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, 1998         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. _X_

The issuer's revenues for its most recent fiscal year were $178,200.

The aggregate market value of the voting stock held by non-affiliates of the
issuer on December 31, 1998 based upon the average bid and asked prices of such
stock on that date was $1,706.703. The number of issuer's shares of Common Stock
outstanding as of December 31, 1998 was 20,728,578.

Transitional Small Business Disclosure Format (check one): Yes ___ No _X_


<PAGE>


                                     PART I


                         ITEM 1. DESCRIPTION OF BUSINESS

General


Advanced Optics Electronics, Inc. (ADOT-NASDAQ BB) is a technology company based
in Albuquerque, New Mexico. Its primary focus is the development, production and
sales of its novel and innovative electronic flat panel displays. The company
maintains an R&D facility and manufacturing plant, and is engaged in building
large-scale flat panel displays utilizing its patented technology.

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

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

Products

Advanced Optics Electronics, Inc. management has concentrated its efforts in
developing its proprietary Spatial Light Modulator (SLM) flat panel display at
the Company's facilities.

The SLM light valve works the same as a water valve controlling the water flow
in a water pipe. Here the valve is controlled electronically; the valve will
respond to an electrical input and will modulate the light passing through the
valve. By reducing the valve size (.001 inch square) and placing them in a
matrix, an SLM is formed.

The major advantages of the SLM flat panel displays are viewing quality,
affordability, customer system integrity, and remote change in seconds to reduce
advertising site maintenance.

The primary initial product, which will be marketed to users of Outdoor
Advertising Billboards, is a large-scale electronic flat panel display. The
development of AOE's product represents the first time that such display
technology is available for Outdoor Advertising Billboards.

The Company's product has benefits over traditional billboards of providing
dynamic, eye-catching ads and rapid change of image to provide for multiple
advertisers during a 24-hour period. The ability to change images from a remote
location will provide advertisers with immediate access to billboard markets.

The AOE billboard display will provide an image 13' X 36' which is approximately
the same size as existing billboards.


                                                                               2
<PAGE>


The major advantages of the Advanced Optics Electronics, Inc. flat panel
displays are better viewing quality, affordability, customer system integrity,
and remote change in seconds to reduce advertising site maintenance. They are
also inexpensive to produce relative to alternative systems.

In addition, none of these technologies can be scaled (driven larger or smaller)
as well as can the Advanced Optics Electronics, Inc. solution.

Marketing 

After researching various markets including laptop computers, HDTV flat screen
industries, and Outdoor Advertising/Billboards, management has decided to
concentrate its full efforts and attention on marketing to the Electronic
Outdoor Advertising/Billboards industry.

Management believes that, due to the Highway Beautification Act, the number of
billboards nationwide will not increase dramatically but should remain stable.
Advertisers will place increased focus on securing and developing prime
billboard locations. The customer base for billboards is diversifying as more
advertisers are attracted to this media. Management's market penetration
analysis is based on capturing existing sites in a stable market.

It is anticipated that the company's product and marketing strategy will create
a new segment of the outdoor advertising market while leveraging the underlying
growth and excellent fundamentals of the existing market.

Revenues will be derived from a combination of direct sales, owned and operated
billboards, leasing, licensing, and partnerships. Experienced professionals in
finance, marketing, and research are leading management.

Customers

Over the past ten years, there has been considerable consolidation in Outdoor
Advertising. The four leaders in the industry currently account for
approximately 48% of the billboard market. Media companies have been buying
billboard owners in order to offer packages of TV, radio and newly acquired
outdoor space to advertisers.

Initial customer contact will be through the company by directly communicating
with potential customers. Management is developing a marketing department to
follow through on each transaction and coordinate with manufacturing.

Competition

Advanced Optics Electronics, Inc. will compete against established forms of
electronic display technology. Management believes that its planned products
will be superior to these established products. To management's knowledge, no
other company is currently working on like products. Management nevertheless
believes that its products and technologies will be subject to substantial
competition as the market and technologies evolve.

CRT's and passive and active LCD's currently dominate the electronic display
market. Primarily large multi-national companies manufacture them. However,
these current industry leaders have hit


                                                                               3
<PAGE>


very difficult technical hurdles in extending the performance of their displays
using current methods.

The Company will compete with the existing Billboard display techniques of hand
painted or printed and pasted signs. Recently, the trend has been 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. Management believes
these forms of billboard presentations will only be viable in low density/low
traffic areas.

Approximately 65% of billboards were booked on 12-month contracts last year.
Long term contracts could potentially limit the access to desirable sites during
the start-up period. Management believes however, that the trend is to go to
shorter-term contracts with significant turnover.

Sources and availability of raw materials

The Company's major raw material PLZT. PLZT is ceramic material with
electro-optic properties. PLZT is readily available from several sources
including PRAXAIR and AURA.

Patents

The company's latest Patent Pending #9247157 relates to an Electro-Optic Light
Valve Array. This invention describes a high-density, high-resolution array of
light valves that can be selectively activated by low induced voltages to alter
a light beam passing through the array.

The present invention also relates to a process for manufacturing such a
high-density light valve array using semiconductor-type processing equipment and
techniques. This constitutes a significant improvement over prior techniques by
the use of semiconductor processing technology to further increase pixel density
and reduce activation voltage. It further offers the advantage of increased
light transmission (brightness) by a reduction in surface area.

Research and Development Activities

In fiscal 1998, which ended December 31, 1998, $148,123 was spent on research
and development activities. In 1997 $10,521 was spent on research and
development activities. The expenditures are primarily the result of costs
associated with the Company's efforts in developing its proprietary Spatial
Light Modulator (SLM) flat panel display.

Employees

As of December 31, 1998, the Company has approximately 10 full-time employees
and one part-time employee. The Company also contracted with other personnel and
subcontractors for various projects on an as-needed basis.

ITEM 2. DESCRIPTION OF PROPERTY

The company maintains a 5,000 square foot headquarters facility at 8301
Washington NE, Suite 5 in Albuquerque, New Mexico. This includes the executive
offices, research and development facility 


                                                                               4
<PAGE>


and manufacturing plant. The facility is in good condition with no material
defects or deferred maintenance. The facility is leased from unaffiliated third
parties under a lease that expires June 16, 2000. The lease may be extended at
the Company's option for an additional one-year term. Management believes that
its existing facility space currently under lease is sufficient for its current
activities and potential growth in the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

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

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

There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1998.

There was a special meeting of the Board of Directors held on December 9, 1998
at which Harold Herman was elected as a new Director. The term for directors is
3 years. Leslie Robins and Michael Pete continued their term of office as
Directors after the meeting. The resignation of Francisco Urrea Jr. as a
Director was acknowledged and accepted in November 1998.



                                                                               5
<PAGE>


                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

The table below sets forth the high and low bid prices for the Common Stock as
reported by NASDAQ. 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 1997:
--------------------------------------------------------------------------------
             1st Quarter                         $2.50               $.25
--------------------------------------------------------------------------------
             2nd Quarter                           .81                .19
--------------------------------------------------------------------------------
             3rd Quarter                          1.63                .29
--------------------------------------------------------------------------------
             4th Quarter                           .88                .19
--------------------------------------------------------------------------------
Fiscal 1998:                                                     
--------------------------------------------------------------------------------
             1st Quarter                         $.57               $.15
--------------------------------------------------------------------------------
             2nd Quarter                           .30                .18
--------------------------------------------------------------------------------
             3rd Quarter                           .23                .11
--------------------------------------------------------------------------------
             4th Quarter                           .12                .04
--------------------------------------------------------------------------------
                                                                 
                                                             
As of December 31, 1998 the Company estimates that there were approximately 250
shareholders directly and in street name. The Company has never paid cash
dividends on its Common Stock and does not anticipate paying cash dividends in
the near future.

ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS

Forward - Looking Statements

This Annual Report 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


                                                                               6
<PAGE>


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 Annual Report, 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.

Liquidity and Capital Resources

The Company relies upon the current placement of its securities to provide
capital for its development of prototype units and manufacturing operations. The
Company's holding in BioModa, Inc will provide additional liquidity.

BioModa is a biomedical development company. The Company's ownership of BioModa,
as of December 31, 1998, was 21.93%. The Company holds options to increase this
position to 26.4%. No immediate family members of officers or directors of
Advanced Optics Electronics, Inc. are securities holders of BioModa.


It is believed that sales of securities will provide adequate capital resources
to meet the anticipated developmental stage requirements through the third
quarter of fiscal year 1999. At that time it is anticipated that sales of flat
panel displays will begin and contribute to operating revenues.

During the fiscal year ended December 31, 1998 $135,344 was spent for the
purchase of equipment. Product development expenditures were $148,123 in 1998.
Funds for operation needs, product development and capital expenditures were
provided from the sale of securities and cash reserves.

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

Results of Continuing Operations

Fiscal 1998 Compared to Fiscal 1997

Revenues increased 247.5% to $178,200 in 1998 from $72,000 in 1997. The increase
was due primarily to revenues from the contract in place.

Research development and technical costs increased to $148,123 in 1998 from
$10,521 in1997. The increase in these costs is due primarily to research and
development efforts.

General and administrative costs increased to $490,296 in 1998 from $73,421 in
1997 due to increases in salaries related to changes in personnel and increases
in professional fees.


                                                                               7
<PAGE>


Depreciation increased to $60,037 in 1998 from $37,156 in 1997 due primarily to
depreciation expense for equipment acquired under capital leases.

Fiscal 1997 Compared to Fiscal 1996

The Company was started in 1996. Advanced Optics Electronics, Inc. was organized
as a Nevada Corporation on May 22, 1996. It acquired the business and patents of
PLZTech on November 7, 1996.

Revenues increased to $72,000 in 1997 from $0 in 1996. These revenues were
generated by a contract to provide large panel displays to a customer.

Research development and technical costs decreased to $10,521 as compared to
$30,474 in 1996.

General and Administrative costs increased to $73,421 from $17,969 in 1996. This
was due to increases in salaries related to changes in personnel and increases
in professional fees.

Amortization and Depreciation increased to $37,156 in 1997 from $3,578 in 1996.
This was due primarily to depreciation expense for equipment that was acquired
under capital leases.

Professional Expenses increased to $33,644 in 1997 from $21,739 in 1996. The
increase was the result of professional fees for engineering and legal services.

The total notes payable for the Company decreased from $44,571 in 1996 to
$25,455 in 1997. As a result of the reduction in notes, interest expense
decreased by $1,194 from $3,142 in 1996 to $1,948 in 1997.

Accounting Matters

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


ITEM 7. FINANCIAL STATEMENTS

The financial statements and notes thereto, together with the report thereon of
Neff and Company (the Company's accountants) dated March 12, 1999, 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.

None.





                                                                               8
<PAGE>


                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth information, as of December 31, 1998, concerning the
Company's directors and executive officers:


<TABLE>
<CAPTION>
Name                           Age      Position                                        Since
<S>                            <C>      <C>                                             <C> 
Michael Pete                   52       President, Treasurer, Director                  July 1994
Leslie S. Robins               60       Exec. Vice Pres., Secretary, Chairman           November 1992
Dr. Roger A. Boggs             51       Sr. Vice President-Research                     June 1996
Dr. Garth W. Gobeli            70       Chief Scientist                                 May 1998
Dr. Albert Goodman             73       Science Advisor                                 April 1995
Harold C. Herman               73       Director                                        December 1998
</TABLE>


Michael H. Pete is the President, Treasurer, and a Director since July 1994 to
the present. Developed and coordinated satellite transmission plans. Interface
with DOD regarding the flat panel initiative. From 1990 to 1994 President of
SEES New Mexico Inc. SEES New Mexico, Inc. was a company involved in developing
specialized computer programs for use by various governmental state agencies in
New Mexico. He worked with the Los Alamos and Sandia National R&D Laboratories
creating and implementing information management systems. From 1982 to 1990 he
was President of Phoenix Filtration Systems. Phoenix Filtration Systems was a
company that set up oil filtration systems used by the oil industry. From 1979
to 1981 he was a Technical Management Consultant in the Office of the Secretary,
DOE. From1977 to 1979 he worked as a Project Manager for the consulting firm
Booz, Allen and Hamilton. 1975 to 1977 Office director, Low Income
Weatherization Federal Energy Administration, Wash. D.C. Williams College, BA;
Stanford University, Business and private sector management.

Leslie S. Robins is the Executive Vice President, Secretary and Chairman of the
Board of Directors since January 1993 to the present. Supervised scientists and
technicians in completion of final research for end use in flat panel displays.
Developed cost estimates and time lines and manufacturing procedures for flat
panel display program, formulated patent strategy, raised interim financing.
From November 1989 to December 1992 Managing Partner of Coronado Group,
performing analysis of small technology companies. From May 1986 to June 1989 he
was Executive Vice President of Triton Productions Inc. From September 1978 to
October 1987 Managing Partner of Longview Mgmt.; investment managers for
individuals in the entertainment industry. University of Miami, BS; Harvard
University, MBA program.

Dr. Roger A. Boggs is Senior Vice President of Research from June 1996 to the
present. Polaroid Corporation, June 1974 to present. Project manager laser
media. Responsible for budget and delivery of laser ablation media for direct
digital color products. Dr. Boggs managed 15 material system and analytical
scientists in development of product applications. He led a group of nine
professionals in design of infrared dyes and acid providing compounds for
application in electrically imaged media. Led effort to invent and developed set
of three proprietary IR dyes for laser imaged, photographic three-color product.
Ph.D. Univ. Wisconsin.


                                                                               9
<PAGE>


Dr. Garth Gobeli is Chief Scientist from April 1998 to the present. He has been
a science consultant to various technology companies. From 1993 to 1995 he was
the head of research for PLZTECH. From January 1990 to April 1992, Senior
Scientist at Foresight in Albuquerque, New Mexico. Dr. Gobeli was responsible
for the design, fabrication and testing of optics and illumination components
developed by Foresight. From 1989 to 1991, principal of Chromex , where Dr.
Gobeli designed and supervised prototype manufacture and marketing of imaging
spectrographs. Also, developed special analysis oriented package. Prepared and
received a number of SBIR grants. 1987 to 1988, Scientist at CVI Laser, Inc.
Responsible for developing and bringing to market double beam spectrometer. 1980
to 1987, Principal at Hanseatic Group in Albuquerque, NM where he developed
computer models for forward hedging of currencies, interest rates and portfolio
immunization. 1966 to 1979, Senior Scientist at Sandia National Labs Physical
Optics Group. From 1959 to1966, Physicist at Bell Telephone Labs, Murray Hill,
New Jersey. Gobeli holds several patents, DOD Secret Clearance, PhD Purdue
University, Physics.

Albert Goodman, Ph.D. is the Science Advisor of the Company from April 1995 to
the present. From 1992 to 1998, Dr. Goodman worked for Technologies Specialties
Inc. where he was the Vice President of Research. From 1985-1992, Dr. Goodman
worked for Advanced Sciences Inc. where he managed and monitored several defense
R&D programs. From 1981-1985, Dr. Goodman was science advisor for Kalatek
Products Inc. Dr. Goodman worked as an independent Science consultant and
adviser from 1977-1985.

Dr. Goodman worked for Hazeltine Electronic Corporation from 1945-1946 where he
analyzed and participated, in the redesign of radar components to be used by the
U.S. Navy. From 1946-1949, Dr. Goodman was with Los Alamos National Labs, which
carried out experiments on transmission of neutron beams by materials. From
1949-1956, Dr. Goodman worked for Sandia National Labs. Again from 1956-1960,
Dr. Goodman worked for Los Alamos National Labs with Van de Graaff accelerators.
Dr. Goodman returned to Sandia National Labs from 1960-1977, where he supervised
and carried out R&D efforts.

Dr. Goodman received his Ph.D. in Nuclear Physics in 1960 from the University of
New Mexico and Los Alamos Laboratories; He acquired an M.S. in Physics and
Mathematics from the University of New Mexico in 1955 and a B.S. in Physics from
the City University of New York in 1946.

Harold C. Herman is a Director since December 1998 to the present. Formerly a
senior partner of NYC law firm and supervisor in the Patent Department of Bell
Telephone Laboratories. He is a member of the NY and CA Bars. He is a general
partner of numerous limited real estate partnerships. Mr. Herman is an engineer
holding an advanced degree in mathematics.


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 four other most highly compensated executive
officers for 1996, 1997 and 1998:


                                                                              10
<PAGE>


SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                              Annual Compensation                         Long-Term Compensation
                                                                                  Awards
---------------------------------------------------------------------------------------------------------------------------------
                                                          Other Annual     Restricted  Securities      LTIP           All Other
                                                          Compensation     Stock       Underlying      Payouts       Compensation
                                                          (1)              Award(s)    Options
---------------------------------------------------------------------------------------------------------------------------------
Name and            Year          Salary       Bonus      ($)                ($)       (#)             ($)            ($)
Principal Position                 ($)          ($)
---------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>            <C>           <C>        <C>              <C>       <C>               <C>           <C>
Michael Pete,
President,
Director
---------------------------------------------------------------------------------------------------------------------------------
                    1996               --        --            --            --            --            --            --
---------------------------------------------------------------------------------------------------------------------------------
                    1997           $10,000       --            --            --            --            --            --
---------------------------------------------------------------------------------------------------------------------------------
                    1998           $30,000       --            --            --            --            --            --
---------------------------------------------------------------------------------------------------------------------------------
Leslie S. Robins,
Chairman of the
Board and Exec. VP
---------------------------------------------------------------------------------------------------------------------------------
                    1996            --           --            --            --            --            --            --
---------------------------------------------------------------------------------------------------------------------------------
                    1997           $18,000       --            --            --            --            --            --
---------------------------------------------------------------------------------------------------------------------------------
                    1998           $67,600       --          $2448           --        315,000           --            --
---------------------------------------------------------------------------------------------------------------------------------
Dr. Garth Gobeli,
Chief Scientist
---------------------------------------------------------------------------------------------------------------------------------
                    1996            --           --            --            --            --            --            --
---------------------------------------------------------------------------------------------------------------------------------
                    1997            --           --            --            --            --            --            --
---------------------------------------------------------------------------------------------------------------------------------
                    1998           $68,700       --            --            --            --            --            --
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Other Annual Compensation for Leslie Robins was in the form of three months
     of a car lease.

OPTION GRANTS IN FISCAL YEAR 1998

No options were granted in Fiscal Year 1998.

                 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
                     AND OPTION VALUES AT DECEMBER 31, 1998

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Name                    Shares Acquired   Value Realized    Number of Securities Underlying         Value of Unexercised
                        on Exercise (#)         ($)          Unexercised Options at Fiscal     In-the-Money Options at Fiscal
                                                                       Year End                         Year End ($)
--------------------------------------------------------------------------------------------------------------------------------
                                                           Exercisable       Unexercisable    Exercisable       Unexercisable
--------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>              <C>            <C>                 <C>               <C>              <C>      
Michael Pete                   --               --             153,954             --                --               --  
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The exercise price of Michael Pete's options is $.58 per share.



                                                                              11
<PAGE>


                            LONG-TERM INCENTIVE PLANS

As of December 31, 1998 there is no long-term incentive plan.


Director Compensation

Non-employee directors of the Company received in 1998 a $1500 annual retainer
and $1500 for each board meeting attended.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENIFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1998 by (i) each
person or entity known to the Company to own beneficially five percent or more
of the Company's Common Stock, (ii) each of the Company's directors, (iii) the
Named Executive Officers, and (iv) all directors and executive officers of the
Company as a group.

--------------------------------------------------------------------------------
Name and Addresses (1)           Number of Shares          Percent Beneficially
                                 Beneficially Owned        Owned
--------------------------------------------------------------------------------
Leslie S. Robins                  3,421,546 (2)              16.41%
--------------------------------------------------------------------------------
Grupo Nueve Ltd.                  1,199,300 (3)               5.75%
--------------------------------------------------------------------------------
Francisco Urrea Jr.                 400,000 (3)               1.92%
--------------------------------------------------------------------------------
Y. L. Hirsch                      1,448,052 (4)               6.94%
--------------------------------------------------------------------------------
Harold Herman                       200,000 (5)                .96%
--------------------------------------------------------------------------------
Michael Pete                         40,000 (6) (7)            .19%
--------------------------------------------------------------------------------
All Directors and Officers        3,661,546                  17.56%
 as a group                      
--------------------------------------------------------------------------------
TOTAL SHARES OUTSTANDING         20,854,287                    100%
--------------------------------------------------------------------------------
                                 
                           
(1) The address of all persons who are executive officers or directors of the
Company is care of the Company, 8301 Washington NE, Building 5, Albuquerque New
Mexico 87113.

(2) Leslie S. Robins is a Director and Officer of the Company. Of this total
number, Marcia Robins who is the wife of Leslie Robins and Oliver Robins who is
the son of Leslie Robins, own 107,751 shares.

(3) The managing partner of Grupo Nueve Ltd. Partnership is Francisco Urrea Jr.



                                                                              12
<PAGE>


(4) Y. L. Hirsch has recently filed a 13D form with the SEC.

(5) Harold Herman is a Director of the Company.

(6) Michael Pete is a Director and Officer of the Company.

(7) Michael Pete has options totaling 153,954 shares.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company issued 315,000 shares to Leslie S. Robins, an officer of the
Company, in exchange for a note receivable of $29,000. The note bears interest
at the rate of 7% with interest due semiannually and the principal due July of
2001.


                                                                              13
<PAGE>


                                     PART IV

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

Financial Statements and Financial Statement Schedules

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

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Exhibits
-----------------------------------------------------------------------------------------------------------
<S>         <C>                                                      <C>
2           Plan of Acquisition, Reorganization, arrangement,        None
            liquidation, or succession
-----------------------------------------------------------------------------------------------------------
3.1         Articles of Incorporation                                Incorporated by reference to Exhibit
                                                                     3(i) of the Company's Registration
                                                                     Statement No.1000-24511 on Form
                                                                     10-SB filed June 23,1998.
-----------------------------------------------------------------------------------------------------------
3.2         By-Laws                                                  Incorporated by reference to Exhibit
                                                                     3(ii) of the Company's Registration
                                                                     Statement No.1000-24511 on Form
                                                                     10-SB filed June 23,1998.
-----------------------------------------------------------------------------------------------------------
4           Instruments defining the rights of holders,              Incorporated by reference to Exhibit
            including Indentures                                     3.2
-----------------------------------------------------------------------------------------------------------
7           Opinion re: liquidation preference                       Incorporated by reference to Exhibit
                                                                     3.2
-----------------------------------------------------------------------------------------------------------
10.1        Michael Pete Option                                      Filed Herewith
            Agreement
-----------------------------------------------------------------------------------------------------------
10.2        Lease Agreement Advanced Optics Electronics,             Incorporated by reference to Exhibit 
            Inc. and JMP Company Inc                                 10.2 of the Company's Registration   
                                                                     Statement No.1000-24511 on Form 10-SB
                                                                     filed June 23,1998.                  
-----------------------------------------------------------------------------------------------------------
10.3        State of Nevada Corporate Charter                        Incorporated by reference to Exhibit
                                                                     10.3 of the Company's Registration
                                                                     Statement No.1000-24511 on Form
                                                                     10-SB filed June 23,1998.
-----------------------------------------------------------------------------------------------------------
24          Power of Attorney                                        Incorporated by reference to Exhibit
                                                                     3.2
-----------------------------------------------------------------------------------------------------------
27          Financial Data Schedule                                  Filed Herewith
-----------------------------------------------------------------------------------------------------------
</TABLE>


                               Reports on Form 8-K

During the last quarter of the 1998 fiscal year, the Company filed no reports on
Form 8-K.


                                                                              14
<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 23, 1998

                                        ADVANCED OPTICS ELECTRONICS, INC.


                                        BY: /s/Leslie S. Robins
                                           ------------------------------
                                           Leslie S. Robins
                                           Chief Accounting Officer
                                           (Principal Accounting Officer)


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




                                                                              15
<PAGE>

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

                                                                FINANCIAL REPORT

DECEMBER 31, 1998




                                                                               
<PAGE>






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







                                    CONTENTS

                                                                           Page

INDEPENDENT AUDITORS' REPORT                                                 1

FINANCIAL STATEMENTS

     Balance Sheet                                                           2

     Statements of Operations                                                4

     Statements of Changes in Stockholders' Equity                           5

     Statements of Cash Flows                                                7

     Notes to Financial Statements                                           8





                                                                              
<PAGE>





NEFF & RICCI
------------
         LLP

                          Independent Auditors' Report



Board of Directors
Advanced Optics Electronics, Inc.


We have  audited  the  balance  sheet of Advanced  Optics  Electronics,  Inc. (a
development  stage company) as of December 31, 1998, and the related  statements
of income, retained earnings, and cash flows for the year then ended and for the
1998 portion of the period from May 22, 1996  (inception)  through  December 31,
1998.  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 year ended  December  31, 1997,  and for the 1996 and
1997 portion of the period from May 22, 1996  (inception)  through  December 31,
1998,  were  audited by other  auditors  whose  report  dated  February 5, 1998,
expressed an unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
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 1998 financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Optics Electronics,
Inc. as of December 31,  1998,  and the results of its  operations  and its cash
flows for the year then ended and for the 1998  portion  of the period  from May
22, 1996  (inception)  through  December 31, 1998, in conformity  with generally
accepted accounting principles.


Neff & Ricci LLP


Albuquerque, New Mexico
March 12, 1999




                                                                              1
<PAGE>





BALANCE SHEET
December 31, 1998



ASSETS

CURRENT ASSETS
    Cash and cash equivalents                                       $   204,612
    Certificate of deposit                                               50,000
    Marketable equity securities                                         63,159
    Costs and estimated earnings
        in excess of billings on
        uncompleted contract                                            250,200
    Related party receivables                                            47,047
                                                                    -----------
           Total current assets                                         615,018
                                                                    -----------
FIXED ASSETS, at cost
    Furniture and fixtures                                               22,235
    Computers                                                            24,898
    Technical equipment                                                  81,055
    Automobile                                                           41,733
    Equipment under capital lease                                       100,499
    Leasehold improvements                                                8,595
    Less accumulated depreciation                                       (35,133)
                                                                    -----------
           Total fixed assets                                           243,882
                                                                    -----------
OTHER ASSETS
    Note receivable from officer                                         29,000
    Investment in Bio Moda, Inc.                                        290,421
    Organizational costs, net of accumulated
        amortization of $42,014                                          63,020
    Goodwill, net of accumulated amortization
        of $271                                                           4,729
    Patents, net of accumulated amortization
        of $29,353                                                      212,986
    Other assets                                                         20,350
                                                                    -----------
           Total other assets                                           620,506
                                                                    -----------
           Total assets                                             $ 1,479,406
                                                                    ===========

The Notes to Financial Statements are an integral part of these statements.




                                                                              2
<PAGE>





LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable                                                $    27,602
    Notes payable                                                         5,384
    Accrued liabilities                                                   7,811
    Current portion of long-term debt
        and capital lease obligation                                     31,536
                                                                    -----------
           Total current liabilities                                     72,333
                                                                    -----------
Long-term portion of long-term debt
    and capital lease obligation                                         67,387
                                                                    -----------
COMMITMENTS

SHAREHOLDERS' EQUITY
    Common stock, authorized 25,000,000 shares,
        $.001 par value, 20,854,287 shares issued
        and outstanding                                                  20,854
    Additional paid-in capital                                        2,232,535
    Deficit accumulated during the development stage                   (913,703)
                                                                    -----------

           Total shareholders' equity                                 1,339,686

           Total liabilities and shareholders' equity               $ 1,479,406
                                                                    ===========



                                                                              3
<PAGE>



STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997,
and the Period from May 22, 1996 (Inception)
Through December 31, 1998



                                                                       5/22/96
                                                                     (Inception)
                                                                       Through
                                            1998           1997       12/31/98

REVENUES
    Contract revenue                  $    178,200        72,000      250,200
                                      ---------------------------------------

COSTS AND EXPENSES
    General and administrative             490,296        86,532      620,135
    Contract costs                         215,472        57,688      273,140
    Research and development               148,123        10,521      189,118
                                      ---------------------------------------

           Total expenses                  853,891       154,741    1,082,393
                                      ---------------------------------------

    Operating loss                        (675,691)      (82,741)    (832,193)
                                      ---------------------------------------

OTHER INCOME AND (EXPENSES)
    Interest income                            851            --          851
    Unrealized gain on marketable
        equity securities                   (6,875)           --       (6,875)
    Loss on Bio Moda, Inc.                 (68,424)           --      (68,424)
    Interest expense                        (1,972)       (1,949)      (7,062)
                                      ---------------------------------------

           Total other expenses            (76,420)       (1,949)     (81,510)
                                      ---------------------------------------

           Net loss                       (752,111)      (84,690)    (913,703)
                                      ---------------------------------------

Loss per share                        $      (.055)        (.014)       (.113)
                                      =======================================

Weighted average shares outstanding     13,723,302     6,156,986    8,051,835
                                      =======================================


The Notes to Financial Statements are an integral part of these statements.



                                                                              4
<PAGE>



STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period from May 22, 1996 (Inception) Through
December 31, 1998



                                                            Common Stock 
                                                     --------------------------
                                                                          Par
                                                         Shares          Value

Balance, May 22, 1996                                         --    $        --

Stock issued to incorporators for cash                   500,000            500

Stock issued for the net assets of PLZ Tech, Inc.      4,500,000          4,500

Net loss                                                      --             --
                                                     --------------------------

Balance, December 31, 1996                             5,000,000          5,000

Stock issued in public offering                        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
                                                     ==========================


The Notes to Financial Statements are an integral part of these statements.


                                                                              5
<PAGE>



                                      Equity
                                     (Deficit)
                                    Accumulated
                   Additional       During the         Total
                     Paid-In        Development    Shareholders'
                     Capital           Stage          Equity

                    $       --             --              --
                                                      
                        24,500             --          25,000
                                                      
                       281,096             --         285,596
                                                      
                            --        (76,902)        (76,902)
                    ----------------------------------------- 
                    
                        305,596        (76,902)       233,694
                    
                        362,720             --        365,001
                    
                             --        (84,690)       (84,690)
                    -----------------------------------------
                    
                        668,316       (161,592)       514,005
                    
                      1,281,728             --      1,292,707
                    
                        293,719             --        296,470
                    
                         28,685             --         29,000
                    
                        (39,913)            --        (40,385)
                    
                             --       (752,111)      (752,111)
                    -----------------------------------------
                    
                    $ 2,232,535       (913,703)     1,339,686
                    =========================================
     




                                                                              6
<PAGE>





STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1998 and 1997,
and the Period from May 22, 1996 (Inception) Through December 31, 1998

<TABLE>
<CAPTION>
                                                                                             5/22/96
                                                                                           (Inception)
                                                                                             Through
                                                               1998           1997          12/31/98
<S>                                                       <C>                <C>           <C>      
CASH FLOWS FROM OPERATING ACTIVITIES
    Net (loss)                                            $  (752,111)       (84,690)      (913,703)
    Adjustments to reconcile net loss to net cash        
        provided by operating activities:                
           Amortization and depreciation expense               66,037         37,156        106,771
           Unrealized loss on marketable securities             6,875             --          6,875
           Loss on Bio Moda, Inc.                              68,424             --         68,424
           Issuance of common stock for services              296,470             --        296,470
           Contract receivable                               (178,200)       (72,000)      (250,200)
           Other receivables                                  (13,704)       (43,693)       (57,397)
           Accrued liabilities and accounts payable            29,988          5,425         35,413
                                                          -----------------------------------------
               Net cash applied to operating             
                  activities                                 (476,221)      (157,802)      (707,347)
                                                          -----------------------------------------
                                                         
                                                         
CASH FLOWS FROM INVESTING ACTIVITIES                     
    Purchase of equipment                                    (135,334)       (30,879)      (178,516)
    Investment in Bio Moda, Inc.                             (358,845)            --       (358,845)
    Purchase marketable securities                            (70,034)            --        (70,034)
    Purchase of certificate of deposit                        (50,000)            --        (50,000)
    Purchase of other assets                                  (20,050)       (66,727)       (86,777)
                                                          -----------------------------------------
               Net cash applied to investing             
                  activities                                 (634,263)       (97,606)      (744,172)
                                                          -----------------------------------------
                                                         
CASH FLOWS FROM FINANCING ACTIVITIES                     
    Additions to notes payable                                 41,733          6,150         94,726
    Payments on notes payable and capital                
        lease obligation                                      (63,380)       (25,267)       (90,918)
    Issuance of common stock                                1,292,707        347,986      1,682,708
    Purchase of treasury stock                                (30,385)            --        (30,385)
                                                          -----------------------------------------
               Net cash provided by financing            
                  activities                                1,240,675        328,869      1,656,131
                                                          -----------------------------------------
                                                         
Net increase (decrease) in cash                               130,191         73,461        204,612
                                                         
Cash, beginning of period                                      74,421            960             --
                                                          -----------------------------------------
Cash, end of period                                       $   204,612         74,421        204,612
                                                          =========================================
</TABLE>

The Notes to Financial Statements are an integral part of these statements.


                                                                              7
<PAGE>


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business.  Advanced Optics  Electronics,  Inc. (the Company) is a
developmental   stage  technology  company  with  its  principal  focus  on  the
development and production of large-scale  flat panel  displays.  The Company is
currently  continuing  its  research  and  development  of  this  product.  Upon
substantial  completion of the research and  development of the large flat panel
display,  the Company plans to make the transition  from a  developmental  stage
company to selling and producing  this product.  The market for the  large-scale
flat panel will include,  but not be limited to,  cockpit  displays,  flat panel
computer monitors, and advertising billboards. Advanced Optics Electronics, Inc.
plans to focus on producing and selling the large-scale  flat panel displays for
outdoor advertising billboards.

The  Company  has  obtained  a  contract  to  produce  two  outdoor  advertising
billboards using its flat panel display technology. This is the first commercial
application of the Company's technology.  The success of the Company will depend
on its ability to  commercialize  its technology and complete this contract.  In
addition,  the Company will be required to obtain additional capital in order to
fund the completion of the contract.

Cash and Cash Equivalents.  Cash and cash equivalents  include all cash balances
and highly liquid debt instruments with an original  maturity of three months or
less. The Company's cash is deposited in financial  institutions  and is insured
only  up to  $100,000  by the  Federal  Deposit  Insurance  Corporation  at each
institution. As of December 31, 1998, approximately $105,000 was not insured.

Marketable  Equity  Securities.  The Company  classifies  all of its  marketable
equity securities as trading securities.  Trading securities are carried at fair
value with the unrealized gains and losses reported in the income statement.  As
of December 31, 1998,  gross  unrealized gains were $24,983 and gross unrealized
losses were $31,858. Realized gains and losses were not material.

Equity  Investment.  The investment in Bio Moda, Inc. is accounted for using the
equity method. Under this method, income and losses reported by the investee are
recorded  by the  Company  in its  proportionate  interest  at the time they are
recognized by the investee.  The original cost of the Bio Moda, Inc.  investment
exceeded the  Company's  proportionate  interest in Bio Moda's book value.  This
difference is being amortized over a 15 year period.

Depreciation. Depreciation of property, plant and equipment is provided over the
estimated useful lives of the respective assets ranging from 3 to 10 years using
declining balance methods.



                                                                              8
<PAGE>


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 
        (CONTINUED)

Other Assets. Organization costs are amortized on a straight-line basis over the
period to be benefited of five years.  Patents are amortized on a  straight-line
basis  over  the  remaining  estimated  useful  life of 15  years.  Goodwill  is
amortized over the period to be benefited,  or 40 years,  whichever is less. The
Company continually reviews other assets to assess recoverability from estimated
future net cash flows.  To date,  these reviews have not resulted in a reduction
of other assets.

Research and Development  Costs.  Research and development costs are expensed as
incurred.

Advertising.  Advertising costs are expensed as incurred and amounted to $15,040
in 1998.

Income  Taxes.  The Company  accounts for its income  taxes using the  liability
method.  Under this method,  deferred tax  liabilities and assets are determined
based on the difference between the financial statement carrying amounts and tax
basis of assets and  liabilities  using enacted tax rates in effect in the years
in which the  differences  are  expected to reverse.  The Company has provided a
valuation   allowance  to  offset  the  benefit  of  any  net   operating   loss
carryforwards or deductible temporary differences

Loss per share.  Loss per share is computed on the basis of the weighted average
number of common  shares  outstanding  during the year and did not  include  the
effect of potential  common stock as their  effect  would be  antidilutive.  The
numerator  for the  computation  is the net  loss  and  the  denominator  is the
weighted average shares of common stock outstanding.

Effect of New  Accounting  Pronouncements.  Statement of Position 98-5 Reporting
the Costs of Start-up  Activities  requires that organization costs be expensed.
The Company expects to apply this new accounting pronouncement effective January
1, 1999.  The impact of this change in accounting  principle  would be to reduce
assets and  increase the deficit  accumulated  during the  development  stage by
$63,020 as of December 31, 1998.

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


                                                                              9
<PAGE>


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)

Revenue and Cost Recognition.  The Company recognized revenue on its contract in
process using the percentage-of-completion  method of accounting, which is based
on the proportion of the contract cost incurred to the estimated  total contract
cost. Costs incurred and estimated  earnings in excess of billings represent the
revenue recognized that has not yet been billed.

Contract  costs include all direct  material and labor costs and those  indirect
costs  related  to  contract  performance,  such as  indirect  labor,  supplies,
overhead, and equipment depreciation.

The contract to produce two outdoor advertising  billboards totals $1.7 million,
with  $885,000  allocated  to  the  first  unit.  An  estimated  total  loss  of
approximately  $23,000 in the first unit has been  recognized as of December 31,
1998.  The  Company's  estimated  cost to complete  as of  December  31, 1998 is
$580,000  which it expects  to fund with  cash,  billings  on the  contract  and
additional capital.

In accordance with the contract, the Company will bill the customer when certain
milestones have been met. There were no billings as of December 31, 1998.

Adjustments to the original estimates of total contract revenue,  total contract
cost,  and 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 required under the contract may not change. The nature of accounting
for  contracts  is  such  that   refinements  of  the  estimating   process  for
continuously  changing  conditions and new developments are a characteristic  of
the process.  Accordingly,  provisions  for losses on contracts  are made in the
period in which they become evident under the percentage-of-completion method.

Reclassifications.  Certain  amounts  in 1997  financial  statements  have  been
reclassified to conform with 1998 presentation.


NOTE 2. RELATED PARTY RECEIVABLES

Related party receivables at December 31, 1998, consist of the following:

     Due from Bio Moda, Inc.                                             $ 5,000
     Due from officer                                                     27,047
     Note receivable from former shareholder bearing
        interest at 8% and due in February, 1999                          15,000
                                                                        --------
                                                                         $47,047
                                                                         =======

The note  receivable  from  former  shareholder  was issued  for  $10,000 in the
Company's common stock and $5,000 in cash.


                                                                              10
<PAGE>


NOTE 3. INVESTMENT IN BIO MODA, INC.

During 1998 the Company  increased  its  investment  in Bio Moda,  Inc. to 21.93
percent. Bio Moda, Inc. is a development stage company involved primarily in the
development  of  technology  for  the  early  detection  of  lung  cancer.  As a
development  stage company,  Bio Moda,  Inc. has not had any revenues and, as of
December 31, 1998, was in the process of conducting clinical trials.

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

A summary of the financial  data  relative to Bio Moda,  Inc. as of December 31,
1998 is as follows:

     Assets:
        Current assets                                              $  56,223
        Other assets                                                   17,000
                                                                    ---------
                                                                    $  73,223
                                                                    =========

     Liabilities and equity
        Current liabilities                                         $  32,148
        Notes payable to stockholders                                  84,884
        Common stock                                                  372,273
        Deficit accumulated during the development stage             (416,082)
                                                                    ---------
                                                                    $  73,223
                                                                    =========

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

     Original cost, all of which exceeded book value                $ 358,845
     Share of net loss                                                (51,514)
     Amortization of excess of cost
        over book value                                               (16,910)
                                                                    ---------
     Net investment                                                 $ 290,421
                                                                    =========



                                                                             11
<PAGE>


NOTE 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION

Capital Lease Obligation. In July, 1998, the Company entered into a capital
lease agreement for equipment valued at $100,499 (net book value of $90,448 at
December 31, 1998). The Company made a down payment of $20,170. The remaining
amount was financed on a lease with 36 monthly payments of $2,810. Future
minimum lease payments are as follows for the years ending December 31:

     1999                                                            $ 33,720 
     2000                                                              33,720
     2001                                                              14,050
                                                                     --------
                                                                       81,490
                                                                    
     Less amounts representing interest                               (15,366)
                                                                     --------
                                                                     $ 66,124
                                                                     ========
                                                                    
Long-Term Debt. In October 1998, the Company obtained a note payable from a bank
as  part  of  the  purchase  of an  automobile.  The  note  is  due  in  monthly
installments  of principal and interest  (fixed rate of 8 percent) of $817 until
October 2002. The note is secured by the automobile and the balance  outstanding
at year end was $32,799.

Principal payments by year are as follows:

     1999                                                            $  7,475
     2000                                                               8,068
     2001                                                               8,738
     2002                                                               8,518
                                                                     --------
                                                                     $ 32,799
                                                                     ========


NOTE 5. EQUITY TRANSACTIONS

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

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


                                                                             12
<PAGE>


NOTE 5. EQUITY TRANSACTIONS (CONTINUED)

During  1998,  the  Company  repurchased  472,200  of its  outstanding  stock in
exchange  for  $10,000  in  notes  receivable  and  $30,385  in cash in  various
transactions. This stock was subsequently retired.

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

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


NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The  following  are the  carrying  amounts  and  methods  used by the Company in
estimating its fair value of financial instruments.

     Cash and  Certificates  of Deposit.  The carrying  amounts  reported in the
     balance sheet approximate fair value.

     Marketable Equity Securities.  The fair value reported in the balance sheet
     was based on current market prices.

     Notes Receivable.  Management  estimates the fair value of notes receivable
     approximates the carrying value due to their short terms.

     Notes  Payable.  Management  estimates  the fair  value  of  notes  payable
     approximates the carrying value due to their short terms.

     Capital Lease and Long-Term  Debt.  Management  estimates the fair value of
     capital lease obligations and notes payable approximates the carrying value
     due to their short terms and the fact that they were entered into recently.


                                                                             13
<PAGE>


NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The carrying amounts and fair values of the Company's financial  instruments are
as follows at December 31, 1998: 

                                                                       Estimated
                                                          Carrying       Fair 
                                                           Amount        Value

     Cash and cash equivalents                            $204,612      204,612
     Certificate of deposit                                 50,000       50,000
     Marketable equity securities (with an
         original cost of $70,034)                          63,159       63,159
     Notes receivable                                       76,047       76,047
     Notes payable                                           5,384        5,384
     Long-term debt and capital lease obligation            98,923       98,923

NOTE 7. INCOME TAXES

At  December  31,  1998,  the  Company  had  deferred  tax assets  amounting  to
approximately  $320,000.  The deferred tax assets  consist  primarily of the tax
benefit of net operating loss  carryforwards and are fully offset by a valuation
allowance of the same amount.

The net  change in the  valuation  allowance  for  deferred  tax  assets  was an
increase of approximately $270,000 in the year ending December 31, 1998. The net
change is due primarily to the increase in net operating loss carryforwards.

At December  31,  1998,  the Company had net  operating  loss  carryforwards  of
approximately  $800,000  available to offset  future  state and federal  taxable
income. These carryforwards will expire in 2016 to 2018 for federal tax purposes
and 2001 to 2003 for state tax purposes.

NOTE 8. COMMITMENTS

The Company has a  non-cancelable  operating  lease agreement for its office and
production space. The agreement is through June 2000 with an option to renew for
one additional year.

Rent expense during 1998 and 1997 was $13,634 and $7,570, respectively.

Future minimum lease payments are as follows:

     1999                                                     $ 32,400
     2000                                                       16,200

As of December 31, 1998, there was one stock option outstanding for the purchase
of 153,954  shares at $.58 per share by an officer  of the  Company.  The option
expires August 1, 1999. During the years ended December 31, 1997 and 1998, there
was no stock option activity.



                                                                             14