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, 2002         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, 2002 based upon the average bid and asked prices of such
stock on that date was $3,020,454. The number of issuer's shares of Common Stock
outstanding as of December 31, 2002 was 592,245,903.

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


<PAGE>


                                TABLE OF CONTENTS

Forward Looking Statements

                                     PART I

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

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.........9
Item 6.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations.......................................12
Item 7.  Financial Statements............................................16
Item 8.  Changes in and Disagreements with Accountants...................16

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act...............17
Item 10. Executive Compensation..........................................19
Item 11. Security Ownership of Certain Beneficial Owners and Management..20
Item 12. Certain Relationships and Related Transactions..................21
Item 13. Exhibits, Financial Statements and Financial Statement
         Schedules, and Reports on Form 8-K..............................22
Item 14. Controls and Procedures.........................................23


                                   SIGNATURES

                                       2

<PAGE>


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

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

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

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


                                     PART I

                         ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

Advanced Optics Electronics, Inc. (ADOT-OTC BB) is a technology company based in
Albuquerque,  New Mexico.  Its primary focus is 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
is currently investigating other applications of its 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

                                       3
<PAGE>

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.  There are other  applications and  technologies  that the company has
been  investigating  in the past year such as helmet  displays using a different
approach to our core technical patents.

COMPANY BACKGROUND

         We were  incorporated  as a  Nevada  corporation  on May 22,  1996.  In
November 1996, we acquired all the assets of PLZTech, Inc., including all of its
patents and research and development  activities.  The transaction was accounted
for as a purchase, and all assets acquired and liabilities assumed were recorded
at their fair market value, 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 2002,  which was .08% higher than the  previous  year.
This was flat growth in 2002 but indicates  the strength of the segment  because
it did not decrease.  Merrill Lynch predicts that in 2012,  $8.6 billion will be
spent on outdoor  advertising  media,  up  two-thirds  from the  projected  $5.2
billion  for  2002.The  billboard  segment  of the  outdoor  advertising  market
represents 60% of total outdoor  expenditures  and topped $3.18 billion in 2002.
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
2002. 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.

                                       4
<PAGE>

         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.

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

                                       5
<PAGE>

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

MANUFACTURING, DISTRIBUTION, INSTALLATION AND MAINTENANCE OF OUR PRODUCTS

         We have 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.

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 2002.  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.

                                       6
<PAGE>

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 such as
lap-top  computer  screens,  and  cathode ray tubes such as  traditional  TV set
display  technology,  which currently dominate the electronic  billboard market.
However,  we believe that the products based on these  technologies  are limited
and new technologies being developed, including ours, will significantly improve
the  performance  of  electronic  displays in the future and  displace  existing
products  in  the  electronic   billboard  market.  Many  companies,   including
Daktronics,  Inc., SI Diamond Technology, Inc. and Universal Display Corporation
have, or are developing,  other  technologies  utilizing carbon field emissions,
incandescent  lamps,  inorganic  electroluminescence,   organic  light  emitting
diodes,  polymeric  light  emitting  diodes,  gas plasma and vacuum  fluorescent
lamps.  Furthermore,  although  we believe  our  products  will be  superior  to
established  advertising  billboard products, we cannot assure you that business
customers will prefer our technology sufficiently to be willing to pay for it at
the price at which it will be offered.  We recently  set the sales prices of our
flat panel displays measuring approximately three meters by two meters and three
meters by eight meters at $395,000 and $1,490,000, respectively.

         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;

                                       7
<PAGE>

     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.  Although we have been
awarded the patent and 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 2002, which ended December 31, 2002, $65,989 was spent on research and
development  activities.  In 2001 $105,908 was spent on research and development
activities.   This  reduction   reflects  our  transition  from  development  to
production  and  manufacturing  and  attention to cost cutting  initiatives.  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.

                                       8
<PAGE>

Employees
---------

As of December 31, 2002, the Company has approximately 5 full-time employees and
four part-time  employees.  The Company also contracted with other personnel and
subcontractors for various projects on an as-needed basis.

Other Information
-----------------

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

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,
approximately 500 square feet of which is sublet to Biomoda,  Inc.. The facility
is in good  condition  with no  material  defects or deferred  maintenance.  The
facility  is  leased  from  unaffiliated  third  parties  under a lease  that is
currently on month to month status.  Management is in the process of negotiating
for a larger and more efficient space.

ITEM 3.  LEGAL PROCEEDINGS

The  Company  may be  involved  from time to time in various  claims,  lawsuits,
disputes with third parties,  actions involving allegations of discrimination or
breach of contract actions in the normal course of the business operations.  The
Company  is  currently  not  involved  in  any  such  litigation  or  any  legal
proceedings pending, that management believes could have material adverse affect
on the Company's financial position or results of operations.

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, 2002.

                                     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
("OTCBB")  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.

                                       9
<PAGE>

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        $0.26              $.11
                2nd Quarter          .16              0.05
                3rd Quarter        0.085             0.028
                4th Quarter         0.04              0.02
Fiscal 2002:
                1st Quarter       $0.032            $0.014
                2nd Quarter        0.014             0.003
                3rd Quarter        0.007            0.0006
                4th Quarter        0.082            0.0007


As of March 14, 2003 the Company estimates that there were  approximately  9,800
shareholders and the closing price of the Company's common stock was $.0022. The
Company  has  never  paid  cash  dividends  on its  Common  Stock  and  does not
anticipate paying cash dividends in the near future.

Penny Stock
-----------

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

                                       10
<PAGE>

Consequently,  these rules may  restrict the ability of  broker-dealer  to trade
and/or  maintain  a market in the  Company's  Common  Stock and may  affect  the
ability of the Company's shareholders to sell their shares.

Recent Sales of Unregistered Securities
---------------------------------------

Common Stock
------------

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

During the year ended December 31, 2002, the Company issued 96,048,000 shares of
common stock for services,  which were valued at $155,321  (based on the closing
market  price on the date of  grant,  which was less than  $0.01).  The  Company
recorded such amounts in the accompanying statement of operations.

During the year ended December 31, 2002, the Company issued 10,820,000 shares of
common stock for services,  which were valued at $123,318  (based on the closing
market  price on the date of  grant,  which  approximated  $0.01).  The  Company
recorded such amounts in the accompanying statement of operations.

During the year ended December 31, 2002, the Company issued  8,900,000 shares of
common stock for services,  which were valued at $203,430  (based on the closing
market  price on the date of  grant,  which  approximated  $0.02).  The  Company
recorded such amounts in the accompanying statement of operations.

During the year ended  December 31, 2002,  the Company  issued 205,850 shares of
common stock  (based on the fair market value on the dates of grant,  which were
less than $0.01) held as treasury stock for cash totaling $1,151.

During the year ended  December 31, 2002,  the Company  issued 225,150 shares of
common  stock  (based on the fair  market  value on the  dates of  grant,  which
approximated $0.01) held as treasury stock for cash totaling $4,448.

During the year ended  December 31, 2002,  the Company  issued  76,800 shares of
common  stock  (based on the fair  market  value on the  dates of  grant,  which
approximated $0.03) held as treasury stock for cash totaling $2,230.

In January 2002, the Company granted  1,500,000 options to three officers of the
Company.  The exercise  price of the options is $0.02 per share (the fair market
value  of  the  Company's  common  stock  on  the  date  of  grant)  and  vested
immediately.  The  options  expire  four years from the date of grant.  As noted
above,  1,100,000 of the options were  exercised  during the year ended December
31, 2002.

In August 2002, in connection with a settlement  agreement,  the Company granted
750,000 options to a former  employee of the Company.  The exercise price of the
options is $0.09 per share and were valued at $0 (using the Black Scholes option
pricing model). The options vested upon grant and expire in August 2003.

                                       11
<PAGE>

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

Equity Compensation Plans
-------------------------

<TABLE>
<S>              <C>                 <C>                    <C>

|---------------------------------------------------------------------------------------------|
|                           EQUITY COMPENSATION PLANS                                         |
|-----------------|-------------------|----------------------|--------------------------------|
|Plan Category    | Number of         | Weighted-Average     | Remaining available for future |
|                 | Securities to be  | Exercise Price of    | issuance under equity          |
|                 | issued upon       | outstanding Options, | compensation plans (excluding  |
|                 | exercise of       | Warrants and Rights  | securities reflected in        |
|                 | outstanding       | ($)                  | column (A)) (#)                |
|                 | Options, Warrants |                      |                                |
|                 | and Rights (#)    |                      |                                |
|-----------------|-------------------|----------------------|--------------------------------|
|Equity           | 4,975,000         | $0.23                | 1,925,000                      |
|Compensation     |                   |                      |                                |
|Plans approved   |                   |                      |                                |
|by security      |                   |                      |                                |
|holders          |                   |                      |                                |
|-----------------|-------------------|----------------------|--------------------------------|
|Equity           | 8,646,000         | $0.25                | N/A                            |
|Compensation     |                   |                      |                                |
|Plans not        |                   |                      |                                |
|approved by      |                   |                      |                                |
|security holders |                   |                      |                                |
|-----------------|-------------------|----------------------|--------------------------------|
|Total            | 13,621,000        |                      | 4,675,000                      |
|-----------------|-------------------|----------------------|--------------------------------|

</TABLE>

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 may provide additional liquidity.

Biomoda is a biomedical development company. The Company's ownership of Biomoda,
as of December 31, 2002, was 18.6%.  No immediate  family members of officers or
directors  of  Advanced  Optics  Electronics,  Inc.  are  securities  holders of
Biomoda.  Biomoda is currently in the securities  registration process.  Biomoda
has filed a revised SB2 registration  statement with the Securities and Exchange
Commission.  Biomoda  is  offering  5,000,000  shares at $6.00 per share (for an
aggregate  offering of $30,000,000).  It is anticipated that a public market for
Biomoda's securities will be created in the second quarter of 2003. A market for
Biomoda's shares has not been established,  therefore the potential value of the
Company's  investment cannot be measured.  There can be no assurance that if the
Company was to sell such  investment that it would be able to on terms favorable
to the  Company  or for the  initial  offering  price.  Factors  such  dilution,
blockage and a lack of a market may be encountered.

                                       12

<PAGE>

During the fiscal year ended December 31, 2002 $7,240 was spent for the purchase
of equipment.  Product development  expenditures were $65,989 in 2002. Funds for
operations,  product development and capital expenditures were provided from the
sale of securities and cash reserves.

General - Overall, the Company had negative cash flows of $41,005 for the twelve
months ended  December 31, 2002  resulting  from  $513,159 used in the Company's
operating  activities,  $16,742 used in the Company's  investing  activities and
$488,896 of cash provided by financing activities.

Cash Flows from Operating  Activities - Net cash used in operating activities of
$513,159 for the twelve  months ended  December  31, 2002 was  primarily  due to
$880,778 in operating expenses,  of which $814,789 is General and Administrative
and  $65,989  is  Research  and  Development.  Primary  non-cash  components  of
Operating  Expenses include $482,069,  representing  115,768,000 shares of stock
issued for professional  services rendered and increase in allowance for loss on
contract for $297,000.

Cash Flows from Investing  Activities - Net cash used in investing activities of
$16,742 for the twelve  months ended  December 31, 2002 was  primarily  due to a
$38,432  advance to  Biomoda,  Inc,  and  proceeds  of $28,930  from the sale of
Biomoda stock.

Cash Flows from Financing  Activities - Net cash used in financing activities of
$488,896 for the twelve months ended  December 31, 2002 was primarily due to the
proceeds of $545,661,  representing  315,845,000  shares of common stock, and an
increase of a note receivable from a stockholder of $34,300.

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

Results of Continuing Operations
--------------------------------

Fiscal 2002 Compared to Fiscal 2001
-----------------------------------

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.  There were no  developments  in this  category
during 2002.

Assets and  Liabilities - Assets  decreased by $1,213,264  from $2,219,560 as of
-----------------------
December 31, 2001 to  $1,006,296  as of December 31, 2002.  The decrease was due
primarily to accounting for the contract in a different manner than the previous
year. Both are methods of percentage of completion of contract  accounting,  the
net result is essentially the same. Costs and billings on uncompleted  contracts
are summarized as follows:

                                       13

<PAGE>

Costs incurred on uncompleted contract                $ 1,970,349
Billings on uncompleted contract                          (90,000)
Less allowance for loss on contract                    (1,205,000)
                                                    ---------------
                                                      $   675,349
                                                    ===============

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  $65,989  in 2002 from  $105,908  in 2001.  This
reduction  reflects  our  transition  from  incurring  significant   development
expenses 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.

Operating Expenses - Operating expenses decreased by $512,295 or 37% to $880,778
------------------
during the twelve months ended  December 31, 2002 compared to $1,393,073 for the
twelve months ended  December 31, 2001.  This was  primarily due to  managements
efforts to reduce spending and create a more efficient organization

The Company had a net loss of $1,985,142 or $.03 loss per share,  and $1,285,830
or $.01 loss per share,  for the twelve months ended December 31, 2001 and 2002,
respectively.

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 $814,789 in 2002 from $1,059,595 in 2001 due
to decreases in salary  expense and  professional  fees.  We expect  general and
administrative  costs to  increase  in the future as our  business  matures  and
develops. 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 decreased to $15,426 in 2002 from $25,626 in
2001. The decrease in interest  income was due to an decrease in our average net
cash and cash equivalents  balance.  Interest  expense  decreased to $107,912 in
2002 from $280,695 in 2001. 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.

Stockholders' Deficit - Stockholders' deficit increased by $23,132 from $766,041
---------------------
as of December 31, 2001 to $789,173 as of December  31,  2002.  The increase was
primarily  attributable  to the current  year net loss,  offset by current  year
equity activity.

Going Concern
-------------

The Company's  independent  certified  public  accountants  have stated in their
Auditors  Report  included in the Form  10-KSB  that the  Company  has  incurred
operating  losses,  has a working capital deficit,  losses from operations and a
significant  stockholders'  deficit.  These  conditions,   among  others,  raise
substantial doubt about the Company's ability to continue as a going concern.

                                       14
<PAGE>

The  Company  intends  to fund  operations  through  increased  sales and equity
financing arrangements which management believes may be insufficient to fund its
capital expenditures, working capital and other cash requirements for the fiscal
year ending December 31, 2003.  Therefore,  the Company will be required to seek
additional funds to finance its long-term operations.  The successful outcome of
future  activities  cannot be  determined at this time and there is no assurance
that if achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.

Inflation

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

Accounting Matters
------------------

Critical Accounting Policies

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

Revenue Recognition

In accordance  with Statement of Position 81-1,  "Accounting  for Performance of
Construction-Type and Certain  Production-Type  Contracts," the Company accounts
for  revenue  and costs  related  to its  long-term  contract  in process by the
completed-contract   method,  whereas  during  the  period  from  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 the period from May 22, 1996 (inception)
to December 31,  1999,  were  restated to apply the  completed  contract  method
retroactively.  The effect of the accounting change had no effect on net loss or
loss per share previously  reported for 1999 or for the period from 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.

Costs in excess of amounts  billed are  classified as current assets under costs
and estimated earnings in excess of billings on uncompleted contract.

                                       15
<PAGE>

ESTIMATES

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

ITEM 7.  FINANCIAL STATEMENTS

The financial statements and notes thereto,  together with the report thereon of
Squar,  Milner,  Reehl &  Williamson,  LLP  (the  Company's  accountants)  dated
February  7, 2003,  included  elsewhere  in this  report,  are  incorporated  by
reference in answer to this Item 7.

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

On November 21, 2002,  Advanced  Optics  Electronics  Inc. (the  "Company")  was
formally  notified of the  resignation  of their  auditors,  Atkinson & Company.
Atkinson & Company cited the significant new regulations and oversight  required
upon pubic  registrants and the accounting firms who serve as their auditors and
their decision to discontinue their public registrant audit practice.

The audit reports of Atkinson & Company on the Registrant's financial statements
for the fiscal year ending December 31, 2001 did not contain any adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.

In  connection  with the audits for the two most recent fiscal years and through
November 21, 2002, there have been no  disagreements  with Atkinson & Company on
any  matter  of  accounting   principles  or  practices,   financial   statement
disclosure, or auditing scope or procedure,  which disagreements if not resolved
to the  satisfaction  of  Atkinson  & Company  would  have  caused  them to make
reference  thereto in their report on the financial  statements  for such years.
During the two most recent  fiscal years and through  November  21, 2001,  there
have been no reportable events as defined in Regulation S-B Item 304(a)(1)(iv).

The Registrant  has requested  that Atkinson & Company  furnish it with a letter
addressed to the SEC stating whether or not it agrees with the above statements.
A copy of such letter, dated November 22, 2002, is filed as Exhibit 16.1 of this
Form 10-KSB.


Effective  December 19, 2002, the Board of Directors of the Company approved the
engagement of Squar, Milner, Reehl & Williamson,  LLP Public Accountants ("Squar
Milner") as its independent auditors for the fiscal year ended December 31, 2002
to replace  Atkinson & Co. The Company did not consult  with Squar Milner on any
matters prior to their retention.

                                       16

<PAGE>

                                    PART III

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

The following sets forth  information,  as of December 31, 2002,  concerning the
Company's directors and executive officers:


Name                  Age   Position                               Since
Michael Pete          58    President, Treasurer, Director         July 1994
Leslie S. Robins      64    Exec. Vice Pres., Secretary, Chairman  November 1992
John J. Cousins       46    Vice President-Finance                 June 1999
Richard Josephberg    55    Director                               April 2000


The Company elects its Board of Directors at meetings of  shareholders  and hold
office until the next meeting of shareholders after their election. In the event
of a vacancy due to  resignation,  removal or death,  the remaining duly elected
Directors  may fill such  vacancy  until the next  meeting of the  shareholders.
Officers of the Company are elected by the Board of  Directors  which shall at a
minimum  elect a president,  a secretary  and a treasurer to hold office for one
year and thereafter until their  successors are elected.  The Board of Directors
may,  from time to time,  by  resolution,  appoint one or more vice  presidents,
assistant  secretaries,  assistant treasurers and transfer agents of the Company
as it may deem advisable, prescribe their duties; and fix their compensation.

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

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

JOHN J. COUSINS, Vice President of Finance and Treasurer - Mr. Cousins began his
business   career  as  a  design  engineer  for  Ampex  Corp  and  the  American
Broadcasting  Company.  After  receiving his MBA from the Wharton School he held

                                       17
<PAGE>

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  Effective April 14, 2002 Harold Herman resigned as Director of
Advanced Optics Electronics,  Inc because of restrictive health challenges.  The
Company filed an 8K disclosing the change.

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 & 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.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
directors and executive  officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the SEC initial
reports of  ownership  and reports of changes in  ownership  of common stock and
other equity securities of the Company. Officers, directors and greater than ten
percent shareholders are requited by SEC regulations to furnish the Company with
copies of all Sections 16(a) forms they file. To the Company's knowledge,  based
solely on the review of copies of such  reports  furnished  to the  Company  and
written  representations  that no other reports were required and to the best of
its knowledge, during the year ended December 31, 2002, all Section 16(a) filing
requirements  applicable to the Company's  officers,  directors and greater than
ten percent shareholders were complied with.

Family Relationships

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

Involvement in Legal Proceedings

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

                                       18
<PAGE>
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
2000, 2001 and 2002:

<TABLE>
<S>          <C>     <C>         <C>        <C>           <C>                 <C>               <C>        <C>

  SUMMARY COMPENSATION TABLE
|-------------|-------|----------------------|--------------|--------------------------|-------------------|---------------|
|             |       | Annual Compensation  |              |  Long-Term Compensation  |                   |               |
|             |       |                      |              |         Awards           |                   |               |
|-------------|-------|----------|-----------|--------------|-------------------|------|---------|---------|---------------|
|             |       |          |           | Other Annual | Restricted Stock  |   Securities   | LTIP    | All Other     |
|             |       |          |           | Compensation |     Award(s)      |   Underlying   | Payouts | Compensation  |
|             |       |          |           | (1)          |                   |   Options      |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|Name and     | Year  | Salary   | Bonus     | ($)          |       ($)         |  (#)           | ($)     | ($)           |
|Principal    |       | ($)      | ($)       |              |                   |                |         |               |
|Position     |       |          |           |              |                   |                |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|Michael      |       |          |           |              |                   |                |         |               |
|Pete,        |       |          |           |              |                   |                |         |               |
|President,   |       |          |           |              |                   |                |         |               |
|Director     |       |          |           |              |                   |                |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|             | 2002  |   $5,975 |           |              |                   |   150,000      |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|             | 2001  |  $15,600 |           |              |                   |                |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|             | 2000  |  $38,700 |  ----     |  ----        |  -----            |   275,000(3)   |  ----   |  ----         |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|Leslie S.    |       |          |           |              |                   |                |         |               |
|Robins,      |       |          |           |              |                   |                |         |               |
|Chairman of  |       |          |           |              |                   |                |         |               |
|the Board    |       |          |           |              |                   |                |         |               |
|and Exec.    |       |          |           |              |                   |                |         |               |
|VP           |       |          |           |              |                   |                |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|             | 2002  |  $86,223 |           |   $2451(1)   |                   |  1,100,000(2)  |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|             | 2001  |  $62,133 |           | $10,387(1)   |                   |                |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|             | 2000  |  $82,830 |  ----     |  $8,986(1)   |  ----             |   4,850,000(4) |  ----   |  ----         |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|John J.      |       |          |           |              |                   |                |         |               |
|Cousins,     |       |          |           |              |                   |                |         |               |
|VP Finance   |       |          |           |              |                   |                |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|             | 2002  | $109,797 |           |              |                   |     250,000    |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|             | 2001  | $109,406 |           |              |                   |                |         |               |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
|             | 2000  |  $95,072 |  ----     |  ----        |  ----             |     400,000(5) |  ----   |  ----         |
|-------------|-------|----------|-----------|--------------|-------------------|----------------|---------|---------------|
</TABLE>
(1) Represents the amount of an automobile  lease for the benefit of Mr. Robins.
(2) Exercised during the current year 2002 for a note receivable.
(3) 275,000 were cancelled subsequent to issuance.
(4) 1,900,000 were cancelled subsequent to issuance.
(5) 300,000 were cancelled subsequent to issuance.

OPTION GRANTS IN FISCAL YEAR 2002
<TABLE>
<S>             <C>             <C>              <C>              <C>

|----------------|---------------|----------------|-----------------|-------------------|
| Name           | Number of     | % of Total     | Exercise Price  | Expiration Date   |
|                | Securities    | Options        | ($/Sh)          |                   |
|                | Underlying    | Granted to     |                 |                   |
|                | Options       | Employees in   |                 |                   |
|                | and Warrants  | Fiscal Year(1) |                 |                   |
|----------------|---------------|----------------|-----------------|-------------------|
| Michael Pete   |      150,000  |       10.00%   |       $0.02     |  1/15/2007        |
|----------------|---------------|----------------|-----------------|-------------------|
| Leslie Robins  | 1,100,000(1)  |       73.33%   |       $0.02     |  1/15/2007        |
|----------------|---------------|----------------|-----------------|-------------------|
| John Cousins   |      250,000  |       16.67%   |       $0.02     |  1/15/2007        |
|----------------|---------------|----------------|-----------------|-------------------|

</TABLE>
                                       19
<PAGE>

(1) Exercised during the current year 2002 for a note receivable.


                 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2002
                     AND OPTION VALUES AT DECEMBER 31, 2002

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, 2002.

<TABLE>
<CAPTION>
                             Year-End Option Values
<S>                   <C>            <C>             <C>             <C>                  <C>            <C>

                                                          Number of Securities Underlying      Value of Unexercised
                                                              Unexercised                      In-the-Money Options
                                                                Options                        December 31, 2002(1)
                                                          December 31, 2002(1)                 --------------------
                                                       ---------------------------
Name                   Shares          Value          Exercisable     Unexercisable         Exercisable    Unexercisable
----                   -------------   ------               (#)             (#)                 ($)             ($)
                       Acquired on     Realized ($)
                       -------------   ------------   ------------    --------------         -----------   -------------
                       Exercise (#)
                       -------------
Michael Pete                                               725,000             ---               ---            ---
Leslie Robins           1,100,000      $22,000           2,050,000             ---               ---            ---
John Cousins                                               850,000             ---               ---            ---
                                                                               ---                              ---
-------------------
</TABLE>



(1)      The value of the  unexercised  "in-the-money"  options  is based on the
         fair  market  value as of  December  31,  2002  (the  closing  price on
         12/31/02  was  $0.0051)  minus the exercise  price,  multiplied  by the
         numbers of shares underlying the option.

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

                            LONG-TERM INCENTIVE PLANS

As of December 31, 2002 there is no long-term incentive plan.


                              Director Compensation

Non-employee directors of the Company received in 2002 a $750 annual retainer.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENIFICIAL OWNERS AND MANAGEMENT

The  following  table sets forth certain  information  known to the Company with
respect to beneficial  ownership of the  Company's  Common Stock as of March 15,

                                       20
<PAGE>


2003 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, 2002 there were  592,245,903  shares
outstanding.

                                                                    Percent
                                              Number of Shares      Beneficially
      Name of Beneficial Owner (1)            Beneficially Owned    Owned
------------------------------------------  ----------------------  ------------
Leslie Robins.............................    15,831,546(2)                2.67%
Michael Pete..............................     1,400,000(3)                *
John Cousins..............................       850,000(4)                *
Richard A. Josephberg.....................       200,000(5)                *
All directors and executive officers as a
group (4 persons)                             18,531,546

------------------
     *Less than 1.0%.
    (1)  The address of all persons who are  executive  officers or directors of
         the Company is in care of the Company,  8301  Washington  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  725,000  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  850,000  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  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

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

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.
                                       21

<PAGE>



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

         Financial Statements and Financial Statement Schedules

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


Exhibits
2        Plan of Acquisition, Reorganization,          None
         arrangement, liquidation, or succession

3.1      Articles of Incorporation                     Incorporated by reference
                                                       to Exhibit 3(I) of the
                                                       Company's Registration
                                                       Statement No.1000-24511
                                                       on 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,   Incorporated by reference
         including Indentures                          to Exhibit 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,  Incorporated by reference
         Inc. and JMP Company Inc                      to Exhibit 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.

16.1     Prior Accountants letter                      Filed Herewith

24       Power of Attorney                             Incorporated by reference
                                                       to Exhibit 3.2

99.1     Certification of Chief Executive Officer      Filed Herewith
         persuant to Section 906 of the Sarbannes
         Oxley Act of 2002

99.2     Certification of Chief Financial Officer      Filed Herewith
         persuant to Section 906 of the Sarbannes
         Oxley Act of 2002

                                       22

<PAGE>

                               Reports on Form 8-K

During the 2002 fiscal year, the Company filed a report on Form 8-K relating the
resignation  of Harold Herman as a director and its change of  accountants  from
Atkinson & Co. to Squar, Milner, Reehl & Williamson, LLP.

ITEM 14. Controls and Procedures

The Company's  principal  executive and financial  officer,  have  evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rule 13a-14 (c)) under the Securities  Exchange Act of 1934) as of a date within
90 days of the  filing  of this  report.  Based on that  evaluation,  they  have
concluded that the Company's disclosure controls and procedures are adequate and
effective.  There have been no  significant  changes in the  Company's  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date they completed their evaluation.

                                       23

<PAGE>
                                   SIGNATURES


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


Dated:    March 27, 2003



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)





CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002

In connection  with the Annual Report of Advanced  Optics  Electronics,  Inc. on
Form 10-KSB for the year ended  December  31, 2002 as filed with the  Securities
and Exchange  Commission on the date hereof, I Leslie Robins the Chief Executive
Officer of the  Company,  certify;  pursuant  to and for  purposes  of 18 U.S.C.
Section  1350 as adopted  pursuant to Section 302 of the  Sarbanes-Oxley  Act of
2002 that:

1.       I have reviewed  this annual  report on Form 10-KSB of Advanced  Optics
         Electronics, Inc.
2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by his annual report;
3.       Based on my knowledge,  the financial  statements  and other  financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;
4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act rule 13a-14 and 15d-14) for the  registrant and
         have:

                                       24
<PAGE>

     a.     designed such disclosure control and procedures to ensure that
            material information relating to the registrant, including its
            consolidate subsidiaries is made known to us by others within those
            entities, particularly during the period in which this annual report
            is being prepared;
     b.     evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and
     c.     presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of  the Evaluation Date;
5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation;  to the  registrant's  auditors and the
         audit  committee of the  registrant's  board of  directors  (or persons
         performing the equivalent function);
     a.     all  significant  deficiencies  in the design or  operation of
            internal controls  which  could  adversely  affect the  registrant's
            ability to record, process,  summarize  and  report  financial  data
            and  have identified  for the  registrant's  auditors  any  material
            weakness in internal controls; and
     b.     any fraud,  whether or not material,  that involves management or
            other  employees  who have a  significant  role in the  registrant's
            internal controls; and
6.       The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.


     Dated:  March 25, 2003

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


CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002

In connection  with the Annual Report of Advanced  Optics  Electronics,  Inc. on
Form 10-KSB for the year ended  December  31, 2002 as filed with the  Securities
and Exchange  Commission on the date hereof,  I John Cousins the Chief Financial
Officer of the  Company,  certify;  pursuant  to and for  purposes  of 18 U.S.C.
Section  1350 as adopted  pursuant to Section 302 of the  Sarbanes-Oxley  Act of
2002 that:

7.       I have reviewed  this annual  report on Form 10-KSB of Advanced  Optics
         Electronics, Inc.
8.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by his annual report;

                                       25
<PAGE>

9.       Based on my knowledge,  the financial  statements  and other  financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;
10.      The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act rule 13a-14 and 15d-14) for the  registrant and
         have:
     a.     designed such disclosure control and procedures to ensure that
            material information  relating  to the  registrant,  including  its
            consolidate subsidiaries  is made  known to us by  others  within
            those  entities, particularly  during the period in which  this
            annual  report is being prepared;
     b.     evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and
     c.     presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;
11.      The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation;  to the  registrant's  auditors and the
         audit  committee of the  registrant's  board of  directors  (or persons
         performing the equivalent function);
     a.     all  significant  deficiencies  in the design or  operation of
            internal controls  which  could  adversely  affect the  registrant's
            ability to record,   process,   summarize  and  report  financial
            data  and  have identified  for the  registrant's  auditors  any
            material  weakness in internal controls; and
     b.     any fraud,  whether or not material,  that involves management or
            other employees  who have a  significant  role in the  registrant's
            internal controls; and
12.      The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.

     Dated:  March 25, 2003

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


                                       26
<PAGE>



Exhibit 16.1






      Securities and Exchange Commission
      Washington, D.C. 20549


      Gentlemen:

      We were previously the accountants for Advanced Optics  Electronics,  Inc.
      (the  Company)  and on  January  31,  2002 we  reported  on the  financial
      statements  of  Advanced  Optics  Electronics,  Inc. as of and for the two
      years ended  December  31,  2001.  On November  21,  2002,  we resigned as
      accountants of the Company. We have read the Company's statements included
      under Item 4 of its Form 8-K for November 21, 2002, and we agree with such
      statements.


                                                       Sincerely,


                                                       Atkinson & Co., Ltd.





                                       27
<PAGE>




Exhibit 99.1
------------

      CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT
                TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In  connection  with  the  annual  report  on Form  10-KSB  of  Advanced  Optics
Electronics, Inc. ("the Company") for the year ending December 31, 2002 as filed
with the Securities Exchange  Commission on the date hereof ("the Report"),  the
undersigned Chief Executive Officer of the Company hereby certifies, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 that:

        1.  The Report fully complies with the requirements of Section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

        2.  The  information  contained  in  the  Report  fairly  presents,  in
            all material respects, the financial condition and results of
            operations of  the Company.

A signed  original of this  written  statement  required by Section 906 has been
provided to Advanced Optics Electronics,  Inc., and will be retained by Advanced
Optics Electronics, Inc. and furnished to the Securities and Exchange Commission
or its staff upon request.


Dated:  March 25, 2003

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

                                       28
<PAGE>

Exhibit 99.2
------------

      CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT
                TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In  connection  with  the  annual  report  on Form  10-KSB  of  Advanced  Optics
Electronics, Inc. ("the Company") for the year ending December 31, 2002 as filed
with the Securities Exchange  Commission on the date hereof ("the Report"),  the
undersigned Chief Financial Officer of the Company hereby certifies, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 that:

      1.    The Report fully complies with the requirements of Section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      2.    The  information  contained  in  the  Report  fairly  presents,  in
            all material respects, the financial condition and results of
            operations of the Company.

A signed  original of this  written  statement  required by Section 906 has been
provided to Advanced Optics Electronics,  Inc., and will be retained by Advanced
Optics Electronics, Inc. and furnished to the Securities and Exchange Commission
or its staff upon request.




Dated:  March 25, 2003



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

                                       29
<PAGE>










                        ADVANCED OPTICS ELECTRONICS, INC.

                              FINANCIAL STATEMENTS

                                DECEMBER 31, 2002









<PAGE>







                          INDEX TO FINANCIAL STATEMENTS





Independent Auditors' Reports.................................................1

Balance Sheet.................................................................3

Statements of Operations......................................................4

Statements of Stockholders' Deficit...........................................5

Statements of Cash Flows......................................................9

Notes to Financial Statements................................................11




<PAGE>




                          INDEPENDENT AUDITORS' REPORT


         To the Board of Directors
         Advanced Optics Electronics, Inc.

         We have  audited the  accompanying  balance  sheet of  Advanced  Optics
         Electronics,  Inc. (the "Company"),  a development stage company, as of
         December  31,  2002,   and  the  related   statements  of   operations,
         stockholder's  deficit  and cash  flows  for  year  then  ended.  These
         financial   statements   are  the   responsibility   of  the  Company's
         management.  Our  responsibility  is to  express  an  opinion  on these
         financial statements based on our audit.

         We conducted our audit in accordance with 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 that 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. as of December 31, 2002,  and the results of
         its  operations  and its cash flows for year then  ended in  conformity
         with accounting  principles  generally accepted in the United States of
         America.

         The accompanying  financial statements have been prepared assuming that
         the Company  will  continue as a going  concern.  As  disclosed  in the
         financial statements,  the Company is a development stage Company which
         has   negative   working   capital  of   $1,033,429,   an   accumulated
         stockholders'  deficit  of  $789,173,   losses  from  operations  since
         inception and a lack of operational  history. As discussed in Note 1 to
         the financial  statements,  a significant  amount of additional capital
         will be necessary to advance the  development of the Company's  product
         to the point at which it may become commercially viable. These factors,
         among others,  raise  substantial  doubt about the Company's ability to
         continue  as a going  concern.  Management's  plans in  regard to these
         matters  are  described  in Note 1.  The  financial  statements  do not
         include  any  adjustments  that may  result  from the  outcome  of this
         uncertainty.

         /s/ Squar, Milner, Reehl & Williamson, LLP

         February 7, 2003
         Newport Beach, California

--------------------------------------------------------------------------------
Page 1


<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 year then ended 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 year then
ended 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


--------------------------------------------------------------------------------
Page 2

<PAGE>

--------------------------------------------------------------------------------
                       ADVANCED OPTICS ELECTRONICS, INC.
                         (A Development Stage Company)
                                 BALANCE SHEET
                               DECEMBER 31, 2002
--------------------------------------------------------------------------------

                                    ASSETS

Current Assets
    Cash                                                           $     49,858
                                                                   -------------
    Costs and estimated earnings in excess of
      billings on uncompleted contract                                1,880,349
    Allowance for loss on contract                                   (1,205,000)
                                                                   -------------
                                                                        675,349
    Other current assets                                                 36,833
                                                                   -------------

         Total current assets                                           762,040

Property and Equipment, net                                             125,250

Other Assets
    Intangible asset, net                                                15,409
    Investment in Biomoda, Inc.                                          65,165
    Notes receivable from related parties                                38,432
                                                                   -------------
                                                                        119,006

                                                                   $  1,006,296
                                                                   =============

                     LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
    Accounts payable                                               $    167,036
    Accrued expenses                                                    345,806
    Notes payable                                                        38,110
    Convertible debentures                                            1,244,517
                                                                   -------------

         Total current liabilities                                    1,795,469
                                                                   -------------

Commitments and Contingencies

Stockholders' Deficit
    Preferred stock, $0.001 par value, 10,000,000 shares
      authorized; no shares issued and outstanding                           -
    Common stock, $0.001 par value, 800,000,000 shares
      authorized; 592,245,903 shares issued and outstanding             592,246
    Treasury stock, at cost - 1,209,000 shares                           (6,634)
    Notes receivable officer                                           (308,902)
    Additional paid in capital                                        9,810,201
    Deficit accumulated during the development stage                (10,876,084)
                                                                   -------------

         Total stockholders' deficit                                   (789,173)
                                                                   -------------

                                                                   $  1,006,296
                                                                   =============

--------------------------------------------------------------------------------
Page 3                       See accompanying notes to the financial statements.

<PAGE>
--------------------------------------------------------------------------------

                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                            STATEMENTS OF OPERATIONS
        For the Years Ended December 31, 2002 and 2001 and For The Period
             From May 22, 1996 (Inception) Through December 31, 2002

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

<TABLE>
<S>                                                    <C>              <C>            <C>


                                                                                          May 22, 1996
                                                                                          (Inception)
                                                                                            Through
                                                                                          December 31,
                                                             2002             2001            2002
                                                         -------------    ------------   -------------


CONTRACT REVENUES                                        $         --     $        --    $         --

OPERATING EXPENSES
  General and administrative                                 (814,789)     (1,059,595)     (6,812,094)
  Research and development                                    (65,989)       (105,908)     (1,332,073)
  Asset impairment                                                 --        (227,570)       (227,570)
                                                         -------------    ------------   -------------
                                                             (880,778)     (1,393,073)     (8,371,737)

ESTIMATED LOSS ON CONTRACT                                   (297,000)       (343,000)     (1,205,000)
                                                         -------------    ------------   -------------

OPERATING LOSS                                             (1,177,778)     (1,736,073)     (9,576,737)
                                                         -------------    ------------   -------------

OTHER (EXPENSE) INCOME
  Interest income                                              15,426          25,626          71,382
  Gain (loss) on marketable equity securities                      --              --         (29,368)
  Other investment gains                                           --              --          59,784
  Loss from investment in Biomoda, Inc.                       (15,566)             --        (289,750)
  Gain (loss) on disposal of assets                                --           6,000          (4,306)
  Interest expense                                           (107,912)       (280,695)     (1,044,069)
                                                         -------------    ------------   -------------
                                                             (108,052)       (249,069)     (1,236,327)
                                                         -------------    ------------   -------------

NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE                                    (1,285,830)     (1,985,142)    (10,813,064)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE                                                          --              --         (63,020)
                                                         -------------    ------------   -------------

NET LOSS                                                 $ (1,285,830)    $(1,985,142)   $(10,876,084)
                                                         =============    ============   =============

Basic and diluted net loss before cumulative
  effect of change in accounting principle available
  to common shareholder per common share                 $      (0.01)    $     (0.03)   $      (0.17)

Cumulative effect of change in accounting principle                --              --              --
                                                         -------------    ------------    ------------

Basic and diluted net loss available to
  common shareholder                                     $      (0.01)    $     (0.03)   $      (0.17)
                                                         =============    ============    ============
per common share

Basic and diluted weighted average common shares
  outstanding                                             208,684,389      70,190,322      64,480,833
                                                         =============    ============    ============


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

Page 4                       See accompanying notes to the financial statements.

<PAGE>

<TABLE>
<CAPTION>


------------------------------------------------------------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' DEFICIT
     For The Period From May 22, 1996 (Inception) Through December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>               <C>            <C>           <C>           <C>


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

                                                Shares          Amount           Shares        Amount        Shares       Amount
                                             ------------   ---------------   ------------    ---------    ----------    --------
Balance at May 26, 1996 (Inception)                   --    $           --             --     $     --            --          --
Stock issued to incorporators for cash                --                --        500,000          500            --          --
Stock issued for the net assets
  of PLZ Tech, Inc.                                   --                --      4,500,000        4,500            --          --
Net loss                                              --                --             --           --            --          --
                                             ------------   ---------------   ------------    ---------    ----------    --------

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

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

Balance, December 31, 1998                            --                --     20,854,287       20,854            --          --
Stock issued for cash                                 --                --      8,681,624        8,682            --          --
Stock issued for services                             --                --     17,094,313       17,094            --          --
Intrinsic value of beneficial
  conversion feature of notes payable                 --                --             --           --            --          --
Fair value of warrants related
  to notes payable                                    --                --             --           --            --          --
Purchase and retirement of
  treasury stock                                      --                --       (489,251)        (489)           --          --
Purchase of treasury stock                            --                --             --           --      (229,000)    (41,760)
Sale of treasury stock                                --                --             --           --        85,000      11,130
Net loss                                              --                --             --           --            --          --
                                             ------------   ---------------   ------------    ---------    ----------    --------

---------------------------------------------------------------------------------------------------------------------------------
Page 5                       See accompanying notes to the financial statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                 STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
     For The Period From May 22, 1996 (Inception) Through December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------

<S>                                        <C>             <C>               <C>             <C>         <C>            <C>


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

                                                Shares          Amount           Shares        Amount        Shares       Amount
                                             ------------   ---------------   ------------    ---------    ----------    --------
Balance, December 31, 1999                            --                --     46,140,973       46,141      (144,000)    (30,630)
Stock issued for cash                                710                 1        782,000          782            --          --
Stock issued for services                             --                --      3,955,202        3,955            --          --
Purchase of treasury stock                            --                --             --           --       (63,500)    (46,486)
Sale of treasury stock                                --                --             --           --       142,400      22,542
Exercise of stock options for
  notes receivable                                    --                --      1,850,000        1,850            --          --
Amortizaton of discount of
  convertible preferred stock                         --                --             --           --            --          --
Exercise of preferred stock
  conversion feature                                  --                --      9,200,000        9,200            --          --
Issuance of convertible debentures                    --                --             --           --            --          --
Exchange of preferred stock for
  convertible debentures                            (710)               (1)            --           --            --          --
Intrinsic value of convertible
  debenture                                           --                --             --           --            --          --
De-investment in Wizard Technologies                                    --             --           --            --          --
Net loss                                              --                --             --           --            --          --
                                             ------------   ---------------   ------------    ---------    ----------    --------

Balance, December 31, 2000                            --                --     61,928,175       61,928       (65,100)    (54,574)
Stock issued for cash                                 --                --      1,382,778        1,383            --          --
Stock issued for services                             --                --     10,461,498       10,461            --          --
Purchase of treasury stock                            --                --             --           --      (251,700)    (16,215)
Amortization of discount on
  convertible debentures                              --                --             --           --            --          --
Stock issued upon debt conversion                     --                --      7,064,886        7,065            --          --
Net loss                                              --                --             --           --            --          --
                                             ------------   ---------------   ------------    ---------    ----------    --------

Balance, December 31, 2001                            --                --     80,837,337       80,837      (316,800)    (70,789)
Stock issued for cash                                 --                --    315,845,000      315,845            --          --
Stock issued for services                             --                --    115,768,000      115,768            --          --
Purchase of treasury stock                            --                --             --           --    (1,400,000)     (8,732)
Sale of treasury stock                                --                --             --           --       507,800      72,887
Exercise of stock options for
  notes receivable                                    --                --      1,100,000        1,100            --          --
Advances to officer                                   --                --             --           --            --          --
Reclass of accrued interest with
  note receivable                                     --                --             --           --            --          --
Stock issued upon debt conversion                     --                --     78,695,566       78,696            --          --
Retroactive application of equity
  method for investment in
  Bio Moda, Inc.                                      --                --             --           --            --          --
Net loss                                              --                --             --           --            --          --
                                             ------------   ---------------   ------------    ---------    ----------    --------

Balance, December 31, 2002                            --    $           --    592,245,903     $ 592,246   (1,209,000)    $(6,634)
                                             ============   ===============   ============    =========    ==========    ========

---------------------------------------------------------------------------------------------------------------------------------
Page 6                       See accompanying notes to the financial statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                 STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
     For The Period From May 22, 1996 (Inception) Through December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>              <C>          <C>            <C>

                                                                                          Deficit
                                                                                        Accumulated
                                                           Additional                    During the         Total
                                                            Paid In         N/R         Development     Stockholders'
                                                            Capital      Stockholder       Stage           Deficit
                                                          ------------   -----------   -------------    -------------
Balance at May 26, 1996 (Inception)                       $        --    $       --     $        --     $        --
Stock issued to incorporators for cash                         24,500            --              --           25,000
Stock issued for the net assets
  of PLZ Tech, Inc.                                           281,096            --              --          285,596
Net loss                                                           --            --         (76,902)         (76,902)
                                                          ------------   -----------   -------------    -------------

Balance, December 31, 1996                                    305,596            --         (76,902)         233,694
Stock issued for cash and services                            362,720            --              --          365,001
Net loss                                                           --            --         (84,690)         (84,690)
                                                          ------------   -----------   -------------    -------------

Balance, December 31, 1997                                    668,316            --        (161,592)         514,005
Stock issued for cash                                       1,281,728            --              --        1,292,707
Stock issued for services                                     293,719            --              --          296,470
Stock issued in exchange
  for note receivable                                          28,685            --              --           29,000
Purchase and retirement
  of treasury stock                                           (39,913)           --              --          (40,385)
Net loss                                                           --            --        (752,111)        (752,111)
                                                          ------------   -----------   -------------    -------------

Balance, December 31, 1998                                  2,232,535            --        (913,703)       1,339,686
Stock issued for cash                                         855,101            --              --          863,783
Stock issued for services                                   1,469,320            --              --        1,486,414
Intrinsic value of beneficial
  conversion feature of notes payable                         174,610            --              --          174,610
Fair value of warrants related
  to notes payable                                            125,000            --              --          125,000
Purchase and retirement of
  treasury stock                                              (10,643)           --              --          (11,132)
Purchase of treasury stock                                         --            --              --          (41,760)
Sale of treasury stock                                         24,334            --              --           35,464
Net loss                                                           --            --      (2,765,862)      (2,765,862)
                                                          ------------   -----------   -------------    -------------


---------------------------------------------------------------------------------------------------------------------------------
Page 7                       See accompanying notes to the financial statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                 STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
     For The Period From May 22, 1996 (Inception) Through December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>             <C>            <C>            <C>


                                                                                          Deficit
                                                                                        Accumulated
                                                           Additional                    During the         Total
                                                            Paid In         N/R         Development     Stockholders'
                                                            Capital      Stockholder       Stage           Deficit
                                                          ------------   -----------   -------------    -------------
Balance, December 31, 1999                                  4,870,257            --      (3,679,565)       1,206,203
Stock issued for cash                                       1,012,710            --              --        1,013,492
Stock issued for services                                   1,726,197            --              --        1,730,152
Purchase of treasury stock                                         --            --              --          (46,486)
Sale of treasury stock                                         54,771            --              --           77,313
Exercise of stock options for
  notes receivable                                            220,150      (193,427)             --           28,573
Amortizaton of discount of
  convertible preferred stock                                 159,677            --              --          159,677
Exercise of preferred stock
  conversion feature                                          533,678            --              --          542,878
Issuance of convertible debentures                            263,830            --              --          263,830
Exchange of preferred stock for
  convertible debentures                                     (869,678)           --              --         (869,678)
Intrinsic value of convertible
  debenture                                                   227,898            --              --          227,898
De-investment in Wizard Technologies                          (59,583)           --              --          (59,583)
Net loss                                                           --            --      (3,827,873)      (3,827,873)
                                                          ------------   -----------   -------------    -------------

Balance, December 31, 2000                                  8,139,907      (193,427)     (7,507,438)         446,396
Stock issued for cash                                          66,844            --              --           68,227
Stock issued for services                                     412,284            --              --          422,745
Purchase of treasury stock                                         --            --              --          (16,215)
Amortization of discount on
  convertible debentures                                      143,875            --              --          143,875
Stock issued upon debt conversion                             147,008            --              --          154,073
Net loss                                                           --            --      (1,985,142)      (1,985,142)
                                                          ------------   -----------   -------------    -------------

Balance, December 31, 2001                                  8,909,918      (193,427)     (9,492,580)        (766,041)
Stock issued for cash                                         229,816            --              --          545,661
Stock issued for services                                     366,301            --              --          482,069
Purchase of treasury stock                                         --            --              --           (8,732)
Sale of treasury stock                                        (65,058)           --              --            7,829
Exercise of stock options for
  notes receivable                                             20,900       (22,000)             --               --
Advances to officer                                                --       (34,300)             --          (34,300)
Reclass of accrued interest with
  note receivable                                                  --       (59,175)             --          (59,175)
Stock issued upon debt conversion                             348,324            --              --          427,020
Retroactive application of equity
  method for investment in
  Bio Moda, Inc.                                                   --            --         (97,674)         (97,674)
Net loss                                                           --            --      (1,285,830)      (1,285,830)
                                                          ------------   -----------   -------------    -------------

Balance, December 31, 2002                                $ 9,810,201    $ (308,902)   $(10,876,084)    $   (789,173)
                                                          ============   ===========   =============    =============

----------------------------------------------------------------------------------------------------------------------
Page 8                       See accompanying notes to the financial statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

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

                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
        FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND FOR THE PERIOD
            FROM MAY 22, 1996 (INCEPTION) THROUGH DECEMBER 31, 2002

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

<S>                                                           <C>              <C>         <C>


                                                                                              May 22, 1996
                                                                                               (Inception)
                                                                                                 Through
                                                                                              December 31,
                                                                    2002           2001           2002
                                                                ------------    ------------  -------------

Cash flows from operating activities:
     Net (loss) income                                          $(1,285,830)    $(1,985,142)  $(10,876,084)
     Adjustments to reconcile net (loss) income to net cash
       used in operating activities:
        Intrinsic value of conversion features                           --        143,875         610,603
        Write off of organization costs                                  --             --          63,020
        Amortization of discount on convertible notes and
          preferred stock                                                --             --         295,209
        Loss on marketable securities                                    --             --          29,368
        Loss (gain) on disposal of assets                                --         (6,000)          4,306
        Loss on investment in Biomoda, Inc.                          15,566             --         289,750
        Issuance of common stock for services                       482,069        422,745       4,417,851
        Issuance of notes payable for services                           --             --          50,000
        Increase in excess of costs and earnings over billin
        on uncompleted contract                                    (309,785)      (425,075)     (1,880,349)
        Increase in allowance for loss on contract                  297,000        343,000       1,205,000
        Interest accrued on convertible debentures                  107,229        121,217         228,446
        Interest earned on note receivable from stockholder
          related parties                                           (15,426)            --         (15,426)
        Depreciation and amortization                                93,355        117,964         537,960
        Bad debt expense                                             15,000             --          15,000
        Asset impairment                                                 --        227,570         227,570
        Other non-cash expenses                                          --             --          33,447
        Accrued interest                                                 --             --          30,667
     Changes in operating assets and liabilities:
        Decrease in other current assets                             28,442             --         (51,434)
        Decrease in inventory                                            --             --         (35,293)
        Increase in accounts payable and accrued expenses            59,221         57,333         332,780
                                                                ------------    -----------   -------------

     Net cash used in operating activities                         (513,159)      (982,513)     (4,487,609)
                                                                -----------     ------------  -------------

Cash flows from investing activities:
     Purchases of property and equipment                             (7,240)       (30,349)       (389,832)
     Proceeds from sale of property and equipment                        --         23,800          23,800
     Investment in Biomoda, Inc.                                         --             --        (383,845)
     Proceeds from sale of Biomoda, Inc. stock                       28,930             --          28,930
     Advances to Biomoda, Inc.                                      (38,432)            --         (38,432)
     Sale of marketable securities                                       --             --          40,665
     Purchases of marketable securities                                  --             --         (70,034)
     Decrease in certificates of deposit                                 --        107,426              --
     Purchase of other assets                                            --        (12,447)       (245,579)
                                                                ------------    ------------  -------------

     Net cash (used in) provided by investing activities            (16,742)        88,430      (1,034,327)
                                                                ------------    ------------  -------------


----------------------------------------------------------------------------------------------------------------------
Page 9                     See accompanying notes to the financial statements.
</TABLE>

<PAGE>

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

                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                      STATEMENTS OF CASH FLOWS (CONTINUED)
        FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND FOR THE PERIOD
            FROM MAY 22, 1996 (INCEPTION) THROUGH DECEMBER 31, 2002

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




<TABLE>
<S>                                                              <C>              <C>            <C>


Cash flows from financing activities:
     Principal repayments on notes payable and capital lease         (8,111)        (51,658)      (231,877)
     Proceeds from notes payable                                         --              --        622,776
     Issuance of common stock for cash                              545,661          68,227      4,173,872
     (Increase) decrease in note receivable stockholder             (34,300)            305         (5,422)
     Proceeds from sale of treasury stock                             7,829              --        120,606
     Purchase of treasury stock                                      (8,732)        (16,215)      (154,710)
     Proceeds from issuance of convertible debt                          --         575,000      1,060,000
     Principal repayments on convertible debt                       (13,451)             --        (13,451)
                                                                ------------    ------------  -------------

     Net cash provided by financing activities                      488,896         575,659      5,571,794
                                                                ------------    ------------  -------------

Net (decrease) increase in cash                                     (41,005)       (318,424)        49,858

Cash at beginning of period                                          90,863         409,287             --
                                                                ------------    ------------  -------------

Cash at end of period                                           $    49,858     $    90,863   $     49,858
                                                                ============    ============  =============


Supplemental disclosure of cash flow information -
     Cash paid during the year for:
        Interest                                                $       683     $    15,603
                                                                ============    ============
        Income taxes                                            $        --     $        --
                                                                ============    ============
</TABLE>


See accompanying notes to the financial statements for additional information
relating to non-cash investing and financing activities during the years ended
December 31, 2002 and 2001.

--------------------------------------------------------------------------------
Page 10                      See accompanying notes to the financial statements.

<PAGE>


--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------


1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations
-------------------------------------

Advanced  Optics  Electronics,  Inc.  (the  "Company")  is a  development  stage
technology company with its principal focus on the development and production of
large-scale  flat panel  displays and trades on the OTC Bulletin Board under the
symbol  "ADOT.OB".  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,  complete  this  contract and
obtain  additional  contracts.  As of  December  31,  2002,  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.

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

Development Stage and Going Concern
-----------------------------------

The Company has been in the  development  stage since its  inception  on May 22,
1996,  and has not  generated  any  revenues  from  operations  and  there is no
assurance of any future revenues.

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

--------------------------------------------------------------------------------
Page 11

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------


1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Development Stage and Going Concern (continued)
-----------------------------------------------

Management has taken action to address these matters. They include:

  o     Retention of experienced management personnel with particular skills in
        the development and commercialization of such product.
  o     The Company is aggressively seeking new contracts.
  o     The  Company has an equity  method  investment  in a start-up  company,
        which management hopes will be profitable (see Note 4).
  o     The Company is seeking investment capital through the public markets.

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

As a result, the accompanying  financial  statements have been prepared assuming
the Company will continue as a going concern,  which  contemplates,  among other
things,  the realization of assets and satisfaction of liabilities in the normal
course of business.  As of December 31, 2002,  the Company has negative  working
capital  of  $1,033,429,   an  accumulated  deficit  of  $789,173,  losses  from
operations and lack of  operational  history,  among other matters,  which raise
substantial doubt about its ability to continue as a going concern.

The   financial   statements   do  not  include  any   adjustments   related  to
recoverability  and  classification of assets carrying amounts or the amount and
classification  of liabilities that might result should the Company be unable to
continue as a going concern.

Concentrations of Credit Risk
-----------------------------

Cash is  maintained  at various  financial  institutions.  The  Federal  Deposit
Insurance  Corporation  insures accounts at each institution for up to $100,000.
The Company had no such funds exceeding such limit at December 31, 2002.

As of December  31,  2002,  the Company had only one  contract  which it will be
deriving future revenue.

--------------------------------------------------------------------------------
Page 12

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------



1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Risks and Uncertainties
-----------------------

The Company operates in a highly competitive industry.  The Company's operations
are  subject  to  significant  risks  and  uncertainties   including  financial,
operational,  technological  and other risks  associated  with  operating such a
business including the potential risk of business failure.

Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------

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 the 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. Significant estimates made by management are, among
others,  estimates for current and deferred taxes,  recoverability of intangible
assets, collectibility of contract receivable, estimation of costs for long-term
contracts,  allowance  for loss on  contracts,  recoverability  of investment in
Biomoda and the  valuation of other  assets.  Actual  results  could  materially
differ from those estimates.

Other Current Assets
--------------------

Certain  assets  previously  classified  as inventory  are no longer used in the
Company's  on-going processes and are held for sale.  Management  estimates that
the net  realizable  value of these items  exceeds their  carrying  values as of
December 31, 2002.

Property and Equipment
---------------------

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

Investment in Biomoda, Inc.
---------------------------

Investment  in  Biomoda,  Inc.  ("Biomoda")  is  accounted  for under the equity
method.  During fiscal 2001,  the  investment was recorded under the cost method
since the  Company's  ownership  was not  sufficient  for the  investment  to be
accounted for under the equity method (see Note 4) and  management  believes the
Company did not exercise significant influence during such period.

--------------------------------------------------------------------------------
Page 13

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Goodwill and Intangible Assets
------------------------------

Statement of Financial  Accounting  Standard  ("SFAS")  142,  "Goodwill an Other
Intangible Assets," which is effective for fiscal years beginning after December
15, 2001 addresses how intangible assets that are acquired  individually or with
a group of other assets should be accounted for in the financial statements upon
their acquisition and after they have been initially recognized in the financial
statements.  SFAS 142 requires  that  goodwill and  intangible  assets that have
indefinite useful lives not be amortized, but rather be tested at least annually
for impairment.  In addition, SFAS 142 expands the disclosure requirements about
goodwill  and  other  intangible   assets  in  the  years  subsequent  to  their
acquisition.  Impairment  losses for  goodwill  and  indefinite-life  intangible
assets that arise due to the initial  application of SFAS 142 are to be reported
as  resulting  from a change in  accounting  principle.  However,  goodwill  and
intangible  assets acquired  after June 30, 2001 will be subject  immediately to
the  provisions  of SFAS 142.  The  adoption of SFAS 142 did not have a material
effect on the Company's financial statements.

The Company's  intangible assets consist mainly of debt origination costs, which
are shown at  historical  cost of  $50,000,  less  accumulated  amortization  of
approximately  $38,000. The cost is being amortized to interest expense over the
term of the related debt,  which is four years,  of which $12,500 was recognized
during the year ended December 31, 2002.

Long-Lived Assets
-----------------

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed  Of." SFAS 144,  which  supercedes  SFAS 121,  addresses  financial
accounting  and reporting for the  impairment or disposal of long-lived  assets.
SFAS 144 requires that  long-lived  assets be reviewed for  impairment  whenever
events or changes in circumstances  indicate that their carrying amounts may not
be  recoverable.  If the cost basis of a  long-lived  asset is greater  than the
projected  future  undiscounted  net  cash  flows  from  such  asset  (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as
the difference  between the cost basis of an asset and its estimated fair value.
SFAS 144 also requires  companies to separately report  discontinued  operations
and extends  that  reporting  to a  component  of an entity that either has been
disposed  of (by  sales,  abandonment  or in a  distribution  to  owners)  or is
classified as held for sale.  Assets to be disposed are reported at the lower of
the carrying  amount or fair value less costs to sell. The Company  adopted SFAS
144 on January 1, 2002.  The  provisions  of this  statement for assets held for
sale or other disposal generally are required to be applied  prospectively after
the adoption date to newly initiated commitments to plan to sell such assets, as
defined, by management.  As a result,  management cannot determine the potential
effects that  adoption of SFAS 144 will have on the  financial  statements  with
respect to future disposal decisions,  if any. At December 31, 2002,  management
has determined that no such review for impairment was required and therefore, no
adjustments  have been made to the carrying values of long-lived  assets.  There
can be no assurance,  however,  that market conditions will not change or demand
for the  Company's  products or services  will  increase,  which could result in
impairment of long-lived assets.

--------------------------------------------------------------------------------
Page 14

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition
-------------------

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin  101 ("SAB  101"),  "Revenue  Recognition,"  which  outlines  the basic
criteria  that  must be met to  recognize  revenue  and  provides  guidance  for
presentation  of revenue  and for  disclosure  related  to  revenue  recognition
policies  in  financial  statements  filed  with  the  Securities  and  Exchange
Commission. As the Company accounts for long-term contracts in accordance to SOP
81-1 (see below),  management  believes that the Company's  revenue  recognition
policy conforms to SAB 101.

In accordance  with Statement of Position 81-1,  "Accounting  for Performance of
Construction-Type and Certain  Production-Type  Contracts," the Company accounts
for  revenue  and costs  related  to its  long-term  contract  in process by the
completed-contract   method,  whereas  during  the  period  from  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 the period from May 22, 1996 (inception)
to December 31,  1999,  were  restated to apply the  completed  contract  method
retroactively.  The effect of the accounting change had no effect on net loss or
loss per share previously  reported for 1999 or for the period from 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.

Costs in excess of amounts  billed are  classified as current assets under costs
and estimated earnings in excess of billings on uncompleted contract.

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
$1,205,000  from  production  of the  first  unit  has been  recognized  through
December 31,  2002,  which  includes a current  year  expense of  $297,000.  The
Company's estimated cost to complete, as of December 31, 2002 is $285,000, which
is expected to be funded with cash,  billings on the  contract  and  contributed
capital.

In accordance with the contract terms, as amended, the anticipated delivery date
of the first unit is in  November  2003.  Unanticipated  delays  have  postponed
delivery resulting in the amended delivery date. During the contract period, the
Company is entitled to bill the customer as the following milestones are met:

--------------------------------------------------------------------------------
Page 15

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition (continued)
-------------------------------

Completion of board design                          $   65,000
Production                                             265,000
Completion                                             265,000
Acceptance after installation                          290,000
                                                    -----------
                                                    $  885,000
                                                    ===========

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 completed-contract  method. It is at least reasonably possible
that the estimate of completion  costs for this contract will be further revised
in the near-term.

Research and Development Costs
------------------------------

Research and development costs are expensed as incurred.

Income Taxes
------------

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

Basic and Diluted Loss Per Common Share
---------------------------------------

Under SFAS 128,  "Earnings  Per  Share,"  basic  earnings  per  common  share is
computed by dividing  income  available to common  stockholders  by the weighted
average  number of common shares  assumed to be  outstanding  during the period.
Diluted  earnings  per share is  computed  similar to basic  earnings  per share
except the  denominator is increased to include the number of additional  common
shares that would have been  outstanding if the potential common shares had been
issued and if the  additional  common  share were  dilutive  (using the treasury
stock  method).  There were no  additional  potential  shares of common stock at
December 31, 2002 and 2001.  Because the Company has incurred net losses,  basic
and diluted loss per share are the same as  additional  potential  common shares
would be anti-dilutive.

--------------------------------------------------------------------------------
Page 16

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock Based Compensation
------------------------

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

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

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

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

SFAS 148, "Accounting for Stock-Based  Compensation - Transition and Disclosure,
an amendment  of FASB  Statement  No.  123," was issued in December  2002 and is
effective  for fiscal years ending  after  December 15, 2002.  SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee  compensation.  In addition,  this
statement  amends the disclosure  requirements of SFAS 123 to require  prominent
disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used on reported results.

--------------------------------------------------------------------------------
Page 17

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------


1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock Based Compensation (continued)
------------------------------------

At December 31, 2002, the Company has one stock-based employee compensation plan
(the "Plan"),  which is described more fully in Note 8. The Company accounts for
the Plan under the recognition and measurement principles of APB 25, and related
interpretation.  No  stock-based  compensation  cost is  recognized in net loss.
Stock options  granted  under the Plan have exercise  prices equal to the market
value of the underlying  common stock on the dates of grant. The following table
illustrates  the  effect on net  income  and loss per share if the  Company  had
applied  the  fair  value  recognition  provisions  of SFAS  123 to  stock-based
employee compensation.

                                                    2002              2001
                                               ---------------   ---------------
Net loss:
    As reported                                $   (1,285,830)   $   (1,985,142)
    Deduct: Total stock-based employee
       compensation expense determined
       under fair value based method for
       all awards                                     (30,000)                -
                                               ---------------   ---------------
    Pro forma                                  $   (1,308,620)   $   (1,985,142)
                                               ===============   ===============

Basic and diluted net loss per share:
    As reported                                $        (0.01)   $        (0.03)
                                               ===============   ===============
    Pro forma                                  $        (0.01)   $        (0.03)
                                               ===============   ===============

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

Fair Value of Financial Instruments
-----------------------------------

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

--------------------------------------------------------------------------------
Page 18

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Business Combinations
---------------------

SFAS 141, "Business  Combinations," which is effective for business combinations
initiated  after June 30,  2001,  eliminates  the pooling of interest  method of
accounting for business combinations and requires that all business combinations
occurring  after July 1, 2001 are accounted for under the purchase  method.  The
adoption of SFAS 141 did not have a material  impact on the Company's  financial
statements.

Significant Recent Accounting Pronouncements
--------------------------------------------

SFAS 143, "Accounting for Asset Retirement  Obligations,"  establishes standards
associated with the retirement of tangible  long-lived assets and the associated
asset  retirement  costs.  This statement is effective for financial  statements
issued for fiscal  years  beginning  after June 15,  2002.  The Company does not
expect SFAS 143 to have a material effect on its financial statements.

SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," is
effective for such activities  initiated after December 31, 2002.  Activities of
this  type  include  restructurings  (such  as  relocation  of  a  business  and
fundamental  reorganizations of a business itself), which may give rise to costs
such as contract  cancellation  provisions,  employee  relocation,  and one-time
termination  costs.  SFAS 146 prohibits  liability  recognition  based solely on
management's intent, and requires that liabilities be measured at estimated fair
value.  Management  has not  determined  the effect,  in any, of SFAS 146 on the
Company's future financial statements.

Management  does  not  believe  that  or has  not  determined  if  other  recent
significant  accounting  pronouncements  will  have  a  material  effect  on the
Company's future financial statements.

Reclassifications
-----------------

Certain   amounts   presented  in  the  2001  financial   statements  have  been
reclassified to conform to the current year's presentation.


2. COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS

Costs and  billings  on  uncompleted  contracts  are  summarized  as  follows at
December 31, 2002:


Costs incurred on uncompleted contract                      $  1,970,349
Billings on uncompleted contract                                 (90,000)
Less allowance for loss on contract                           (1,205,000)
                                                            -------------
                                                            $    675,349
                                                            =============

--------------------------------------------------------------------------------
Page 19

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------


3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2002:

Machinery and equipment                                     $    283,927
Furniture and fixtures                                            78,092
Automobiles                                                       43,313
Leasehold improvements                                            21,351
                                                            -------------
                                                                 426,683

Less accumulated depreciation and amortization                  (301,433)
                                                            -------------

                                                            $    125,250
                                                            =============


4. RELATED PARTY TRANSACTIONS

Notes Receivable
----------------

As of December  31, 2002,  the Company has net  advances to an officer  totaling
$308,902.  The  advances  accrue  interest  at  rates  ranging  from  5%  to  6%
(approximately  $15,000 and $19,000 of interest income has been recorded for the
year ended  December  31,  2002 and 2001,  respectively)  and are due on demand.
Approximately $215,000 of the note receivable relates to the exercise of certain
stock  options  (see Note 8). As these notes  receivable  are with the  majority
shareholder and a Company officer, the Company has reclassified these amounts as
an increase to stockholders' deficit at December 31, 2002.

In December 2002, the Company advanced  $38,432 to Biomoda.  The advances accrue
interest at 5% and are due on demand. The related advances are included in notes
receivable from related parties in the accompanying balance sheet.

Investment In Biomoda, Inc.
---------------------------

As of December 31, 2002,  the Company owned  1,072,285 or 18.6% of the 5,765,282
outstanding shares of Biomoda, a development stage company involved primarily in
the  development  of  technology  for the early  detection of lung cancer.  As a
development  stage company,  Biomoda has not had any revenues as of December 31,
2002.

--------------------------------------------------------------------------------
Page 20

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------


4. RELATED PARTY TRANSACTIONS

Investment In Biomoda, Inc. (continued)
---------------------------------------

Biomoda is a private  company that is currently in the  securities  registration
process.  Biomoda  has  filed a revised  SB-2  registration  statement  with the
Securities and Exchange Commission,  in which they are offering 5,000,000 shares
of its common stock. The initial offering price is $6.00 per share,  however the
price  that  Biomoda,  and the  Company,  will be able to sell the shares is not
determinable. A market for Biomoda's shares has not been established,  therefore
the potential value of the Company's investment cannot be measured. There can be
no assurance  that if the Company was to sell such  investment  that it would be
able to on terms  favorable  to the Company or for the initial  offering  price.
Factors such as dilution, blockage and a lack of market may be encountered.

For the year ended December 31, 2001, the Company  reported it investment  under
the cost method since its ownership was not  sufficient for the investment to be
accounted for using the equity method. During 2002, the Company's influence over
Biomoda  increased such that the investment  qualified for accounting  under the
equity  method.  The  Company  has  recognized  the  proportionate  interest  in
Biomoda's  net loss for the year ended  December  31,  2002 in the  accompanying
statements of operations. Retroactive recognition of the Biomoda losses prior to
fiscal  2002  amounted to $97,674  and is  recorded  directly  to the  Company's
deficit accumulated during the development stage at December 31, 2002.

The  carrying  value of the  investment  as of December 31, 2002 is the original
investment  cost  adjusted  by the  Company's  proportionate  interest in losses
reported by the investee through December 31, 2002.

During the year ended  December  31,  2002,  the  Company  sold a portion of its
interest in Biomoda to an individual for proceeds of $28,930.

A summary of the investment is as follows:

       Original cost                                         $   383,845
       Equity in loss of investment                             (247,250)
       Amortization of excess of cost over book value            (42,500)
       Sale of investment                                        (28,930)
                                                             ------------
                                                             $    65,165
                                                             ============


--------------------------------------------------------------------------------
Page 21

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------

5. NOTES PAYABLE

Notes payable consists of the following at December 31, 2002:


Note payable  to   a financial institution; matured
     during  the   year  ended  December  31, 2002,
     including  interest  at 8%, and  secured by an
     automobile.  The note was paid off  subsequent
     to  December 31, 2002.                                   $      5,750


Note  payable to a financial institution;  maturing
     in  October  2003,  including  interest at the
     institution's base rate (5.75% at December 31,
     2002) plus 1.5%, and secured by equipment. The
     Company made no principle payments on the note
     during the year ended December 31, 2002, which
     automatically puts the note  into  default and
     immediately due. The Company received a waiver
     from the  institution,  which  resulted in the
     maturity  date   remaining  in  October  2003.
     Subsequent  to  year-end,  the  Company   made
     payments totaling approximating $20,000.                       32,360
                                                              -------------
                                                              $     38,110
                                                              =============


6.  CONVERTIBLE DEBENTURES

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

--------------------------------------------------------------------------------
Page 22

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------



6. CONVERTIBLE DEBENTURES (continued)

On September 15, 2000, the Company issued $500,000 of the initial  $2,000,000 in
unsecured convertible  debentures discussed above.  Effective as of the issuance
date, the debentures are  convertible  into shares of common stock at the lesser
of a 25 percent  discount to the average of the three lowest  closing bid prices
during  the  thirty  trading  days prior to the issue date of this note and a 20
percent  discount to the average of the three lowest  closing bid prices for the
ninety  trading days prior to the  conversion  date, as defined.  The debentures
were issued in exchange  for  $430,000 in cash,  $20,000 in legal  services  and
$50,000  in  commissions.   The  commissions   have  been  capitalized  as  debt
origination  costs and are being amortized to interest  expense over the life of
the  debentures.  The  embedded  intrinsic  value of the  beneficial  conversion
feature was estimated to be $238,830,  which was immediately charged to interest
expense.  The convertible  debentures also include  detachable  warrants for the
purchase of 500,000  shares of common  stock at an  exercise  price of $0.38 per
share,  which vested upon grant and expired in September  2005.  Management  has
estimated the fair market value of these warrants at $25,000 (based on the Black
Scholes  pricing  model  pursuant  to SFAS 123 and EITF  00-27) and  immediately
charged such amounts to interest expense.  The principal balance at December 31,
2002 totaled approximately $335,000.

On November  7, 2000,  the  Company  entered  into an  agreement  that  modified
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  for  the  Company's  7.5%  convertible  debentures  and  other
consideration.  The total amount of the convertible debentures totaled $740,667,
including  $30,667 of interest.  The debentures are  convertible  into shares of
common  stock at the lesser of the  stock's  closing  price on March 8, 2000 and
77.5% of the  average of the five  lowest  closing bid prices for 20 days before
November 2, 2000. The intrinsic value of the conversion feature was estimated to
be  $227,898,   which  was  immediately  charged  to  expense.  The  convertible
debentures also include detachable warrants for the purchase of 71,000 shares of
common stock, which value was  insignificant.  The principal balance at December
31, 2002 totaled approximately $575,000.

During 2001, the Company issued convertible  debentures  totaling $500,000.  The
debentures are  convertible  into shares of common stock at the lesser of (i) 75
percent of the average of the three lowest closing bid prices for 30 days before
August 30 and  November  19, 2001 or (ii) 80% of the average of the three lowest
closing  bids  during the 90 days prior to the  conversion  date.  The  embedded
intrinsic  value  of the  beneficial  conversion  feature  was  estimated  to be
$143,875 and immediately charged to interest expense. The convertible debentures
also include  detachable  warrants for the purchase of 500,000  shares of common
stock,  of which 300,000 shares are  exercisable at $0.31 and 200,000 shares are
$0.33 and vested  immediately.  Management has  determined  that the fair market
value of these warrants was insignificant. The principal balance at December 31,
2002 totaled approximately $265,000.

Also during 2001,  7,064,886  shares of common stock were issued upon conversion
of $154,073 of the convertible debentures.

--------------------------------------------------------------------------------
Page 23

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------


6. CONVERTIBLE DEBENTURES (continued)

During the year ending December 31, 2002, 78,695,566 shares of common stock were
issued upon  conversion  of  approximately  $370,000  and  $60,000 of  debenture
principal and interest, respectively (see Note 8).


7. INCOME TAXES

During  fiscal  2002 and  2001,  the  provision  for  taxes  (substantially  all
deferred)  differs from the amounts computed by applying the U.S. Federal income
tax  rate of 34% to  income  before  provision  for  taxes  as a  result  of the
following:

                                                      2002           2001
                                                 -----------    -----------

Computed "expected" tax (benefit) expense        $ (435,000)    $ (675,000)

Addition to (reduction) in income taxes
  resulting from:
    State income taxes, net of federal benefit      (85,000)      (131,000)
    Change in deferred tax asset
       valuation allowance                          402,000        669,000
    Non-deductible expenses                         118,000        137,000
                                                 -----------    -----------
                                                 $        -     $       -
                                                 ===========    ===========

The total  valuation  allowance  increased by $402,000  and $669,000  during the
years ended December 31, 2002 and 2001, respectively.

The effects of temporary  differences that give rise to significant  portions of
the deferred taxes at December 31, 2002 are presented below:


Deferred tax asset:
    Tax net operating loss carryforwards                        $ 3,675,000
    Allowance for doubtful accounts                                 463,000
                                                                ------------
                                                                  4,138,000
Deferred tax asset valuation allowance                           (4,138,000)
                                                                ------------
                                                                $        -
                                                                ============

--------------------------------------------------------------------------------
Page 24

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------

7. INCOME TAXES (continued)

At December 31, 2002,  the Company had net tax operating loss  carryforwards  of
approximately  $9,566,000  and  $4,783,000  available to offset  future  taxable
federal and state income, respectively. If not utilized to offset future taxable
income,  the  carryforwards  will expire in various  years  through 2023. In the
event the Company  were to  experience a greater than 50% change in ownership as
defined in Section 382 of the Internal  Revenue  Code,  the  utilization  of the
Company's tax net operating loss carryforwards could be severely restricted.


8. STOCKHOLDERS' EQUITY

Preferred Stock
---------------

The Company's  articles of  incorporation  authorize up to 10,000,000  shares of
$0.001 par value preferred stock. Shares of preferred stock may be issued in one
or more classes or series at such time as the Board of Directors  determine.  As
of December 31, 2002, there were no shares of preferred stock outstanding.

Common Stock
------------

During the year ended December 31, 2001,  the Company sold  1,382,778  shares of
common  stock for $68,227 in cash and issued  10,461,498  shares of common stock
for  services  from  contractors,  officers  and  others,  which were  valued at
$422,745 (estimated by the Company based on the closing market price on the date
of grant).  The value of such services is included in operating  expenses in the
accompanying statements of operations.

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

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

During the year ended December 31, 2002, the Company issued 96,048,000 shares of
common stock for services,  which were valued at $155,321  (based on the closing
market  price on the date of  grant,  which was less than  $0.01).  The  Company
recorded such amounts in the accompanying statement of operations.

During the year ended December 31, 2002, the Company issued 10,820,000 shares of
common stock for services,  which were valued at $123,318  (based on the closing
market  price on the date of  grant,  which  approximated  $0.01).  The  Company
recorded such amounts in the accompanying statement of operations.


--------------------------------------------------------------------------------
Page 25

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------


8. STOCKHOLDERS' EQUITY (continued)

Common Stock (continued)
------------------------

During the year ended December 31, 2002, the Company issued  8,900,000 shares of
common stock for services,  which were valued at $203,430  (based on the closing
market  price on the date of  grant,  which  approximated  $0.02).  The  Company
recorded such amounts in the accompanying statement of operations.

During the year ended  December 31, 2002,  the Company  issued 205,850 shares of
common stock  (based on the fair market value on the dates of grant,  which were
less than $0.01) held as treasury stock for cash totaling  $1,151 on a first-in,
first-out basis.

During the year ended  December 31, 2002,  the Company  issued 225,150 shares of
common  stock  (based on the fair  market  value on the  dates of  grant,  which
approximated  $0.01)  held as  treasury  stock  for cash  totaling  $4,448  on a
first-in, first-out basis.

During the year ended  December 31, 2002,  the Company  issued  76,800 shares of
common  stock  (based on the fair  market  value on the  dates of  grant,  which
approximated  $0.03)  held as  treasury  stock  for cash  totaling  $2,230  on a
first-in, first-out basis.

During the year ended December 31, 2002, the Company  repurchased 735,000 shares
of its  outstanding  common  stock  (based on the fair market value on the dates
repurchase,  which were less than $0.01) for cash totaling $1,427.  These shares
are included in the  accompanying  balance  sheet under  treasury  stock and are
recorded at cost.

During the year ended December 31, 2002, the Company  repurchased 660,000 shares
of its  outstanding  common  stock  (based on the fair market value on the dates
repurchase, which approximated $0.01) for cash totaling $7,134. These shares are
included in the accompanying balance sheet under treasury stock and are recorded
at cost.

In January 2002, the Company issued 1,100,000 shares of its outstanding stock in
connection with the exercise of stock options by an officer of the Company for a
note  receivable,  which is due on demand,  totaling  $22,000  (see Note 4). The
Company has recorded the note receivable as an increase to stockholders' deficit
in the accompanying balance sheet.

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

--------------------------------------------------------------------------------
Page 26

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------

8. STOCKHOLDERS' EQUITY (continued)

Common Stock (continued)
------------------------

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

During the year ended  December  31, 2002,  in  accordance  with the  applicable
convertible  note payable  agreement,  the Company  issued  2,165,000  shares of
common stock at conversion prices of approximately  $0.02 in connection with the
conversion of notes payable of approximately  $35,000,  including  approximately
$2,000 of accrued interest.

Stock Options
-------------

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

In January 2002, the Company granted  1,500,000 options to three officers of the
Company.  The exercise  price of the options is $0.02 per share (the fair market
value  of  the  Company's  common  stock  on  the  date  of  grant)  and  vested
immediately.  The  options  expire  four years from the date of grant.  As noted
above,  1,100,000 of the options were  exercised  during the year ended December
31, 2002.

In August 2002,  in  connection  with a settlement  agreement  (see Note 9), the
Company  granted  750,000  options  to a former  employee  of the  Company.  The
exercise  price of the  options is $0.09 per share and were  valued at $0 (using
the Black  Scholes  option  pricing  model).  The options  vested upon grant and
expire in August 2003.



--------------------------------------------------------------------------------
Page 27

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------



8. STOCKHOLDERS' EQUITY (continued)

Stock Options (continued)

The following is a status of the stock options  outstanding at December 31, 2002
and the changes during the two years then ended:
<TABLE>
<S>                          <C>             <C>             <C>          <C>



                                   Year Ended December 31,       Year Ended December 31,
                                           2002                           2001
                                 ---------------------------   ---------------------------

                                                 Weighted                      Weighted
                                                  Average                       Average
                                   Options         Price         Options        Price
                                 -----------   -------------   -----------   -------------

Outstanding, beginning of year    3,825,000      $   0.27       3,825,000      $   0.27

Granted                           2,250,000          0.04              --            --

Exercised                        (1,100,000)         0.02              --            --

Cancelled/Terminated                     --            --              --            --
                                 -----------   -------------   -----------   -------------

Balance, end of year              4,975,000      $   0.23       3,825,000      $   0.27
                                 ===========   =============   ===========   =============

Exercisable, end of year          4,975,000      $   0.23       3,825,000      $   0.27
                                 ===========   =============   ===========   =============

Weighted average fair value of options
granted                                          $   0.01
                                               =============

</TABLE>


All of the outstanding options at December 31, 2002 have exercise prices between
$0.02 per share to $0.34 per share,  with a weighted  average  exercise price of
$0.23 and a weighted average remaining contractual life of 2.03 years.

Had  compensation  costs for the  Company's  options  granted to employees  been
determined  under SFAS 123 for fiscal  2002,  the  minimum  value of each option
would have been estimated  using the  Black-Scholes  option pricing model on the
date of grant  using the  following  assumptions:  (i) no dividend  yield,  (ii)
average  volatility of 365%,  (iii) weighted  average risk free interest rate of
approximately  3.5% and (iv) average expected useful life of 4 years. There were
no options granted during fiscal 2001.


--------------------------------------------------------------------------------
Page 28

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------



8. STOCKHOLDERS' EQUITY (continued)

Warrants
--------

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

During the year ended December 31, 2001, the Company issued warrants to purchase
500,000  shares of the  Company's  common stock in connection  with  convertible
debentures  (see Note 6). The exercise  price of the  warrants is  approximately
$0.03 per share (the fair market value of the Company's common stock on the date
of grant) and vested  immediately.  The warrants expire five years from the date
of issuance.

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

The following  represents a summary of warrants  outstanding for the years ended
December 31, 2002 and 2001:

<TABLE>
<S>                            <C>           <C>             <C>             <C>


                                   Year Ended December 31,       Year Ended December 31,
                                           2002                          2001
                                 ---------------------------   ---------------------------

                                                 Weighted                      Weighted
                                                  Average                       Average
                                   Warrants       Price          Warrants        Price
                                 -----------   -------------   -----------   -------------

Outstanding, beginning of year    8,346,000       $  0.25       7,846,000      $   0.27

Granted                             300,000          0.02         500,000          0.03

Exercised                                -             -               -             -

Cancelled/Terminated                     -             -               -             -
                                 -----------   -------------   -----------   -------------

Balance, end of year              8,646,000       $  0.25       8,346,000      $   0.25
                                 ===========   =============   ===========   =============

Exercisable, end of year          8,646,000       $  0.25       8,346,000      $   0.25
                                 ===========   =============   ===========   =============

Weighted average fair value of warrants
granted                                           $  0.02
                                               =============
</TABLE>


--------------------------------------------------------------------------------
Page 29

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------



8. STOCKHOLDERS' EQUITY (continued)

Warrants (continued)
--------------------

4,650,000 of the warrants  outstanding at December 31, 2002 have exercise prices
ranging  from  $0.02 per  share to $0.15  per  share,  with a  weighted  average
exercise price of $0.13 and a weighted  average  remaining  contractual  life of
1.88 years.  3,941,000 of the outstanding  warrants have exercise prices ranging
from $0.34 per share to $0.43 per share,  with a weighted average exercise price
of $0.37 and a weighted average remaining contractual life of 2.68 years. 55,000
of the  outstanding  warrants  have an  exercise  price of $1.62 per share and a
weighted average remaining contractual life of 2.19 years.

The fair value of each warrant  granted during fiscal 2002 and 2001 is estimated
using the  Black-Scholes  pricing model on the date of grant using the following
assumptions:  (i) no dividend  yield,  (ii) average  volatility of 365% and 43%,
(iii) weighted average risk free interest rate of approximately 3.5% and 6%, and
(iv) average expected life of 4 years and 4years, respectively.


9. COMMITMENTS AND CONTINGENCIES

Leases
------

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

Rental  expense for operating  leases  approximated  $51,000 for the years ended
December  31, 2002 and 2001,  respectively  and  approximated  $200,000  for the
period from May 22, 1996 (inception)  through  December 31, 2002.  Rental income
from the  sublease  to  Biomoda,  Inc.  approximated  $2,400  for the year ended
December  31,  2002 and for the period  from May 22,  1996  (inception)  through
December  31,  2002  and  has  been  included  in  operating   expenses  in  the
accompanying statement of operations.

Payroll Taxes
-------------

The  Company has  recorded an accrual for past due payroll  taxes as of December
31, 2002 due to the under-reporting of the Company's payroll tax liability. As a
result, the Company has accrued approximately $160,000 (including  approximately
$20,000 of penalties and interest)  under accrued  expenses in the  accompanying
balance  sheet at  December  31,  2002.  The Company  expects  this matter to be
settled and the related accrual paid by December 2003.



--------------------------------------------------------------------------------
Page 30

<PAGE>
--------------------------------------------------------------------------------
                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                 For the Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------



9. COMMITMENTS AND CONTINGENCIES (continued)

Settlement Agreement
--------------------

In August 2002,  the Company  entered into a settlement  agreement with a former
employee in which the Company is obligated to pay up to $75,000  contingent upon
milestones from sales of the Company's common stock for cash, as defined.

Legal
-----

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


10. SUBSEQUENT EVENTS

Subsequent to December 31, 2002,  the Company issued  approximately  196,000,000
shares of common stock. The subsequent share issuances  consist of approximately
146,000,000  shares for cash and  approximately  50,000,000 shares in connection
with the conversion of debentures.

Subsequent  to December 31, 2002,  the Company made payments on notes payable of
approximately  $28,000.  Therefore,  the outstanding balance on notes payable at
March 31, 2003 approximated $10,000.

--------------------------------------------------------------------------------
Page 31