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, 2004         Commission file No. 0-24511

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

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

           8301 WASHINGTON NE, SUITE 5, ALBUQUERQUE, NEW MEXICO 87113
           (Address of principal executive offices including zip code)

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

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

Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
       (Title of class)

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

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
issuer on March 31,  2005 was  approximately  $3,725,000  based upon the closing
price of such  stock  on that  date of  approximately  $ 0.001.  The  number  of
issuer's  shares  of  Common  Stock  outstanding   including  shares  issued  to
affiliates as of March 31, 2005 was 3,733,136,349.

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

<PAGE>

                                TABLE OF CONTENTS

Forward Looking Statements

                                     PART I

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

                                     PART II

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

Item 8A. Evaluation of Controls and Procedures

                                    PART III

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

                                   SIGNATURES

                                                                               2

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

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

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

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

                                     PART I

                         ITEM 1. DESCRIPTION OF BUSINESS

General
-------

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

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

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

                                                                               3

<PAGE>

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

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

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

Company Background
------------------

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

Industry Background
-------------------

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

The market  for our color  recognition  optical  device,  ("Color-Chek")  is the
population of the visually  impaired,  industrial  manufacturing  and in thermal
imaging  applications  for  the  military.  We plan to  initially  focus  on the
visually impaired.  The company's unique and novel conception and implementation

                                                                               4

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of hardware  and firmware  determines  the color  optically  and  expresses  the
results with vocal responses.  The company with establish marketing arrangements
for the  distribution to retail  locations after a supply has been  manufactured
and inventoried.

Strategy
--------

PANELS

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

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

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

To  familiarize  ourselves  with the  industry  and market we are  investigating
purchasing a billboard location in Florida which we intend to retro-fit with our
product.  This will allow us to conduct a real world test of the product so that
we may understand the requirements  that outdoor  advertising  necessitates.  It
will also allow us an ongoing revenue stream from  advertising  through our ramp
up of production.

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

Products and Markets
--------------------

Our  primary  initial  product  that will be  marketed  to users of the  outdoor
advertising  industry is the flat panel  display.  Our flat panel  displays will
provide an image measuring  approximately three meters by eight meters, which is
similar  in size to  existing  printed  billboards.  We  believe  that the major
advantages  of  our  flat  panel  displays   include  better  viewing   quality,
affordability,  customer system  integrity,  and an

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<PAGE>

almost  immediate  change of display  images from a remote site. We believe that
our flat panel displays and underlying  software system  represent an innovative
approach  to  advertising  that  take  advantage  of  the  recent  technological
convergence of billboard media, broadcast media and the Internet.

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

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

The Company has contracted with Indesign, a contract engineering firm to provide
electronic, mechanical and systems engineering services.

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

Suppliers and Availability of Raw Materials
-------------------------------------------

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

Manufacturing, Distribution, Installation and Maintenance of Our Products
-------------------------------------------------------------------------

We have established relationships with contract manufacturing facilities for the
production  of our  flat  panel  displays.  We  intend  to  establish  a  larger
manufacturing facility for assembling our flat panel displays in preparation for
larger scale  operations.  Our flat panel displays will be shipped directly from
our manufacturing  facilities to our customers, and we intend to promote, market
and sell our products through direct sales channels.  Our plan is to install the
first 10 to 20 flat panel displays that we sell.

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

We also plan to maintain and repair our products for a specific  warranty period
and offer  maintenance  contracts  beyond the warranty period.  In addition,  we
intend to investigate  the  possibility  of  contracting

                                                                               6

<PAGE>

with United States and  international  third party service providers for on-site
installation, maintenance and repair of our flat panel displays.

Customers
---------

PANELS

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

It is estimated that the four leaders in this industry account for approximately
half of the  outdoor  advertising  billboard  market  and the top ten  billboard
owners represent 61% of this market. The 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 the marketing film that we have produced about our
flat panel  displays.  We are  developing  a  marketing  department  to initiate
contact,   process  each  transaction  and  coordinate  with  our  manufacturing
department for production and delivery of our flat panel displays.

COLOR-CHEK

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

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<PAGE>

Competition
-----------

PANELS

We will  compete  with the  existing  billboard  techniques  of hand  painted or
printed and pasted signs.  Recently,  there has been a trend toward creating the
art digitally, but these images are still printed on large sheets and pasted up.
We believe  these forms of  billboard  presentations  will only be viable in low
density, low traffic areas. In comparison,  our flat panel displays include high
brightness,  full  color,  superior  image  quality,  wide  viewing  angle  with
excellent  outdoor  readability,  relatively  low cost compared  with  competing
electronic billboard technologies,  high reliability and rapid change of display
images from a remote site.

We  will  compete  against  other  established   forms  of  electronic   display
technology,  and we believe that our products and technologies  will continue to
face substantial competition as the market and technologies evolve. Existing and
potential competitors such as Toshiba, Sharp, Hitachi and Mitsubishi 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;

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<PAGE>

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

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

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

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

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

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

COLOR-CHEK

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

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS (STATUS)

     Advanced Optics holds the following patents and patents pending:

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

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

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

Research and Development Activities
-----------------------------------

In fiscal 2004, which ended December 31, 2004,  approximately $222,000 was spent
on research and development activities.  In 2003 approximately $61,000 was spent
on research and development activities.  We believe that continued investment in
product development is critical to attaining our strategic  objectives and, as a
result, expect product development expenses to increase  significantly in future
periods. We expense product development costs as they are incurred.

Employees
---------

As of December 31, 2004, the Company has 8 full-time employees. The Company also
contracted with other personnel and  subcontractors  for various  projects on an
as-needed basis.

Reporting
---------

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

                                                                               9

<PAGE>

pursuant to Sections 13(a) and 15(d) of the Securities  Exchange Act of 1934, as
amended.  The  public  may read and copy  these  materials  at the SEC's  Public
Reference Room at 450 Fifth St NW,  Washington,  DC 20549. The public may obtain
information on the operation of the public  reference room by calling the SEC at
1-800-SEC-0330.  The SEC also  maintains  a  website  (HTTP://WWW.SEC.GOV)  that
contains  reports,  proxy  and  information  statements  and  other  information
regarding  the  Company and other  companies  that file  materials  with the SEC
electronically. The Company's 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.

ITEM 3. LEGAL PROCEEDINGS

On December  10,  2004,  the Company and another  entity  filed a lawsuit in the
State  of  New  Mexico  against  an  individual  ("the  DEFENDANT")  to  recover
$13,500,000.  for damages and injunctive relief arising out of the intentionally
tortuous  conduct of the  Defendant.  On December 23, 2004,  instead of filing a
counterclaim,  the Defendant  filed a lawsuit against the Company and others for
alleged malicious abuse of process,  defamation,  civil conspiracy,  prima facie
tort, and intentional  infliction of emotional distress,  but did not allege any
amount of damages.  On January 26, 2005,  the Company  filed a motion to dismiss
that lawsuit. Because of the inherent uncertainties,  a favorable or unfavorable
outcome  could not be  determined as of this date as well as the amount or range
of potential  recovery by the Company in the event of favorable  outcome or loss
to the  Company  in the  event of an  unfavorable  outcome.  On April 5, 2005 an
insurance  carrier for the Company confirmed that it would provide legal counsel
for the  Company in the  defense of the claims  brought by the above  referenced
Defendant.

On April 8, 2005 the Company was awarded  damages in the sum of $13,500,269 as a
result of a two separate judgments against two former co-defendants of the above
referenced  Defendant.  The Court's order also provides that the defendants must
pay the Company an additional $905,794 as pre-judgment interest.

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

None

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<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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

                                COMMON STOCK BID

                                                High              Low
-----------------------------------------------------------------------
Fiscal 2003:
                         1st Quarter           $.007            $0.001
                         2nd Quarter            .003            $0.001
                         3rd Quarter            .051            $0.002
                         4th Quarter            .086           $0.0039
-----------------------------------------------------------------------
Fiscal 2004:
                         1st Quarter            .025              .010
                         2nd Quarter            .010              .004
                         3rd Quarter            .005              .003
                         4th Quarter            .003              .002
-----------------------------------------------------------------------

As of  December  31, 2004 the Company  estimates  that there were  approximately
10,000  shareholders  and the closing  price of the  Company's  common stock was
$.002.  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

                                                                              11

<PAGE>

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

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

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

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

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

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

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

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

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

                                                                              12

<PAGE>

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

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                             EQUITY COMPENSATION PLANS
---------------------------------------------------------------------------------------------------------------------
Plan Category           Number of Securities to   Weighted-Average           Remaining available for future
                        be issued upon exercise   Exercise Price of          issuance under equity compensation
                        of outstanding Options,   outstanding Options,       plans (excluding securities reflected
                        Warrants and Rights (#)   Warrants and Rights  ($)   in column (A))  (#)
---------------------------------------------------------------------------------------------------------------------
<S>                     <C>                       <C>                        <C>
Equity Compensation     400,000                   $0.02                      9,600,000
Plans approved by
security holders
---------------------------------------------------------------------------------------------------------------------
Equity Compensation     4,121,000                 $0.10                      N/A
Plans not approved by
security holders
---------------------------------------------------------------------------------------------------------------------
Total                   4,521,000                                            9,600,000
---------------------------------------------------------------------------------------------------------------------
</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 its  subsidiary,  Biomoda,  Inc  may  provide  additional
liquidity.

Biomoda is a biomedical  development  company. The Company's direct ownership of
Biomoda,  as of December  31, 2004,  was  approximately  16.0%.  Two officers of
Advanced Optics Electronics,  Inc. are securities holders of Biomoda in addition
to the ADOT ownership.  Biomoda has filed a revised SB2  registration  statement
with the Securities and Exchange  Commission,  which has been declared effective
February 11, 2005.  Biomoda is offering 6,000,000 shares at $3.00 per share (for
an aggregate  offering of  $18,000,000).  It is anticipated that a public market
for Biomoda's securities will be created in the fourth quarter of 2005. A market
for Biomoda's shares has not been established;  therefore the potential value of
the Company's  investment cannot be measured.  There can be no assurance that if
the  Company  were to sell  such  investment  that it  would be able to on terms
favorable  to the Company or for the initial  offering  price.  Factors  such as
dilution, blockage and a lack of a market may be encountered.

General
-------

Overall,  the Company had negative cash flows of  $3,351,957  for the year ended
December 31, 2004  resulting  from  $2,964,495  used in the Company's  operating
activities, $1,419,029 used in the Company's

                                                                              13

<PAGE>

investing activities and $1,031,567 of cash provided by financing activities.

Cash Flows From Operating Activities
------------------------------------

Net cash used in operating  activities of $2,964,495 for the year ended December
31,  2004 was  primarily  due to  $3,284,995  in  operating  expenses,  of which
$1,493,145  is  General  and   Administrative   and  $658,859  is  Research  and
Development.  Primary non-cash components of Net income include asset impairment
of $365,314 and loss on contract of $1,000,944.

Cash Flows From Investing Activities
------------------------------------

Net cash used in investing  activities of $1,419,029 for the year ended December
31, 2004 was primarily  due to investment in Genomed of $900,000,  net purchases
of marketable securities of $383,878 and additions to property and equipment and
patent, trademark and licenses of $125,018.

During the first quarter of 2004,  Advanced Optics  Electronics,  Inc. purchased
33,354,230 shares of Genomed, Inc., for $900,000.  This represents 17.09% of the
outstanding  shares of  Genomed,  Inc. At  December  31,  2004 the Company  held
33,364,230 shares. GenoMed, Inc. is a publicly traded biotech company working in
genomics based disease management.

Cash Flows From Financing Activities
------------------------------------

Net cash  provided by  financing  activities  of  $1,031,567  for the year ended
December 31, 2004 was primarily due to the proceeds of $1,119,031,  representing
462,800,000  shares of common  stock.  Cash used in financing  activities in the
amount of $154,000 represented primarily principal payments on convertible debt.

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 2004 Compared to Fiscal 2003
-----------------------------------

Loss On Contract
----------------

During  2004,  the Company  expensed  the balance of its contract to deliver two
flat panel  displays  resulting in a charge of  $1,000,944  in the  Consolidated
Statements of Operations.

Assets and Liabilities
----------------------

Assets  decreased  significantly  from  2003 to 2004  because  of use of cash of
$3,351,957,  reduction in the carrying  value of the contract  above of $795,000
and elimination of investment in subsidiary in  consolidation  which amounted to
$49,548 in 2003.  Total  assets  reported  at December  31,  2003 of  $5,169,984
decreased by $3,365,530 to $1,970,342 at December 31, 2004.

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  and

                                                                              14

<PAGE>

continued testing of disease  detection  protocol(s).  Research  development and
technical  costs increased to $658,859 in 2004 from $110,717 in 2003. We believe
that  continued  investment in product  development is critical to attaining our
strategic  objectives and, as a result,  expect product development  expenses to
increase  significantly in future periods.  We expense product development costs
as they are incurred.

Operating Expenses
------------------

Operating  expenses  decreased by $253,696 to  $3,284,995  during the year ended
December 31, 2004 compared to $3,538,691  for the year ended  December 31, 2003.
Although asset impairment increased by $365,314,  professional fees increased by
$98,055  and  research  and  development  increased  by  $548,142,  general  and
administrative  decreased by $806,579 from  $2,299,724 to $1,493,145 and payroll
expense  decreased  by $436,455  from  $984,626  to $548,171  from 2003 to 2004.
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

The  Company  had a net  loss of  $5,048,067  or  $0.002  loss  per  share,  and
$3,900,959 or $0.002 loss per share,  for the years ended  December 31, 2004 and
2003, respectively.

Other Income (Expense)
----------------------

Other  income  (expense)  consists  primarily  of  interest,  gain  or  loss  on
marketable securities and debt settlement losses. Debt settlement or forgiveness
loss increased, in aggregate,  $685,872 from a gain of $64,892 in 2003 to a loss
of  $620,980  in  2004.  Interest  expense  decreased  by  $146,160  and loss on
marketable securities was $98,560 in 2004 and zero in 2003.

Stockholders' Equity
--------------------

Stockholders'  equity  decreased by $2,569,070 from of $3,840,833 as of December
31, 2003 to  $1,271,763  as of December  31, 2004.  The  decrease was  primarily
attributable to the net loss of $5,048,067 in 2004.

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.

Consolidation of Variable Interest Entities
-------------------------------------------

In January 2003, the FASB issued FIN No. 46, "CONSOLIDATION OF VARIABLE INTEREST
ENTITIES, AN INTERPRETATION OF ARB 51." The primary objectives of FIN No. 46 are
to provide  guidance  on the  identification  of entities  for which  control is
achieved through means other than voting rights (variable  interest  entities or
"VIEs")  and  how  to  determine  when  and  which  business  enterprise  should
consolidate the VIE. This new model for  consolidation  applies to an entity for
which  either:  (1) the equity  investors
                                                                              15

<PAGE>

do not have a controlling  financial  interest;  or (2) the equity investment at
risk is  insufficient  to finance that  entity's  activities  without  receiving
additional  subordinated  financial support from other parties. In addition, FIN
No. 46 requires that both the primary beneficiary and all other enterprises with
a significant variable interest in a VIE make additional disclosures. As amended
in December 2003, the effective dates of FIN No. 46 for public entities that are
small business issuers, as defined ("SBIs"),  are as follows:  (a) For interests
in special-purpose entities:  periods ended after December 15, 2003; and (b) For
all other VIEs:  periods  ending  after  December 15,  2004.  The December  2003
amendment of FIN No. 46 also includes  transition  provisions that govern how an
SBI which previously  adopted the  pronouncement  (as it was originally  issued)
must  account for  consolidated  VIEs.  As  disclosed  in Note 7 of the notes to
consolidated financial statements,  the Company is associated with Biomoda, Inc.
Because of common  ownership  between the Company and Biomoda and other  factors
discussed in FIN No. 46R, the Company has complied  with the  pronouncement  and
consolidated the two company's financial  statements.  See note 7 for the impact
of adoption of the standard.

Estimates
---------

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

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

The  consolidated  financial  statements  and  notes to  consolidated  financial
statements thereto,  together with the report thereon of Kabani & Co., Inc. (the
Company's  principal  accountants)  dated February 4, 2004 included elsewhere in
this report, are incorporated by reference in answer to this Item 7.

RESTATEMENT OF 2003

In accordance with paragraph 40 of FIN 46(R),  management has elected to restate
the statements of operations,  stockholders' equity, and cash flows for the year
ended  December  31,  2003 for the  consolidation  of  Biomoda,  Inc. as if such
consolidation  occurred on January 1, 2003. Such initial consolidation  resulted
in the recording of an extraordinary loss of approximately $189,000 for the year
ended December 31, 2003.

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

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

In a Current  Report on Form 8-K filed on February  25, 2005,  we dismissed  our
former auditor,  Singer,  Lewak,  Greenbaum & Goldstein LLP. We did not have any
disagreements with our former auditor on any matter of accounting  principles or
practices, disclosure, or auditing scope or procedure.

In a Current Report on Form 8-K filed on March 3, 2005, we engaged Kabani & Co.,
Inc. as our new  auditor.  The  decision to change  auditors was approved by our
board of  directors.  The Company did not consult  with Kabani & Co., Inc on any
matters prior to their retention.

                                                                              16

<PAGE>

ITEM 8A.  EVALUATION OF CONTROLS AND PROCEDURES

Under the supervision and with the  participation  of our management,  including
our Chief  Executive  Officer ("CEO") and Chief Financial  Officer  ("CFO"),  we
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls  and  procedures  (as defined in Rule  13a-15(e)  and  15d-15(e) of the
Exchange Act as of a date (the "Evaluation Date") within 90 days prior to filing
the Company's December 31, 2004 Form 10-KSB. Based upon that evaluation, the CEO
and CFO concluded  that, as of December 31, 2004,  our  disclosure  controls and
procedures  were  effective  in  timely  alerting  management  to  the  material
information  relating to us required to be included in our periodic filings with
the SEC. Based on their most recent  evaluation as of the  Evaluation  Date, the
CEO and the CFO have also concluded  that there are no significant  deficiencies
in the design or operation of internal  controls over financial  reporting which
are  reasonably  likely to  adversely  affect the  Company's  ability to record,
process,  summarize  and report  financial  information,  and such officers have
identified  no material  weaknesses  in the  Company's  internal  controls  over
financial reporting.

However,  during the year ended  December  31,  2004,  the  Company has hired an
independent third party to evaluate and revise its existing control policies and
procedures,  including our disclosure controls and procedures,  and to implement
more effective and efficient controls and procedures.

CHANGES IN CONTROLS AND PROCEDURES

There were no significant  changes made in our internal  controls over financial
reporting  during the  quarter  ended  December  31,  2004 that have  materially
affected or are reasonably likely to materially affect these controls.  Thus, no
corrective   actions  with  regard  to  significant   deficiencies  or  material
weaknesses were necessary.

                                                                              17

<PAGE>

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROL

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

                                                                              18

<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, 2004,  concerning the
Company's directors and executive officers:

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

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

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

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

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

                                                                              19

<PAGE>

markets and business development. He is also President of Biomoda, Inc. He holds
undergraduate  degrees from Boston University and the Lowell Institute School at
MIT.

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

Compliance With Section 16(A) of the Securities Exchange
--------------------------------------------------------

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
directors and executive  officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the SEC initial
reports of  ownership  and reports of changes in  ownership  of common stock and
other equity securities of the Company. Officers, directors and greater than ten
percent shareholders are requited by SEC regulations to furnish the Company with
copies of all Sections 16(a) forms they file. To the Company's knowledge,  based
solely on the review of copies of such  reports  furnished  to the  Company  and
written  representations  that no other reports were required and to the best of
its knowledge, during the year ended December 31, 2004, 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.

CODE OF ETHICS

For the year ended  December 31, 2004,  the Company did not have formal  written
values and ethical standards.  However,  the Company management does communicate
values and ethical standards during company wide meetings.

                                                                              20

<PAGE>

AUDIT COMMITTEE FINANCIAL EXPERT

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

ITEM 10.   EXECUTIVE COMPENSATION

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

                           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 Principal        Year      Salary ($)   Bonus ($) ($)             ($)      (#)            ($)       ($)
Position
--------------------------------------------------------------------------------------------------------------------------
<S>                      <C>       <C>           <C>        <C>           <C>     <C>             <C>        <C>
Michael Pete, President,
Director
--------------------------------------------------------------------------------------------------------------------------
                          2004       $38,500
--------------------------------------------------------------------------------------------------------------------------
                          2003       $13,325
--------------------------------------------------------------------------------------------------------------------------
                          2002       $ 5,975                                         150,000
--------------------------------------------------------------------------------------------------------------------------
Leslie S. Robins,
Chairman of the Board
and Exec. VP
--------------------------------------------------------------------------------------------------------------------------
                          2004      $356,331                 $ 7,932 (1)
--------------------------------------------------------------------------------------------------------------------------
                          2003      $162,444   $ 390,000     $ 8,500 (1)
--------------------------------------------------------------------------------------------------------------------------
                          2002      $ 86,223                 $ 2,451 (1)            1,100,000 (2)
--------------------------------------------------------------------------------------------------------------------------
John J. Cousins,
VP Finance
--------------------------------------------------------------------------------------------------------------------------
                          2004      $112,335
--------------------------------------------------------------------------------------------------------------------------
                          2003      $113,965
--------------------------------------------------------------------------------------------------------------------------
                          2002      $109,797                                         250,000
--------------------------------------------------------------------------------------------------------------------------
Dr. Linda Obenour,        2004                               $12,000 (3)
Director
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Represents the value of an automobile used by Mr. Robins.
(2)  Exercised during 2002 for a note receivable plus interest.
(3)  Directors Fee

                                                                              21

<PAGE>

OPTION GRANTS IN FISCAL YEAR 2004

None.

Aggregated  Option  Exercises in Fiscal Year 2004 and Option  Values At December
-------------------------------------------------------------------------------
31, 2004
--------

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, 2004.

                             YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                        NUMBER OF SECURITIES UNDERLYING            VALUE OF UNEXERCISED
                                                              UNEXERCISED OPTIONS                  IN-THE-MONEY OPTIONS
                                                               DECEMBER 31, 2004                     DECEMBER 31, 2004
                                                        -------------------------------        ----------------------------
NAME                SHARES AQCUIRED    VALUE              EXERCISABLE    UNEXERCISABLE         EXERCISABLE    UNEXERCISABLE
                    ON EXERCISE (#)    REALIZED ($)           (#)             (#)                  ($)              ($)
----------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>                   <C>              <C>
Michael Pete                                                150,000           --                 $3,000             --
John Cousins                                                250,000           --                 $5,000             --
Total                                                       400,000           --                 $8,000             --
</TABLE>

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

                            LONG-TERM INCENTIVE PLANS

As of December 31, 2004 there is no long-term incentive plan.

                              DIRECTOR COMPENSATION

Non-employee  directors of the Company  received  $12,000 in 2004 for  Directors
Fees.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENIFICIAL OWNERS AND MANAGEMENT

The  following  table sets forth certain  information  known to the Company with
respect to beneficial  ownership of the  Company's  Common Stock as of March 25,
2005 by (a) each person known to the Company to beneficially  own more than five
percent  of the  Company's  Common  Stock,  (b)  each  Director,  (c) the  Named
Executive  Officers,  and (d) all Directors  and executive  officers as a group.
Unless otherwise  indicated in the footnotes to the table, the beneficial owners
named have, to the knowledge of the Company,  sole voting and  investment  power
with respect to the shares  beneficially  owned,  subject to community  property
laws where applicable.  As of December 31, 2004 there were 3,378,007,055  shares
outstanding.

                                                                              22

<PAGE>

<TABLE>
<CAPTION>
                                                                                   PERCENT
                                                         NUMBER OF SHARES        BENEFICIALLY
            NAME OF BENEFICIAL OWNER (1)                BENEFICIALLY OWNED          OWNED
---------------------------------------------------------------------------------------------
<S>                                                     <C>                      <C>
Leslie Robins*......................................        10,831,546(2)              *
Michael Pete*.......................................           325,000(3)              *
John Cousins*.......................................           400,000(4)              *
*All directors and executive officers as a group            11,556,546                 *
</TABLE>
-------
     *Less than 1.0%.

     (1)  The address of all persons who are executive  officers or directors of
          the Company is in care of the Company,  8301  Washington  NE, Suite 5,
          Albuquerque New Mexico 87113.

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

     (3)  Includes  150,000  shares of common stock  issuable  upon  exercise of
          options which are currently exercisable.

     (4)  Includes  350,000  shares of common stock  issuable  upon  exercise of
          options which are currently  exercisable.  Includes  250,000 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.

Compliance With Section 16(A) of the Securities Exchange Act of 1934
--------------------------------------------------------------------

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

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

As of  December  31, 2004 and 2003,  the Company had net  advances to an officer
approximating  $67,300. The advances accrue interest at rates ranging from 5% to
6%  (approximately  $0 and $3,900 of interest  income has been  recorded for the
year ended December 31, 2004 and 2003,  respectively)  and are due on demand. As
these notes receivable are with a shareholder and a Company officer, the Company
has classified these amounts as a decrease to  stockholders'  equity at December
31, 2004.

During fiscal 2004, the Company advanced approximately $619,000 to Biomoda under
a line of credit  agreement (see below).  The advances accrue interest at 5% and
are due on demand.

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

As of December 31, 2004, the Company owned  1,132,285 or 15.91% of the 7,117,282
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

                                                                              23

<PAGE>

revenues as of December  31,  2004.  In  compliance  with FASB FIN 46,  Advanced
Optics Electronics, Inc. has consolidated its financial statements with those of
Biomoda at December 31, 2004.

Biomoda has filed a SB-2 registration statement with the Securities and Exchange
Commission, in which they are offering 6,000,000 shares of its common stock. The
initial offering price is $3.00 per share,  however the price that Biomoda,  and
the Company,  will be able to sell the shares is not determinable,  AS NO SHARES
HAVE BEEN ISSUED AS OF THE FILING OF THESE  FINANCIAL  STATEMENTS.  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's investment under
the cost method since its ownership was not  sufficient for the investment to be
accounted for using the equity method. During 2002, the Company's influence over
Biomoda  increased such that the investment  qualified for accounting  under the
equity method.  The Company  recognized the proportionate  interest in Biomoda's
net loss for the year ended  December  31,  2004 and 2003 until such time as the
net investment without regard to the advance was reduced to zero.

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 3.2
          including Indentures
------------------------------------------------------------------------------------------------------------------------------------
7         Opinion re: liquidation preference                    Incorporated by reference to Exhibit 3.2
------------------------------------------------------------------------------------------------------------------------------------
10.1      Incentive Stock Option Plan                           Incorporated by reference to Exhibit 10.1
------------------------------------------------------------------------------------------------------------------------------------
10.2      Lease Agreement Advanced Optics Electronics, Inc.     Incorporated by reference to Exhibit 10.2 of the
          and JMP Company Inc                                   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.
------------------------------------------------------------------------------------------------------------------------------------
23.1      Consent of Squar, Milner                              Filed Herewith
------------------------------------------------------------------------------------------------------------------------------------
24        Power of Attorney                                     Incorporated by reference to Exhibit 3.2
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                              24
<PAGE>

<TABLE>
<CAPTION>
EXHIBITS
------------------------------------------------------------------------------------------------------------------------------------
<S>       <C>                                                   <C>
31.1      Certification of Chief Executive Officer persuant     Filed Herewith
          to Section 302 of the Sarbannes Oxley Act of 2002
------------------------------------------------------------------------------------------------------------------------------------
31.2      Certification of Chief Financial Officer persuant     Filed Herewith
          to Section 302 of the Sarbannes Oxley Act of 2002
------------------------------------------------------------------------------------------------------------------------------------
32.1      Certification Pursuant To 18 U.S.C. ss.1350, As       Filed Herewith
          Adopted Pursuant To Section 906 Of The
          SARBANES-OXLEY ACT OF 2002
------------------------------------------------------------------------------------------------------------------------------------
32.2      Certification Pursuant To 18 U.S.C. ss.1350, As       Filed Herewith
          Adopted Pursuant To Section 906 Of The
          SARBANES-OXLEY ACT OF 2002
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Reports On Form 8-K
-------------------

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

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

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

The aggregate fees billed by our auditors for professional  services rendered in
connection with the audit of our annual  consolidated  financial  statements for
the fiscal  years  ended  December  31,  2003 and 2004 were  $45,000 and $60,300
respectively.

AUDIT-RELATED FEES

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

TAX FEES

The  aggregate  fees billed by our  auditors for  professional  services for tax
compliance,  tax advice, and tax planning were  approximately  $3,000 and $2,500
for the fiscal years ended December 31, 2003 and 2004.


                                                                              25
<PAGE>

ALL OTHER FEES

The aggregate fees billed by our auditors for all other non-audit services, such
as attending  meetings and other  miscellaneous  financial  consulting,  for the
fiscal years ended December 31, 2003 and 2004 were $0 and $0 respectively.

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

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

                                                                              26

<PAGE>

                                   SIGNATURES

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

Dated:    April 13, 2005

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)

                                                                              27

<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

We have audited the accompanying  consolidated  balance sheet of Advanced Optics
Electronics,  Inc.  and  subsidiaries  as of  December  31, 2004 and the related
consolidated  statements  of  operations,   consolidated   stockholders'  equity
(deficit) and comprehensive income and consolidated  statement of cash flows for
the  year  ended  December  31,  2004.   These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial  statements based on our audits. We did not audit the
financial  statements of Biomoda,  Inc. whose statements reflect total assets of
approximately  $160,206 as of December 31, 2004 and  operating  loss of $708,380
and $302,333 for the years ended December 31, 2004 and 2003, respectively. Those
statements  were audited by other  auditors whose reports have been furnished to
us, and in our opinion,  insofar as it relates to the amounts included  Biomoda,
Inc.  for the years ended  December  31, 2004 and 2003,  is based  solely on the
report of the other auditors.

We conducted our audit of these  statements in accordance  with the standards of
the Public Company Accounting  Oversight Board (United States).  Those standards
require that we plan and perform the audit to obtain reasonable  assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes  examining,  on a test basis,  evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our  opinion,  based on our audits and the  reports  of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,  the  consolidated  financial  position of  Advanced  Optics
Electronics,  Inc. and  subsidiaries  as of December 31, 2004 and the results of
its consolidated operations and its consolidated statement of cash flows for the
year,  ended  December  31,  2004,  in  conformity  with  accounting  principles
generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern.  As shown in the consolidated
financial  statements,  the  Company  has  accumulated  deficit  of  $19,825,110
including net losses of $5,048,067  and  $3,900,959 for the years ended December
31, 2004 and 2003,  respectively.  These  factors as  discussed in Note 1 to the
financial  statements,  raises  substantial doubt about the Company's ability to
continue as a going concern.  Management's  plans in regard to these matters are
also  described  in  Note  1.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

/s/ Kabani & Company, Inc.

KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Huntington Beach, California
March 15, 2005



<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




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

We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity, and cash flows of Advanced Optics  Electronics,  Inc. and
subsidiary  (the  "Company"),  a development  stage company,  for the year ended
December 31, 2003.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the consolidated  results of operations and
cash flows of Advanced  Optics  Electronics,  Inc. and  subsidiary  for the year
ended  December 31, 2003 in  conformity  with  accounting  principles  generally
accepted in the United States of America.



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

February 27, 2004
Newport Beach, California

<PAGE>


                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                ASSETS
<S>                                                                      <C>
Current Assets

      Cash                                                               $    612,652
      Marketable securities                                                    60,920
      Other current assets                                                     17,446
                                                                         ------------

           Total current assets                                               691,018

Intangibles, net                                                              176,577

Property and Equipment, net                                                   153,168

Other Assets
      Investment in Genomed                                                   900,000
      Notes receivable                                                         49,579
                                                                         ------------
                                                                              949,579
                                                                         ------------

                                                                         $  1,970,342
                                                                         ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
      Accounts payable                                                   $    175,630
      Accrued expenses                                                        195,274
      Advances from shareholders                                              134,988
      Advances from officer                                                    89,710
      Convertible debentures                                                  102,977
                                                                         ------------

           Total current liabilities                                          698,579
                                                                         ------------

Commitments and Contingencies

Stockholders' Equity

      Preferred stock, $0.001 par value, 10,000,000 shares authorized;
        no shares issued and outstanding                                           --
      Common stock, $0.001 par value, 4,000,000,000 shares authorized;
        3,368,136,349 shares issued and outstanding                         3,368,136
      Treasury stock, at cost                                                 (37,195)
      Notes receivable officer                                                (67,299)
      Additional paid in capital                                           17,842,922
      Accumulated other comprehensive income                                   (9,691)
      Deficit accumulated during the development stage                    (19,825,110)
                                                                         ------------

           Total stockholders' equity                                       1,271,763
                                                                         ------------

                                                                         $  1,970,342
                                                                         ============
</TABLE>

--------------------------------------------------------------------------------
Page F-1        See accompanying notes to the consolidated financial statements.

<PAGE>

                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
        For the Years Ended December 31, 2004 and 2003 and For The Period
             From May 22, 1996 (Inception) Through December 31, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                               May 22, 1996
                                                                                                (Inception)
                                                                                                 Through
                                                                                               December 31,
                                                             2004               2003               2004
                                                                           (as restated)
                                                       ---------------    ---------------    ---------------
<S>                                                    <C>                <C>                <C>
CONTRACT REVENUES                                         $          -       $          -       $          -

OPERATING EXPENSES
       General and administrative                            1,493,145          2,299,724         10,604,963
       Payroll and related                                     548,171            984,626          1,532,797
       Research and development                                658,859            110,717          2,101,649
       Professional Fees                                       134,218             36,163            170,381
       Depreciation & amortization                              40,219             85,261            125,480
       Licensing Fees                                           15,776             22,200             37,976
       Inventory write-off                                      29,293                 --             29,293
       Asset impairment                                        365,314                 --            592,884
                                                       ---------------    ---------------    ---------------
             Total operating expenses                        3,284,995          3,538,691         15,195,423

LOSS ON CONTRACT                                             1,000,944             50,000          2,255,944
                                                       ---------------    ---------------    ---------------

OPERATING LOSS                                              (4,285,939)        (3,588,691)       (17,451,367)
                                                       ---------------    ---------------    ---------------
OTHER INCOME (EXPENSES)
       Interest income                                           3,397              5,602             80,381
       Loss on marketable equity securities                    (98,560)                --           (127,928)
       Other investment gains                                       --                 --             59,784
       Loss from investment in Biomoda, Inc.                        --                 --           (289,750)
       Gain (loss) on disposal of assets                           786                 --             (3,520)
       Gain (loss) on settlement of debts                     (620,980)            64,892           (556,088)
       Interest expense                                        (47,322)          (193,482)        (1,284,873)
       Other income                                                551                 --                551
                                                       ---------------    ---------------    ---------------
                      Total other income (expenses)           (762,128)          (122,988)        (2,121,443)
                                                       ---------------    ---------------    ---------------

NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS                (5,048,067)        (3,711,679)       (19,572,810)

EXTRAORDINARY LOSS                                                  --           (189,280)          (189,280)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE                                                           --                 --            (63,020)
                                                       ---------------    ---------------    ---------------
NET LOSS                                               $    (5,048,067)   $    (3,900,959)   $   (19,825,110)
                                                       ===============    ===============    ===============

Basic and  diluted  net loss before  cumulative
effect of change in  accounting principle available
to common shareholder per common share and
extraordinary loss                                     $        (0.002)   $        (0.002)

Extraordinary loss                                                  --                 --

Cumulative effect of change in accounting principle                 --                 --
                                                       ---------------    ---------------
Basic and diluted net loss available to
common shareholders per common share                   $        (0.002)   $        (0.002)
                                                       ===============    ===============

Basic and diluted weighted average common shares
  outstanding                                            2,959,935,666      1,568,587,985
                                                       ===============    ===============
</TABLE>

*    Weighted average number of shares used to compute basic and diluted loss
     per share is the same since the effect of dilutive securities is
     anti-dilutive.

--------------------------------------------------------------------------------
Page F-2        See accompanying notes to the consolidated financial statements.

<PAGE>

                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE PERIOD
             FROM MAY 22, 1996 (INCEPTION) THROUGH DECEMBER 31, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                  May 22, 1996
                                                                                                                   (Inception)
                                                                                                                     Through
                                                                                                                   December 31,
                                                                                       2004            2003            2004
                                                                                                   (as restated)
                                                                                   ------------    ------------    ------------
<S>                                                                                <C>             <C>             <C>
Cash flows from operating activities:
     Net loss                                                                      $ (5,048,067)   $ (3,900,959)   $(19,825,110)
     Adjustments to reconcile net loss to net cash
       used in operating activities:
        Intrinsic value of conversion features                                               --              --         610,603
        Write off of organization costs                                                      --              --          63,020
        Extraordinary loss                                                                   --         189,280         189,280
        Inventory write off                                                              29,293              --          29,293
        Amortization of discount on convertible notes and preferred stock                    --              --         295,209
        Loss on marketable securities                                                    98,560              --         127,928
        Loss (Gain) on disposal of assets                                                  (786)             --           3,520
        Issuance of common stock for services                                           254,780       1,832,095       6,504,726
        Issuance of Biomoda common stock and options for services                        18,000         147,000         165,000
        Issuance of notes payable for services                                               --              --          50,000
        Increase in excess of costs and earnings over billings on
         uncompleted contract                                                                --        (169,651)     (2,050,000)
        Increase in allowance for loss on contract                                      795,000          50,000       2,050,000
        Loss (Gain) on extinguishment of debt                                           620,980         (64,892)        556,088
        Interest accrued on convertible debentures                                           --          81,058         309,504
        Interest earned on note receivable from stockholder and
         related parties                                                                     --          (2,397)        (17,823)
        Depreciation and amortization                                                    40,218          85,262         663,440
        Bad debt expense                                                                     --              --          15,000
        Asset impairment                                                                365,314              --         592,884
        Other non-cash expenses                                                              --              --          33,447
        Accrued interest                                                                     --              --          30,667
     Changes in operating assets and liabilities:
        Decrease (Increase) in other current assets                                      26,233          12,988         (12,213)
        Decrease in inventory                                                                --              --         (35,293)
        (Decrease) Increase in accounts payable and accrued expenses                   (164,019)       (142,976)         25,940
                                                                                   ------------    ------------    ------------

     Net cash used in operating activities                                           (2,964,495)     (1,883,192)     (9,335,141)
                                                                                   ------------    ------------    ------------
Cash flows from investing activities:
     Purchases of property and equipment                                                (61,276)        (66,972)       (518,080)
     Additions to patents, trademark & license fee                                      (63,742)        (40,830)       (104,572)
     Proceeds from sale of property and equipment                                            --              --          23,800
     Investment in Genomed                                                             (900,000)             --        (900,000)
     Investment in Biomoda, Inc.                                                             --              --        (383,845)
     Proceeds from sale of Biomoda, Inc. stock                                               --              --          28,930
     Advances to Biomoda, Inc.                                                               --              --         (38,432)
     Advances from shareholders                                                           4,445           9,564          14,009
     Sale of marketable securities                                                      152,122              --         192,787
     Purchases of marketable securities                                                (536,000)        (39,300)       (645,334)
     Cash of variable entity on consolidation                                                --             155             155
     Increase in notes receivable                                                       (14,579)        (35,000)        (49,579)
     Purchase of other assets                                                                --              --        (245,579)
                                                                                   ------------    ------------    ------------

     Net cash used in investing activities                                           (1,419,029)       (172,383)     (2,625,739)
                                                                                   ------------    ------------    ------------
</TABLE>

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

<PAGE>

<TABLE>
<CAPTION>
                                                                                                                  May 22, 1996
                                                                                                                   (Inception)
                                                                                                                     Through
                                                                                                                   December 31,
                                                                                       2004            2003            2004
                                                                                                   (as restated)
                                                                                   ------------    ------------    ------------
<S>                                                                                <C>             <C>             <C>
Cash flows from financing activities:
     Principal repayments on notes payable and capital leases                                --         (38,110)       (269,987)
     Proceeds from notes payable                                                             --              --         622,776
     Issuance of common stock for cash                                                1,119,031       6,030,815      11,323,718
     Issuance of Biomoda common stock for cash                                           60,000              --          60,000
     (Increase) decrease in note receivable stockholder                                      --              --          (5,422)
     Proceeds from sale of treasury stock                                                48,260          56,553         225,419
     Purchase of treasury stock                                                         (41,724)        (61,943)       (258,377)
     Proceeds from issuance of convertible debt                                              --         210,965       1,270,965
     Principal repayments on convertible debt                                          (154,000)       (228,109)       (395,560)
                                                                                   ------------    ------------    ------------

     Net cash provided by financing activities                                        1,031,567       5,970,171      12,573,532
                                                                                   ------------    ------------    ------------

Net (decrease) increase in cash                                                      (3,351,957)      3,914,596         612,652

Cash at beginning of period                                                           3,964,609          50,013              --
                                                                                   ------------    ------------    ------------

Cash at end of period                                                              $    612,652    $  3,964,609    $    612,652
                                                                                   ============    ============    ============

Supplemental  disclosure  of cash flow  information  - Cash paid during the year
     for:

        Interest                                                                   $        451    $     23,221
                                                                                   ============    ============

        Income taxes                                                               $         50    $         50
                                                                                   ============    ============

See accompanying notes to the financial statements for additional information
relating to non-cash investing and financing activities during the years ended
December 31, 2004 and 2003.
</TABLE>

--------------------------------------------------------------------------------
Page F-4   See accompanying notes to the consolidated financial statements.

<PAGE>

                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
                              COMPREHENSIVE INCOME
     For The Period From May 22, 1996 (Inception) Through December 31, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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

Balance, December 31, 2003                                            --                --     2,755,136,349         2,755,136
Stock issued for cash                                                 --                --       462,800,000           462,800
Stock issued for services                                             --                --        47,200,000            47,200
Purchase of treasury stock                                            --                --                --                --
Sale of treasury stock                                                --                --                --                --
Stock issued upon debt conversion, including
    $166,240 of interest                                              --                --       103,000,000           103,000
Realized loss on sale of market of available for
    sale securities, net                                              --                --                --                --
Net loss                                                              --                --                --                --
                                                          --------------    --------------    --------------    --------------

Balance, December 31, 2004                                            --    $           --     3,368,136,349    $    3,368,136
                                                          ==============    ==============    ==============    ==============
</TABLE>

<TABLE>
<CAPTION>

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

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

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

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

Balance, December 31, 1999                                       (144,000)          (30,630)        4,870,257                --
Stock issued for cash                                                  --                --         1,012,710                --
Stock issued for services                                              --                --         1,726,197                --
Purchase of treasury stock                                        (63,500)          (46,486)               --                --
Sale of treasury stock                                            142,400            22,542            54,771                --
Exercise of stock options for notes receivable                         --                --           220,150          (193,427)
Amortization of discount of convertible preferred stock                --                --           159,677                --
Exercise of preferred stock conversion feature                         --                --           533,678                --
Issuance of convertible debentures                                     --                --           263,830                --
Exchange of preferred stock for convertible debentures                 --                --          (869,678)               --
Intrinsic value of convertible debenture                               --                --           227,898                --
De-investment in Wizard Technologies                                   --                --           (59,583)               --
Net loss                                                               --                --                --                --
                                                           --------------    --------------    --------------    --------------

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

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

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

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

Balance, December 31, 2004                                       (209,000)   $      (37,195)   $   17,842,922    $      (67,299)
                                                           ==============    ==============    ==============    ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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

Balance, December 31, 2004                               $       (9,691)   $  (19,825,110)   $    1,271,763
                                                         ==============    ==============    ==============
</TABLE>

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

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF OPERATIONS

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

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

Since May 22, 1996 ("Inception"),  the Company has primarily been engaged in the
research and  development of its 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.

The Company's  research and development work in the third and fourth quarters of
2004 have not  completed  the initial  product as  expected.  Completion  of the
product  is now  expected  in the  latter  half of 2005.  Because of the lack of
anticipated  revenues  in 2004,  the  Company  has taken  excess  cash funds and
invested  these in what  they  deem to be  sound  investments  that may  produce
additional  funds and gains to the company in 2005.  These funds and gains would
then be used for additional product  development and administrative  expenses in
the  initial  production  stage  of  the  product.   These  investments  include
marketable   securities  of  other  companies   including  several   bio-medical
companies.

In 2002, the Company's Chief  Executive  Officer ("CEO") and the Chief Financial
Officer  ("CFO")  replaced  Biomoda's  management  team,  affecting  a change in
control. The Company also owns approximately 16% of Biomoda's outstanding common
stock.  In 2003,  the CEO and the CFO  each  acquired  7.27% of the  outstanding
common  stock of  Biomoda.  On August  13,  2003,  Biomoda  formed a 100%  owned
subsidiary  known as  Biomoda  Holdings,  Inc.,  a Nevada  corporation,  for the
purpose of  research,  development,  production  and  marketing  of medical  and
biomedical  products.  As of December 31, 2004, the Company owned  approximately
1,132,000 or 15.9% of the 7,117,000  outstanding shares of Biomoda. In addition,
two of the Company's officers own approximately 12%, collectively,  of Biomoda's
outstanding  shares.  Further,  the  Company  subleases  office  space  and  lab
equipment  to Biomoda and two of the  Company's  officers  are also  officers of
Biomoda.  The Company has been the sole source of funding to Biomoda  since 2002
through  advances  made  under  a line  of  credit  agreement.  The  Company  is
considered  the  primary  beneficiary  as it stands to absorb  the  majority  of
Biomoda's, called herein as the variable interest entity, expected losses. Since
Biomoda  and the  Company  are

--------------------------------------------------------------------------------
Page F-6

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

considered  entities under common control for accounting  purposes,  the Company
measures  the assets and  liabilities  of Biomoda at their  carrying  amounts in
consolidation. (Note 7)

Biomoda's  primary  focus is on early  cancer  detection  technology.  Its novel
cell-targeting   technology   is  globally   patented   for  the   detection  of
pre-cancerous  and cancerous  conditions in all human tissue.  This  technology,
based  on a  compound  called  Tetrakis  Carboxy  Phenyl  Porphine  (TCPP),  was
developed  at  St.  Mary's   hospital  in  Colorado  and  Los  Alamos   National
Laboratories.  Biomoda  obtained  a  worldwide  exclusive  license  to the  TCPP
technology  from the  University  of  California  in late  1995,  and  began new
research broadening the scope of the original patent and technology. In November
2000,  Biomoda  filed a new U.S.  provisional  patent  application  defining the
ability  of its  version  of the  TCPP to  detect  pre-cancerous  and  cancerous
conditions in all human tissue.  Biomoda began the commercialization  process by
trademarking  the  technology as CyPath.  Management  expects to continue  assay
valuation work and register its product with the FDA in 2005.

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include accounts of the Company and the
accounts  of  the  variable  interest  entity,   Biomoda,  Inc.  (Note  7).  All
significant  inter-company  accounts and  transactions  have been  eliminated in
consolidation.

RESTATEMENT OF 2003

In accordance with paragraph 40 of FIN 46(R),  management has elected to restate
the statements of operations,  stockholders' equity, and cash flows for the year
ended  December  31,  2003 for the  consolidation  of  Biomoda,  Inc. as if such
consolidation  occurred on January 1, 2003. Such initial consolidation  resulted
in the recording of an extraordinary loss of approximately $189,000 for the year
ended December 31, 2003.

DEVELOPMENT STAGE AND GOING CONCERN

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

The accompanying  consolidated  financial statements have been prepared assuming
the Company will continue as a going concern,  which  contemplates,  among other
things,  the realization of assets and satisfaction of liabilities in the normal
course of business. As of December 31, 2004, the Company has accumulated deficit
of $19,825,110.  The Company's  total assets  exceeded the total  liabilities by
$1,271,763.  These  factors,  among others,  raise  substantial  doubt about the
Company's ability to continue as a going concern.

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

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

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

     o    The Company is seeking new contracts.

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

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

--------------------------------------------------------------------------------
Page F-7

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

Management  plans to  obtain  revenues  from  product  sales,  but  there are no
significant  commitments for purchases of any of the proposed  products.  In the
absence  of  significant  sales  and  profits,  the  Company  may  seek to raise
additional  funds  to  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.

RISKS AND UNCERTAINTIES

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

USE OF ESTIMATES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

CASH AND CASH EQUIVALENTS

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

--------------------------------------------------------------------------------
Page F-8

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

MARKETABLE SECURITIES

The  Company   classifies   its   investments   in   marketable   securities  as
"available-for sale" in accordance with the provisions of Statement of Financial
Accounting  Standards No. 115,  "ACCOUNTING FOR CERTAIN  INVESTMENTS IN DEBT AND
EQUITY  SECURITIES"  (SFAS  115).  The  Company  does not  have any  investments
classified as "trading" or "held to maturity".

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

Following is a summary of marketable securities classified as available for sale
as of December 31, 2004:

                                     COST BASIS   FAIR VALUE   UNREALIZED LOSS
                                     ----------   ----------   ---------------
Marketable securities-Common stock   $ 69,153      $ 59,462        $  9,691

CONCENTRATIONS OF CREDIT RISK

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

From time to time the  Company  maintains  cash  balances  at certain  financial
institutions in excess of the Federal  Deposit  Insurance  Corporation  ("FDIC")
limit of $100,000.  At December 31,  2004,  such  balances in excess of the FDIC
limit approximated $500,000.

INVENTORIES

Inventories  consist of small parts and supplies to be used in the manufacturing
process of large panel display.  Inventories  are valued at the lower of cost or
market.  Cost is  determined by the first-in,  first-out  method.  The Company's
management  determined  that  inventory,  based  upon  its  condition,  has been
obsolete and therefore,  recorded inventory write off of $29,293 at December 31,
2004.

PROPERTY AND EQUIPMENT

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

INTANGIBLE ASSETS - PATENTS

--------------------------------------------------------------------------------
Page F-9

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

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

LONG-LIVED ASSETS

Statement of Financial  Accounting  Standards ("SFAS") 144,  "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED  ASSETS AND FOR  LONG-LIVED  ASSETS TO BE DISPOSED OF,"
which supercedes SFAS 121, addresses financial  accounting and reporting for the
impairment or disposal of long-lived  assets.  SFAS 144 requires that long-lived
assets be reviewed for impairment  whenever  events or changes in  circumstances
indicate that their carrying  amounts may not be recoverable.  If the cost basis
of a long-lived asset is greater than the projected future undiscounted net cash
flows from such asset  (excluding  interest),  an impairment loss is recognized.
Impairment losses are calculated as the difference  between the cost basis of an
asset  and its  estimated  fair  value.  SFAS 144  also  requires  companies  to
separately  report  discontinued  operations  and extends  that  reporting  to a
component of an entity that either has been  disposed of (by sales,  abandonment
or in a distribution to owners) or is classified as held for sale.  Assets to be
disposed  are  reported at the lower of the  carrying  amount or fair value less
costs to sell.  The  provisions  of this  statement  for assets held for sale or
other  disposal  generally  are required to be applied  prospectively  after the
adoption date to newly  initiated  commitments  to plan to sell such assets,  as
defined, by management.  As a result,  management cannot determine the potential
effects that  adoption of SFAS 144 will have on the  financial  statements  with
respect to future disposal  decisions,  if any. At December 31, 2004, a total of
$365,314  was  impaired.  There  can  be  no  assurance,  however,  that  market
conditions will not change or demand for the Company's products or services will
increase, which could result to additional impairment of long-lived assets.

DEBT SETTLEMENT

In April 2002,  the FASB issued  Statement  of  Financial  Accounting  Standards
("SFAS") No. 145,  "Rescission  of FASB  Statements 4, 44, and 64,  Amendment of
FASB  Statement  13,  and  Technical  Corrections  as of April  2002."  SFAS 145
provides  guidance for income  statement  classification  of gains and losses on
extinguishments  of debt. Such gains and losses must be analyzed to determine if
they meet the criteria for extraordinary item classification  based on the event
being both  unusual and  infrequent.  The  Company  adopted  SFAS 145  beginning
January 1, 2003.  During 2004 and 2003,  the  Company  recorded a gain (loss) of
$(620,980) and $64,892 on settlement of debt.  The Company has  determined  that
gain or loss is not extraordinary in nature.

REVENUE RECOGNITION

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

--------------------------------------------------------------------------------
Page F-10

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

In accordance  with Statement of Position 81-1,  "ACCOUNTING  FOR PERFORMANCE OF
CONSTRUCTION-TYPE AND CERTAIN PRODUCTION-TYPE  CONTRACTS," the Company accounted
for  revenue  and costs  related  to its  long-term  contract  in process by the
completed-contract  method, whereas during the period from Inception to December
31,  1999,  revenue and costs were  determined  by the  percentage-of-completion
method. The  completed-contract  method of accounting was adopted in 2000 due to
the  Company's  uncertainty  regarding  contract cost  estimates.  The financial
statements of the period from  Inception to December 31, 1999,  were restated to
apply the completed contract method retroactively.  The effect of the accounting
change had no effect on net loss or loss per share previously  reported for 1999
or for the period from Inception to December 31, 1999.

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
in excess of billings on uncompleted contracts.

The contract to produce two outdoor  advertising  billboards total $1.7 million,
with  $885,000  assigned to the first unit. An estimated  loss of  approximately
$1,425,000  from  production  of the  first  unit  has been  recognized  through
December 31, 2004. Per the agreement,  the first unit is not to exceed $885,000,
of which $90,000 has been billed and collected in prior periods. At December 31,
2004,  the contract was  terminated by mutual consent of both parties and a 100%
provision for contract losses was provided.  The Company recorded  $1,000,994 as
loss on contract in 2004 and $50,000 in 2003.

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, 2004 and 2003.  Because the Company has incurred net losses,  basic
and diluted loss per share is the same as  additional  potential  common  shares
would be anti-dilutive.

STOCK BASED COMPENSATION

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

--------------------------------------------------------------------------------
Page F-11

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

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

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

FASB  Interpretation  No. 44 ("FIN 44"),  "ACCOUNTING  FOR CERTAIN  TRANSACTIONS
INVOLVING  STOCK  COMPENSATION,  AN  INTERPRETATION  OF APB  25"  clarifies  the
application of APB 25 for (a) the definition of employee for purpose of applying
APB 25, (b) the  criteria  for  determining  whether a plan  qualifies  as a non
compensatory plan, (c) the accounting  consequence for various  modifications to
the terms of a previously fixed stock option or award and (d) the accounting for
an exchange of stock compensation awards in a business  combination.  Management
believes that the Company accounts for transactions involving stock compensation
in accordance with FIN 44.

SFAS 148, "ACCOUNTING FOR STOCK-BASED  COMPENSATION - TRANSITION AND DISCLOSURE,
AN  AMENDMENT  OF FASB  STATEMENT  NO.  123,"  provides  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for stock-based employee  compensation.  In addition,  this statement amends the
disclosure  requirements  of SFAS 123 to require  prominent  disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.

At December 31, 2004, the Company has one stock-based employee compensation plan
(the "Plan"), which is described more fully in Note 11. The Company accounts for
the Plan under the recognition and measurement principles of APB 25, and related
interpretation.  No  stock-based  compensation  cost is  recognized in net loss.
Stock options  granted  under the Plan have exercise  prices equal to the market
value of the underlying common stock on the dates of grant.

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

<TABLE>
<CAPTION>
                                                              2004                  2003
                                                      ------------------    ------------------
<S>                                                   <C>                   <C>
Net loss:
    As reported                                       $       (5,048,067)   $       (3,900,959)
    Deduct: Total stock-based employee compensation
          expense determined under fair value based
          method for all awards                                       --                    --
                                                      ------------------    ------------------
    Pro forma                                         $       (5,048,067)   $       (3,900,959)
                                                      ==================    ==================

Basic and diluted net loss per share:

    As reported                                       $            (0.00)   $            (0.00)
                                                      ==================    ==================
    Pro forma                                         $            (0.00)   $            (0.00)
                                                      ==================    ==================
</TABLE>

--------------------------------------------------------------------------------
Page F-12

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

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

COMPREHENSIVE INCOME

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

REPORTING SEGMENTS

Statement of financial  accounting standards no. 131, DISCLOSURES ABOUT SEGMENTS
OF AN  ENTERPRISE  AND RELATED  INFORMATION  (sfas no.  131),  which  superseded
statement of financial  accounting  standards  no. 14,  FINANCIAL  REPORTING FOR
SEGMENTS OF A BUSINESS ENTERPRISE, establishes standards for the way that public
enterprises  report  information  about operating  segments in annual  financial
statements  and  requires  reporting  of selected  information  about  operating
segments  in interim  financial  statements  regarding  products  and  services,
geographic areas and major customers. SFAS NO. 131 defines operating segments as
components  of an  enterprise  about which  separate  financial  information  is
available that is evaluated  regularly by the chief operating  decision maker in
deciding how to allocate  resources and in assessing  performances.  The Company
allocates resources and assesses the performance based upon information from two
reporting units, (1) Adot and (2) Biomoda, Inc.

ADVERTISING

The Company  expenses the cost of advertising when incurred.  Advertising  costs
for the years ended December 31, 2004 and 2003 were  immaterial to the financial
statements,  and are  included  in general  and  administrative  expenses in the
accompanying statement of operations.

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS

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

--------------------------------------------------------------------------------
Page F-13

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

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

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

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

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

--------------------------------------------------------------------------------
Page F-14

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

transition  provisions  that  govern  how an SBI which  previously  adopted  the
pronouncement (as it was originally issued) must account for consolidated VIEs.

As disclosed in Note 7, the Company is associated with Biomoda, Inc. because two
officers  of the Company  also serve as  officers  of Biomoda and other  factors
discussed in FIN No. 46R, the Company has complied  with the  pronouncement  and
consolidated the two Company's financial  statements.  See note 7 for the impact
of adoption of the standard.

RECLASSIFICATIONS

Certain   amounts   presented  in  the  2003  financial   statements  have  been
reclassified to conform to the current year's presentation.

2. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2004:

Machinery and equipment                          $ 388,392
Furniture and fixtures                             101,372
Automobiles                                         43,313
Leasehold improvements                              21,351
                                                 ---------
                                                   554,928
Less accumulated depreciation and amortization    (401,760)
                                                 ---------
                                                 $ 153,168
                                                 =========

3. PATENTS

Biomoda has entered into license agreements with a major university and national
laboratory to obtain rights for the purpose of  developing,  manufacturing,  and
selling products using its patented technologies.  Under such agreement, Biomoda
will pay  royalties  at  varying  rates  based upon the level of  revenues  from
licensed  products.  The  agreement  continues as long as any  licensed  patents
remain in force.  Biomoda has not incurred any royalty expense during the period
from January 3, 1990  (inception)  to December  31,  2004.  Biomoda also pays an
annual  fee in the amount of $15,000  to renew  such  license  agreement.  As of
December 31, 2004,  Biomoda was in full  compliance  with the provisions of this
agreement.

Amortization  expense  for the  Company's  intangible  assets over the next five
fiscal  years is  estimated  to be:  2005-$13,527,  2006-$13,527,  2007-$13,527,
2008-$13,527 and 2009-$13,527.

4. RELATED PARTY TRANSACTIONS

NOTES RECEIVABLE - OFFICER

As of  December  31, 2004 and 2003,  the Company has net  advances to an officer
approximating

--------------------------------------------------------------------------------
Page F-15

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

$67,300.  The advances  accrue interest at rates ranging from 5% to 6% (interest
income was insignificant for the years ended December 31, 2004 and 2003) and are
due on demand.  As these notes receivable are with the shareholder and a Company
officer, the Company has classified these amounts as a decrease to stockholders'
equity at December 31, 2004.

ADVANCES FROM OFFICER

As of December 31, 2004, the Company has advances from officer of $89,710.  This
is due on demand and non interest bearing.

ADVANCES FROM SHAREHOLDERS

As  of  December  31,  2004,  Biomoda  had  advances  and  accrued  interest  of
approximately  $135,000  payable  to  two  of its  stockholders.  Such  advances
historically  bore interest at 10% per annum.  On December 31, 2003,  one of the
stockholders agreed to forgive all accrued interest payable to him in the amount
of approximately  $25,000,  which is included in the gain on settlement of debts
in the  accompanying  statements of  operations.  In 2004,  he accepted  200,000
shares of common stock as repayment of the remaining  balance.  Interest expense
related to such advances for the years ended  December 31, 2004 and 2003 and for
the period from Inception through December 31, 2004 were approximately  $12,000,
$27,000 and $123,000, respectively.

5. INVESTMENT IN GENOMED, INC.

On  January 8, 2004,  the  Company  entered  into a Stock  Sale  Agreement  (the
"Agreement") with GenoMed,  Inc., a Florida corporation  ("GenoMed") whereby the
Company purchased approximately  33,300,000 shares of restricted common stock of
GenoMed for  $900,000  in cash,  representing  approximately  17.9% of the total
outstanding shares of GenoMed  immediately after the execution of the Agreement.
The Company has accounted for this investment under the cost method as it cannot
exercise  significant  influence  over the operating  and financial  policies of
GenoMed.  In addition,  the Company holds  approximately  529,098 shares of free
trading  common stock of GenoMed not acquired in connection  with the Agreement,
which the Company has  classified as marketable  securities in the  accompanying
financial statements.  Management believes that no impairment of this investment
is necessary as of December 31, 2004.

6. NOTES RECEIVABLE

Notes Receivable consists of the following at December 31, 2004

   Notes receivable bearing a 7% and will mature on March 2005        $25,466
   Notes receivable bearing a 6.5% and will mature on December 2005   $24,113
                                                                      -------
           Total                                                      $49,579
                                                                      =======

7. VARIABLE INTEREST ENTITY-BIOMODA, INC.

--------------------------------------------------------------------------------
Page F-16

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

At December 31, 2004, the Company owned approximately  1,132,000 or 15.9% of the
7,117,000 outstanding shares of Biomoda,  Inc. ("Biomoda"),  a development stage
company  involved in the  development of technology  for the early  detection of
lung cancer. In addition,  two of the Company's  officers own approximately 12%,
collectively,  of Biomoda's  outstanding shares.  Further, the Company subleases
office space and lab equipment to Biomoda and two of the Company's  officers are
also  officers  of  Biomoda.  Finally,  the  Company has been the sole source of
funding  to  Biomoda  since 2002  through  advances  made under a line of credit
agreement.  Such advances  totaled $975,165 at December 31, 2004. The Company is
considered  the primary  beneficiary  as it stands to absorb the majority of the
VIE's expected  losses.  Since Biomoda and the Company are  considered  entities
under common control, the Company measures the assets and liabilities of Biomoda
at their carrying amounts in consolidation.

As of December 31, 2004, the Company has  consolidated  Biomoda's  balance sheet
and its results of the  operations  for the year then ended in the  accompanying
financial  statements.

At December 31, 2004, the Company has advanced  $975,165 to Biomoda,  and during
the year ended  December 31, 2004,  it has recorded a loss on Biomoda of $63,617
and  interest  income on  advances of $30,367.  All of these  amounts  have been
eliminated in consolidation.

The accounts of Biomoda that have been consolidated with the Company at December
31, 2004 are as follows:

                Cash                                 $   1,360
                Other current assets                     3,241
                Patents, net                           206,577
                Property and equipment, net             14,193
                Accounts payable                       (70,390)
                Accrued expenses                      (161,121)
                Advances from Biomoda stockholders    (134,988)

General  creditors  of  Biomoda  have no  recourse  against  the  Company.  From
inception  through  December 31, 2004,  Biomoda has  generated no revenues.  The
Company  has  recorded  $189,280  extraordinary  loss in  December  31, 2003 and
charged $30,000 against  non-current  assets in December 31, 2004 to consolidate
Biomoda's account.

In 2005,  Biomoda  anticipates  being  able to raise its own funds in the public
equity market. In this case,  Biomoda may be able to sustain its own operations,
repay its  obligation to the Company,  and hire its own officers.  In such case,
the Company may no longer be considered the primary  beneficiary and the results
of Biomoda may be deconsolidated. There can be no assurance that Biomoda will be
able to raise sufficient funds to repay its obligation to the Company and become
self-sustaining in its operations.

8.  ACCRUED EXPENSES

--------------------------------------------------------------------------------
Page F-17

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------


Accrued expenses consisted of the following as of December 31, 2004:

                Accrued expense and contingency   $185,233
                Accrued Interest                     8,238
                Others                               1,803
                                                  --------
                                                  $195,274
                                                  ========

9.  CONVERTIBLE DEBENTURES

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

On September 15, 2000, the Company issued $500,000 of the initial  $2,000,000 in
unsecured convertible  debentures discussed above.  Effective as of the issuance
date, the debentures are  convertible  into shares of common stock at the lesser
of a 25 percent  discount to the average of the three lowest  closing bid prices
during  the  thirty  trading  days prior to the issue date of this note and a 20
percent  discount to the average of the three lowest  closing bid prices for the
ninety  trading days prior to the  conversion  date, as defined.  The debentures
were issued in exchange  for  $430,000 in cash,  $20,000 in legal  services  and
$50,000  in  commissions.   The  commissions   have  been  capitalized  as  debt
origination  costs and are being amortized to interest  expense over the life of
the  debentures.  The  embedded  intrinsic  value of the  beneficial  conversion
feature  was  estimated  to be  approximately  $239,000,  which was  immediately
charged to interest expense. The convertible  debentures also include detachable
warrants for the purchase of 500,000 shares of common stock at an exercise price
of $0.38 per  share,  which  vested  upon grant and  expire in  September  2005.
Management  has  estimated  the fair market  value of these  warrants at $25,000
(based on the Black Scholes  pricing model  pursuant to SFAS 123 and EITF 00-27)
and immediately charged such amounts to interest expense.  During the year ended
December 31, 2003, the Company  settled amounts owed and in connection with such
settlement,  the  Company  recorded a gain on  extinguishment  of  approximately
$40,000, which is included in the accompanying statement of operations.

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

--------------------------------------------------------------------------------
Page F-18

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

immediately  charged  to  expense.  The  convertible   debentures  also  include
detachable  warrants for the purchase of 71,000  shares of common  stock,  which
value was insignificant.  The principal balance of the convertible debentures at
December 31, 2004 amounts to $102,977.

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

During the years ending  December 31, 2004 and 2003,  approximately  103,000,000
and  320,830,000   shares  of  common  stock  were  issued  upon  conversion  of
approximately  $505,000  and  $658,000  of  debenture  principal  and  interest,
respectively,  resulting  in  gain  (loss)  of  ($620,729)  and  $40,171  on the
settlement (see Note 11).

10. INCOME TAXES

During  fiscal  2004 and  2003,  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:

<TABLE>
<CAPTION>
                                                              2004           2003
                                                          -----------    -----------
<S>                                                       <C>            <C>
Computed "expected" tax (benefit) expense                 $(1,716,000)   $(1,326,000)

Addition to (reduction) in income taxes resulting from:

    State income taxes, net of federal benefit               (303,000)      (234,000)
    Change in deferred tax asset valuation allowance        2,008,000      1,523,000
    Other                                                      11,000         37,000
                                                          -----------    -----------
                                                          $        --    $        --
                                                          ===========    ===========
</TABLE>

The total valuation  allowance increased by $2,008,000 and $1,523,000 during the
years ended December 31, 2004 and 2003, respectively.

The effects of temporary  differences that give rise to significant  portions of
the deferred taxes at December 31, 2004 are presented below:

Deferred tax asset:
    Tax net operating loss carryforwards                $ 7,206,000
Deferred tax asset valuation allowance                   (7,206,000)
                                                        -----------
                                                        $        --
                                                        ===========

At December 31, 2004,  the Company had tax net operating loss  carryforwards  of
approximately  $20,624,000  and  $10,365,000  available to offset future taxable
federal and state income, respectively. If not utilized to offset future taxable
income,  the  carryforwards  will expire in various  years  through 2024. In the
event the Company was to  experience  a greater  than 50% change in ownership as
defined in

--------------------------------------------------------------------------------
Page F-19

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

Section 382 of the Internal  Revenue  Code,  the  utilization  of the
Company's tax net operating loss carryforwards could be severely restricted.

11. 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, 2004, there were no shares of preferred stock outstanding.

TREASURY STOCK

During the year ended December 31, 2004, the Company purchased 14,300,000 shares
of  treasury  stock for  approximately  $85,000 and sold  14,100,000  shares for
approximately $48,000.

During the year ended December 31, 2003, the Company purchased 13,250,000 shares
of treasury stock for approximately $62,000 in cash and sold 9,950,000 shares of
treasury stock for approximately  $57,000 in cash, which the Company  originally
repurchased for approximately $25,000.

COMMON STOCK

During the year ended December 31, 2004, the Company issued 47,200,000 shares of
common stock for  services,  which were valued at  approximately  $255,000.  The
Company  recorded  such  amounts in the  accompanying  condensed  statements  of
operations.

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

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

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

On March 17, 2003, the Company's Board of Directors authorized the change in the
total number of common  shares which the Company is authorized to issue from the
current authorized of 800,000,000 to 1,500,000,000 common shares.

--------------------------------------------------------------------------------
Page F-20

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

On June 19, 2003, the Company's Board of Directors  authorized the change in the
total number of common  shares which the Company is authorized to issue from the
current authorized of 1,500,000,000 to 1,950,000,000 common shares.

On August 12, 2003,  the Company's  Board of Directors  authorized the change in
the total number of common shares, which the Company is authorized to issue from
the current authorized of 1,950,000,000 to 2,500,000,000 common shares.

On October 29, 2003, the Company's  Board of Directors  authorized the change in
the total number of common shares, which the Company is authorized to issue from
the current authorized of 2,500,000,000 to 2,750,000,000 common shares.

On December 17, 2003, the Company's Board of Directors  authorized the change in
the total number of common shares, which the Company is authorized to issue from
the current authorized of 2,750,000,000 to 2,950,000,000 common shares.

During  the year  ended  December  31,  2003,  the  Company  sold  approximately
1,236,910,000  shares of common  stock for cash  approximating  $2,680,000;  all
shares were sold for less than $0.01.

During  the year  ended  December  31,  2003,  the  Company  sold  approximately
179,100,000 shares of common stock for cash approximating $2,343,000; all shares
were sold for approximately $0.01.

During  the year  ended  December  31,  2003,  the  Company  sold  approximately
49,750,000 shares of common stock for cash  approximating  $779,000;  all shares
were sold for approximately $0.02.

During  the year  ended  December  31,  2003,  the  Company  sold  approximately
12,000,000 shares of common stock for cash  approximating  $229,000;  all shares
were sold for approximately $0.03.

During the year ended  December  31,  2003,  the  Company  issued  approximately
251,650,000  shares  of  common  stock  for  services,   which  were  valued  at
approximately  $555,000 (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,  2003,  the  Company  issued  approximately
87,600,000   shares  of  common  stock  for  services,   which  were  valued  at
approximately  $713,000 (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,  2003,  the  Company  issued  approximately
20,500,000   shares  of  common  stock  for  services,   which  were  valued  at
approximately  $367,000 (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,  2003,  the  Company  issued  approximately
7,500,000   shares  of  common  stock  for   services,   which  were  valued  at
approximately  $197,000 (based on the closing market

--------------------------------------------------------------------------------
Page F-21

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

price on the date of grant, which approximated $0.03). The Company recorded such
amounts in the accompanying statement of operations.

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

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

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.

--------------------------------------------------------------------------------
Page F-22

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
                                                 Year Ended December 31,                Year Ended December 31,
                                                           2004                                  2003
                                             ---------------------------------     ----------------------------------
                                                                   Weighted                               Weighted
                                                                   Average                                Average
                                                Options             Price              Options             Price
                                             ---------------     -------------     ---------------      -------------
<S>                                          <C>                 <C>               <C>                  <C>
Outstanding, beginning of year                    3,175,000             $0.23           4,975,000              $0.23
Granted                                                   -                 -                   -                  -
Exercised                                                 -                 -                   -                  -
Cancelled/Terminated                             (2,775,000)             0.34          (1,800,000)              0.11
                                             ---------------     -------------     ---------------      -------------
Outstanding and exercisable, end of year            400,000             $0.02           3,175,000              $0.30
                                             ===============     =============     ===============      =============
Weighted average fair value of options
granted                                                                                                        $0.01
                                                                                                        =============
</TABLE>

The following table summarizes  information related to stock options outstanding
at December 31, 2004:

<TABLE>
                                      Options Outstanding                             Options Exercisable
                        -------------------------------------------------        -------------------------------
                                           Weighted
                                            Average           Weighted                                Weighted
                                           Remaining          Average                                  Average
                                          Contractual         Exercise                                Exercise
  Exercise Price           Number        Life (Years)          Price                 Number             Price
-------------------     ------------------------------------------------------------------------------------------
<S>                     <C>                <C>             <C>                    <C>                <C>
      $0.02                400,000             1.04           $  0.02                400,000           $  0.02
                        ----------                         ----------             ----------         ---------
==================================================================================================================
</TABLE>

There were no stock options granted in 2003 and 2004.

WARRANTS

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

--------------------------------------------------------------------------------
Page F-23

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

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, 2004 and 2003:

<TABLE>
<CAPTION>
                                                Year Ended December 31,                Year Ended December 31,
                                                          2004                                   2003
                                           -----------------------------------    -----------------------------------
                                                                  Weighted                              Weighted
                                              Warrants         Average Price         Warrants         Average Price
                                           ----------------    ---------------    ---------------    ----------------
<S>                                        <C>                 <C>                <C>                 <C>
Outstanding, beginning of year                   8,646,000              $0.06          8,646,000               $0.25
Granted                                                  -                  -                  -                   -
Exercised                                                -                  -                  -                   -
Cancelled/Terminated                            (3,850,000)              0.05                  -                   -
                                           ----------------    ---------------    ---------------    ----------------
Outstanding and exercisable, end of year         4,796,000              $0.11          8,646,000               $0.25
                                           ================    ===============    ===============    ================
Weighted average fair value of warrants
granted                                                                                                        $0.02
                                                                                                     ================
</TABLE>

The following table summarizes  information  related to warrants  outstanding at
December 31, 2004:

<TABLE>
<CAPTION>
                                      Warrants Outstanding                            Warrants Exercisable
                        -------------------------------------------------        -------------------------------
                                           Weighted
                                            Average           Weighted                               Weighted
                                           Remaining          Average                                 Average
                                          Contractual         Exercise                               Exercise
  Exercise Price           Number        Life (Years)          Price                 Number            Price
-------------------     ----------------------------------------------------------------------------------------
<S>                     <C>                   <C>       <C>                     <C>               <C>
      $0.02                 3,250,000         0.79           $  0.02              3,250,000         $  0.02
  $0.34 - $0.43             1,491,000         1.97              0.22              1,491,000            0.22
       1.62                    55,000         1.19              1.62                 55,000            1.62
                          -----------                     ----------           ------------       ---------
                            4,796,000                        $  0.11              4,796,000         $  0.11
-------------------     ----------------------------------------------------------------------------------------
</TABLE>

There were no warrants issued in 2003 and 2004.

--------------------------------------------------------------------------------
Page F-24

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

12. IMPAIRMENT OF ASSETS

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

13. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases the facilities in which it operates.  Payments for the office
facility  are $4,225 per month and are  currently  month-to-month.  In addition,
during  the  year  ended  December  31,  2002,   the  Company   entered  into  a
month-to-month sublease with Biomoda, Inc. (see Note 7), in which the Company is
to receive $300 per month.

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

                  Year                      Amount
                  2005                    $ 29,825
                  2006                       2,560
                                           -------
                      Total                $32,385

Rental  expense for operating  leases  approximated  $77,000 and $51,000 for the
years ended December 31, 2004 and 2003  respectively and  approximated  $327,000
for the period from Inception  through December 31, 2004. Rental income from the
sublease to Biomoda,  Inc. approximated $3,600 for both years ended December 31,
2004 and 2003,  and $10,000 for the period from Inception  through  December 31,
2004 and has been included in operating  expenses in the accompanying  statement
of operations.

LITIGATION AND SUBSEQUENT EVENTS

On December  10,  2004,  the Company and another  entity  filed a lawsuit in the
State  of  New  Mexico  against  an  individual  ("the  DEFENDANT")  to  recover
$13,500,000 for damages and injunctive  relief arising out of the  intentionally
tortuous  conduct of the  Defendant.  On December 23, 2004,  instead of filing a
counterclaim,  the Defendant  filed a lawsuit against the Company and others for
alleged malicious abuse of process,  defamation,  civil conspiracy,  prima facie
tort, and intentional  infliction of emotional distress,  but did not allege any
amount of damages.  On January 26, 2005,  the Company  filed a motion to dismiss
that lawsuit. Because of the inherent uncertainties,  a favorable or unfavorable
outcome  could not be  determined as of this date as well as the amount or range
of potential  recovery by

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Page F-25

<PAGE>

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                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
--------------------------------------------------------------------------------

the  Company in the event of  favorable  outcome  or loss to the  Company in the
event of an unfavorable outcome.

On April 5, 2005 an insurance  carrier for the Company  confirmed  that it would
provide  legal  counsel for the Company in the defense of the claims  brought by
the above referenced Defendant.

On April 8, 2005 the Company was awarded  damages in the sum of $13,500,269 as a
result of a two separate judgments against two former co-defendants of the above
referenced  Defendant.  The Court's order also provides that the defendants must
pay the Company an additional $905,794 as pre-judgment interest.

NOTE  14.         SEGMENTS AND MAJOR CUSTOMERS

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

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

<TABLE>
<CAPTION>
                                           2004                                               2003
                              ADOT      Biomoda    Unallocated    Total      ADOT      Biomoda  Unallocated    Total
     -------------------------------------------------------------------------------------------------------------------
     <S>                    <C>         <C>          <C>      <C>       <C>           <C>         <C>       <C>
     Revenue                $     -    $     -      $    -    $      -    $     -     $    -      $    -     $     -
     Loss on Operations       3,578        708         -0-       4,286      3,287        302         -0-        3,589
     Depreciation
         and amortization        25         15         -0-          40         73         12         -0-           85
     Interest expense            18         30         -0-          48        165         28         -0-          193
     Capital expenditure        539        278                     817          -        117         158          275
     Net Loss               $(4,289)     $(759)        $-0-    $(5,048)   $(3,590)     $(311)        $-0-     $(3,901)

--------------------------------------------------------------------------------
</TABLE>
Page F-26