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, 2001       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 December  31, 2001 based upon the average bid and asked prices of such
stock on that date was $1,940,096. The number of issuer's shares of Common Stock
outstanding as of December 31, 2001 was 80,837,337.

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


<PAGE>

                                TABLE OF CONTENTS

Forward Looking Statements

                                     PART I

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

                                     PART II

Item 5.   Market for Common Equity and Related Stockholder Matters
Item 6.   Management's Discussion and Analysis of Financial Condition and
           Results of Operations
Item 7.   Financial Statements
Item 8.   Changes in and Disagreements with Accountants

                                    PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act
Item 10.  Executive Compensation
Item 11.  Security Ownership of Certain Beneficial Owners and Management
Item 12.  Certain Relationships and Related Transactions

                                     PART IV

Item 13.  Exhibits, Financial Statements and Financial Statement Schedules, and
           Reports on Form 8-K

                                   SIGNATURES


<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 the development,  production and
sales of its novel and innovative  electronic flat panel  displays.  The company
maintains an R&D facility and  manufacturing  plant,  and is engaged in building
large-scale flat panel displays utilizing its patented technology.

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.

The  Company's  principal  offices are located at 8301  Washington  NE, Suite 5,
Albuquerque, New Mexico 87113, and its telephone number is (505) 797-7878.

Company Overview

     We are a developmental  stage technology  company with our primary focus on
the  development,  production and sales of our large-scale  flat panel displays,
which utilize our patented technology.  We are currently continuing our research
and development of our product and the underlying technology, although we are in
the  process of making the  transition  from a  developmental  stage  company to
producing and selling our product. 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.



<PAGE>

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
book values,  as determined in accordance  with  generally  accepted  accounting
principles.  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 $5.2
billion  industry  in 2001,  which was 2% higher  than the  previous  year.  The
billboard  segment of the outdoor  advertising  market  represents  60% of total
outdoor  expenditures  and topped  $3.18  billion in 2001.  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.

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  406,000  billboards in 2001. 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  media.  Our  market
penetration  analysis is based on capturing and  converting  existing sites in a
stable market and expanding the indoor market.

     In September 2000, we received payment of $89,873 to produce and install
two large-scale flat panel displays, which is the first commercial application
of our electro-optic array technology. After the completion of these two flat
panel displays, we intend to target the outdoor advertising billboard industry
in phases.

     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.  We estimate
that we could begin supplying flat panel displays to meet the initial demand for
these  locations  within five to seven months of  installing  our first two flat
panel displays under our existing  commitment and obtaining  funding for ongoing
development and commercialization. Once demand in these prime locations has been
met and increased  manufacturing  volumes have lowered the production  costs per
display, we will target the remaining outdoor advertising billboard market.


<PAGE>

     Approximately  65% of billboards were booked for 12-month  periods in 1999.
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.

     Our  management  team has extensive  experience  in finance,  marketing and
research related to developing and rapidly growing technology businesses serving
business customers.

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.  Our flat panel  displays are expected to be
inexpensive to produce  relative to alternative  electronic  billboard  systems,
none of which we believe can be scaled up or down as effectively and efficiently
as our products. We believe that our flat panel displays and underlying software
system  represent an innovative  approach to advertising  that take 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.

Suppliers and Availability of Raw Materials

     We have  identified at least six  suppliers of the basic  components of our
systems. We anticipate this technology to develop and mature rapidly in the next
year, 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 limited  established  commercial  manufacturing  facilities for the
production of our flat panel displays,  although 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.  Our plan is to install the
first 10 to 20 flat panel  displays  that we sell.  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.


<PAGE>

Customers

According to the Outdoor Advertising  Association of America, there were 210,000
30-sheet  billboards that measure  approximately  12 feet by 24 feet and 140,000
8-sheet  billboards  that measure  approximately 6 feet by 12 feet in the United
States in 2001.  We believe  that many of these  billboards  represent  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 39% that  constitutes  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, represent 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 a 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.

Competition

     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
in the same manner as before  World War I. 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 may 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,  and
cathode ray tubes,  or CRT 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.

<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;

Intellectual Property and Other Proprietary Rights

     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  that  relates  to  an   Electro-Optic   Array.   The
          Electro-Optic  Array describes a high-density,  high-resolution  array
          that can be selectively  activated by low induced  voltages to alter a
          light  beam  passing  through  the array of valves.  This  proprietary
          technology   that  we   developed   also  relates  to  a  process  for
          manufacturing  such  a  high-density  array  using  semiconductor-type
          processing  equipment  and  techniques.   This  manufacturing  process
          constitutes a significant  improvement  over prior techniques by using
          semiconductor  processing technology to further increase pixel density
          and reduce activation voltage.

     o    Patent pending for Light Emitting Diode  Configuration for Large-Scale
          Displays  includes a pulse width modulation  scheme for light emitting
          diode, or LED,  illumination,  a data distribution  scheme that allows
          greater ease and economy in manufacturing and assembly,  and a current
          source circuit that allows for a design with lower power requirements.

     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.  The  patent  pending  that  relates  to the
Electro-Optic Array was assigned to us by its inventor in February 2000, and the
patent pending that relates to the LED  Configuration  for Large-Scale  Displays
was assigned to us by its inventors in February 2001. The inventors who assigned
each of these patents pending to us are employees of Advanced  Optics.  Although
we have been awarded the patent and


<PAGE>

have filed two  applications  for patents,  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 fiscal 2001,  which ended  December 31, 2001,  $105,908 was spent on research
and  development  activities.  In  2000  $732,029  was  spent  on  research  and
development activities.  This reduction reflects our transition from development
to production and manufacturing.  We believe, however, that continued investment
in product development is critical to attaining our strategic objectives and, as
a result,  expect  product  development  expenses to increase  significantly  in
future periods. We expense product development costs as they are incurred.

Employees

As of December 31, 2001, the Company has  approximately  10 full-time  employees
and two part-time employee. The Company also contracted with other personnel and
subcontractors for various projects on an as-needed basis.

ITEM 2. DESCRIPTION OF PROPERTY

The  company  leases its  headquarters  facility  of 7,500  square  feet at 8301
Washington NE, Suite 5 in Albuquerque,  New Mexico.  This includes the executive
offices, research and development facility and manufacturing plant. 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.  Management is in the process of negotiating
for a larger and more efficient space.

ITEM 3. LEGAL PROCEEDINGS

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

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

There were no matters  submitted  to a vote of the  Company's  security  holders
during the fourth quarter of the fiscal year ended December 31, 2001.


<PAGE>

                                     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 2000:
                1st Quarter        $1.53         $.687
                2nd Quarter         1.09          .406
                3rd Quarter          .60          .285
                4th Quarter          .46           .21

Fiscal 2001:
                1st Quarter        $0.26         $0.11
                2nd Quarter         0.16          0.05
                3rd Quarter        0.085         0.028
                4th Quarter         0.04          0.02

As of  December  31, 2001 the Company  estimates  that there were  approximately
13,000 shareholders directly and in street name. The Company has never paid cash
dividends on its Common Stock and does not  anticipate  paying cash dividends in
the near future.

ITEM 6.  MANAGEMENT DISCUSSION AND ANALYSIS

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 BioModa, Inc will provide additional liquidity.

BioModa is a biomedical development company. The Company's ownership of BioModa,
as of December 31, 2001, was 13.6%.  No immediate  family members of officers or
directors of Advanced Optics Electronics, Inc. are securities holders of BioModa
with the  exception  of Harold  Herman,  who is a director  of  Advanced  Optics
Electronics,   Inc.  and  a  small   minority   shareholder   in  BioModa.   The
recoverability  of the  investment in Bio Moda,  Inc. is supported by two recent
private  placements  that  were  completed  at a share  price  greater  than the
carrying value of the asset.

<PAGE>

It is believed that sales of securities will provide adequate capital  resources
to meet the anticipated  developmental stage requirements through the first half
of fiscal year 2002. At that time it is anticipated  that sales of displays will
begin and contribute to operating revenues.

During the  fiscal  year  ended  December  31,  2001  $30,349  was spent for the
purchase of equipment. $23,800 was realized from the sale of equipment no longer
required for the Company's  operation.  Product  development  expenditures  were
$105,908  in  2001.  Funds  for  operations,  product  development  and  capital
expenditures were provided from the sale of securities and cash reserves.

In August 1998 Advanced Optics Electronics,  Inc. entered into a lease agreement
for the  financing of equipment  for the  development  of its flat panel display
systems. The Company is required to repay the $101,000 in equal monthly payments
of the lease.  Monthly payments on the lease are approximately  $2,850. The term
of the  lease is 3 years  and is  backed  by the  credit  of the  Company.  This
obligation was satisfied and paid in full during the second quarter 2001.

Results of Continuing Operations

Fiscal 2001 Compared to Fiscal 2000

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

Product Development. Product development expenses consist primarily of personnel
expenses,  consulting fees and depreciation of the equipment associated with the
development and enhancement of our flat panel displays. Research development and
technical  costs  decreased  to  $105,908 in 2001 from  $732,029  in 2000.  This
reduction   reflects  our   transition   from   development  to  production  and
manufacturing.  We  believe,  however,  that  continued  investment  in  product
development is critical to attaining our strategic  objectives and, as a result,
expect product development expenses to increase significantly in future periods.
We expense product development costs as they are incurred.

General and  Administrative.  General  and  administrative  expenses  consist of
expenses for executive and administrative  personnel,  facilities,  professional
services,  travel,  general  corporate  activities,  and  the  depreciation  and
amortization  of  office  furniture  and  leasehold  improvements.  General  and
administrative costs decreased to $1,059,599 in 2001 from $2,364,975 in 2000 due
to decreases in salary expense and  professional  fees. Due to the growth of our
business  and  continuing   expansion  of  our  staff,  we  expect  general  and
administrative  costs to increase in the future. The costs associated with being
a publicly  traded  company will also be a  contributing  factor to increases in
this expense.

Other Income  (Expense).  Other income (expense)  consists of interest and other
income and expense. Interest income increased to $25,626 in 2001 from $18,614 in
2000. The increase in interest  income was due to an increase in our average net
cash and cash equivalents  balance.  Interest  expense  decreased to $280,695 in
2001 from $418,969 in 1999. The decrease in interest expense is due primarily to
reduced non-cash charges to interest expense from the accounting  calculation of
the  intrinsic  value of the  conversion  feature of the  convertible  debenture
financings that were done during 2001 as compared to 2000.

Fiscal 2000 Compared to Fiscal 1999

Contract Revenue. No contract revenue has been recognized in connection with our
contract to produce and install two electronic outdoor  advertising  billboards,
which is being accounted for using the completion of


<PAGE>

contract  method  of  accounting.  Please  note  that the  Company  changed  the
accounting for our contract to the completed  contract method during the quarter
ended March 31, 2001.

Product Development. Product development expenses consist primarily of personnel
expenses,  consulting fees and depreciation of the equipment associated with the
development and enhancement of our flat panel displays. Research development and
technical  costs  increased  206% to $732,029 in 2000 from $239,029 in 1999. The
increase in these costs is due primarily to increased  research and  development
efforts  and  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.

General and  Administrative.  General  and  administrative  expenses  consist of
expenses for executive and administrative  personnel,  facilities,  professional
services,  travel,  general  corporate  activities,  and  the  depreciation  and
amortization  of  office  furniture  and  leasehold  improvements.  General  and
administrative costs increased 20% to $2,364,975 in 2000 from $1,952,600 in 1999
due to increases in salary expense related to increased  personnel and increases
in professional fees. Due to the growth of our business and continuing expansion
of our staff,  we expect  general  and  administrative  costs to increase in the
future.  The costs  associated  with being a publicly  traded company and future
strategic  acquisitions will also be a contributing  factor to increases in this
expense.

Other Income  (Expense).  Other income (expense)  consists of interest and other
income and expense. Interest income increased to $18,614 in 2000 from $10,865 in
1999. The increase in interest  income was due to an increase in our average net
cash and cash equivalents  balance.  Interest  expense  increased to $418,969 in
2000 from $229,432 in 1999. The increase in interest expense is due primarily to
non-cash  charges to interest  expense from the  accounting  calculation  of the
intrinsic  value  of  the  conversion  feature  of  the  convertible   debenture
financings that were done during 2000.

Accounting Matters

The Financial Accounting Standards Board ("FASB") periodically issues accounting
standards,  which may affect the  financial  accounting  or  disclosures  of the
Company.  There are no accounting  standards that have been issued,  but not yet
adopted by the  Company,  which  would have a material  effect on the  financial
position or results of operation of the Company.

ITEM 7. FINANCIAL STATEMENTS

     The  financial  statements  and notes  thereto,  together  with the  report
     thereon of Atkinson & Co., Ltd. (the Company's  accountants)  dated January
     31, 2002,  included elsewhere in this report, are incorporated by reference
     in answer to this Item 7. Please note that the financial statements for the
     years ended December 31, 1999 and 2000 have been retroactively  restated to
     give effect to a change in accounting for the Company's long-term contract.
     This change had no effect on net loss or net loss per share.  Additionally,
     the  financial  statements  for the year ended  December 31, 2000 have been
     restated to give effect to a change in estimate of the  Company's  deferred
     tax  asset,  a change  in the  amount  of  intrinsic  value of  convertible
     instruments  charged to interest  expense,  and changes in estimated useful
     lives of intangible assets. The effect of these changes was to increase net
     loss for the year ended December 31, 2000 by $627,938,  and to increase net
     loss per share by $0.01.


<PAGE>

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

The Company changed accountants from Neff & Ricci to Atkinson & Co., Ltd. in the
first quarter of 2001 prior to the  preparation  of the 2000 audit.  The Company
filed an 8K disclosing the change.


<PAGE>

                                    PART III

ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth information, as of December 31, 2001, concerning the
Company's directors and executive officers:

Name                 Age   Position                                Since
Michael Pete         57    President, Treasurer, Director          July 1994
Leslie S. Robins     63    Exec. Vice Pres., Secretary, Chairman   November 1992
John J. Cousins      45    Vice President-Finance                  June 1999
Harold C. Herman     75    Director                                December 1998
Richard Josephberg   54    Director                                April 2000

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 holds undergraduate degrees from Boston University and
the Lowell Institute School at MIT.

Harold C. Herman has been a director of the Company since December 1998. He is a
member of the State Bar in New York and  California.  From 1980 to the  present,
Mr.  Herman has been general  partner of numerous  limited  partnerships  owning
commercial  properties,  including  apartment  complexes,  shopping  centers and
malls,  in the  Northeastern  area of the United States.  From 1969 to 1980, Mr.
Herman was a senior partner of the law firm of Herman,  Mcginnis and Kass Esqs.,
located in New York City,  handling  business and legal matters relating to real
estate,  corporations  and securities  law. Mr. Herman has a B.S. in Physics and
B.E.E.  in  Electrical  Engineering  from City  College of New York,  an M.S. in
Applied  Mathematics  from New York  University and an L.L.D.  from Brooklyn Law
School.

Mr.  Josephberg has been a member of our Board of Directors  since April,  2000.
From 1986 to the present,  Mr. Josephberg has been a principal in the investment
and merchant banking firm of Josephberg Grosz &


<PAGE>

Co., Inc. in New York City.  From 1980 to 1984,  Mr.  Josephberg was a member of
the New York Stock Exchange.  He has a B.A. in business  administration from the
University of Cincinnati and has completed all the coursework  towards an M.B.A.
from Bernard Baruch College.

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
1999, 2000 and 2001:

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                          Long-Term Compensation
                                  Annual Compensation                             Awards
                                  -------------------                    -------------------------
                                                        Other Annual                    Securities
                                                        Compensation     Restricted     Underlying      LTIP     All Other
                                                        (1)             Stock Award(s)    Options      Payouts  Compensation
                                                        ------------    -------------   ----------     -------  ------------
Name and
Principal Position     Year        Salary      Bonus          ($)            ($)           (#)            ($)         ($)
                                    ($)         ($)
                       ----        ------      -----          ---            ---           ---            ---         ---
<S>                    <C>       <C>             <C>           <C>        <C>               <C>            <C>         <C>
Michael Pete,
President,
Director
                       2001      $  15,600
                       2000      $  38,700       --            --               --          275,000        --          --
                       1999      $  36,000       --            --         $  7,350          800,000        --          --
                      --------------------------------------------------------------------------------------------------------
Leslie S. Robins,
Chairman of the
Board and Exec. VP
                       2001      $  62,133                $10,387(1)
                       2000      $  82,830       --        $8,986(1)            --        4,850,000        --          --
                       1999      $ 109,340       --        $7,352(1)      $ 131,915       5,000,000        --          --
                      --------------------------------------------------------------------------------------------------------
John J. Cousins,
VP Finance
                       2001      $ 109,406
                       2000      $  95,072       --            --               --          400,000        --          --
                       1999      $  41,495       --            --         $  3,375          300,000        --          --
                      --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the amount of an automobile lease for the benefit of Mr. Robins.


<PAGE>

OPTION GRANTS IN FISCAL YEAR 2001

No options were granted in fiscal year 2001.

<TABLE>
<CAPTION>
<S>                     <C>                   <C>                  <C>                   <C>
----------------------- --------------------- -------------------- --------------------- --------------------
Name                    Number of             % of Total Options   Exercise Price        Expiration Date
                        Securities            Granted to
                        Underlying Options    Employees in
                        and Warrants          Fiscal Year(1)       ($/Sh)
----------------------- --------------------- -------------------- --------------------- --------------------
</TABLE>


                 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2001
                     AND OPTION VALUES AT DECEMBER 31, 2001

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, 2001.

                             Year-End Option Values
<TABLE>
<CAPTION>
                                                          Number of Securities Underlying         Value of Unexercised
                                                                Unexercised Options               In-the-Money Options
                                                                December 31, 2001(1)              December 31, 2001(1)
                                                       -----------------------------------    -----------------------------
                      Shares Aqcuired   Value                                                 Exercisable   Unexercisable
Name                  on Exercise (#)   Realized ($)   Exercisable (#)   Unexercisable (#)        ($)              ($)
----                  ---------------   ------------   ---------------   -----------------    -----------    --------------
<S>                   <C>               <C>               <C>                   <C>                <C>               <C>
Michael Pete                                                575,000             --                 --                --
Leslie Robins         1,850,000         $ 715,500         2,050,000             --                 --                --
John Cousins                                                600,000             --                 --                --
</TABLE>
-------------------
(1)  The value of the  unexercised  "in-the-money"  options is based on the fair
     market  value as of December  31, 2001 (the  closing  price on 12/31/01 was
     $0.024)  minus the  exercise  price,  multiplied  by the  numbers of shares
     underlying the option.

                            LONG-TERM INCENTIVE PLANS

As of December 31, 2001 there is no long-term incentive plan.


                              Director Compensation

Non-employee  directors of the Company  received in 2001 a $1500 annual retainer
and $1500 for each board meeting attended.


<PAGE>

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 December 31,
2001 by (1) each person known to the Company to beneficially  own more than five
percent  of the  Company's  Common  Stock,  (2)  each  Director,  (3) the  Named
Executive  Officers,  and (4) 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, 2001 there were  80,758,043  shares
outstanding.

<TABLE>
<CAPTION>
                                                                               Percent
                                                        Number of Shares     Beneficially
            Name of Beneficial Owner (1)               Beneficially Owned      Owned
            ----------------------------               ------------------      -----
<S>                                                       <C>                  <C>
Leslie Robins.......................................      14,731,546(2)        18.24%
Michael Pete........................................       1,250,000(3)         1.55%
John Cousins........................................         850,000(4)         1.05%
Harold Herman.......................................       1,379,778(5)         1.71%
Richard A. Josephberg...............................         200,000(6)         *
All directors and executive officers as a group (5
persons)                                                  14,281,500
</TABLE>
------------------
     *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  NE, Suite 5,
          Albuquerque New Mexico 87113.

     (2)  Includes  2,050,000  shares of common stock  issuable upon exercise of
          options  which are  currently  exercisable,  and  5,950,000  shares of
          common stock  issuable upon  exercise of warrants  which are currently
          exercisable.

     (3)  Includes  575,000  shares of common stock  issuable  upon  exercise of
          options which are currently  exercisable  and 500,000 shares of common
          stock   issuable  upon  exercise  of  warrants   which  are  currently
          exercisable.

     (4)  Includes  600,000  shares of common stock  issuable  upon  exercise of
          options which are currently  exercisable  and 100,000 shares of common
          stock   issuable  upon  exercise  of  a  warrant  which  is  currently
          exercisable.

     (5)  Includes  225,000  shares of common stock  issuable  upon  exercise of
          options which are currently  exercisable  and 600,000 shares of common
          stock   issuable  upon  exercise  of  warrants   which  are  currently
          exercisable..

     (6)  Includes  125,000  shares of common stock  issuable upon exercise of a
          warrant which is currently exercisable.

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

Section 16(a) of the Securities  Exchange Act of 1934, as amended,  requires our
officers and directors,  and persons who own more than 10% of a registered class
of our equity  securities to file with the  Securities  and Exchange  Commission
reports  detailing their ownership of existing equity  securities and changes in
such  ownership.  Officers,  directors  and greater  than 10%  stockholders  are
required by the  Securities  and Exchange  Commission  regulations to furnish us
with copies of all filed Section 16(a) forms.

     Based  solely on review of the  copies of such  forms  furnished  to us, we
believe that all officers,  directors and greater than 10% stockholders complied
with the filing  requirements  of Section 16(a),  except that Mr. Pete filed two
reports late with respect to ten transactions, Mr. Robins filed two reports late
with respect to  twenty-four  transactions,  Mr.  Cousins filed two reports late
with respect to nine transactions,


<PAGE>

Mr. Herman filed two reports late with respect to twenty-one  transactions,  Mr.
Josephberg  filed two reports  late with  respect to three  transactions,  and a
former  director and former 10% stockholder who resigned in November 1998 and is
no longer available never filed any reports.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In 1998 the Company issued 315,000 shares to Leslie S. Robins, an officer of the
Company,  in exchange for a note receivable of $29,000.  The note bears interest
at the rate of 7% with interest due  semiannually  and the principal due July of
2001.  In June 2000,  we issued to Leslie  Robins,  our  Chairman  of the Board,
Executive Vice President and Secretary,  1,000,000 shares of Common Stock as the
result of exercising  options with an exercise  price of $0.12 in exchange for a
promissory note in the principal amount of $120,000.  The note bears interest at
10% per annum due  quarterly  and the  principal is due in June 2003.  In August
2000,  we issued to Mr. Robins  450,000  shares of Common Stock as the result of
exercising  options with an exercise price of $0.12 in exchange for a promissory
note in the principal  amount of $54,000.  The promissory note bears interest at
10.0%  per annum due  quarterly  and the  principal  is due in August  2003.  In
September  2000, we issued to Mr. Robins  400,000  shares of Common Stock as the
result of exercising  options with an exercise  price of $0.12 in exchange for a
promissory  note in the principal  amount of $48,000.  The promissory note bears
interest at 10.0% per annum due  quarterly and the principal is due in September
2003.


<PAGE>

                                     PART IV

         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.


<TABLE>
<CAPTION>
Exhibits
<S>              <C>                                                           <C>
---------------- ------------------------------------------------------------- --------------------------------------
2                Plan of Acquisition, Reorganization, arrangement,             None
                 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 Form
                                                                               10-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 holders, including         Incorporated by reference to Exhibit
                 Indentures                                                    3.2
---------------- ------------------------------------------------------------- --------------------------------------
7                Opinion re: liquidation preference                            Incorporated by reference to Exhibit
                                                                               3.2
---------------- ------------------------------------------------------------- --------------------------------------
10.1             Incentive Stock Option Plan                                   Filed Herewith
---------------- ------------------------------------------------------------- --------------------------------------
10.2             Lease Agreement Advanced Optics Electronics, Inc. and JMP     Incorporated by reference to Exhibit
                 Company Inc                                                   10.2 of the Company's Registration
                                                                               Statement No.1000-24511 on Form
                                                                               10-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
---------------- ------------------------------------------------------------- --------------------------------------
27               Financial Data Schedule                                       Filed Herewith
---------------- ------------------------------------------------------------- --------------------------------------
</TABLE>


                               Reports on Form 8-K

During the 2001 fiscal year,  the Company filed a report on Form 8-K relating to
its change of accountants from Neff & Ricci to Atkinson & Co.


<PAGE>

<TABLE>
<CAPTION>
                   Appendix A to Item 601(c) of Regulation S-B
                       Commercial and Industrial Companies
                           Article 5 of Regulation S-X

      Item Number                              Item Description                          Amount
      -----------                              ----------------                          ------
<S>                      <C>                                                          <C>
5-02(1)                  Cash and cash items                                               $90,863
5-02(2)                  Marketable securities                                                 N/A
5-02(3)(a)(1)            Notes and accounts receivable-trade                            $1,570,564
5-02(4)                  Allowances for doubtful accounts                                      N/A
5-02(6)                  Inventory                                                             N/A
5-02(9)                  Total current assets                                           $1,661,427
5-02(13)                 Property, plant and equipment                                    $194,698
5-02(14)                 Accumulated depreciation                                       ($224,745)
5-02(18)                 Total assets                                                   $2,219,560
5-02(21)                 Total current liabilities                                      $1,211,196
5-02(22)                 Bonds, mortgages and similar debt                              $1,757,821
5-02(28)                 Preferred stock-mandatory redemption                                  N/A
5-02(29)                 Preferred stock-no mandatory redemption                               N/A
5-02(30)                 Common stock                                                      $80,837
5-02(31)                 Other stockholder's equity                                      8,909,918
5-02(32)                 Total liabilities and stockholder's equity                     $2,219,560
5-03(b)1(a)              Net sales of tangible products                                         $0
5-03(b)1                 Total revenues                                                         $0
5-03(b)2(a)              Cost of tangible goods sold                                    $1,393,073
5-03(b)2                 Total costs and expenses applicable to sales and revenues      $1,736,073
5-03(b)3                 Other costs and expenses                                         $249,069
5-03(b)5                 Provision for doubtful accounts and notes                             N/A
5-03(b)8                 Interest and amortization of debt discount                     ($280,695)
5-03(b)10                Income before taxes and other items                          ($1,985,142)
5-03(b)11                Income tax expense                                                    N/A
5-03(b)14                Income/loss continuing operations                            ($1,985,142)
5-03(b)15                Discontinued operations                                               N/A
5-03(b)17                Extraordinary items                                                   N/A
5-03(b)18                Cumulative effect-changes in accounting principals                    N/A
5-03(b)19                Net income or loss                                           ($1,985,142)
5-03(b)20                Earnings per share - primary                                     ($0.028)
5-03(b)20                Earnings per share - fully diluted                                    N/A
</TABLE>


<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: March 21, 2002

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)


<PAGE>


       FINANCIAL STATEMENTS AND REPORT
       OF INDEPENDENT CERTIFIED
       PUBLIC ACCOUNTANTS

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

                                December 31, 2001


<PAGE>

                                    CONTENTS

                                                                            Page

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

      FINANCIAL STATEMENTS

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

        STATEMENTS OF OPERATIONS.............................................3

        STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT........................4

        STATEMENTS OF CASH FLOWS...........................................5-6

        NOTES TO FINANCIAL STATEMENTS.....................................7-20


<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


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

We have audited the accompanying  balance sheet of Advanced Optics  Electronics,
Inc. (A  Development  Stage  Company),  as of December 31, 2001, and the related
statements of operations,  changes in stockholders'  deficit, and cash flows for
the years ended  December 31, 2001 and 2000 and for the period from May 22, 1996
(inception)  through  December  31, 1997.  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.  The  financial
statements of Advanced Optics  Electronics,  Inc. for the 1998 and 1999 portions
of the period from  inception  (May 22, 1996)  through  December 31, 2001,  were
audited by other  auditors  whose reports dated  February 18, 2000  expressed an
unqualified opinion on those statements.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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 our audit  provides a reasonable
basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Advanced Optics  Electronics,
Inc. (A  Development  Stage Company) as of December 31, 2001, and the results of
its  operations  and its cash flows for the years  ended  December  31, 2001 and
2000,  and for the  1996,  1997,  2000  and 2001  portions  of the  period  from
Inception  (May  22,  1996)  through  December  31,  2001,  in  conformity  with
accounting principles generally accepted in the United States of America.


Atkinson & Co., Ltd.
Albuquerque, New Mexico
January 31, 2002


                                      -1-
<PAGE>

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

BALANCE SHEET

                                December 31, 2001

<TABLE>
<CAPTION>
                                     ASSETS

<S>                                                                               <C>
     CURRENT ASSETS
       Cash and cash equivalents                                                  $    90,863
       Costs and estimated earnings in excess of
         billings on uncompleted contract                                           1,570,564
                                                                                  -----------

           Total current assets                                                     1,661,427
                                                                                  -----------

     PROPERTY AND EQUIPMENT, net                                                      194,698
                                                                                  -----------

     DEFERRED TAX ASSET                                                                    --
                                                                                  -----------

     OTHER ASSETS
       Intangible assets, net                                                          32,076
       Investment in Bio Moda, Inc.                                                   207,335
       Other assets                                                                    79,836
       Note receivable from officer and shareholder                                    44,188
                                                                                  -----------

           Total other assets                                                         363,435
                                                                                  -----------

           Total assets                                                           $ 2,219,560
                                                                                  ===========

     LIABILITIES AND STOCKHOLDERS' DEFICIT

   CURRENT LIABILITIES
     Accounts payable                                                             $   202,501
     Accrued liabilities                                                               71,058
     Current portion of long-term
       debt                                                                            29,637
     Allowance for loss on contract                                                   908,000
                                                                                  -----------

           Total current liabilities                                                1,211,196
                                                                                  -----------

   LONG-TERM DEBT, less current portion                                                16,584

   CONVERTIBLE DEBENTURES                                                           1,757,821

   STOCKHOLDERS' EQUITY
     Common stock - Authorized 150,000,000 shares, $.001 par value;
       80,837,337 shares issued and 80,520,537
       shares outstanding                                                              80,837
     Additional paid-in capital                                                     8,909,918
     Deficit accumulated during the development stage                              (9,492,580)
     Treasury stock, at cost                                                          (70,789)
     Notes receivable from officer for exercise of stock options                     (193,427)
                                                                                  -----------

           Total stockholders' deficit                                               (766,041)
                                                                                  -----------

           Total liabilities and stockholders' deficit                            $ 2,219,560
                                                                                  ===========
</TABLE>



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


                                      -2-
<PAGE>

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

                            STATEMENTS OF OPERATIONS

                     Years ended December 31, 2001 and 2000
                  and the Period from May 22, 1996 (Inception)
                            through December 31, 2001
<TABLE>
<CAPTION>
                                                                                             May 22, 1996
                                                                                              (Inception)
                                                                                                Through
                                                                                              December 31,
                                                          2001                2000                2001
                                                     ------------        ------------        ------------
<S>                                                  <C>                 <C>                 <C>
   Revenues
     Contract revenue                                $         --        $         --        $         --

   Costs and expenses
     General and administrative                        (1,059,595)         (2,364,975)         (5,997,305)
     Research and development                            (105,908)           (732,029)         (1,266,084)
     Asset impairment                                    (227,570)                 --            (227,570)
                                                     ------------        ------------        ------------

       Total costs and expenses                        (1,393,073)         (3,097,004)         (7,490,959)

   Estimated loss on contract                            (343,000)           (384,183)           (908,000)
                                                     ------------        ------------        ------------

   Operating loss                                      (1,736,073)         (3,481,187)         (8,398,959)
                                                     ------------        ------------        ------------

   Other income (expenses)
     Interest income                                       25,626              18,614              55,956
     Gain (loss) on marketable
       equity securities                                       --               4,191             (29,368)
     Other investment gains                                    --              59,784              59,784
     Loss on Bio Moda, Inc.                                    --                  --            (176,510)
     Gain (loss) on disposal of assets                      6,000             (10,306)             (4,306)
     Interest expense                                    (280,695)           (418,969)           (936,157)
                                                     ------------        ------------        ------------

       Total other expenses                              (249,069)           (346,686)         (1,030,601)
                                                     ------------        ------------        ------------

       Net loss before cumulative effect of
         change in accounting principle                (1,985,142)         (3,827,873)         (9,429,560)
                                                     ------------        ------------        ------------

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

   Provision for income tax benefit                            --                  --                  --
                                                     ------------        ------------        ------------

       Net loss                                      $ (1,985,142)       $ (3,827,873)       $ (9,492,580)
                                                     ============        ============        ============

   Net loss per share before cumulative effect
     of change in accounting principle               $      (.028)       $      (.066)       $      (.291)

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

   Net loss per share                                $      (.028)       $      (.066)       $      (.293)
                                                     ============        ============        ============

   Weighted average shares outstanding                 70,190,322          58,029,724          32,435,598
                                                     ============        ============        ============
</TABLE>

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


                                      -3-
<PAGE>

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

             STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

                  For the Period from May 22, 1996 (Inception)
                            through December 31, 2001

<TABLE>
<CAPTION>
                                                                             Common Stock                    Preferred Stock
                                                                   ------------------------------         -----------------------
                                                                                           Par                              Par
                                                                      Shares              Value            Shares          Value
                                                                   -----------           --------         --------        -------
<S>                                                                 <C>                    <C>              <C>            <C>
Balance, May 22, 1996                                                       --           $     --             --           $--
Stock issued to incorporators for cash                                 500,000                500             --            --
Stock issued for the net assets of PLZ Tech, Inc.                    4,500,000              4,500             --            --
Net loss                                                                    --                 --             --            --
                                                                   -----------           --------           ----           ---
Balance, December 31, 1996                                           5,000,000              5,000             --            --
Stock issued for cash and services                                   2,281,212              2,281             --            --
Net loss                                                                    --                 --             --            --
                                                                   -----------           --------           ----           ---
Balance, December 31, 1997                                           7,281,212              7,281             --            --
Stock issued for cash                                               10,979,275             10,979             --            --
Stock issued for services                                            2,751,000              2,751             --            --
Stock issued in exchange for note receivable                           315,000                315             --            --
Purchase and retirement of treasury stock                             (472,200)              (472)            --            --
Net loss                                                                    --                 --             --            --
                                                                   -----------           --------           ----           ---
Balance, December 31, 1998                                          20,854,287             20,854             --            --
Stock issued for cash                                                8,681,624              8,682             --            --
Stock issued for services                                           17,094,313             17,094             --            --
Intrinsic value of beneficial conversion feature of notes
  Payable                                                                   --                 --             --            --
Fair value of warrants related to notes payable                             --                 --             --            --
Purchase and retirement of treasury stock                             (489,251)              (489)            --            --
Purchase of treasury stock                                                  --                 --             --            --
Sale of treasury stock                                                      --                 --             --            --
Net loss                                                                    --                 --             --            --
                                                                   -----------           --------           ----           ---
Balance, December 31, 1999                                          46,140,973             46,141             --            --
Stock issued for cash                                                  782,000                782            710             1
Stock issued for services                                            3,955,202              3,955             --            --
Purchase of treasury stock                                                  --                 --             --            --
Sale of treasury stock                                                      --                 --             --            --
Exercise of stock options for notes receivable                       1,850,000              1,850             --            --
Amortization of discount on convertible preferred stock                     --                 --             --            --
Exercise of preferred stock conversion feature                       9,200,000              9,200             --            --
Issuance of convertible debentures                                          --                 --             --            --
Exchange of preferred stock for convertible debentures                      --                 --           (710)           (1)
Net loss                                                                    --                 --             --            --
                                                                   -----------           --------           ----           ---
Balance, December 31, 2000                                          61,928,175             61,928             --            --
Stock issued for cash                                                1,382,778              1,383             --            --
Stock issued for services                                           10,461,498             10,461             --            --
Purchase of treasury stock                                                  --                 --             --            --
Amortization of discount on convertible preferred stock                     --                 --             --            --
Stock issued upon debt conversion                                    7,064,886              7,065             --            --
Net loss                                                                    --                 --             --            --
                                                                   -----------           --------           ----           ---

Balance, December 31, 2001                                          80,837,337           $ 80,837             --           $--
                                                                   ===========           ========           ====           ===

<CAPTION>

                                                                         Treasury Stock
                                                                   --------------------------
                                                                                                         Additional
                                                                                                           Paid-In
                                                                    Shares             Cost               Capital
                                                                   ---------         ---------          -----------
<S>                                                                <C>                 <C>                <C>
Balance, May 22, 1996                                                    --           $     --           $        --
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 on 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                   --                 --              (641,780)
                                                                         --                 --               (59,583)
Net loss                                                                 --                 --                    --
                                                                   --------           --------           -----------
Balance, December 31, 2000                                          (65,100)           (54,574)            8,139,907
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 preferred stock                  --                 --               143,875
Stock issued upon debt conversion                                        --                 --               147,008
Net loss                                                                 --                 --                    --
                                                                   --------           --------           -----------
Balance, December 31, 2001                                         (316,800)          $(70,789)          $ 8,909,918
                                                                   ========           ========           ===========

<CAPTION>


                                                                   Equity (Deficit)          Notes               Total
                                                                     During the           Receivable          Stockholders'
                                                                    Development              From                Equity
                                                                       Stage                Officer             (Deficit)
                                                                   --------------         -----------         ------------
<S>                                                                   <C>                   <C>                 <C>
Balance, May 22, 1996                                                $        --           $      --           $        --
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                                --            (193,427)               28,573
Amortization of discount on 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                        --                  --              (641,781)
                                                                              --                  --               (59,583)
Net loss                                                              (3,827,873)                 --            (3,827,873)
                                                                     -----------           ---------           -----------
Balance, December 31, 2000                                            (7,507,438)           (193,427)              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 preferred stock                       --                  --               143,875
Stock issued upon debt conversion                                             --                  --               154,073
Net loss                                                              (1,985,142)                 --            (1,985,142)
                                                                     -----------           ---------           -----------
Balance, December 31, 2001                                           $(9,492,580)          $(193,427)          $  (766,041)
                                                                     ===========           =========           ===========
</TABLE>

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

                                       -4-


<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
                     Years ended December 31, 2001 and 2000
                  and the Period from May 22, 1996 (Inception)
                            through December 31, 2001
<TABLE>
<CAPTION>
                                                                                                               May 22, 1996
                                                                                                                (Inception)
                                                                                                                  Through
                                                                                                                December 31,
                                                                        2001                  2000                   2001
                                                                    -----------           -----------           -----------
<S>                                                                 <C>                   <C>                   <C>
Cash flows from operating activities
  Net loss                                                          $(1,985,142)          $(3,827,873)          $(9,492,580)
  Adjustments to reconcile net loss to net cash
    provided by operating activities
      Intrinsic value of conversion features                            143,875               466,728               610,603
      Depreciation                                                       77,026                80,572               352,124
      Amortization                                                       40,938                51,543                92,481
      Write-off of organization costs                                        --                    --                63,020
      Amortization of discounts on
        convertible notes                                                    --               119,619               295,209
      (Gain) loss on marketable securities                                   --                (4,191)               29,368
      (Gain) loss on disposal of assets                                  (6,000)               10,306                 4,306
      Loss on Bio Moda, Inc.                                                 --                    --               176,510
      Issuance of common stock for services                             422,745             1,730,152             3,935,782
      Issuance of notes for services                                         --                    --                50,000
      Increase in excess of costs and earnings
        over billings on uncompleted contract                          (425,075)             (498,614)           (1,570,564)
      Interest accrued on convertible debentures                        121,217                    --               121,216
      Asset impairment                                                  227,570                    --               227,570
      (Decrease) in other receivables                                        --                    --               (79,875)
      (Decrease) in inventory                                                --                    --               (35,293)
      Increase in allowance for loss on contract                        343,000               407,124               908,000
      Increase in accrued liabilities and accounts payable               57,333               135,846               273,559
      Other non-cash expenses                                                --                33,447                33,447
      Accrued interest                                                       --                30,667                30,667
                                                                    -----------           -----------           -----------

         Net cash provided by (used in)
           operating activities                                        (982,513)           (1,264,674)           (3,974,450)
                                                                    -----------           -----------           -----------

Cash flows from investing activities
  Purchase of equipment                                                 (30,349)              (39,903)             (382,592)
  Proceeds from sale of equipment                                        23,800                    --                23,800
  Investment in Bio Moda, Inc.                                               --                    --              (383,845)
  Sale of marketable securities                                              --                40,665                40,665
  Purchase of marketable securities                                          --                    --               (70,034)
  Decrease (increase) in certificate of deposits                        107,426                (2,844)                   --
  Purchase of other assets                                              (12,447)             (136,705)             (245,579)
  Redemption of (investment in) Wizard Technologies                          --                65,000                    --
                                                                    -----------           -----------           -----------
        Net cash provided by (used in)
         investing activities                                            88,430               (73,787)           (1,017,585)
                                                                    -----------           -----------           -----------
</TABLE>

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


                                      -5-
<PAGE>

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

                      STATEMENTS OF CASH FLOWS - CONTINUED

                     Years ended December 31, 2001 and 2000
                  and the Period from May 22, 1996 (Inception)
                            through December 31, 2001
<TABLE>
<CAPTION>
                                                                                                       May 22, 1996
                                                                                                        (Inception)
                                                                                                         Through
                                                                                                        December 31,
                                                                2001                2000                   2001
                                                             ---------           -----------           -----------
<S>                                                          <C>                 <C>                   <C>
Cash flows from financing activities
  Additions to notes payable                                        --                50,000               622,776
  Payments on notes payable and capital
    lease obligations                                          (51,658)              (50,532)             (223,766)
  Issuance of capital stock                                     68,227             1,013,493             3,628,211
  Collection of notes receivable from officer                      305                28,573                28,878
  Sale of treasury stock                                            --                77,313               112,777
  Purchase of treasury stock                                   (16,215)              (46,486)             (145,978)
  Proceeds from issuance of convertible instruments            575,000               485,000             1,060,000
                                                             ---------           -----------           -----------

     Net cash provided by financing activities                 575,659             1,557,361             5,082,898
                                                             ---------           -----------           -----------

     NET INCREASE (DECREASE) IN CASH                          (318,424)              218,900                90,863

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

Cash and cash equivalents, end of period                     $  90,863           $   409,287           $    90,863
                                                             =========           ===========           ===========

                                           SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES

Cash paid for interest                                       $  15,603           $        --           $   204,338
                                                             =========           ===========           ===========

                                             SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Conversion of debentures into common stock                   $ 154,073           $        --           $        --
                                                             =========           ===========           ===========
</TABLE>

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


                                      -6-

<PAGE>


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

                          NOTES TO FINANCIAL STATEMENTS

                                December 31, 2001


               NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Description of Business

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

The  Company  has  obtained  a  contract  to  produce  two  outdoor  advertising
billboards using its flat panel display technology. This is the first commercial
application of the Company's technology.  The success of the Company will depend
on its ability to commercialize its technology and complete this contract. As of
December 31, 2001, completion of this contract was behind schedule.

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

Cash and Cash Equivalents

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

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

                                      -7-


<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

     Revenue and Cost Recognition

     During 2001,  the Company  accounted  for revenue and costs  related to its
     long-term contract in process by the completed-contract  method, whereas in
     all prior  years,  and during the period from May 22, 1996  (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 all prior years, and
     of the period from May 22, 1996 (inception) to December 31, 1999, have been
     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  May  22,  1996
     (inception) to December 31, 1999.

     Under the completed  contract method of accounting,  contract  revenues and
     costs are recognized when the contract is completed,  with estimated losses
     recognized when it becomes evident that contract costs will exceed contract
     revenues.  Contract  costs include all direct  material and labor costs and
     those  indirect  costs  related to contract  performance,  such as indirect
     labor, supplies, overhead, equipment depreciation, and interest.

     The  contract  to produce two outdoor  advertising  billboards  totals $1.7
     million,  with $885,000  assigned to the first unit.  An estimated  loss of
     approximately   $908,000  from  production  of  the  first  unit  has  been
     recognized  through  December 31, 2001.  The  Company's  estimated  cost to
     complete  as of  December  31,  2001 is  $132,563,  which is expected to be
     funded with cash, billings on the contract, and contributed capital.

     In accordance with the contract terms, the anticipated delivery date of the
     first  unit is  October  15,  2001.  Unanticipated  delays  have  postponed
     delivery  which is now  estimated  to occur by June 15,  2002.  During  the
     contract  period,  the  Company is  entitled  to bill the  customer  as the
     following milestones are met:

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

     Billings and collections through December 31, 2000 have totaled $89,873.


                                      -8-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                December 31, 2001

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

     Revenue and Cost Recognition - Continued

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

     Investment

     As of December 31, 2001, the Company owned 13.6% of the outstanding  common
     stock of Bio Moda, Inc., an unconsolidated  investment  accounted for using
     the cost method.  Prior to December 31, 2000,  the Company's  ownership was
     sufficient for the investment to be accounted for using the equity method.

     The  carrying  value  of the  investment  as of  December  31,  2001 is the
     original investment cost adjusted by the Company's  proportionate  interest
     in losses reported by the investee through December 31, 2000.

     Property, Plant and Equipment

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

     Other Assets

     Intangible  assets  are  carried at  historical  cost,  net of  accumulated
     amortization.  Goodwill is amortized over 10 years.  Debt origination costs
     are amortized over 3 years.

     Certain assets previously classified as inventory are no longer used in the
     Company's on-going production processes,  and are held for sale. Management
     estimates  that  the net  realizable  value of these  items  exceeds  their
     carrying value as of December 31, 2001.

     Authorized Preferred stock

     The  Company  has  authorized  10,000,000  shares of $.001 par value,  7.5%
     cumulative  preferred  stock.  As of December 31, 2001 and 2000,  no shares
     were issued or outstanding.


                                      -9-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

     Research and Development Costs

     Research and development costs are expensed as incurred.

     Income Taxes

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

     Loss Per Share

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

     Use of Estimates

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

     Stock-Based Compensation

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


                                      -10-
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED

                               December 31, 2001

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

     Reclassifications

     Certain  reclassifications have been made to 2000 information to conform to
     the 2001 presentation.

     Comprehensive Income

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


NOTE 2. NOTES RECEIVABLE

     Notes receivable at December 31, 2001, consist of the following:

         Due from officer                                  $   29,188
         Note receivable from former shareholder,
           interest at 8% and due on demand                    15,000
                                                           ----------

                                                           $   44,188
                                                           ==========

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

NOTE 3. INVESTMENTS

     As of  December  31,  2001,  the  Company  owned  791,707  or  13.6% of the
     5,811,319 outstanding shares of Bio Moda, Inc.

     Bio Moda,  Inc. is a development  stage company  involved  primarily in the
     development  of  technology  for the early  detection of lung cancer.  As a
     development stage company,  Bio Moda, Inc. has not had any revenues and, as
     of December 31, 2001, was in the process of conducting clinical trials.

     There is currently no active market for the common stock of Bio Moda,  Inc.
     The ultimate  value of the  Company's  investment  in Bio Moda,  Inc.  will
     depend on its ability to complete its research and either  commercialize or
     sell its proprietary technology.


                                      -11-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001


NOTE 3.  INVESTMENTS - CONTINUED

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

         Original cost                                     $    383,845
         Share of net loss                                     (134,010)
         Amortization of excess of cost
           over book value                                      (42,500)
                                                           ------------

         Carrying value of investment in Bio Moda, Inc.    $    207,335
                                                           ============

     In August 1999,  the Company  issued  200,000 shares of its common stock to
     Wizard  Technologies,  Inc.  for $88,580.  The Company then  purchased a 10
     percent  ownership  in Wizard for  $65,000  with the  proceeds.  During the
     quarter  ending  March 31,  2000,  the  Company  sold all of its  shares of
     Wizard's common stock to Wizard for its original investment of $65,000.

NOTE 4. LONG-TERM DEBT

     As of December 31, 2001, the Company's long-term debt was as follows:

        Notes  payable  to a  financial
          institution,  due in  monthly
          payments  aggregating  $3,221
          through October 2003, bearing
          interest  at bank  prime rate
          plus 1.5%,  collateralized by
          operating   equipment  and  a
          vehicle                                              $ 46,221

          Less:  Current portion                                (29,637)
                                                           ------------

                                                           $     16,584
                                                           ============

          Future  principal  payments  on  long-term  debt for the years  ending
          December 31, are as follows:

              2002                                         $     29,637
              2003                                               16,584
                                                           ------------

                                                           $     46,221
                                                           ============


                                      -12-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001

NOTE 5. CONVERTIBLE DEBENTURES

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

     The intrinsic value of the conversion  feature of the principal and accrued
     interest  was  estimated  to be  $174,610.  This  has been  recorded  as an
     increase  in  paid-in  capital  and a  discount  to the  convertible  notes
     payable,  with related  amortization being charged to interest expense. The
     discount is being amortized over a one-year  period,  which is management's
     estimate of time before any conversion  will be exercised.  The convertible
     notes also  include  detachable  warrants  for the  purchase of  12,500,000
     shares of common  stock at the lower of 75 percent of the closing bid price
     of a share of common  stock at the time of exercise or  September  1, 1999.
     The  warrants   expire  on  June  3,  2002.   Management   estimates   that
     approximately half the warrants will be exercised prior to expiration.

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

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

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


                                      -13-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001

NOTE 5. CONVERTIBLE DEBENTURES - CONTINUED

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

     The intrinsic value of the conversion  feature of the principal and accrued
     interest  was  estimated  to be  $238,830.  This  has been  recorded  as an
     increase  in  paid-in  capital  and a  discount  to the  convertible  notes
     payable,  with related  amortization being charged to interest expense. The
     discount is being amortized over a one-year  period,  which is management's
     estimate of time before any conversion  will be exercised.  The convertible
     notes also include  detachable  warrants for the purchase of 500,000 shares
     of common  stock.  Management  has estimated the fair market value of these
     warrants  at $25,000  and  recorded  this  amount as an increase in paid-in
     capital and a discount to the  convertible  notes payable.  The discount is
     being amortized over the three-year life of the notes.

     On November 7, 2000,  the Company  entered into an agreement  that modified
     the outstanding  convertible  preferred agreements entered into on March 8,
     2000 and August 2, 2000.  The new  agreement  resulted  in the  exchange of
     outstanding preferred stock plus additional consideration for the Company's
     7.5 percent  convertible  debentures due November 7, 2003. The total amount
     of the debentures is $740,667,  including accrued interest of $30,667.  The
     debentures are convertible into shares of common stock at the lesser of the
     stocks  closing  price on March 8, 2000 and 77.5  percent of the average of
     the five lowest closing bid prices for 20 days before November 2, 2000.

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

     During 2001, the Company issued additional  convertible debentures totaling
     $500,000. The debentures are convertible into shares of common stock at the
     lesser of the stocks  closing price on the and 75 percent of the average of
     the three  lowest  closing  bid  prices  for 30 days  before  August 30 and
     November  19, 2001 or 80% of the average of the three  lowest  closing bids
     during the 90 days prior to the conversion date. The intrinsic value of the
     conversion feature was estimated to be $143,875.


                                      -14-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001

NOTE 5. CONVERTIBLE DEBENTURES - CONTINUED

     Also  during  2001,  7,064,886  shares of common  stock  were  issued  upon
     conversion of $154,073 of debenture principal.

                   NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

          Long-term obligations.  Notes payable to bank have variable rates that
          reflect  currently  available  terms for similar debt, and accordingly
          the carrying values are reasonable estimates of their fair values.

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

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

     The carrying amounts and fair values of the Company's financial instruments
     as of December 31, 2001 are as follows:


                                                                     Estimated
                                                      Carrying         Fair
                                                      Amount           Value
                                                    ----------      ----------
         Cash and cash equivalents                  $   90,863      $   90,863
         Costs and estimated loss in excess
           of billings on uncompleted contract       1,570,564       1,570,564
         Notes receivable                               44,188          44,188
         Accounts payable                              202,501         202,501
         Long-term obligations                          46,221          46,221
         Convertible debentures                      1,757,821       1,757,821
         Notes receivable from officer                 193,427         193,427


                                      -15-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001

NOTE 7. INCOME TAXES

     As of December 31, 2001, the Company had a net operating loss carryforwards
     of  approximately  $9,500,000  which expire in varying amounts between 2016
     and 2021.  Realization of this potential future tax benefit is dependent on
     generating  sufficient  taxable  income  prior  to  expiration  of the loss
     carryforward.  The deferred tax asset related to this potential  future tax
     benefit has been offset by a valuation  allowance in the same  amount.  The
     amount of the deferred tax asset  ultimately  realizable could be increased
     in the  near  term  if  estimates  of  future  taxable  income  during  the
     carryforward period are revised.

NOTE 8. OPERATING LEASES

     The  Company  occupies  administrative,   engineering,   and  manufacturing
     facilities under operating leases which expire in February 2002. The leases
     call for aggregate minimum monthly lease payments of $4,225.  Lease expense
     totaled $50,700 and $48,975 in 2001 and 2000, respectively, and $147,909 in
     the period from May 22, 1996 (inception) through December 31, 2001.

     Future minimum lease payments  under the long-term  operating  lease are as
     follows:

                2002     $   4,225
                         =========

NOTE 9. EQUITY TRANSACTIONS

     The  Company was  initially  capitalized  through  the  issuance of 500,000
     shares for $25,000 in cash. In November 1996, the Company issued  4,500,000
     shares  in  exchange  for the  outstanding  shares of PLZ  Tech,  Inc.  The
     transaction  was  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.

     During  1997,  the  Company  issued  2,281,212  shares of stock in a public
     offering, primarily for cash.

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


                                      -16-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001

NOTE 9. EQUITY TRANSACTIONS - CONTINUED

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

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

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

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

     During the year ending  December 31, 2000,  the Company sold 782,000 shares
     of its common stock for $368,495 in cash,  and issued  3,955,203  shares of
     its common stock for services from contractors,  officers and others, which
     were  valued at  $1,726,197.  The value of the  services is included in the
     costs and expenses on the Statements of Operations.

     Also during 2000,  the Company sold 70,000 shares of its treasury stock for
     $77,313 and repurchased  63,500 shares for $46,486.  The repurchased shares
     have been recorded at cost.

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


                                      -17-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001

NOTE 9. EQUITY TRANSACTIONS - CONTINUED

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

     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.

     Also,  during 2000,  the Company  issued 160 shares of preferred  stock for
     $160,000 in cash.

     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 its common  stock for
     services  from  contractors,  officers  and  others,  which were  valued at
     $104,075. The value of such services is included with costs and expenses in
     the statement of operations

     During the year ended  December 31, 2001, the Company  repurchased  251,700
     shares of its outstanding  stock for $16,215 in cash. These shares remained
     in the treasury and were valued at cost.

     On January 4, 1999,  the Company  established  the  Incentive  Stock Option
     Plan. Pursuant to the Plan, up to 10,000,000 shares of the Company's common
     stock may be granted as options to key  employees.  The shares  issued upon
     exercise of the options may be  authorized  and  unissued  shares or shares
     held by the Company in its  treasury.  The exercise  date of the options is
     based on the related  agreement as approved by the Board of Directors.  The
     Incentive  Stock  Option Plan expires on January 4, 2009.  Options  awarded
     under the Plan have  four-year  terms and vest ratably over one to two year
     periods.  As of December 31, 2001,  there were 9,175,000  shares  available
     under the Plan for future awards.


                                      -18-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001

NOTE 10. STOCK PLANS

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

                                              2000                    1999
                                         --------------         ---------------
     Net loss, as reported              $   (3,827,873)         $   (2,765,862)
     Proforma net loss                      (4,203,472)             (2,980,691)

     Loss per share, as reported                (0.066)                 (0.073)
     Proforma loss per share                    (0.072)                 (0.079)

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

     During the year  ended  December  31,  2001,  there  were no stock  options
     granted,  exercised or cancelled,  resulting in total stock options granted
     and  unexercised  of 3,825,000 as of December 31, 2001.  The shares  issued
     upon  exercise of the  options may be  authorized  and  unissued  shares or
     shares held by the Company in its  treasury.  The exercise  date of options
     granted is based upon the  related  agreement  as  approved by the Board of
     Directors.

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

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


                                      -19-
<PAGE>

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

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2001

NOTE 10. STOCK PLANS - CONTINUED
                                                      Weighted
                                      Warrants         Average
                                        and           Exercise
                                      Options          Prices        Exercisable
                                    -----------      -----------     ----------
Balance, December 31, 1997             153,954          $0.58           153,954
Balance, December 31, 1998             153,954           0.58           153,954

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

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

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

Balance, December 31, 2000          11,100,000           0.27         9,517,500

     Cancelled                              --             --
     Replacement                            --             --
     Granted                                --             --
     Exercised                              --             --
                                    ----------

Balance, December 31, 2001          11,100,000          $0.27         9,517,500
                                    ==========

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

NOTE 11. ACCOUNTING CHANGES

     The  financial  statements  for the year ended  December  31, 2000 has been
     retroactively  restated  to give effect to a change in  accounting  for the
     Company's long-term contract.  This change had no effect on net loss or net
     loss per share.  Additionally,  the financial statements for the year ended
     December 31, 2000 have been restated to give effect to a change in estimate
     of the  Company's  deferred  tax asset and to changes in  estimated  useful
     lives of intangible assets. The effect of these changes was to increase net
     loss for the year ended December 31, 2000 by $627,938,  and to increase net
     loss per share by $0.01.


                                      -20-