficial conversion
  feature of notes payable                            --              --              --              --
Fair value of warrants related to
  notes payable                                       --              --              --              --
Purchase and retirement of treasury stock             --              --          (489,251)           (489)
Purchase of treasury stock                            --              --              --              --
Sale of treasury stock                                --              --              --              --
Net loss                                              --              --              --              --
                                              ------------    ------------    ------------    ------------

Balance, December 31, 1999                            --              --        46,140,973          46,141
Stock issued for cash                                  710               1         782,000             782
Stock issued for services                             --              --         3,955,202           3,955
Purchase of treasury stock                            --              --              --              --
Sale of treasury stock                                --              --              --              --
Exercise of stock options for
  notes receivable                                    --              --         1,850,000           1,850
Amortization of discount of convertible
  preferred stock                                     --              --              --              --
Exercise of preferred stock
  conversion feature                                  --              --         9,200,000           9,200
Issuance of convertible debentures                    --              --              --              --
Exchange of preferred stock for
  convertible debentures                              (710)             (1)           --              --
Intrinsic value of convertible debenture              --              --              --              --
De-investment in Wizard Technologies                  --              --              --              --
Net loss                                              --              --              --              --
                                              ------------    ------------    ------------    ------------

Balance, December 31, 2000                            --              --        61,928,175          61,928
Stock issued for cash                                 --              --         1,382,778           1,383
Stock issued for services                             --              --        10,461,498          10,461
Purchase of treasury stock                            --              --              --              --
Amortization of discount on convertible
  debentures                                          --              --              --              --
Stock issued upon debt conversion                     --              --         7,064,886           7,065
Net loss                                              --              --              --              --
                                              ------------    ------------    ------------    ------------

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

F-3
<PAGE>


Balance, December 31, 2001                            --              --        80,837,337          80,837
Stock issued for cash                                 --              --       315,845,000         315,845
Stock issued for services                             --              --       115,768,000         115,768
Purchase of treasury stock                            --              --              --              --
Sale of treasury stock                                --              --              --              --
Exercise of stock options for
  notes receivable                                    --              --         1,100,000           1,100
Advances to officer                                   --              --              --              --
Reclass of accrued interest with
  note receivable                                     --              --              --              --
Stock issued upon debt conversion                     --              --        78,695,566          78,696
Retroactive application of equity method
  for investment in Biomoda, Inc.                     --              --              --              --
Net loss                                              --              --              --              --
                                              ------------    ------------    ------------    ------------

Balance, December 31, 2002                            --              --       592,245,903         592,246
Stock issued for cash                                 --              --     1,477,760,000       1,477,760
Stock issued for services                             --              --       367,249,994         367,250
Purchase of treasury stock                            --              --              --              --
Sale of treasury stock                                --              --              --              --
Accrued interest on advances to officer               --              --              --              --
Cancellation of stock issued for
  note receivable                                     --              --        (2,950,000)         (2,950)
Stock issued upon debt conversion,
  including $67,000 of interest                       --              --       320,830,452         320,830
Gain on sale of available for
  sale securities                                     --              --              --              --
Net loss                                              --              --              --              --
                                              ------------    ------------    ------------    ------------

Balance, December 31, 2003                            --              --     2,755,136,349       2,755,136
Stock issued for cash                                 --              --       462,800,000         462,800
Stock issued for services                             --              --        47,200,000          47,200
Purchase of treasury stock                            --              --              --              --
Sale of treasury stock                                --              --              --              --
Stock issued upon debt conversion,
  including $166,240 of interest                      --              --       103,000,000         103,000
Unrealized gain (loss) on
  marketable securities                               --              --              --              --
Net loss                                              --              --              --              --
                                              ------------    ------------    ------------    ------------

Balance, December 31, 2004                            --              --     3,368,136,349       3,368,136
Stock issued for cash                                 --              --     2,634,700,000       2,634,700
Purchase of treasury stock                            --              --              --              --
Sale of treasury stock                                --              --              --              --
Expense advances to officer, net
  of accrued interest                                 --              --              --              --
Stock issued upon debt conversion                     --              --        21,000,000          21,000
Unrealized gain (loss) on marketable
  securities                                          --              --              --              --
Net loss                                              --              --              --              --
                                              ------------    ------------    ------------    ------------

Balance, December 31, 2005                            --      $       --     6,023,836,349    $  6,023,836
                                              ============    ============    ============    ============
</TABLE>

F-4
<PAGE>
--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
    COMPREHENSIVE INCOME For The Period From May 22, 1996 (Inception) Through
                                December 31, 2005

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                      Treasury Stock            Additional
                                              -----------------------------      Paid In            N/R
                                                Shares           Amount          Capital        Stockholder
                                              ------------     ------------    ------------     ------------
 <S>                                           <C>             <C>             <C>             <C>
Balance at May 22, 1996 (Inception)                   --       $       --      $       --       $       --
Stock issued to incorporators for cash                --               --            24,500             --
Stock issued for the net assets of
  PLZ Tech, Inc.                                      --               --           281,096             --
Net loss                                              --               --              --               --
                                              ------------     ------------    ------------     ------------

Balance, December 31, 1996                            --               --           305,596             --
Stock issued for cash and services                    --               --           362,720             --
Net loss                                              --               --              --               --
                                              ------------     ------------    ------------     ------------

Balance, December 31, 1997                            --               --           668,316             --
Stock issued for cash                                 --               --         1,281,728             --
Stock issued for services                             --               --           293,719             --
Stock issued in exchange for
  note receivable                                     --               --            28,685             --
Purchase and retirement of treasury stock             --               --           (39,913)            --
Net loss                                              --               --              --               --
                                              ------------     ------------    ------------     ------------

Balance, December 31, 1998                            --               --         2,232,535             --
Stock issued for cash                                 --               --           855,101             --
Stock issued for services                             --               --         1,469,320             --
Intrinsic value of beneficial conversion
  feature of notes payable                            --               --           174,610             --
Fair value of warrants related to
  notes payable                                       --               --           125,000             --
Purchase and retirement of treasury stock             --               --           (10,643)            --
Purchase of treasury stock                        (229,000)         (41,760)           --               --
Sale of treasury stock                              85,000           11,130          24,334             --
Net loss                                              --               --              --               --
                                              ------------     ------------    ------------     ------------

Balance, December 31, 1999                        (144,000)         (30,630)      4,870,257             --
Stock issued for cash                                 --               --         1,012,710             --
Stock issued for services                             --               --         1,726,197             --
Purchase of treasury stock                         (63,500)         (46,486)           --               --
Sale of treasury stock                             142,400           22,542          54,771             --
Exercise of stock options for
  notes receivable                                    --               --           220,150             --
Amortization of discount of convertible
  preferred stock                                     --               --           159,677             --
Exercise of preferred stock
  conversion feature                                  --               --           533,678             --
Issuance of convertible debentures                    --               --           263,830             --
Exchange of preferred stock for
  convertible debentures                              --               --          (869,678)            --
Intrinsic value of convertible debenture              --               --           227,898             --
De-investment in Wizard Technologies                  --               --           (59,583)            --
Net loss                                              --               --              --               --
                                              ------------     ------------    ------------     ------------

Balance, December 31, 2000                         (65,100)         (54,574)      8,139,907         (193,427)
Stock issued for cash                                 --               --            66,844             --
Stock issued for services                             --               --           412,284             --
Purchase of treasury stock                        (251,700)         (16,215)           --               --
Amortization of discount on convertible
  debentures                                          --               --           143,875             --
Stock issued upon debt conversion                     --               --           147,008             --
Net loss                                              --               --              --               --
                                              ------------     ------------    ------------     ------------

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

F-5
<PAGE>

Balance, December 31, 2001                        (316,800)         (70,789)      8,909,918         (193,427)
Stock issued for cash                                 --               --           229,816             --
Stock issued for services                             --               --           366,301             --
Purchase of treasury stock                      (1,400,000)          (8,732)           --               --
Sale of treasury stock                             507,800           72,887         (65,058)            --
Exercise of stock options for
  notes receivable                                    --               --            20,900          (22,000)
Advances to officer                                   --               --              --            (34,300)
Reclass of accrued interest with
  note receivable                                     --               --              --            (59,175)
Stock issued upon debt conversion                     --               --           348,324             --
Retroactive application of equity method
  for investment in Biomoda, Inc.                     --               --              --               --
Net loss                                              --               --              --               --
                                              ------------     ------------    ------------     ------------

Balance, December 31, 2002                      (1,209,000)          (6,634)      9,810,201         (308,902)
Stock issued for cash                                 --               --         4,553,055             --
Stock issued for services                             --               --         1,464,845             --
Purchase of treasury stock                     (13,250,000)         (61,943)           --               --
Sale of treasury stock                           9,950,000           24,846          31,707             --
Accrued interest on advances to officer               --               --              --             (2,397)
Cancellation of stock issued for
  note receivable                                     --               --          (241,050)         244,000
Stock issued upon debt conversion,
  including $67,000 of interest                       --               --           337,563             --
Gain on sale of available for
  sale securities                                     --               --              --               --
Net loss                                              --               --              --               --
                                              ------------     ------------    ------------     ------------

Balance, December 31, 2003                      (4,509,000)         (43,731)     15,956,321          (67,299)
Stock issued for cash                                 --               --           656,231             --
Stock issued for services                             --               --           207,580             --
Purchase of treasury stock                      (9,800,000)         (41,724)           --               --
Sale of treasury stock                          14,100,000           48,260            --               --
Stock issued upon debt conversion,
  including $166,240 of interest                      --               --         1,022,790             --
Unrealized gain (loss) on
  marketable securities                               --               --              --               --
Net loss                                              --               --              --               --
                                              ------------     ------------    ------------     ------------

Balance, December 31, 2004                        (209,000)         (37,195)     17,842,922          (67,299)
Stock issued for cash                                 --               --        (1,487,526)            --
Purchase of treasury stock                     (22,205,000)         (15,926)           --               --
Sale of treasury stock                           1,804,000           40,461         (39,267)            --
Expense advances to officer, net
  of accrued interest                                 --               --              --             67,299
Stock issued upon debt conversion                     --               --            10,122             --
Unrealized gain (loss) on marketable
  securities                                          --               --              --               --
Net loss                                              --               --              --               --
                                              ------------     ------------    ------------     ------------

Balance, December 31, 2005                     (20,610,000)    $    (12,660)   $ 16,326,251     $       --
                                              ============     ============    ============     ============

</TABLE>

F-6
<PAGE>
--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
    COMPREHENSIVE INCOME For The Period From May 22, 1996 (Inception) Through
                                December 31, 2005

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                      Deficit
                                                       Other         Accumulated             Total
                                                    Comprehensive     During the          Stockholders'
                                                       Income       Development Stage    equity (deficit)
                                                     ------------    ------------        ------------
<S>                                           <C>             <C>             <C>             <C>
Balance at May 22, 1996 (Inception)                  $       --      $       --          $       --
Stock issued to incorporators for cash                       --              --                25,000
Stock issued for the net assets of
  PLZ Tech, Inc.                                             --              --               285,596
Net loss                                                     --           (76,902)            (76,902)
                                                     ------------    ------------        ------------

Balance, December 31, 1996                                   --           (76,902)            233,694
Stock issued for cash and services                           --              --               365,001
Net loss                                                     --           (84,690)            (84,690)
                                                     ------------    ------------        ------------

Balance, December 31, 1997                                   --          (161,592)            514,005
Stock issued for cash                                        --              --             1,292,707
Stock issued for services                                    --              --               296,470
Stock issued in exchange for
  note receivable                                            --              --                29,000
Purchase and retirement of treasury stock                    --              --               (40,385)
Net loss                                                     --          (752,111)           (752,111)
                                                     ------------    ------------        ------------

Balance, December 31, 1998                                   --          (913,703)          1,339,686
Stock issued for cash                                        --              --               863,783
Stock issued for services                                    --              --             1,486,414
Intrinsic value of beneficial conversion
  feature of notes payable                                   --              --               174,610
Fair value of warrants related to
  notes payable                                              --              --               125,000
Purchase and retirement of treasury stock                    --              --               (11,132)
Purchase of treasury stock                                   --              --               (41,760)
Sale of treasury stock                                       --              --                35,464
Net loss                                                     --        (2,765,862)         (2,765,862)
                                                     ------------    ------------        ------------

Balance, December 31, 1999                                   --        (3,679,565)          1,206,203
Stock issued for cash                                        --              --             1,013,493
Stock issued for services                                    --              --             1,730,152
Purchase of treasury stock                                   --              --               (46,486)
Sale of treasury stock                                       --              --                77,313
Exercise of stock options for
  notes receivable                                           --              --                28,573
Amortization of discount of convertible
  preferred stock                                            --              --               159,677
Exercise of preferred stock
  conversion feature                                         --              --               542,878
Issuance of convertible debentures                           --              --               263,830
Exchange of preferred stock for
  convertible debentures                                     --              --              (869,679)
Intrinsic value of convertible debenture                     --              --               227,898
De-investment in Wizard Technologies                         --              --               (59,583)
Net loss                                                     --        (3,827,873)         (3,827,873)
                                                     ------------    ------------        ------------

Balance, December 31, 2000                                   --        (7,507,438)            446,396
Stock issued for cash                                        --              --                68,227
Stock issued for services                                    --              --               422,745
Purchase of treasury stock                                   --              --               (16,215)
Amortization of discount on convertible
  debentures                                                 --              --               143,875
Stock issued upon debt conversion                            --              --               154,073
Net loss                                                     --        (1,985,142)         (1,985,142)
                                                     ------------    ------------        ------------

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

F-7
<PAGE>

Balance, December 31, 2001                                   --        (9,492,580)           (766,041)
Stock issued for cash                                        --              --               545,661
Stock issued for services                                    --              --               482,069
Purchase of treasury stock                                   --              --                (8,732)
Sale of treasury stock                                       --              --                 7,829
Exercise of stock options for
  notes receivable                                           --              --                  --
Advances to officer                                          --              --               (34,300)
Reclass of accrued interest with
  note receivable                                            --              --               (59,175)
Stock issued upon debt conversion                            --              --               427,020
Retroactive application of equity method
  for investment in Biomoda, Inc.                            --           (97,674)            (97,674)
Net loss                                                     --        (1,285,830)         (1,285,830)
                                                     ------------    ------------        ------------

Balance, December 31, 2002                                   --       (10,876,084)           (789,173)
Stock issued for cash                                        --              --             6,030,815
Stock issued for services                                    --              --             1,832,095
Purchase of treasury stock                                   --              --               (61,943)
Sale of treasury stock                                       --              --                56,553
Accrued interest on advances to officer                      --              --                (2,397)
Cancellation of stock issued for
  note receivable                                            --              --                  --
Stock issued upon debt conversion,
  including $67,000 of interest                              --              --               658,393
Gain on sale of available for
  sale securities                                          17,449            --                17,449
Net loss                                                     --        (3,900,959)         (3,900,959)
                                                     ------------    ------------        ------------

Balance, December 31, 2003                                 17,449     (14,777,043)          3,840,833
Stock issued for cash                                        --              --             1,119,031
Stock issued for services                                    --              --               254,780
Purchase of treasury stock                                   --              --               (41,724)
Sale of treasury stock                                       --              --                48,260
Stock issued upon debt conversion,
  including $166,240 of interest                             --              --             1,125,790
Unrealized gain (loss) on
  marketable securities                                   (27,140)           --               (27,140)
Net loss                                                     --        (5,048,067)         (5,048,067)
                                                     ------------    ------------        ------------

Balance, December 31, 2004                                 (9,691)    (19,825,110)          1,271,763
Stock issued for cash                                        --              --             1,147,174
Purchase of treasury stock                                                   --               (15,926)
Sale of treasury stock                                       --              --                 1,194
Expense advances to officer, net
  of accrued interest                                        --              --                67,299
Stock issued upon debt conversion                            --              --                31,122
Unrealized gain (loss) on marketable
  securities                                              174,480            --               174,480
Net loss                                                     --        (2,055,779)         (2,055,779)
                                                     ------------    ------------        ------------

Balance, December 31, 2005                           $    164,789    $(21,880,889)       $    621,327
                                                     ============    ============        ============

</TABLE>

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

F-8
<PAGE>



            ADVANCED OPTICS ELECTRONICS, INC.
              (A Development Stage Company)
                STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 and 2004 and for the Period
 From May 22, 1996 (Inception) Through December 31, 2005

<TABLE>
<CAPTION>
                                                                                               May 22, 1996
                                                                                                (Inception)
                                                                                                  Through
                                                                                               December 31,
                                                                   2005            2004             2005
                                                               ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>
Cash flows from operating activities:
    Net loss                                                   $ (2,055,779)   $ (5,048,067)   $(21,880,889)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
       Intrinsic value of conversion features                          --              --           610,603
       Write off of organization costs/goodwill                        --              --            63,020
       Extraordinary loss                                              --              --           189,280
       Inventory write off                                             --            29,293          29,293
       Amortization of discount on convertible notes and               --
         preferred stock                                               --              --           295,209
       Loss (Gain) on marketable securities                         (84,099)         98,560          43,829
       Loss on disposal of assets                                      --              (786)          3,520
       Loss on investment in Biomoda, Inc.                             --              --           289,750
       Issuance of common stock for services                           --              --         6,504,726
       Issuance of Biomoda common stock and options
         for services                                                  --           254,780         165,000
       Issuance of notes payable for services                          --            18,000          50,000
       Exchange of investment securities for services               153,428            --           153,428
       Increase in excess of costs and earnings over
         billings on uncompleted contract                              --              --        (2,050,000)
       Increase in allowance for loss on contract                      --           795,000       2,050,000
       Loss (Gain) on extinguishment of debt                           --           620,980         556,088
       Interest accrued on convertible debentures                     8,481            --           317,985
       Interest earned on note receivable from stockholder
         and related parties                                           --              --           (17,823)
       Depreciation and amortization                                 52,727          40,218         716,167
       Bad debt expense                                                --              --            15,000
       Asset impairment                                                --           365,314         592,884
       Other non-cash expenses                                        1,476            --            34,923
       Accrued interest                                                --              --            30,667
       Expense advances to officer                                   67,299            --            67,299
       Gain on forgiveness of debt to officer                       (51,351)           --           (51,351)
    Changes in operating assets and liabilities:
       Decrease (Increase) in other current assets                   (6,806)         26,233         (19,019)
       Decrease in inventory                                           --              --           (35,293)
       (Decrease) Increase in accounts payable, accrued and
         other liabilities                                          180,553        (164,019)        206,493
                                                               ------------    ------------    ------------

    Net cash provided by (used in) operating activities          (1,734,071)     (2,964,495)    (11,069,211)
                                                               ------------    ------------    ------------

F-9
<PAGE>


Cash flows from investing activities:
    Purchases of property and equipment                              (3,780)        (61,276)       (521,860)
    Additions to Patent, trademark and license fee,
      net of extraordinary gain                                     (34,106)        (63,742)       (114,878)
    Investment in GenoMed                                           (21,478)       (900,000)       (921,478)
    Proceeds from sale of GenoMed stock                             184,046            --           184,046
    Investment in Biomoda, Inc.                                        --              --          (383,845)
    Proceeds from sale of Biomoda, Inc. stock                          --              --            28,930
    Advances to Biomoda, Inc.                                          --              --           (38,432)
    Advances from shareholders                                         --             4,445          14,009
    Sale of marketable securities                                      --           152,122         192,787
    Purchases of marketable securities                                 --          (536,000)       (645,334)
    Cash of variable entity on consolidation                           --              --               155
    Increase in notes receivable                                     (4,827)        (14,579)        (54,406)
    Purchase of other assets                                           --              --          (245,579)
                                                               ------------    ------------    ------------

    Net cash used in investing activities                           119,855      (1,419,029)     (2,505,885)
                                                               ------------    ------------    ------------

Cash  flows from financing activities:
    Principal repayments on notes payable and capital leases        (38,359)           --          (308,346)
    Proceeds from notes payable                                        --              --           622,776
    Issuance of common stock for cash                             1,147,173       1,119,031      12,470,891
    Issuance of Biomoda common stock for cash                          --            60,000          60,000
    (Increase) decrease in note receivable stockholder                 --              --            (5,422)
    Proceeds from sale of treasury stock                              1,194          48,260         226,613
    Purchase of treasury stock                                      (15,926)        (41,724)       (274,303)
    Proceeds from issuance of convertible debt                         --              --         1,270,965
    Principal repayments on convertible debt                           --          (154,000)       (395,560)
                                                               ------------    ------------    ------------
    Net cash provided by financing activities                     1,094,082       1,031,567      13,667,614
                                                               ------------    ------------    ------------
Net (decrease) increase in cash                                    (520,134)     (3,351,957)         92,518

Cash at beginning of period                                         612,652       3,964,609            --
                                                               ------------    ------------    ------------
Cash at end of period                                          $     92,518    $    612,652    $     92,518
                                                               ============    ============    ============


Supplemental  disclosure  of cash flow  information
    Cash paid during the year for:
       Interest                                                $       --      $        451
                                                               ============   =============
       Income taxes                                            $         50    $         50
                                                               ============   =============

    Non-cash transactions:
       Stock issued for debt conversion                        $     31,122    $  1,125,790
                                                               ============   =============
       Change in unrealized gain (loss) on
          marketable securities                                $    174,480    $    (27,140)
                                                               ============   =============

</TABLE>


F-10
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF OPERATIONS

Advanced Optics Electronics,  Inc. (the "Company") and Biomoda, Inc ("Biomoda"),
a consolidated  entity,  are development  stage  technology  companies  focusing
respectively  on the  development  and  production  of  large-scale  flat  panel
displays and cancer  detection  methods.  The Company's stock trades on the Over
The Counter  Bulletin  Board under the symbol "ADOT." The Company plans to focus
on  producing  and  selling  the  large-scale  flat panel  displays  for outdoor
advertising billboards.

The  Company  is  developing  a color  recognition  optical  device and plans to
initially focus on marketing it as a color  identifier to the visually  impaired
and as a  teaching  aid for  small  children.  The  Company's  unique  and novel
conception  and  implementation  of  hardware  and  firmware   determines  color
optically and expresses the results with vocal responses. The Company intends to
establish marketing  arrangements for the distribution to retail locations after
a supply has been manufactured and inventoried.

Since May 22, 1996 ("Inception"),  the Company has primarily been engaged in the
research and  development of its products.  Once the research and development is
complete,  the Company will begin to manufacture  and obtain new contracts.  The
Company is in the  development  stage and has not  generated  revenues  from any
product  sales.  The Company  believes  that its planned  products  will produce
sufficient revenues in the future.  There are no assurances,  however,  that the
Company will be able to produce such products, or if produced, that they will be
accepted in the market place.

The  Company's  research  and  development  work in 2005 has not  completed  the
initial  product as expected.  Completion  of the product is now expected in the
latter half of 2006.

In mid  2002,  the  Company's  Chief  Executive  Officer  ("CEO")  and the Chief
Financial Officer ("CFO") replaced Biomoda's management team, affecting a change
in control. The Company also owns 15.75% of Biomoda's  outstanding common stock.
On August 13,  2003,  Biomoda  formed a 100% owned  subsidiary  known as Biomoda
Holdings, Inc., a Nevada corporation, for the purpose of research,  development,
production and marketing of medical and biomedical products.  As of December 31,
2005, the Company owned 1,132,285 or 15.75% of the 7,187,282  outstanding shares
of Biomoda. Two of the Company's officers own 12.24%, collectively, of Biomoda's
outstanding  shares.  The Company  subleases  office space and lab  equipment to
Biomoda and two of the  Company's  officers  are also  officers of Biomoda.  The
Company has been the  primary  source of funding to Biomoda  since 2002  through
advances made under a line of credit  agreement.  The Company is considered  the
primary  beneficiary  as it stands to absorb the majority of  Biomoda's,  called
herein as the variable interest entity,  expected losses.  Since Biomoda and the
Company are considered  entities  under common control for accounting  purposes,
the Company  measures the assets and  liabilities  of Biomoda at their  carrying
amounts in consolidation. (Note 6)

Biomoda's  primary  focus is on early  cancer  detection  technology.  Its novel
cell-labeling technology is globally patented for the detection of pre-cancerous

--------------------------------------------------------------------------------
F-11
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

and cancerous  conditions in human fluid  samples and tissue.  This  technology,
based  on a  compound  called  Tetrakis  Carboxy  Phenyl  Porphine  (TCPP),  was
developed  at  St.  Mary's   hospital  in  Colorado  and  Los  Alamos   National
Laboratories.  Biomoda  obtained  a  worldwide  exclusive  license  to the  TCPP
technology  from the  University  of  California  in late  1995,  and  began new
research  broadening the scope of the original  patent and  technology.  Biomoda
received its first patent in the  Company's  name (patent  6,838,248)  issued on
January 4, 2005 to detect  pre-cancerous  and cancerous  conditions in all human
tissue.  Biomoda  began  the  commercialization   process  by  trademarking  the
technology as CyPath.  Management  expects to continue assay  valuation work and
register its product with the FDA in 2006.

Biomoda's   products  are  subject  to  FDA  registration  or  approval  and  to
post-approval FDA reporting requirements.  Biomoda's current intention regarding
regulatory strategy is to initiate product introductions via an ASR registration
and potentially migrate up the regulatory spectrum as markets require. Biomoda's
management  expects to continue assay validation work and commence  registration
of its  product  with the FDA in the  later  half of  2006.  There  are  several
business models,  product types and regulatory routes that Biomoda is evaluating
including  licensing,  ASR,  510K,  PMA for IVD kits and  reagents.  Biomoda  is
evaluating several cancers with a focus on large markets that are in need of the
most immediate diagnostic support. These include: lung, bladder and cervical.

The  following  is a  discussion  of costs  and  time  factors  associated  with
developing products for these cancers:

     a.   Lung:  Validation  is  projected  to be  complete  by  year-end  and a
          contract manufacturing  relationship is projected to be established by
          year-end.  Based on these  benchmarks,  ASR  registration  and product
          listing can be completed by that time also. At that  juncture  reagent
          sales can begin. This is estimated to cost an additional $500,000.

          Class  I/II  510K  can be  completed  as  judged  appropriate  for the
          business  and  will  require  approximately  6 to 9 months  effort  to
          prepare  documentation and receive FDA approval.  During that time kit
          manufacturing can be initiated.  Partial funding will be provided from
          reagent sales revenue. It is estimated  additional funding of $300,000
          will be required.

          PMA  will  require  clinical  studies  to be  completed  and  will  be
          initiated when it is viewed as appropriate for the business. This will
          require  on the  order of 18 months to plan,  execute,  and  document.
          During that time kit manufacturing can be initiated. FDA approval will
          require 6 to 9 months.  Partial  funding will be provided from reagent
          sales.  It is  estimated  additional  funding of a minimum of $2 to $3
          million will be required

     b.   Bladder:  Validation  is projected to be complete by 4th quarter 2006.
          The  formulation  is  expected  to be  identical  to  that  for  lung;
          therefore manufacturing will be in place. Based on this benchmark, FDA
          product listing and registration will only require an update.  Funding
          will be provided by reagent sales revenue.

--------------------------------------------------------------------------------
F-12
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

          Class  I/II  510K  can be  completed  as  judged  appropriate  for the
          business  and  will  require  approximately  6 to 9 months  effort  to
          prepare  documentation and receive FDA approval.  During that time kit
          manufacturing can be initiated.  Partial funding will be provided from
          reagent sales revenue. It is estimated  additional funding of $100,000
          will be required  based on the  assumption  that a 510K of lung cancer
          has been approved.

          PMA  will  require  clinical  studies  to be  completed  and  will  be
          initiated when it is viewed as appropriate for the business. This will
          require  on the  order of 18 months to plan,  execute,  and  document.
          During that time kit manufacturing can be initiated. FDA approval will
          require 6 to 9 months.  Partial  funding will be provided from reagent
          sales.  It is  estimated  additional  funding  of $2  million  will be
          required.

     c.   Cervical:  Validation is projected to be complete by 3rd quarter 2007.
          The  formulation  is  expected  to be  identical  to  that  for  lung;
          therefore manufacturing will be in place. Based on this benchmark, FDA
          product listing and registration will only require an update.  Funding
          will be provided by reagent sales revenue.

          Class  I/II  510K  can be  completed  as  judged  appropriate  for the
          business  and  will  require  approximately  6 to 9 months  effort  to
          prepare  documentation and receive FDA approval.  During that time kit
          manufacturing can be initiated.  Partial funding will be provided from
          reagent sales revenue. It is estimated  additional funding of $100,000
          will be required  based on the  assumption  that a 510K of lung cancer
          has been approved.

          PMA  will  require  clinical  studies  to be  completed  and  will  be
          initiated when it is viewed as appropriate for the business. This will
          require  on  the  order  of  18  months   planning,   executing,   and
          documenting.  During that time kit manufacturing can be initiated. FDA
          approval will require 6 to 9 months.  Partial funding will be provided
          from reagent sales. It is estimated  additional  funding of $2 million
          will be required.

Costs in complying with regulatory and legislative  matters such as the Clinical
Laboratory Improvement Amendment of 1988 (CLIA), which regulates the quality and
reliability of medical testing in the U.S.,  adverse changes in zoning laws, tax
laws, or other laws affecting the medical and  diagnostic  industry may prove to
be a major  obstacle,  both in respect of time and costs,  in our  research  and
development.

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include accounts of the Company and the
accounts  of  the  variable  interest  entity,   Biomoda,  Inc.  (Note  6).  All
significant  inter-company  accounts and  transactions  have been  eliminated in
consolidation.

DEVELOPMENT STAGE AND GOING CONCERN

The  Company has been in the  development  stage  since  inception,  and has not
generated any revenues from  operations  and there is no assurance of any future
revenues.

--------------------------------------------------------------------------------
F-13
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

     o    The accompanying  consolidated financial statements have been prepared
          assuming  the  Company  will  continue  as  a  going  concern,   which
          contemplates,  among  other  things,  the  realization  of assets  and
          satisfaction  of liabilities  in the normal course of business.  As of
          December 31, 2005, the Company has accumulated deficit of $21,679,276.
          The Company's total assets exceeded the total liabilities by $621.327.
          These  factors,  among  others,  raise  substantial  doubt  about  the
          Company's ability to continue as a going concern.

The  Company  may  require  additional  funding  for  continuing   research  and
development,   obtaining   acceptance   in  the   market   place   and  for  the
commercialization  of its product.  There can be no  assurance  that the Company
will be able to obtain  sufficient  additional  funds when needed,  or that such
funds, if available, will be obtainable on terms satisfactory to the Company.

Management has taken action to address these matters, which include:

     o    Retention of experienced  management  personnel with particular skills
          in the development and commercialization of such product.

     o    The Company is seeking new contracts.

     o    The Company has an equity  method  investment  in a start-up  company,
          which management hopes will be profitable (see Note 5).

     o    The Company is seeking  investment  capital through the public markets
          and private placements.

Management  plans to  obtain  revenues  from  product  sales,  but  there are no
significant  commitments for purchases of any of the proposed  products.  In the
absence  of  significant  sales  and  profits,  the  Company  may  seek to raise
additional  funds to  satisfy  its  working  capital  requirements  through  the
additional sales of debt and equity  securities.  There is no assurance that the
Company will be able to obtain sufficient  additional funds when needed, or that
these  funds  will be  obtainable  on terms  satisfactory  to the  Company.  The
successful  outcome of future  activities  cannot be determined at this time and
there is no assurance that if achieved,  the Company will have sufficient  funds
to execute its intended business plan or generate positive operating results.

RISKS AND UNCERTAINTIES

The Company operates in a highly competitive industry that is subject to intense
competition.  The Company has no operating history and has not generated revenue
from its business  operations.  As a development stage entity, the Company faces
risks and  uncertainties  relating to its ability to successfully  implement its
business  strategy.  Among  other  things,  these  risks  include the ability to
develop and sustain revenue growth; managing expanding operations;  competition;
attracting,  retaining  and  motivating  qualified  personnel;  maintaining  and
developing new strategic relationships;  and the ability to anticipate and adapt
to the changing markets. Therefore, the Company may be subject to uncertainties,
including  financial,  operational,  technological,  regulatory  and other risks
associated with an emerging  business,  including the potential risk of business
failure.

USE OF ESTIMATES

The  preparation of the  consolidated  financial  statements in conformity  with

--------------------------------------------------------------------------------
F-14
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

accounting  principles  generally  accepted  in the  United  States  of  America
("GAAP")  requires  management to make estimates and assumptions that affect the
reported  amounts of assets and  liabilities  and the  disclosure  of contingent
assets and liabilities at the date of the consolidated financial statements, and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Significant  estimates  made by  management  are,  among  others,  deferred  tax
valuation allowances, estimation of costs for long-term contracts, allowance for
loss on contracts, expected losses of the variable interest entity, valuation of
marketable  securities  and the valuation of other assets.  Actual results could
materially differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS 107,  "Disclosures  About Fair Value of  Financial  Instruments,"  requires
disclosure of fair value  information  about  financial  instruments  when it is
practicable to estimate that value.  The carrying  amount of the Company's cash,
marketable  securities,  accounts  payables,  accrued  expenses and  convertible
debentures  approximates  their  estimated  fair  values  due to the  short-term
maturities  of those  financial  instruments.  The fair value of  related  party
transactions is not determinable due to their related party nature.

CASH AND CASH EQUIVALENTS

For purposes of the  consolidated  statements of cash flows, the Company defines
cash equivalents as all highly liquid debt instruments purchased with a maturity
of three months or less, plus all certificates of deposit.

MARKETABLE SECURITIES

The  Company   classifies   its   investments   in   marketable   securities  as
"available-for sale" in accordance with the provisions of Statement of Financial
Accounting  Standards No. 115,  "Accounting for Certain  Investments in Debt and
Equity  Securities"  (SFAS  115).  The  Company  does not  have any  investments
classified as "trading" or "held to maturity".

Available-for-sale  securities  consist of equity  securities and are carried at
fair value  with the  unrealized  gain or loss,  net of tax,  reported  in other
comprehensive  income.  The fair value of investment  securities  was determined
based on available market information.

Following is a summary of marketable securities classified as available for sale
as of December 31, 2005:

                             Cost Basis    Fair Market Value    Unrealized Gain
                             ----------    -----------------    ---------------
Marketable securities
  -Common stock              $ 737,238        $ 902,027             $ 164,789

Available-for-sale  securities  consist of securities in GenoMed and are carried
at fair  value  with  the  unrealized  gain or  loss,  net of tax,  reported  in
accumulated other comprehensive  income. The fair value of marketable securities
was  determined  based on available  market  information.  During the year ended
December 31, 2005, the Company transferred 2,571,409 shares valued at $69,364 to
consultants in exchange for services.

--------------------------------------------------------------------------------
F-15
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

CONCENTRATIONS OF CREDIT RISK

The financial instruments that potentially expose the Company to a concentration
of credit risk  principally  consist of cash.  The Company  places its cash with
high credit quality institutions.

From time to time the  Company  maintains  cash  balances  at certain  financial
institutions in excess of the Federal  Deposit  Insurance  Corporation  ("FDIC")
limit of $100,000.  At December 31,  2005,  such  balances in excess of the FDIC
limit approximated $-0-.

PROPERTY AND EQUIPMENT

Property  and  equipment  are  recorded  at cost and are  depreciated  using the
straight-line  method over the  estimated  useful  lives of the related  assets,
ranging from three to ten years.  Maintenance and repairs are charged to expense
as incurred.  Significant renewals and betterments are capitalized.  At the time
of  retirement  or other  disposition  of property and  equipment,  the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in the statement of operations.

INTANGIBLE ASSETS - PATENTS

Costs incurred in connection with securing a patent,  as well as attorneys fees,
have been  capitalized  and amortized  over  seventeen  years using the straight
line-method.  See Note 3 for additional information about patents. Costs related
to patents pending are amortized beginning upon issuance of the related patents

LONG-LIVED ASSETS

Statement of Financial  Accounting  Standards ("SFAS") 144,  "Accounting for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of,"
which supercedes SFAS 121, addresses financial  accounting and reporting for the
impairment or disposal of long-lived  assets.  SFAS 144 requires that long-lived
assets be reviewed for impairment  whenever  events or changes in  circumstances
indicate that their carrying  amounts may not be recoverable.  If the cost basis
of a long-lived asset is greater than the projected future undiscounted net cash
flows from such asset  (excluding  interest),  an impairment loss is recognized.
Impairment losses are calculated as the difference  between the cost basis of an
asset  and its  estimated  fair  value.  SFAS 144  also  requires  companies  to
separately  report  discontinued  operations  and extends  that  reporting  to a
component of an entity that either has been  disposed of (by sales,  abandonment
or in a distribution to owners) or is classified as held for sale.  Assets to be
disposed  are  reported at the lower of the  carrying  amount or fair value less
costs to sell.  The  provisions  of this  statement  for assets held for sale or
other  disposal  generally  are required to be applied  prospectively  after the
adoption date to newly  initiated  commitments  to plan to sell such assets,  as
defined, by management.  As a result,  management cannot determine the potential
effects that  adoption of SFAS 144 will have on the  financial  statements  with
respect  to  future  disposal  decisions,  if any.  Although  no  provision  for
impairment  was  recorded in 2005,  a year-end  total loss on  impairment  since
inception  was  $592,884.  There  can  be no  assurance,  however,  that  market
conditions will not change or demand for the Company's products or services will
increase, which could result to additional impairment of long-lived assets.

--------------------------------------------------------------------------------
F-16
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

DEBT SETTLEMENT

In April 2002,  the FASB issued  Statement  of  Financial  Accounting  Standards
("SFAS") No. 145,  "Rescission  of FASB  Statements 4, 44, and 64,  Amendment of
FASB  Statement  13,  and  Technical  Corrections  as of April  2002."  SFAS 145
provides  guidance for income  statement  classification  of gains and losses on
extinguishments  of debt. Such gains and losses must be analyzed to determine if
they meet the criteria for extraordinary item classification  based on the event
being both  unusual and  infrequent.  The  Company  adopted  SFAS 145  beginning
January 1, 2003.  During  2004,  the  Company  recorded  a loss of  $620,980  on
settlement of debt. The Company has determined that loss is not extraordinary in
nature.

REVENUE RECOGNITION

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin  104 ("SAB  104"),  "Revenue  Recognition,"  which  outlines  the basic
criteria  that  must be met to  recognize  revenue  and  provides  guidance  for
presentation  of revenue  and for  disclosure  related  to  revenue  recognition
policies  in  financial  statements  filed  with  the  Securities  and  Exchange
Commission. As the Company accounts for long-term contracts in accordance to SOP
81-1 (see below),  management  believes that the Company's  revenue  recognition
policy conforms to SAB 104.

In accordance  with Statement of Position 81-1,  "Accounting  for Performance of
Construction-Type and Certain  Production-Type  Contracts," the Company accounts
for  revenue  and costs  related  to its  long-term  contract  in process by the
completed-contract  method, whereas during the period from Inception to December
31,  1999,  revenue and costs were  determined  by the  percentage-of-completion
method. The  completed-contract  method of accounting was adopted in 2000 due to
the  Company's  uncertainty  regarding  contract cost  estimates.  The financial
statements of the period from  Inception to December 31, 1999,  were restated to
apply the completed contract method retroactively.  The effect of the accounting
change had no effect on net loss or loss per share previously  reported for 1999
or for the period from Inception to December 31, 1999.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred.

INCOME TAXES

Under  SFAS  109,  "Accounting  for  Income  Taxes,"  deferred  tax  assets  and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered or settled. A valuation allowance is provided for significant deferred
tax  assets  when it is more  likely  than  not  that  such  assets  will not be
recovered.

--------------------------------------------------------------------------------
F-17
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------


BASIC AND DILUTED LOSS PER COMMON SHARE

Under SFAS 128,  "Earnings  Per  Share,"  basic  earnings  per  common  share is
computed by dividing  income  available to common  stockholders  by the weighted
average  number of common shares  assumed to be  outstanding  during the period.
Diluted  earnings  per share is  computed  similar to basic  earnings  per share
except the  denominator is increased to include the number of additional  common
shares that would have been  outstanding if the potential common shares had been
issued and if the  additional  common  share were  dilutive  (using the treasury
stock method)..  Because the Company has incurred net losses,  basic and diluted
loss per  share is the  same as  additional  potential  common  shares  would be
anti-dilutive.

STOCK-BASED COMPENSATION

The Company accounts for stock-based  compensation issued to employees using the
intrinsic  value based  method as  prescribed  by  Accounting  Principles  Board
Opinion No. 25 ("APB 25"), "Accounting for Stock issued to Employees." Under the
intrinsic value based method, compensation expense is the excess, if any, of the
fair  value of the stock at the grant  date or other  measurement  date over the
amount an employee must pay to acquire the stock.  Compensation expense, if any,
is recognized over the applicable  service period,  which is usually the vesting
period.

SFAS 123, "Accounting for Stock-Based  Compensation," if fully adopted,  changes
the method of accounting for employee stock-based compensation plans to the fair
value based method.  For stock  options and  warrants,  fair value is determined
using an option  pricing  model that takes into  account  the stock price at the
grant date,  the exercise  price,  the  expected  life of the option or warrant,
stock  volatility  and the  annual  rate of  quarterly  dividends.  Compensation
expense,  if any, is recognized  over the applicable  service  period,  which is
usually the vesting period.

The  adoption of the  accounting  methodology  of SFAS 123 is  optional  and the
Company has elected to continue  accounting for stock-based  compensation issued
to  employees  using APB 25;  however,  pro forma  disclosures,  as the  Company
adopted the cost  recognition  requirement  under SFAS 123,  are  required to be
presented (see below). For stock-based compensation issued to non-employees, the
Company uses the fair value method of  accounting  under the  provisions of SFAS
123.

FASB  Interpretation  No. 44 ("FIN 44"),  "Accounting  for Certain  Transactions
Involving  Stock  Compensation,  an  Interpretation  of APB  25"  clarifies  the
application of APB 25 for (a) the definition of employee for purpose of applying
APB 25, (b) the  criteria  for  determining  whether a plan  qualifies  as a non
compensatory plan, (c) the accounting  consequence for various  modifications to
the terms of a previously fixed stock option or award and (d) the accounting for
an exchange of stock compensation awards in a business  combination.  Management
believes that the Company accounts for transactions involving stock compensation
in accordance with FIN 44.

SFAS 148, "Accounting for Stock-Based  Compensation - Transition and Disclosure,
an  amendment  of FASB  Statement  No.  123,"  provides  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for stock-based employee  compensation.  In addition,  this statement amends the
disclosure  requirements  of SFAS 123 to require  prominent  disclosures in both

--------------------------------------------------------------------------------
F-18
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.

At December 31, 2005, the Company has one stock-based employee compensation plan
(the "Plan"), which is described more fully in Note 11. The Company accounts for
the Plan under the recognition and measurement principles of APB 25, and related
interpretation.  No  stock-based  compensation  cost is  recognized in net loss.
Stock options  granted  under the Plan have exercise  prices equal to the market
value of the underlying common stock on the dates of grant.

The following  table  illustrates the effect on net income and loss per share if
the Company had applied  the fair value  recognition  provisions  of SFAS 123 to
stock-based employee compensation.

                                                2005                  2004
                                           ----------------      ---------------
Net loss:
    As reported                            $   (2,055,779)      $   (5,048,067)
    Deduct: Total stock-based
      employee compensation
      expense determined under
      fair value based method
      for all awards                               --                   --
                                           ----------------      ---------------
    Pro forma                              $   (2,055,779)      $   (5,048,067)
                                           ================      ===============

Basic and diluted net loss per share:
    As reported                            $        (0.00)      $        (0.00)
                                           ================      ===============
    Pro forma                              $        (0.00)      $        (0.00)
                                           ================      ===============

The  above  pro  forma  effects  of  applying  SFAS  123  are  not   necessarily
representative of the impact on reported net loss for future years.

The Company did not grant any options  during the years ended  December 31, 2005
and 2004.

COMPREHENSIVE INCOME

The  Company  reports  comprehensive  income in  accordance  with SFAS No.  130,
"Reporting  Comprehensive  Income."  SFAS  130  establishes  standards  for  the
reporting and display of comprehensive  income and its components.  SFAS No. 130
requires  unrealized  holding gains and losses,  net of related tax effects,  on
available  for sale  securities  to be included in  comprehensive  income  until
realized.

REPORTING SEGMENTS

Statement of financial  accounting standards No. 131, Disclosures about segments
of an  enterprise  and related  information  (SFAS No.  131),  which  superseded
statement of financial  accounting  standards  No. 14,  Financial  reporting for
segments of a business enterprise, establishes standards for the way that public
enterprises  report  information  about operating  segments in annual  financial

--------------------------------------------------------------------------------
F-19
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

statements  and  requires  reporting  of selected  information  about  operating
segments  in interim  financial  statements  regarding  products  and  services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components  of an  enterprise  about which  separate  financial  information  is
available that is evaluated  regularly by the chief operating  decision maker in
deciding how to allocate  resources and in assessing  performances.  The Company
allocates resources and assesses the performance based upon information from two
reporting units, Advanced Optics Electronics, Inc. and Biomoda, Inc.

ADVERTISING

The Company  expenses the cost of advertising when incurred.  Advertising  costs
for the years ended December 31, 2005 and 2004 were  immaterial to the financial
statements,  and are  included  in general  and  administrative  expenses in the
accompanying statement of operations.

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS

In June 2005,  the EITF reached  consensus on Issue No.  05-6,  Determining  the
Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides
guidance on  determining  the  amortization  period for  leasehold  improvements
acquired in a business  combination or acquired  subsequent to lease  inception.
The guidance in EITF 05-6 will be applied  prospectively  and is  effective  for
periods  beginning  after June 29,  2005.  EITF 05-6 is not  expected  to have a
material effect on its consolidated financial position or results of operations.

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections."  This  statement  applies to all  voluntary  changes in accounting
principles and requires  retrospective  application to prior periods'  financial
statements   of  changes  in   accounting   principle,   unless  such  would  be
impracticable.  This statement also makes a distinction  between  "retrospective
application"  of an  accounting  principle  and the  "restatement"  of financial
statements to reflect the  correction of an error.  This  statement is effective
for accounting  changes and corrections of errors made in fiscal years beginning
after  December  15,  2005.  We are  evaluating  the effect the adoption of this
interpretation  will have on the Company's  financial  position,  cash flows and
results of operations.

In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R").  FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based  compensation  issued to employees.  FAS
No. 123R is effective  beginning in the Company's  second  quarter of 2006.  The
Company  is  evaluating  the  effects  adoption  of SFAS  123R  will have on its
financial statements.

In December  2004,  the FASB  issued  SFAS  Statement  No.  153,  "Exchanges  of
Nonmonetary  Assets."  The  Statement  is an  amendment of APB Opinion No. 29 to
eliminate the exception for nonmonetary  exchanges of similar  productive assets
and replaces it with a general  exception  for exchanges of  nonmonetary  assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.

--------------------------------------------------------------------------------
F-20
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

In December 2004,  the FASB issued Staff Position No. FAS 109-2,  Accounting and
Disclosure Guidance for the Foreign Earnings  Repatriation  Provision within the
American Jobs Creation Act of 2004.  The American Jobs Creation Act of 2004 (the
"Act")  introduces  a  special  one-time  dividends  received  deduction  on the
repatriation of certain foreign  earnings to a U.S.  taxpayer,  provided certain
criteria  are met. The FASB staff  believes  that the lack of  clarification  of
certain provisions within the Act and the timing of the enactment  necessitate a
practical exception to the Statement 109 requirement to reflect in the period of
enactment  the effect of a new tax law.  Accordingly,  an  enterprise is allowed
time beyond the financial  reporting  period of enactment to evaluate the effect
of the Act on its plan for  reinvestment or repatriation of foreign earnings for
purposes of applying  Statement  109.  The Company is  currently  assessing  the
impact of the Act on its financial  position and results of operations  but does
not  believe  that the Act will likely  provide the Company  with the ability to
recognize a reduction of income tax expense.

In March 2004, the Emerging  Issues Task Force  ("EITF")  reached a consensus on
Issue  No.  03-1,  "The  Meaning  of  Other-Than-Temporary  Impairment  and  its
Application  to Certain  Investments."  The EITF  reached a consensus  about the
criteria  that should be used to  determine  when an  investment  is  considered
impaired,  whether that impairment is other-than-temporary,  and the measurement
of an  impairment  loss and how that criteria  should be applied to  investments
accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND
EQUITY   SECURITIES."  EITF  03-01  also  included   accounting   considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain  disclosures  about  unrealized  losses that have not been recognized as
other-than-temporary   impairments.   Additionally,   EITF  03-01  includes  new
disclosure  requirements  for  investments  that are  deemed  to be  temporarily
impaired.  In September  2004, the Financial  Accounting  Standards Board (FASB)
delayed  the  accounting  provisions  of  EITF  03-01;  however  the  disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are
to provide  guidance  on the  identification  of entities  for which  control is
achieved through means other than voting rights (variable  interest  entities or
"VIEs")  and  how  to  determine  when  and  which  business  enterprise  should
consolidate the VIE. This new model for  consolidation  applies to an entity for
which  either:  (1) the equity  investors  do not have a  controlling  financial
interest;  or (2) the equity  investment at risk is insufficient to finance that
entity's activities without receiving additional  subordinated financial support
from other  parties.  In  addition,  FIN No. 46  requires  that both the primary
beneficiary and all other enterprises with a significant  variable interest in a
VIE make  additional  disclosures.  As amended in December  2003,  the effective
dates of FIN No. 46 for public  entities  that are small  business  issuers,  as
defined ("SBIs"), are as follows: (a) For interests in special-purpose entities:
periods  ended after  December  15,  2003;  and (b) For all other VIEs:  periods
ending after  December 15, 2004.  The December 2003 amendment of FIN No. 46 also
includes  transition  provisions that govern how an SBI which previously adopted
the  pronouncement  (as it was originally  issued) must account for consolidated
VIEs.

As disclosed in Note 6, the Company is associated with Biomoda, Inc. Because two
officers  of the Company  also serve as  officers  of Biomoda and other  factors
discussed in FIN No. 46R, the Company has complied  with the  pronouncement  and
consolidated,  at this time, the two Company's financial statements.  See note 6
for the impact of adoption of the standard.

--------------------------------------------------------------------------------
F-21
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

EARNINGS PER SHARE

Earnings  per  share  for the  years  ended  December  31,  2005 and  2004  were
determined by dividing net income for the periods by the weighted average number
of both basic and diluted  shares of common stock and common  stock  equivalents
outstanding.  Stocks to be issued are regarded as common stock  equivalents  and
are considered in diluted earnings per share calculations.

2. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2005:

 Machinery and equipment                                    $ 386,861
 Furniture and fixtures                                       107,183
 Automobiles                                                   43,313
 Leasehold improvements                                        21,351
                                                  --------------------
                                                              558,708

 Less accumulated depreciation and amortization              (438,380)
                                                  --------------------
                                                            $ 120,328
                                                  ====================

3. PATENTS

Biomoda has entered into license agreements with a major university and national
laboratory to obtain rights for the purpose of  developing,  manufacturing,  and
selling products using its patented technologies.  Under such agreement, Biomoda
will pay  royalties  at  varying  rates  based upon the level of  revenues  from
licensed  products.  The  agreement  continues as long as any  licensed  patents
remain in force.  Biomoda has not incurred any royalty expense during the period
from January 3, 1990  (inception)  to December  31,  2005.  Biomoda also pays an
annual fee in the amount of $15,000 to renew such license agreement.

All patent costs are held in Biomoda.  The gross carrying amount is $266,476 and
accumulated  amortization is $71,900.  Amortization expense for 2005 is $16,107.
Amortization  expense  for the  Company's  intangible  assets over the next five
fiscal  years is  estimated  to be:  2006-$16,107,  2007-$16,107,  2008-$16,107,
2009-$16,107 and 2010-$16,107.

Biomoda has entered into a license  agreement  with the University of California
to license two patents related to TCCP. As provided in the license agreement and
its amendments,  US Patents No.  5,162,231 and No. 5,391,547 are licensed by the
University to Biomoda.  The license  agreement is in good standing and there are
no defaults of the license provisions.

Biomoda,  Inc.  has been  awarded US Patent No.  6,838,248.  The company is also
applying for one CIP and one Divisional Patent.

--------------------------------------------------------------------------------
F-22
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------


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


--------------------------------------------------------------------------------

  Country            Title               Patent No.  Issue Date  Expiration Date
================================================================================

     US      COMPOSITIONS AND METHODS     6,838,248    1/4/05       1/4/22
             OF DETECTING PRE-CANCEROUS
             CONDITIONS IN CELL AND                    Application was filed for
             TISSUE SAMPLES USING                      a Continuation In Part
             5,10,15,20 - TETRAKIS                     additional patent.
             {CARBOXYPHENYL} PORPHINE

--------------------------------------------------------------------------------

     US      METHOD USING 5,10,15,20 -    5,162,231   11/10/1992   11/10/2009
             TETRAKIS {R-CARBOXYPHENYL}
             PORPHINE FOR DETECTING
             CANCERS OF THE LUNG
--------------------------------------------------------------------------------

     US      METHOD USING 5,10,15,20 -    5,391,547    2/21/1995    2/21/2012
             TETRAKIS {R-CARBOXYPHENYL}
             PORPHINE FOR TREATING
             CANCERS OF THE LUNG
--------------------------------------------------------------------------------

Biomoda  has  received  foreign  patents in sixteen  countries  protecting  U.S.
Patents No.  5,162,231 and No.  5,391,547,  noted above in table.  These patents
have  been  issued  in  Austria,   Belgium,  Denmark,  France,  Germany,  Italy,
Netherlands, Spain, Sweden, Australia, Brazil, Canada, Japan, Korea, Russia, and
the United Kingdom and are effective until 6/17/2011.

4. RELATED PARTY TRANSACTIONS

ADVANCES FROM SHAREHOLDERS

As  of  December  31,  2005,  Biomoda  had  advances  and  accrued  interest  of
approximately  $149,000  payable  to  two  of its  stockholders.  Such  advances
historically  bore  interest at 10% per annum.  On December  31,  2003,  a third
stockholder of Biomoda agreed to forgive all accrued  interest payable to him in
the amount of approximately $25,000, which represents the gain on forgiveness of
debt in the accompanying statements of operations.  In 2004, he accepted 200,000
shares of common stock as repayment of the remaining  balance.  Interest expense
related to such advances for the years ended  December 31, 2005 and 2004 and for
the period from Inception through December 31, 2005 were approximately  $14,000,
$12,000, and $137,000 respectively.

--------------------------------------------------------------------------------
F-23
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------


5. INVESTMENT IN GENOMED, INC.

On January 8, 2004,  the Company  entered into a Stock  Purchase  Agreement (the
"Agreement") with GenoMed,  Inc., a Florida corporation  ("GenoMed") whereby the
Company purchased approximately  33,300,000 shares of restricted common stock of
GenoMed for  $900,000  in cash,  representing  approximately  17.9% of the total
outstanding shares of GenoMed  immediately after the execution of the Agreement.


6. VARIABLE INTEREST ENTITY-BIOMODA, INC.

Per  FIN  46  (R),  Interpretation  of  Accounting  Research  Bulletin  No.  51,
Consolidated  Financial  Statements,  which replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, addresses consolidation by business
enterprises  of  variable  interest  entities,  which  have  one or  more of the
following characteristics:

     1.   The equity  investment at risk is not  sufficient to permit the entity
          to finance its activities  without additional  subordinated  financial
          support provided by any parties, including the equity holders.

     2.   The  equity  investors  lack  one or more of the  following  essential
          characteristics of a controlling financial interest:

     a.   The direct or indirect  ability to make  decisions  about the entity's
          activities through voting rights or similar rights

     b.   The obligation to absorb the expected losses of the entity

     c.   The right to receive the expected residual returns of the entity.

     3.   The equity investors have voting rights that are not  proportionate to
          their economic interests,  and the activities of the entity involve or
          are conducted on behalf of an investor with a disproportionately small
          voting interest.

At December 31, 2005,  the Company  owned  1,132,285 or 15.75% of the  7,187,282
outstanding  shares of Biomoda,  Inc.  ("Biomoda"),  a development stage company
involved  in the  development  of  technology  for the early  detection  of lung
cancer.  In  addition,  two of the  Company's  officers own  approximately  12%,
collectively,  of Biomoda's  outstanding shares.  Further, the Company subleases
office space and lab equipment to Biomoda and two of the Company's  officers are
also  officers  of  Biomoda.  Finally,  the  Company has been the sole source of
funding  to  Biomoda  since 2002  through  advances  made under a line of credit
agreement.  Such advances  totaled  $1,491,523 at December 31, 2005 and interest
income of $59,947.has  been recorded.  All of these amounts have been eliminated
in consolidation. The Company is considered the primary beneficiary as it stands
to absorb the  majority  of the VIE's  expected  losses.  Since  Biomoda and the
Company are considered  entities under common control,  the Company measures the
assets and liabilities of Biomoda at their carrying amounts in consolidation.

--------------------------------------------------------------------------------
F-24
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

The  accounts  of Biomoda  that have been  consolidated  with the Company as per
Interpretation 46 of ARB 51 at December 31, 2005 are as follows:
                  Cash                                $              24
                  Other current assets                            6,436
                  Patents, net                                  194,576
                  Property and equipment, net                     9,378
                  Accounts payable                              106,129
                  Accrued expenses                              225,586
                  Advances from Biomoda stockholders            149,002

From inception through December 31, 2005, Biomoda has generated no revenues. The
Company has charged $31,277 against  non-current  assets in December 31, 2005 to
consolidate Biomoda's account.

In 2006,  Biomoda  anticipates  being  able to raise its own funds in the public
equity market. In this case,  Biomoda may be able to sustain its own operations,
repay its  obligation to the Company,  and hire its own officers.  In such case,
the Company may no longer be considered the primary  beneficiary and the results
of Biomoda may be deconsolidated. There can be no assurance that Biomoda will be
able to raise sufficient funds to repay its obligation to the Company and become
self-sustaining in its operations.

7.  ACCRUED EXPENSES

Accrued expenses consisted of the following as of December 31, 2005:

                  Payroll taxes                       $   186,051
                  Contingency                             121,834
                  Accrued expense                          11,189
                  Accrued Interest                         12,184
                  License fees                             15,000
                  Other                                    17,400
                                                           ------
                                                      $   363,658
                                                      ===========


--------------------------------------------------------------------------------
F-25
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------


8.  CONVERTIBLE DEBENTURES

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

On September 15, 2000, the Company issued $500,000 of the initial  $2,000,000 in
unsecured convertible  debentures discussed above.  Effective as of the issuance
date, the debentures are  convertible  into shares of common stock at the lesser
of a 25 percent  discount to the average of the three lowest  closing bid prices
during  the  thirty  trading  days prior to the issue date of this note and a 20
percent  discount to the average of the three lowest  closing bid prices for the
ninety  trading days prior to the  conversion  date, as defined.  The debentures
were issued in exchange  for  $430,000 in cash,  $20,000 in legal  services  and
$50,000  in  commissions.   The  commissions   have  been  capitalized  as  debt
origination  costs and are being amortized to interest  expense over the life of
the  debentures.  The  embedded  intrinsic  value of the  beneficial  conversion
feature  was  estimated  to be  approximately  $239,000,  which was  immediately
charged to interest expense. The convertible  debentures also include detachable
warrants for the purchase of 500,000 shares of common stock at an exercise price
of $0.38 per  share,  which  vested  upon grant and  expire in  September  2005.
Management  has  estimated  the fair market  value of these  warrants at $25,000
(based on the Black Scholes  pricing model  pursuant to SFAS 123 and EITF 00-27)
and immediately charged such amounts to interest expense.

On November  7, 2000,  the  Company  entered  into an  agreement  that  modified
outstanding convertible preferred agreements.  The new agreement resulted in the
exchange of  outstanding  preferred  stock for the  Company's  7.5%  convertible
debentures  and  other  consideration.  The  total  amount  of  the  convertible
debentures approximated $741,000,  including $31,000 of interest. The debentures
are convertible into shares of common stock at the lesser of the stock's closing
price on March 8, 2000 and 77.5% of the average of the five  lowest  closing bid
prices  for 20  days  before  November  2,  2000.  The  intrinsic  value  of the
conversion  feature  was  estimated  to be  approximately  $228,000,  which  was
immediately  charged  to  expense.  The  convertible   debentures  also  include
detachable  warrants for the purchase of 71,000  shares of common  stock,  which
value was insignificant.  The principal balance of the convertible debentures at
December 31, 2004 amounts to $102,977.

During 2001, the Company issued convertible  debentures  totaling $500,000.  The
debentures are  convertible  into shares of common stock at the lesser of (i) 75
percent of the average of the three lowest closing bid prices for 30 days before
August 30 and  November  19, 2001 or (ii) 80% of the average of the three lowest
closing  bids  during the 90 days prior to the  conversion  date.  The  embedded
intrinsic  value  of the  beneficial  conversion  feature  was  estimated  to be
$143,875 and  immediately  charged to interest  expense.  These  debentures were
retired in 2004.

--------------------------------------------------------------------------------
F-26
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

During  the year ended  December  31,  2004 in  accordance  with the  applicable
convertible  debentures  agreement,  the Company  issued  103,000,000  shares of
common stock at a conversion price of  approximately  $0.0109 in connection with
the  conversion  of notes  payable of  $505,060,  including  $166,240 of accrued
interest,  and  recorded  a loss  on  settlement  of  debt  of  $620,730.  Other
conversions produced net losses of $250, for a total of $620,980.

During the year ended December 31, 2005, the Company issued 21,000,000 shares of
common stock for its convertible debentures. Conversion price per share shall be
the lesser of 75% of the average of the three lowest  closing bid prices  during
the 30 trading days prior to but not including the issue date of the  debentures
and 80% of the  average of the three  lowest  closing  bid prices  during the 90
trading days  immediately  prior to but not including the conversion date, which
is  approximately  $0.01 per share.  These  shares were valued at  approximately
$31,000.  A balance  of  $83,041  is being  carried  for this  debenture  on the
Company's financial records as of December 31. 2005.

The following table summarizes these transactions:
                                                  2005               2004
                                                  ----               ----
Shares issued to retire debentures             21,000,000        320,830,452
Approximate value per share                      $ 0.0015            $0.0021
                                                 --------            --------

Total value of shares issued                       31,122            658,393
Cash payments rendered                              -0-              255,811
Carrying value of debt retired                     31,122            954,375
                                                 --------            --------
Gain (loss) on retirement of debt                $  -0-              $40,171
                                                 ========            ========

9. INCOME TAXES

During  fiscal  2005 and  2004,  the  provision  for  taxes  (substantially  all
deferred)  differs from the amounts computed by applying the U.S. Federal income
tax  rate of 34% to  income  before  provision  for  taxes  as a  result  of the
following:
                                                 2005                 2004
                                              -----------           -----------
Computed "expected" tax (benefit) expense     $ (697,000)         $ (1,716,000)

Addition to (reduction) in income taxes
  resulting from:
    State income taxes, net of                  (123,000)             (303,000)
      federal benefit
    Change in deferred tax asset
      valuation allowance                        820,000             2,008,000
    Other                                                               11,000
                                              -----------           -----------
                                              $        --     $              --
                                              ===========           ===========

The total valuation  allowance  increased by $820,000 and $2,008,000  during the
years ended December 31, 2005 and 2004, respectively.

--------------------------------------------------------------------------------
F-27
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

The effects of temporary  differences that give rise to significant  portions of
the deferred taxes at December 31, 2005 are presented below:

Deferred tax asset:
    Tax net operating loss carryforwards    $         8,316,000
    Deferred tax asset valuation allowance           (8,316,000)
                                             ------------------
                                            $                --
                                             ==================

At December 31, 2005,  Advanced Optics  Electronics,  Inc. had tax net operating
loss  carryforwards  of approximately  $22,291,000 and $12,283,000  available to
offset future taxable federal and state income, respectively. If not utilized to
offset future taxable  income,  the  carryforwards  will expire in various years
through  2024.  In the event the Company was to  experience  a greater  than 50%
change in ownership as defined in Section 382 of the Internal  Revenue Code, the
utilization  of the  Company's  tax net operating  loss  carryforwards  could be
severely restricted.

10. STOCKHOLDERS' EQUITY

PREFERRED STOCK

The Company's  articles of  incorporation  authorize up to 10,000,000  shares of
$0.001 par value preferred stock. Shares of preferred stock may be issued in one
or more classes or series at such time as the Board of Directors  determine.  As
of December 31, 2005, there were no shares of preferred stock outstanding.

TREASURY STOCK

During the year ended December 31, 2005 the Company purchased  24,605,000 shares
of its common  stock as  treasury  shares  for  approximately  $16,000  and sold
1,804,000  shares for  approximately  $1,200.  In 2004,  the  Company  purchased
9,800,000  shares  for  approximately  $42,000  and sold  14,100,000  shares for
approximately $48,000.

COMMON STOCK

The Company was initially capitalized through the issuance of 500,000 shares for
$25,000 in cash.  In November  1996,  the  Company  issued  4,500,000  shares in
exchange  for the  outstanding  shares of PLZ Tech,  Inc.  The  transaction  was
accounted for as a purchase and net assets of $285,596,  consisting primarily of
patents and equipment,  were recorded.  In previous  financial  statements,  the
Company  did not present  unclaimed  shares  resulting  from the merger with PLZ
Tech, Inc. as outstanding  shares.  In the accompanying 1997 and prior financial
statements the number of shares  outstanding  has been restated to include these
shares.

In 1997,  The Company  issued  155,000  shares of common  stock in exchange  for
$24,800 in cash, and in accordance with the applicable  convertible note payable
agreement,  the Company  issued  369,545  shares of common  stock at  conversion
prices of less than $0.01 in connection  with the conversion of notes payable of
approximately $59,128.

--------------------------------------------------------------------------------
F-28
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

In 1997, the Company issued 1,756,667 shares of common stock in exchange for the
following  services;   Advice  on  Bringing  in  Additional   Investors,   Radio
Interviews,   Market   Sponsorship,   Market  Reports,   and  Canadian  Investor
Participation.  In each  instance,  the value of stock issued was  determined by
discounting  to 70% of the closing  price on the day of  issuance.  These shares
were valued at $281,072.

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

In 1998, the Company issued 2,751,000 shares of common stock in exchange for the
following  services;   Market  Sponsorship,   Canadian  Investor  Participation,
Locating Asian Investors,  Employee Bonus and Incentive, and the Production of a
Corporate  Promotional  Video.  In each instance,  the value of stock issued was
determined  by  discounting  to 70% of the closing price on the day of issuance.
These shares were valued at $296,470.  The Company also issued 315,000 shares to
an officer in exchange for a note receivable of $29,000. The note bears interest
at the rate of 7 percent with  interest due  semiannually  and the principal due
July 2001.

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

In 1999, the Company also sold 8,681,624 shares for $863,782 in cash, and issued
17,094,313 shares of common stock in exchange for the following services; Market
Research, Capital Raising Advice, Employee Bonus and Incentive,  Market Reports,
and the Production of a Corporate Promotional Video. In each instance, the value
of stock issued was determined by discounting to 70% of the closing price on the
day of issuance. These shares were valued at $1,486,414.

During the year ending December 31, 2000, the Company sold 782,000 shares of its
common stock for $1,013,493 in cash, and issued 3,955,203 shares of common stock
in exchange  for the  following  services;  Capital  Raising,  Market  Research,
Financial  Consulting,  Investor  Relations Reports,  Legal,  Employee Bonus and
Incentive and Company Reports.  In each instance,  the value of stock issued was
determined  by  discounting  to 70% of the closing price on the day of issuance.
These shares were valued at $1,730,152. The value of the services is included in
the costs and expenses on the Statements of Operations.

In 2000, in accordance with the applicable  convertible note payable  agreement,
the Company issued 9,200,000 shares of common stock at conversion prices of less
than $0.01 in connection  with the conversion of notes payable of  approximately
$542,878.

Also, an officer of the Company exercised  1,850,000 stock options at a price of
$0.12 per share.  The  Company  issued  notes  receivable  to the officer in the
amount of $220,000 for the shares. Interest for the first quarter was prepaid.

During the year ended December 31, 2001,  the Company sold 1,382,778  shares for
$68,227 in cash and issued 10,461,498 shares of common stock in exchange for the
following services;  Financial  Consulting,  Marketing,  Legal Fee for Debenture
Issuance,  Advice on  bringing  in  additional  investors,  Market  Sponsorship,

--------------------------------------------------------------------------------
F-29
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

Investor Relations Reports, the Production of Corporate  Promotional Videos, and
Employee Bonus and Incentive . In each  instance,  the value of stock issued was
determined  by  discounting  to 70% of the closing price on the day of issuance.
These  shares were valued at  $422,745.  The value of such  services is included
with costs and expenses in the statement of operations

In 2001, in accordance with the applicable  convertible note payable  agreement,
the Company issued 7,064,886 shares of common stock at conversion prices of less
than $0.01 in connection  with the conversion of notes payable of  approximately
$154,073.

During the year ended December 31, 2002, the Company sold 315,845,000  shares of
common stock for $545,661 in cash; all shares were sold for less than $0.01.

During the year ended December 31, 2002, the Company issued  115,768,000  shares
of common  stock in exchange  for the  following  services;  Product  Marketing,
Advice on Bringing in Additional  Investors,  Canadian  Investor  Participation,
Legal Fees for Debenture Issuance  Securities  Placement and Market Sponsorship.
In each instance, the value of stock issued was determined by discounting to 70%
of the  closing  price on the day of  issuance.  These  shares  were  valued  at
$482,069 (based on the closing market price on the date of grant, which was less
than $0.02). The Company recorded such amounts in the accompanying  statement of
operations.

During the year ended  December 31, 2002,  the Company  issued 507,800 shares of
common stock  (based on the fair market value on the dates of grant,  which were
less than $0.01) held as treasury stock for cash totaling  $7,829 on a first-in,
first-out basis.

During the year ended December 31, 2002, the Company purchased  1,400,000 shares
of common stock held as treasury stock for cash totaling $8,732.

In January 2002, the Company issued 1,100,000 shares of its outstanding stock in
connection with the exercise of stock options by an officer of the Company for a
note  receivable,  which is due on demand,  totaling  $22,000.  The  Company has
recorded  the note  receivable  as an increase to  stockholders'  deficit in the
accompanying balance sheet.

During the year ended  December  31, 2002,  in  accordance  with the  applicable
convertible  note payable  agreement,  the Company issued  46,018,635  shares of
common  stock at  conversion  prices of less than $0.01 in  connection  with the
conversion of notes payable of approximately  $73,000,  including  approximately
$25,000 of accrued interest.

During the year ended  December  31, 2002,  in  accordance  with the  applicable
convertible  note payable  agreement,  the Company issued  30,511,931  shares of
common stock at conversion prices of approximately  $0.01 in connection with the
conversion of notes payable of approximately  $319,000,  including approximately
$20,000 of accrued interest.

During the year ended  December  31, 2002,  in  accordance  with the  applicable
convertible  note payable  agreement,  the Company  issued  2,165,000  shares of

--------------------------------------------------------------------------------
F-30
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

common stock at conversion prices of approximately  $0.02 in connection with the
conversion of notes payable of approximately  $35,000,  including  approximately
$2,000 of accrued interest.

During  the year  ended  December  31,  2003,  the  Company  sold  approximately
1,477,760,000  shares of common  stock for cash  approximating  $6,031,000;  all
shares were sold for less than $0.03.

During the year ended  December  31,  2003,  the  Company  issued  approximately
367,250,000  shares of common  stock in  exchange  for the  following  services;
Marketing,  Financial  Consulting,  Securities Placement Legal Fee for Debenture
Issuance,  Investor Relations Reports,  Capital Raising Advice, Legal, Advice on
bringing in additional  investors and Canadian Investor  Participation.  In each
instance,  the value of stock issued was determined by discounting to 70% of the
closing price on the day of issuance.  These shares were valued at approximately
$1,832,000  (based on the closing  market price on the date of grant,  which was
less  than  $0.03).  The  Company  recorded  such  amounts  in the  accompanying
statement of operations.

During the year ended  December  31, 2003,  in  accordance  with the  applicable
convertible note payable agreement, the Company issued approximately 320,830,000
shares of common  stock at  conversion  prices of less than $0.01 in  connection
with the  conversion  of notes  payable  principal  approximating  $591,000  and
accrued interest approximating $67,000.

In December 2003, the Company cancelled notes receivable from an officer in lieu
of the return of  2,950,000  shares of common  stock to the Company  (which were
cancelled)  that  were  originally  granted  in  fiscal  2000 and 2002  from the
exercise of stock options for such notes receivable.

During the year ended December 31, 2004, the Company issued 47,200,000 shares of
common  stock  in  exchange  for  the  following  services;   Canadian  Investor
Participation,   Advice  on  bringing  in  additional   investors,   and  Market
Sponsorship.  In each  instance,  the value of stock  issued was  determined  by
discounting  to 70% of the closing  price on the day of  issuance.  These shares
were valued at approximately  $255,000. The Company recorded such amounts in the
accompanying condensed statements of operations.

During the year ended December 31, 2004, the Company issued  103,000,000  shares
of common stock for its convertible debentures. Conversion price per share shall
e the lesser of 75% of the average of the three lowest closing bid prices during
the 30 trading days prior to but not including the issue date of the  debentures
and 80% of the  average of the three  lowest  closing  bid prices  during the 90
trading days  immediately  prior to but not including the conversion date, which
is approximately $0.01 per share. The value of these shares was $1,126,000.  The
Company  incurred a loss on settlement  of debt of about  $621,000 in connection
with  the  conversion  of  notes  payable  approximating   $505,000,   including
approximately $166,000 of accrued interest.

During the year ended December 31, 2004, the Company issued  462,800,000  shares
of common stock for cash, which were valued at approximately $1,119,000.

In October 2004, the Company's Board of Directors authorized the increase of the
number of shares of the Company's common stock to 4,000,000,000.

--------------------------------------------------------------------------------
F-31
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

During the year ended December 31, 2005, the Company issued 1,551,700,000 shares
of common stock for cash, which were valued at approximately $935,000.

During the year ended December 31, 2005, the Company issued 21,000,000 shares of
common stock for its convertible debentures. Conversion price per share shall be
the lesser of 75% of the average of the three lowest  closing bid prices  during
the 30 trading days prior to but not including the issue date of the  debentures
and 80% of the  average of the three  lowest  closing  bid prices  during the 90
trading days  immediately  prior to but not including the conversion date, which
is  approximately  $0.01 per share.  These  shares were valued at  approximately
$31,000.

During the year ended  December 31, 2005,  the Company  increased its authorized
shares to 7,000,000,000.

STOCK OPTIONS

On January 4, 1999, the Company established the Incentive Stock Option Plan (the
"Plan").  Pursuant to the Plan, up to 10,000,000  shares of the Company's common
stock may be granted as options to key employees  with exercise  prices at least
equal to the fair market value on the date of grant.  The exercise  dates of the
options  are  based  on the  related  agreement,  as  approved  by the  Board of
Directors.  The Plan expires on January 4, 2009.  Options awarded under the Plan
mature four years from the date of grant and vest  ratably  over one to two year
periods.

The following is a status of the stock options  outstanding at December 31, 2005
and 2004 and the changes during the two years then ended:

<TABLE>
<CAPTION>

                                                     Year Ended                                Year Ended
                                                   December 31, 2005                        December 31, 2004
                                             ---------------------------------     ----------------------------------
                                                                   Weighted                               Weighted
                                                                   Average                                Average
                                                Options             Price             Options              Price
                                             ---------------     -------------     ---------------      -------------
<S>                                          <C>                <C>                <C>                  <C>
Outstanding, beginning of year                      400,000             $0.02           3,175,000              $0.23
Granted                                                   -                 -                   -                  -
Exercised                                                 -                 -                   -                  -
Cancelled/Terminated                                      -                 -         (2,775,000)               0.34
                                             ---------------     -------------     ---------------      -------------
Outstanding and exercisable, end of year            400,000             $0.02             400,000              $0.02
                                             ===============     =============     ===============      =============
Weighted average fair value of options
granted during the year                                                     -                                      -
                                                                 =============                          =============

</TABLE>

--------------------------------------------------------------------------------
F-32
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

The following table summarizes  information related to stock options outstanding
at December 31, 2005:
<TABLE>
<CAPTION>

                                      Options Outstanding                         Options Exercisable
                        -------------------------------------------------  ---------------------------------
                                           Weighted
                                            Average           Weighted                           Weighted
                                           Remaining          Average                             Average
                                          Contractual         Exercise                           Exercise
  Exercise Price           Number        Life (Years)          Price            Number             Price
-------------------     ------------- -------------------- --------------- ----------------- ----------------
<S>                     <C>               <C>                <C>                 <C>              <C>
      $0.02                   400,000         0.04           $  0.02                400,000           $  0.02

                        --------------                      -------------    ---------------    --------------

-------------------     ------------------------------------------------------------------------------------------
</TABLE>

There were no stock options granted in 2005 and 2004.

WARRANTS

From time to time, the Company issues warrants to employees and to third parties
pursuant to various agreements.

In January  2002,  the  Company  issued  warrants to two  directors  to purchase
300,000 shares of the Company's common stock. The exercise price of the warrants
is $0.02 per share (the fair market value of the  Company's  common stock on the
date of grant) and vested  immediately.  The warrants expire five years from the
date of issuance.

--------------------------------------------------------------------------------
F-33
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------


The following  represents a summary of warrants  outstanding for the years ended
December 31, 2005 and 2004:
<TABLE>
<CAPTION>

                                                Year Ended December 31,                Year Ended December 31,
                                                          2005                                   2004
                                           -----------------------------------    -----------------------------------
                                                                  Weighted                               Weighted
                                              Warrants         Average Price         Warrants         Average Price
                                           ----------------    ---------------    ----------------    ---------------
<S>                                        <C>                 <C>                <C>                 <C>
Outstanding, beginning of year                   4,796,000              $0.11           8,646,000              $0.06
Granted                                                  -                  -                   -                  -
Exercised                                                -                  -                   -                  -
Cancelled/Terminated                            (3,996,000)              0.13          (3,850,000)              0.05
                                           ----------------    ---------------    ----------------    ---------------
Outstanding and exercisable, end of year           800,000              $0.03           4,796,000              $0.11
                                           ================    ===============    ================    ===============
Weighted average fair value of warrants
granted during the year                                                     -                                      -
                                                                 =============                          =============

</TABLE>

The following table summarizes  information  related to warrants  outstanding at
December 31, 2005:
<TABLE>
<CAPTION>

                                      Warrants Outstanding                            Warrants Exercisable
                        -------------------------------------------------        ----------------------------------
                                           Weighted
                                            Average            Weighted                               Weighted
                                           Remaining           Average                                 Average
                                          Contractual          Exercise                               Exercise
  Exercise Price           Number        Life (Years)           Price                Number             Price
-------------------     -------------- -------------------- ------------------ ------------------- ----------------
<S>                     <C>             <C>                 <C>                <C>                 <C>
      $0.02                   300,000             0.04           $  0.02                300,000         $  0.02
    $0.31-0.33                500,000             0.30              0.03                500,000            0.03
                        --------------                      -------------        ---------------    ------------
                              800,000                            $  0.11                800,000         $  0.03
-------------------     -------------------------------------------------------------------------------------------
</TABLE>

There were no warrants issued in 2004 and 2005.

11. IMPAIRMENT OF ASSETS

During the year  ended  December  31,  2004,  the  Company  purchased  75 shares
Electronic  Film Market Online,  Inc. in the amount of $88,000 and 18,000 shares
of common stock of Beaver  Information  Technology  (BIT),  a  Philippine  based
company,  representing 9% of the issued and outstanding  common stock of BIT for
$273,710.   Both  Companies  are  privately  held.  The  Company  evaluated  its
investments based upon the fair market value of similar assets and wrote off the
total amount of investments of $361,710 at this time.  This is part of the asset
impairment in the accompanying consolidated statements of operations.

--------------------------------------------------------------------------------
F-34
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

As disclosed in the note #1 to the financial  statements,  an impairment loss is
recognized when estimates of future  undiscounted  cash flows expected to result
from the use of an asset and its eventual disposition are less than its carrying
amount.  At the time such flows of certain  long-lived assets are not sufficient
to recover the carrying  value of such assets,  the assets are adjusted to their
fair values and any  impairment  amount is charged to  operations.  Accordingly,
based on these evaluations and in comparison of such investments with its market
value,  management adjusted the carrying value of investments to zero at October
31, 2004.

12. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases the facilities in which it operates.  Payments for the office
facility  are $4,225 per month and are  currently  month-to-month.  In addition,
during  the  year  ended  December  31,  2002,   the  Company   entered  into  a
month-to-month sublease with Biomoda, Inc. (see Note 6), in which the Company is
to receive $300 per month.

In February  2004, the Company  entered into a 25-month lease  agreement for its
West Coast office.  Monthly  rental is $2,413 per month from February 1, 2004 to
February 28, 2006. Minimum annual rentals subsequent to December 31, 2005 are as
follows:

                  Year              Amount
                  2006              $ 29,861
                  2007                29,861
                                    --------
                  Total             $ 59,722
                                    ========

Rental  expense for operating  leases  approximated  $63,000 and $77,000 for the
years ended December 31, 2005 and 2004  respectively and  approximated  $390,000
for the period from Inception  through December 31, 2005. Rental income from the
sublease to Biomoda,  Inc. approximated $3,600 for both years ended December 31,
2005 and 2004,  and $14,000 for the period from Inception  through  December 31,
2005 and has been included in operating  expenses in the accompanying  statement
of operations.

LITIGATION

From time to time,  the Company may be  involved  in various  claims,  lawsuits,
disputes with third parties,  actions involving allegations of discrimination or
breach of contract actions  incidental to the normal operations of the business.
The Company is currently not involved in any such  litigation  which  management
believes  could have a material  adverse  effect on its  financial  position  or
results from operations.

--------------------------------------------------------------------------------
F-35
<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
--------------------------------------------------------------------------------

The Company and Biomoda have filed an action seeking the court to declare that a
contingent  obligation  to a former  employee  of Biomoda is not due until after
Biomoda's IPO is funded.  The  contingency is reflected on the balance sheet. In
April,  2005 the Company was awarded  damages in the amount of  $13,500,269 as a
result of two  separate  judgments  in favor of the  Company  against  two party
defendants.  The Company has not  accounted  for the now  $14,000,000+  judgment
because the amount to be collected is still uncertain.  To be conservative,  the
Company has assigned zero value at this time.


NOTE  13.         SEGMENTS AND MAJOR CUSTOMERS

The Company has two reportable  segments consisting of (1) producing and selling
large-scale flat panel displays for outdoor advertising billboards and its color
identifier for the vision impaired;  (2) early cancer detection technology.  The
accounting  policies  of the  segments  are the same as those  described  in the
summary of significant  accounting policies.  The Company evaluates  performance
based on sales, gross profit margins and operating profit before income taxes.

The following is information for the Company's reportable segments for the years
ended December 31, 2005 and 2004 (in thousands):

<TABLE>
<CAPTION>
                                           2005                                        2004
                         ADOT    Biomoda    Unallocated   Total       ADOT    Biomoda   Unallocated    Total
<S>                   <C>        <C>        <C>          <C>        <C>        <C>      <C>          <C>
Revenue               $   --     $  --      $  --        $  --      $  --      $  --    $   --        $  --
Loss on Operations
                       (1,566)      (539)      -0-        (2,105)    (3,578)      (708)    -0-         (4,286)
Depreciation
    and amortization       32         21       -0-            53         25         15     -0-             40
Interest expense           13         26       -0-            39         18         30     -0-             48
Capital expenditure         4         35                      39        539        278     -0-            817
Net Loss              $(1,491)   $  (565)   $  -0-       $(2,056)   $(4,289)   $  (759) $  -0-        $(5,048)

</TABLE>



NOTE  14.         SUBSEQUENT EVENTS

In the first quarter of 2006,  1,345,000,000  shares were issued for cash in the
amount of $418,600  and  65,000,000  shares were issued for  services  valued at
$6,370.  During  February 2006, the Company  increased its authorized  shares to
8,000,000,000.

--------------------------------------------------------------------------------
F-36