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


                                  FORM 10-KSB/A


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

<PAGE>

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

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

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

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

                                     PART I

                         ITEM 1. DESCRIPTION OF BUSINESS

General
-------

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

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

Company Overview
----------------

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

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


                                                                               3

<PAGE>

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
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.

                                                                               4

<PAGE>

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 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


                                                                               5

<PAGE>

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  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


                                                                               6

<PAGE>

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.

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


                                                                               7

<PAGE>

have, or are developing,  other  technologies  utilizing carbon field emissions,
incandescent  lamps,  inorganic  electroluminescence,   organic  light  emitting
diodes,  polymeric  light  emitting  diodes,  gas plasma and vacuum  fluorescent
lamps.  Furthermore,  although  we believe  our  products  will be  superior  to
established  advertising  billboard products, we cannot assure you that business
customers will prefer our technology sufficiently to be willing to pay for it at
the price at which it will be offered.  We recently  set the sales prices of our
flat panel displays measuring approximately three meters by two meters and three
meters by eight meters at $395,000 and $1,490,000, respectively.

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

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

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

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

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

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

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

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

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

     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.

                                                                               8

<PAGE>

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.

The Company  files  annual  reports on Form  10-KSB,  quarterly  reports on Form
10-QSB,  current  reports on Form 8-K and proxy and  information  statements and
amendments to reports files or furnished pursuant to Sections 13(a) and 15(d) of
the  Securities  Exchange Act of 1934, as amended.  The public may read and copy
these  materials  at  the  SEC's  Public  Reference  Room  at 450  Fifth  St NW,
Washington,  DC 20549. The public may obtain information on the operation of the
public  reference  room by  calling  the  SEC at  1-800-SEC-0330.  The SEC  also
maintains  a  website  (HTTP://WWW.SEC.GOV)  that  contains  reports,  proxy and
information  statements  and other  information  regarding the Company and other
companies  that  file  materials  with  the SEC  electronically.  The  Company's
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.
                                                                               9

<PAGE>

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

                                                                              10

<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 penny stock to persons other than established  customers
and  accredited  investors.  "Accredited  investors"  are persons with assets in


                                                                              11

<PAGE>

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.

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.

                                                                              12

<PAGE>

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

BIOMODA, INC.


Beginning  with the 2004  10-KSB,  the Company has  consolidated  its  financial
statements with Biomoda,  Inc.'s (Biomoda) This has been done in order to comply
with FIN 46, a pronouncement that became effective December 15, 2004. The nature
of Biomoda's  business is  substantially  different from that of Advanced Optics
Electronics,  Inc..  The  following  is a  discussion  of  Biomoda's  results of
operations, financial condition and liquidity. More information about Biomoda is
available in Biomoda's 2004 10-KSB which is accessible from the SEC website. The
SEC website (HTTP://WWW.SEC.GOV) contains reports and information statements and
other information regarding Biomoda and other companies that file materials with
the SEC electronically.

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


                                                                              13

<PAGE>


developed  nations  of  Europe,  and  North  America  and  Japan.  This has been
determined   on  the  basis  of   available   healthcare   delivery   and  payer
infrastructure.  Japan is leading the world,  in this area, and has instituted a
nationwide lung cancer-screening program.

Since  inception,  Biomoda  has  funded  operations  primarily  through  private
placement  of equity  securities  to third  parties  and to ADOT and loans  from
Advanced  Optics  Electronics,  Inc. As of  December  31, 2004 it had raised net
proceeds  of  approximately  $2,175,199,  of which  approximately  $363,845  was
invested and or loaned by ADOT in 1998. On May 1, 2002,  Biomoda  entered into a
line of credit  agreement (the  "Agreement")  with Advanced Optics  Electronics,
Inc., an affiliated entity,  ("Advanced Optics") with an annual interest rate of
5%. On May 1, 2003 the agreement was extended.

Biomoda had negative  cash flows of $3,387 for the year ended  December 31, 2004
resulting from $550,929 used in Biomoda's operating activities,  $77,922 used in
Biomoda's  investing  activities  and  $625,464 of cash  provided  by  financing
activities.  Cash used in  operating  activities  of $550,929 for the year ended
December 31, 2004 was primarily due to $708,380 in operating expenses,  of which
$106,139 is General and Administrative, $436,899 is Research and Development and
$134,218 is professional fees. Cash used in investing  activities of $77,922 for
the year ended  December 31, 2004 was  primarily due to payments for patents and
intangibles.  Cash  provided by  financing  activities  of $625,464 for the year
ended  December 31, 2004 was due to the  proceeds  from a line of credit from an
affiliated entity.

Biomoda has recorded no revenue from its  inception  through  December 31, 2004.
The  accumulated  deficit is $1,181,458.  In 2004, the net loss was $758,945 and
since inception, it is $2,476,489. The loss from operations was $708,380 in 2004
and  $2,336,294  since  inception.  Most of its  expense  is  related to product
development.   Product  development  expenses  consist  primarily  of  personnel
expenses,  consulting fees and lab expenses.  Research development and technical
costs were $436,899 in 2004 and $1,420,700 since inception. Management believes,
however,  that  continued  investment  in product  development  is  critical  to
attaining our strategic objectives and, as a result,  expect product development
expenses to increase  significantly in future periods.  Biomoda expenses product
development costs as they are incurred.

General and  administrative  expenses  consist of  expenses  for  executive  and
administrative personnel, facilities,  professional services, travel and general
corporate activities. General and administrative costs were $106,139 in 2004 and
$332,927 since inception. We expect general and administrative costs to increase
in the future as our business matures and develops.

Biomoda's  total assets are $225,371 at December 31, 2004. Of this,  $206,577 is
patent costs,  net of accumulated  amortization  of $55,793.  Its liabilities of
1,341,664  primarily  consist of its debt to  Advanced  Optics of  $975,165  and
advances from shareholders of $134,988. Stockholders' deficit as of December 31,
2004 is $1,116,293.

Subsequent to December 31, 2004 and pursuant to a registration statement on Form
SB-2  (the  "Registration  Statement")  under  the  Securities  Act of 1933,  as
amended,  the Company is offering for sale up to 6,000,000  shares of its common
stock  at a price of $3 per  share.  The  Registration  Statement  was  declared
effective on February 11, 2005.  The Offering  will  terminate on the earlier of
February  11, 2008 or the date on which the  maximum  number of shares have been
sold.

GOING CONCERN

Biomoda has been in the development  stage since it began  operations on January
3, 1990 and has not  generated  any  revenues  from  operations  and there is no


                                                                              14

<PAGE>


assurance  of  any  future  revenues.  As of  December  31,  2004,  Biomoda  had
accumulated deficit of approximately $2,476,000 and a working capital deficit of
approximately  $1,337,000.  In addition,  Biomoda did not generate any cash from
operations and had no cash reserve dedicated to fund expenditures. These factors
create an uncertainty as to Biomoda's ability to continue as a going concern.


BIOMODA PRODUCT DEVELOPMENT AND REGULATORY STRATEGY


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

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

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

510K:  This is the FDA  designation for approvals that are based on "Substantial
Equivalence"  with previously  approved products and does require approval prior
to marketing. There are generally three classes: Class I, Class II, & Class III.
Depending on the indication  established  with the FDA,  Biomoda's  product will
either be Class I or Class II, if Biomoda  proceeds  with this product  approval
route.  This  product  will be a kit  developed  to  determine  the  presence of
abnormal cells in a body fluid sample.

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

IVD: This is an industry  designation for In Vitro  Diagnostic.  Products in the
industry are either reagents or kits.  Kits include the key components  required
to conduct the assay for the specific  indication  stated in the package insert.
Reagents are single components used in assays developed by a Reference Labs. The
lab  will be  required  to have met the FDA CLIA  (current  Clinical  Laboratory
Improvement Act) regulations to market a diagnostic.

Biomoda is evaluating  several cancers with a focus on large markets that are in
need of the most immediate diagnostic support.  These include: lung, bladder and
cervical.  The  products  are subject to FDA  registration  or  approval  and to
post-approval FDA reporting requirements.

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


                                                                              15

<PAGE>


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

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

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

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

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

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

Biomoda's  management  expects to continue  assay  validation  work and commence
registration  of its product  with the FDA in 2005.  There are several  business
models,   product  types  and  regulatory  routes  that  Biomoda  is  evaluating
including:  licensing,  ASR,  510K,  PMA for IVD kits and  reagents.  Biomoda is
evaluating several cancers with a focus on large markets that are in need of the
most immediate diagnostic support. These include: lung, bladder and cervical.

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

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

          Class  I/II  510K  can be  completed  as  judged  appropriate  for the
          business  and  will  require  approximately  6 to 9 months  effort  to
          prepare  documentation and receive FDA approval.  During


                                                                              16

<PAGE>


          that time kit manufacturing can be initiated.  Partial funding will be
          provided  from  reagent  sales  revenue.  It is  estimated  additional
          funding  of  $300,000  will be  required.

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

     b.   Bladder:  Validation  is projected to be complete by 3rd quarter 2006.
          The  formulation  is  expected  to be  identical  to  that  for  lung;
          therefore manufacturing will be in place. Based on this benchmark, FDA
          product listing and registration will only require an update.  Funding
          will be  provided  by reagent  sales  revenue.

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

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

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

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

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

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


                                                                              17

<PAGE>

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 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.


The  investment  in GenoMed  was made as an interim  cash  management  decision.
Management's  opinion  is that  the  investment  represented  the  potential  to
increase the resources the Company has to fund ongoing  operations.  The Company
made this decision  based on its  determination  that GenoMed has very promising
technology and prospects.  The company  intends to liquidate its investment over
time in order to fund its core operations.

GenoMed uses medical genomics to improve patient outcomes. GenoMed is working to
translate  knowledge  of  medical  genomics--the  study  of  which  genes  cause
disease--into clinical practice.


                                                                              18

<PAGE>

Marketable Securities
---------------------

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.


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

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.   This   resulted  in  a  gain  on
extinguishment of debt of approximately $40,000.


BIOMODA, INC.


Biomoda's  total assets are $225,371 at December 31, 2004. Of this,  $206,577 is
patent costs,  net of accumulated  amortization  of $55,793.  Its liabilities of
1,341,664  primarily  consist of its debt to  Advanced  Optics of  $975,165  and
advances from shareholders of $134,988. Stockholders' deficit as of December 31,
2004 is $1,116,293.

Subsequent to December 31, 2004 and pursuant to a registration statement on Form
SB-2  (the  "Registration  Statement")  under  the  Securities  Act of 1933,  as
amended, Biomoda is offering for sale up to 6,000,000 shares of its common stock
at a price of $3 per share. The Registration Statement was declared effective on
February 11, 2005.  The Offering  will  terminate on the earlier of February 11,
2008 or the date on which the maximum number of shares have been sold.

Since  inception,  Biomoda  has  funded  operations  primarily  through  private
placement  of equity  securities  to third  parties  and to ADOT and loans  from
Advanced Optics Electronics, Inc. As of June 30, 2004 it had raised net proceeds
of approximately $2,175,199, of which approximately $363,845 was invested and or
loaned by ADOT in 1998.  On May 1, 2002,  Biomoda  entered into a line of credit
agreement  (the  "Agreement")  with  Advanced  Optics   Electronics,   Inc.,  an
affiliated  entity,  ("Advanced  Optics") with an annual interest rate of 5%. On
May 1, 2003 the agreement was extended.


                                                                              19

<PAGE>


Biomoda had negative  cash flows of $3,387 for the year ended  December 31, 2004
resulting from $550,929 used in Biomoda's operating activities,  $77,922 used in
Biomoda's  investing  activities  and  $625,464 of cash  provided  by  financing
activities.  Cash used in  operating  activities  of $550,929 for the year ended
December 31, 2004 was primarily due to $708,380 in operating expenses,  of which
$106,139 is General and Administrative, $436,899 is Research and Development and
$134,218 is professional fees. Cash used in investing  activities of $77,922 for
the year ended  December 31, 2004 was  primarily due to payments for patents and
intangibles.  Cash  provided by  financing  activities  of $625,464 for the year
ended  December  31,  2004 was due to the  proceeds  from a line of credit  from
Advanced Optics

Biomoda has been in the development  stage since it began  operations on January
3, 1990 and has not  generated  any  revenues  from  operations  and there is no
assurance  of  any  future  revenues.  As of  December  31,  2004,  Biomoda  had
accumulated deficit of approximately $2,476,000 and a working capital deficit of
approximately  $1,337,000.  In addition,  Biomoda did not generate any cash from
operations and had no cash reserve dedicated to fund expenditures. These factors
create an uncertainty as to Biomoda's ability to continue as a going concern.


RESULTS OF CONTINUING OPERATIONS


As of March 31, 2005, The Company had a marketable  securities  portfolio valued
at  $1,935,050.  The  Companies'  combined  monthly  burn-rate is  approximately
$215,000. This represents approximately nine months of operating funds. However,
the  impending  offering  of  Biomoda  stock  may net as  much  as  $18,000,000.
Management  expects  the  proceeds  of this  offering  to help  defray  any cash
shortfall.  The Company is actively pursuing  potential  financing options as it
looks to  secure  additional  funds  to both  stabilize  and  grow its  business
operations.  Management  will review any  financing  options at its disposal and
will judge each potential source of funds on its individual merits. There can be
no assurance that the Company will be able to secure  additional funds from debt
or equity  financing,  or if they can, that it will be on terms favorable to the
Company or existing stockholders.

The  Company is  currently  in the  process of final  assembly,  test and system
integration of approximately 1500 of its display subassemblies. This will create
a 2 meter by 3 meter display.  It is anticipated that this work can be completed
in the third  quarter of 2005.  The company  currently  employs  four  full-time
electronic  technicians and a supervisor  working  specifically on this project.
Additional research and development is anticipated and planned in electrical and
mechanical  realms.  These  include but are not limited  to:  power  systems and
distribution, heat dissipation, and weatherproofing.

The Company  expects its display product to be finalized and ready for market in
the fourth quarter of 2005.

There are no expected sales of significant equipment.

The Company hired a full time controller in 2005 in order to support our efforts
in meeting new  reporting  requirements.  The  Company has hired two  additional
technicians in 2005. There are no explicit plans to hire additional personnel at
this time  but,  from  time to time,  the  Company  expects  to hire  additional
personnel in order to carry out its business strategy.


                                                                              20
<PAGE>

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


The Company  has been  developing  and  manufacturing  electronic  signs under a
contract to deliver two signs. At December 31, 2004, the contract was terminated
by mutual consent of both parties and a 100%  provision for contract  losses was
provided.  The  Company  recorded  $1,000,994  as loss on  contract  in 2004 and
$50,000 in 2003.  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.

$2.25 million were costs  associated with the  development  work on this initial
contract.  Development  costs were  allocated to R&D Expense,  and the Contract,
based on management's interpretation of how specific or general they were deemed
to be. These costs have been  aggregated  and  allocated  since the contract was
initiated in 1998.

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

The  cancellation  of the contract to purchase two signs was  negotiated  to the
satisfaction  of both parties and  memorialized  in a Settlement  Agreement  and
Mutual Release.

Although  the  contract  to  purchase  two  signs  has been  canceled  through a
Settlement  Agreement,  we continue to work on completing  this initial sign and
the associated  development work. We currently employ four full-time  electronic
technicians and a supervisor working  specifically on this project. We intend to
complete  12 panels  that will create a two meter by one and one half meter sign
in the  next 30  days.  We are  working  out  issues  of  electrical  power  and
distribution.  We will also need to solve technical details  surrounding cooling
and weather-proofing.

We have engaged a design  engineering firm as consultants and have done $170,000
amount of consulting on this project over the past two years.

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

The Company has continued to build the panel begun under the above  contract and
expects  to  complete  our first 2 meter by 3 meter  sign by the 4th  quarter of
2005.


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

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
$49,579 in 2003.  Total  assets  reported  at December  31,  2003 of  $5,335,872
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  continued  testing  of  disease
detection  protocol(s).  Research  development  and technical costs increased to

                                                                              21

<PAGE>

$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.


As a  consolidated  entity,  Advanced  Optics'  operating  expenses did not vary
significantly  from  2003  to  2004,   decreasing  from  $3,500,000  million  to
$3,300,000,  although  numbers  within this heading  differed,  as we classified
expenses differently in the two periods.  Loss on contract,  however,  went from
$50,000 to $1,001,000, as discussed above. Other income (expense) increased from
$123,000 to $762,000,  largely because extinguishment of debt increased $673,000
from a gain of $40,000 to a loss of $633,000.  This  included the $620,000  loss
from the settlement of debentures, below.

Asset impairment and expensing of inventory increased by approximately  $395,000
as there were no such items in 2003. Asset impairment includes removing from the
balance sheet investments in the stock of Beaver Information Technology, Inc., a
foreign  corporation,  of $273,000 and Electronic  Film Market Online,  Inc., of
$88,000.

General and  administrative  expense  decreased by $806,000  from  $2,300,000 to
$1,493,000,  primarily  from  significant  reductions  in  public  and  investor
relations,  consulting and marketing  expense in Advanced Optics.  This decrease
was of a non-cash nature in the form of stock for services in both years

Payroll and related expense decreased by $436,000 due to  administrative  salary
decreases in Advanced Optics of $287,000 and non-recurring officers compensation
of $149,000 in Biomoda in 2003.  Research  and  development  costs  increased by
$548,000. Biomoda R&D increased by $387,000, primarily because of an increase of
$274,000 in applicable  payroll costs and  approximately  $100,000 in consulting
fees. The Advanced Optics  increase of $161,000 was due to greater  expenditures
for design and engineering consulting.


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.

                                                                              22

<PAGE>

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.

BIOMODA, INC.

Biomoda's  plan of operation  for the next twelve months is to verify and refine
its assay, design its kit, prepare for clinical studies, and initiate a dialogue
with the FDA relative to its approval submission.  Biomoda, Inc. is relying on a
bridge financing  arrangement with Advanced Optics  Electronics,  Inc., and also
intends to raise  additional  funds from its  effective  Form SB-2  Registration
Statement during the next six months.  Biomoda is currently  leasing  Laboratory
equipment from Advanced Optics  Electronics,  Inc. on a month to month basis and
intends to purchase this equipment when adequate funds are raised.

Biomoda has recorded no revenue from its  inception  through  December 31, 2004.
The  accumulated  deficit is $1,181,458.  In 2004, the net loss was $758,945 and
since inception, it is $2,476,489. The loss from operations was $708,380 in 2004
and  $2,336,294  since  inception.  Most of its  expense  is  related to product
development.   Product  development  expenses  consist  primarily  of  personnel
expenses,  consulting fees and lab expenses.  Research development and technical
costs were $436,899 in 2004 and $1,420,700  since inception.  Biomoda  believes,
however,  that  continued  investment  in product  development  is  critical  to
attaining its strategic objectives and, as a result, expects product development
expenses to increase  significantly in future periods.  Biomoda expenses product
development costs as they are incurred.


Operating  expenses  increased  by $406,047 or 134% to $708,380  during the year
ended  December 31, 2004  compared to $302,333  for the year ended  December 31,
2003.  This was due to  $127,000  in  increased  payroll  and  taxes,  a $98,000
increase  in   professional   fees  and  a  $181,000   increase  in  non-payroll
administrative and research and development costs.

General and  administrative  expenses  consist of  expenses  for  executive  and
administrative personnel, facilities,  professional services, travel and general
corporate activities.  General and administrative costs decreased to $106,139 in
2004 from $182,434 in 2003 due to decreases in salary expense. We expect general
and  administrative  costs to increase in the future as our business matures and
develops.


                                                                              23

<PAGE>

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  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 March 15, 2005 included elsewhere in this
report, are incorporated by reference in answer to this Item 7.

Following the above referenced report are the consolidated  financial statements
and notes to consolidated financial statements thereto, together with the report
thereon of Malone & Bailey, PC (Biomoda's principal accountants) dated March 31,
2005 included  elsewhere in this report, are incorporated by reference in answer
to this Item 7.

                                                                              24

<PAGE>

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.

ITEM 8A.  EVALUATION OF CONTROLS AND PROCEDURES


Under the supervision and with the  participation  of our management,  including
our Chief  Executive  Officer ("CEO") and Chief Financial  Officer  ("CFO"),  we
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls  and  procedures  (as defined in Rule  13a-15(e)  and  15d-15(e) of the
Exchange Act as of the end of the period covered by the annual report,  which is
December 31, 2004. 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.

                                                                              25

<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.

                                                                              26

<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 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.

                                                                              27

<PAGE>

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.

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

                                                                              28

<PAGE>

expert. The Company currently is in the process of identifying independent audit
committee members,  including a financial expert to serve on our audit committee
and we expect to continue this process in 2005.

ITEM 10.   EXECUTIVE COMPENSATION

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

<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE

                                                                              Long-Term Compensation
                                                Annual Compensation                  Awards
                                       ------------------------------------   ---------------------
                                                               Other Annual   Restricted Securities
                                                               Compensation   Stock      Underlying     LTIP      All Other
                                                               (1)            Award(s)   Options        Payouts   Compensation
------------------------------------------------------------------------------------------------------------------------------
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        $552,444                 $ 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

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

                                                                              29

<PAGE>

<TABLE>
<CAPTION>
                                                 Number of Securities Underlying     Value of Unexercised
                                                      Unexercised Options            In-the-money Options
                                                       December 31, 2004               December 31, 2004
                                                  ----------------------------    ----------------------------
                Shares Acquired    Value          Exercisable    Unexercisable    Exercisable    Unexercisable
Name            On Exercise (#)    Realized ($)       (#)             (#)             ($)             ($)
--------------------------------------------------------------------------------------------------------------
<S>             <C>                <C>            <C>             <C>             <C>              <C>
Michael Pete                                        150,000            --           $3,000            --
John Cousins                                        250,000            --           $5,000            --
Total                                               400,000            --           $8,000            --
</TABLE>

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

                            LONG-TERM INCENTIVE PLANS

As of December 31, 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.

<TABLE>
<CAPTION>
                                                                                           Percent
                                                      Number of Shares Beneficially      Beneficially
            Name of Beneficial Owner (1)                          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.

                                                                              30

<PAGE>

(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 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


                                                                              31

<PAGE>

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

                                                                              32

<PAGE>

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.

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.

                                                                              33

<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:    October 25, 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)

                                                                              34

<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
                                                                                   ============    ============

</TABLE>

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

--------------------------------------------------------------------------------
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
                                                          ==============    ==============    ==============    ==============



                                                                   Treasury Stock
                                                          --------------------------------       Additional
                                                                                                   Paid In            N/R
                                                               Shares            Amount            Capital        Stockholder
                                                          ---------------   --------------    --------------    --------------

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)
                                                          ==============    ==============    ==============    ==============




                                                                               Deficit
                                                             Other           Accumulated          Total
                                                          Comprehensive      During the       Stockholders'
                                                             Income       Development Stage  equity (deficit)
                                                          --------------  -----------------  ----------------

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.

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


Biomoda's  management  expects to continue  assay  validation  work and commence
registration  of its product  with the FDA in 2005.  There are several  business
models,   product  types  and  regulatory  routes  that  Biomoda  is  evaluating
including:  licensing,  ASR,  510K,  PMA for IVD kits and  reagents.  Biomoda is
evaluating several cancers with a focus on large markets that are in need of the
most immediate diagnostic support. These include: lung, bladder and cervical.

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

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

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

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


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

<PAGE>

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


     b.   Bladder:  Validation  is projected to be complete by 3rd quarter 2006.
          The  formulation  is  expected  to be  identical  to  that  for  lung;
          therefore manufacturing will be in place. Based on this benchmark, FDA
          product listing and registration will only require an update.  Funding
          will be  provided  by reagent  sales  revenue.  Class I/II 510K can be
          completed  as judged  appropriate  for the  business  and will require
          approximately  6 to 9  months  effort  to  prepare  documentation  and
          receive  FDA  approval.  During  that  time kit  manufacturing  can be
          initiated.  Partial  funding  will  be  provided  from  reagent  sales
          revenue.  It is  estimated  additional  funding  of  $100,000  will be
          required based on the  assumption  that a 510K of lung cancer has been
          approved.

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

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

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

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

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


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.

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

<PAGE>

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

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.

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

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

<PAGE>

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

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.

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

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

<PAGE>

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

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

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.

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

<PAGE>

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

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.

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

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred.

INCOME TAXES

Under  SFAS  109,  "ACCOUNTING  FOR  INCOME  TAXES,"  deferred  tax  assets  and
liabilities  are  recognized  for

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

<PAGE>

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

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.

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

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

<PAGE>

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

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>

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.

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

<PAGE>

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

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.

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.

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

<PAGE>

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

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

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

As disclosed in Note 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 and prior year's presentation.

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

<PAGE>

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

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.


All patent costs are held in Biomoda.  The gross carrying amount is $232,370 and
accumulated  amortization is $55,793.  Amortization expense for 2004 is $13,527.
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.

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

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


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

<PAGE>

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


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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
  COUNTRY                            TITLE                            PATENT NO.      ISSUE DATE        EXPIRATION DATE
------------------------------------------------------------------------------------------------------------------------
<S>          <C>                                                      <C>             <C>                <C>
     US      COMPOSITIONS AND METHODS OF DETECTING PRE-CANCEROUS      6,838,248           1/4/05              1/4/22
             CONDITIONS IN CELL AND TISSUE SAMPLES USING
             5,10,15,20 - TETRAKIS {CARBOXYPHENYL} PORPHINE                             Application  was filed for a
                                                                                        Continuation In Part additional
                                                                                        patent.

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

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

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


4. RELATED PARTY TRANSACTIONS

NOTES RECEIVABLE - OFFICER

As of  December  31, 2004 and 2003,  the Company has net  advances to an officer
approximating  $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 represents the gain on forgiveness of debt in
the

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

<PAGE>

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

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.


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

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

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

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

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

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

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


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

<PAGE>

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


     Advanced Optics subleases office space and lab equipment to Biomoda and two
     of Advanced Optics's officers are also officers of Biomoda. Advanced Optics
     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. Advanced Optics is considered the primary beneficiary as
     it stands to absorb the  majority of the VIE's  expected  losses.  Advanced
     Optics owns 16% of Biomoda and its  officers  own 12% of Biomoda.  The note
     between the  companies is over 70% of  liabilities  and six times the total
     assets of Biomoda.


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.  As Biomoda has a  stockholders'  deficit at December 31,
2004.

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 consolidated
Biomoda's account.

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

<PAGE>

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

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

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.

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

<PAGE>

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

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

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



During  the year ended  December  31,  2004 in  accordance  with the  applicable
convertible  debentures  agreement,  the Company  issued  103,000,000  shares of
common stock at a conversion price of  approximately  $0.0109 in connection with
the  conversion  of notes  payable of  $505,060,  including  $166,240 of accrued
interest,  and  recorded  a loss  on  settlement  of  debt  of  $620,730.  Other
conversions  produced net losses of $250, for a total of $620,980.  A balance of
$102,977 is being carried for this debenture on the Company's  financial records
as of December 31. 2004.

During the year ended  December  31, 2003,  in  accordance  with the  applicable
convertible note payable  agreement,  the Company issued  320,830,452  shares of
common stock at conversion  prices of  approximately  $0.0021 in connection with
the  conversion of notes  payable.  These shares were issued to three  debenture
holders for a total value of $658,393 including accrued interest of $67,000.  At
the end of 2003 the Company repaid and retired two debentures for  approximately
$255,811 in cash; this was accounted for as approximately  $210,000 in principal
and  accrued  interest  of  approximately  $45,000.  The  balance  of these  two
debentures  on the  Company's  financial  records  was more  than the  repayment
amount,  resulting in a gain on retirement of debentures of $40,171.  Other such
retirements created net gains of $24,721, for a total of $64,892 for the year.

The following table summarizes these transactions:

                                                  2003             2004
                                                  ----             ----
Shares issued to retire debentures           320,830,452      103,000,000
Approximate value per share                    $  0.0021      $    0.0109
                                                --------       ----------
Total value of shares issued                     658,393        1,125,790
Cash payments rendered                           255,811
Carrying value of debt retired                   954,375          505,060
                                                --------       ----------
 Gain (loss) on retirement of debt             $  40,171      $  (620,730)
                                                ========       ==========

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

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.   This   resulted  in  a  gain  on
extinguishment of debt of approximately $40,000.


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

<PAGE>

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

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 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  9,800,000 shares
of  treasury  stock for  approximately  $42,000 and sold  14,100,000  shares for
approximately $48,000.

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

<PAGE>

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

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

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

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

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

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

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

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

In 1999, the Company also sold 8,681,624 shares for $863,782 in cash, and issued
17,094,313 shares of common stock in exchange for the following services; Market
Research, Capital Raising Advice, Employee Bonus and Incentive,  Market Reports,
and the Production of a Corporate Promotional Video.


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

<PAGE>

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


In each instance, the value of stock issued was determined by discounting to 70%
of the  closing  price on the day of  issuance.  These  shares  were  valued  at
$1,486,414.

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

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

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

During the year ended December 31, 2001,  the Company sold 1,382,778  shares for
$68,227 in cash and issued 10,461,498 shares of common stock in exchange for the
following services;  Financial  Consulting,  Marketing,  Legal Fee for Debenture
Issuance,  Advice on  bringing  in  additional  investors,  Market  Sponsorship,
Investor Relations Reports, the Production of Corporate  Promotional Videos, and
Employee Bonus and Incentive . In each  instance,  the value of stock issued was
determined  by  discounting  to 70% of the closing price on the day of issuance.
These  shares were valued at  $422,745.  The value of such  services is included
with costs and expenses in the statement of operations

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

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

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

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


--------------------------------------------------------------------------------
Page F-25

<PAGE>

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


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

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

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

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

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

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

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

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

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


--------------------------------------------------------------------------------
Page F-26

<PAGE>

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


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

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

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

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


STOCK OPTIONS

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

The following is a status of the stock options  outstanding at December 31, 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>

--------------------------------------------------------------------------------
Page F-27

<PAGE>

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

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

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

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:

--------------------------------------------------------------------------------
Page F-28

<PAGE>

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

<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             $0.09
Granted                                                 --                 --                 --                --
Exercised                                               --                 --                 --                --
Cancelled/Terminated                            (3,850,000)              0.05                 --                --
                                           ----------------    ---------------    ---------------     -------------
Outstanding and exercisable, end of year         4,796,000              $0.11          8,646,000             $0.09
                                           ================    ===============    ===============     =============
Weighted average fair value of warrants
granted                                                                                                         --
                                                                                                      =============

</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.

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  Company  evaluated  its
investments based upon the fair market value of similar assets and wrote off the
total amount of investments of $361,710 at this time.  This is part of the asset
impairment in the accompanying consolidated statements of operations.


As disclosed in the note #1 to the financial  statements,  an impairment loss is
recognized when estimates of future  undiscounted  cash flows expected to result
from the use of an asset and its eventual disposition are less than its carrying
amount.  At the time such flows of certain  long-lived assets are not sufficient
to recover the carrying  value of such assets,  the assets are adjusted to their
fair values and any  impairment


--------------------------------------------------------------------------------
Page F-29

<PAGE>

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


amount is charged to operations.  Accordingly, based on these evaluations and in
comparison of such  investments with its market value,  management  adjusted the
carrying value of investments to zero at October 31, 2004.


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 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.

--------------------------------------------------------------------------------
Page F-30

<PAGE>

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

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.


The  three  defendants,  a  former  officer  of  Biomoda,  Inc.  and  two  other
individuals,  published thousands of false and defamatory statements,  including
vitriolic attacks on management of the Company and Biomoda, in a manner intended
to cause  direct  harm to the  Company,  Biomoda  and  their  management.  These
statements were published on public chat rooms,  such as Raging Bull, as well as
blogs.

The driving force behind the orchestrated and violent attacks on the Company and
Biomoda is the Defendant, a former Biomoda vice president,  alias, Athena_sword,
alias Subpoena me, alias Hestia17. At the time the former Biomoda vice president
joined  Biomoda  to try to raise  capital,  Biomoda  was a small  privately-held
start-up  company based in  Albuquerque  that was  attempting  to  commercialize
potentially  life-saving cancer detection and treatment technology licensed from
Los Alamos National  Laboratories.  In early 2002, the Company undertook to save
Biomoda from  extinction,  and to protect the  Company's  prior  investment,  by
providing financing, operational and management support. Biomoda is currently in
the process of raising capital through an effective SB2 registration statement.

These negative messages have had a substantially negative effect on the value of
the  Company's  shares,  and on  Biomoda's  ability to attract new  capital.  On
December 10, 2004,  the Company and Biomoda  brought  claims  against the former
Biomoda vice president and her two co-conspirators in New Mexico for defamation,
civil  conspiracy,  prima  facie  tort,  injurious  falsehood,  and  intentional
interference  with  prospective  advantage,  based on the messages posted by the
former  Biomoda vice president and her two  co-conspirators  on Raging Bull. The
Company and Biomoda sought damages as well as injunctive relief

Judgments  totaling  more than  $14,000,000  were  granted  against  two "screen
names", one of which was identified subsequent to the date of the judgments.  To
date,  the  Company  has  located  approximately  $500,000 of assets on which to
execute  judgment,  but has not  made  any  recovery  to date.  The  Company  is
continuing  discovery to identify the other  defendant and to locate  additional
assets upon which execution of judgment can be made. We cannot assess the amount
of  financial  recovery  at this time and  consequently  have made no  financial
record of these judgments.

The Company has not  accounted  for the now  $14,000,000+  judgment  because the
amount to be collected is still uncertain.  To be conservative,  the Company has
assigned zero value at this time.


NOTE 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.

--------------------------------------------------------------------------------
Page F-31

<PAGE>

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

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        539        117       158         275
Net Loss               $(4,289)   $  (759)    $-0-     $(5,048)   $(3,590)   $  (311)     $-0-     $(3,901)
</TABLE>

--------------------------------------------------------------------------------
Page F-32



<PAGE>



           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

We have audited the accompanying consolidated balance sheet of Biomoda, Inc. (a
development stage company) as of December 31, 2004, and the related consolidated
statements of operations, stockholder's deficit and cash flows for the year then
ended and the period from January 3, 1990 (inception) to December 31, 2004.
These financial statements are the responsibility of Biomoda, Inc.'s management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The consolidated financial statements for the period from January
3, 1990 (inception) through December 31, 2003 were audited by other auditors
whose reports expressed unqualified opinions on those statements. The
consolidated financial statements for the period from January 3, 1990
(inception) through December 31, 2003 include total revenues and net loss of $23
and $1,717,544, respectively. Our opinion on the consolidated statements of
operations, stockholders' deficit and cash flows for the period from January 3,
1990 (inception) through December 31, 2004, insofar as it relates to amounts for
prior periods through December 31, 2003, is based solely on the reports of other
auditors.

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

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

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company is a development stage company
which experienced significant losses since inception with no significant
revenues. Also discussed in Note 1 to the consolidated financial statements, a
significant amount of additional capital will be necessary to advance the
development of the Company's products to the point at which they may become
commercially viable. Those conditions, among others, raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


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

March 16, 2005

F-1
<PAGE>



            REPORT OF INDEPENDENT REGISTRERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders
BioModa, Inc.

We have audited the consolidated statements of operations,  stockholders' equity
and cash flows of BioModa,  Inc., a New Mexico corporation (the "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 results of operations and cash flows of
BioModa, Inc. for the year ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States.


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

Newport Beach, California
February 27, 2004

F-2
<PAGE>



                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2004

                                    ASSETS

Current Assets
        Cash                                                $     1,360
        Prepaid expenses                                          3,241
                                                            -----------
        Total Current Assets                                      4,601

Intangibles, net of accumulated
  amortization of $55,793                                       206,577
Property and Equipment, net of accumulated
  depreciation of $1,851                                         14,193
                                                            -----------

                                                            $   225,371
                                                            ===========

                    LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
        Accounts payable and accrued liabilities                231,511
        Advances from stockholders                              134,988
        Line of credit from an affiliated entity                975,165
                                                            -----------
        Total Current Liabilities                             1,341,664

Commitments and Contingencies                                        --

Stockholders' Deficit
        Class A redeemable preferred stock; no par value             --
          2,000,000 shares authorized; cumulative and
          convertible; liquidation and redemption values
          of $1.50 and $1.80 per share; no shares issued
          and outstanding
        Undesignated preferred stock; 2,000,000 shares               --
          authorized; no shares issued and outstanding
        Common stock, no par value, 100,000,000 shares
          authorized; 7,117,282 issued and outstanding        1,360,196
        Deficit accumulated during development stage         (2,476,489)
                                                            -----------

        Total Stockholders' Deficit                          (1,116,293)
                                                            -----------

                                                            $   225,371
                                                            ===========

See accompanying notes to these condensed consolidated financial statements.

F-3

<PAGE>

                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
         FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND FOR THE PERIOD
              FROM JANUARY 3, 1990 (INCEPTION) TO DECEMBER 31, 2004

<TABLE>
<CAPTION>
                                                                           January 3, 1990
                                                                             (Inception)
                                                                           to December 31,
                                                   2004           2003          2004
                                               -----------    -----------    -----------
<S>                                            <C>            <C>            <C>
Revenue                                        $        --    $        --    $        23
                                               -----------    -----------    -----------
Operating expenses
Professional fees                                  134,218         36,163        433,139
General and administrative                         106,139        182,434        332,927
Licensing fees                                      15,776         22,200         88,793
Research and development                           436,899         49,879      1,420,700
Depreciation and amortization                       15,348         11,657         60,758
                                               -----------    -----------    -----------

Total Operating Expenses                           667,550        302,333      2,336,317
                                               -----------    -----------    -----------

Loss from operations                              (708,380)      (302,333)    (2,336,294)
Other Income (Expenses)
Gain on forgivness of debt                          12,250         24,721         36,971
Interest income                                         --             --          3,870
Interest expense                                   (62,815)       (33,621)      (181,036)
Foreign currency transaction loss                       --             --             --
                                               -----------    -----------    -----------

Total Other Expenses                               (50,565)        (8,900)      (140,195)
                                               -----------    -----------    -----------

Loss Before Provision For Income Taxes            (758,945)      (311,233)    (2,476,489)
Provision for income taxes                              --             --             --
                                               -----------    -----------    -----------
Net Loss and Losses Accumulated
During Development Stage                       $  (758,945)   $  (311,233)   $(2,476,489)
                                               ===========    ===========    ===========
Basic and diluted weighted average number of
    common shares outstanding                    6,928,151      6,228,060
                                               ===========    ===========
Basic and diluted loss per common share        $     (0.11)   $     (0.05)
                                               ===========    ===========
</TABLE>

See accompanying notes to these condensed consolidated financial statements.

F-4

<PAGE>

                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
      FOR THE PERIOD FROM JANUARY 3, 1990 (INCEPTION) TO DECEMBER 31, 2004

<TABLE>
<CAPTION>
                                                               Common Stock
                                                        -------------------------                                    Total
                                                                                    Additional                    Stockholders'
                                                                                     Paid in       (Accumulated     (Deficit)
                                                          Shares        Amount       Capital         Deficit)        Equity
                                                        -----------   -----------   -----------    -----------    -----------
<S>                                                     <C>           <C>           <C>            <C>            <C>
INCEPTION                                                        --   $        --                  $        --    $        --
Issuance of Common Stock, June 26, 1991                   2,997,000        18,433   $        --                        18,433
Cumulative Net Loss for the period from January 3, 1990          --
        (date of inception) to December 31,1996
                                                                                                       (60,010)       (60,010)
                                                        -----------   -----------   -----------    -----------    -----------
BALANCE, DECEMBER 31, 1996                                2,997,000        18,433            --        (60,010)       (41,577)

Issuance of Common Stock Warrants on December 31, 1997           --            --            --                            --
       (100,952 warrants at exercise price of $.20)
Net loss                                                                                               (32,914)       (32,914)
                                                                                                   -----------    -----------
BALANCE, DECEMBER 31, 1997                                2,997,000        18,433            --        (92,924)       (74,491)

Issuance of Common Stock, January 20, 1998                   59,940        10,000            --                        10,000
Exercise of Common Stock Warrants on March 17, 1998         100,952        20,190            --                        20,190
Issuance of Common Stock, April 15, 1998, net of stock      631,578       276,350            --                       276,350
issuance costs
Issuance of Common Stock Options, April 15, 1998                           23,650            --                        23,650
Exercise of Common Stock Options, November 2, 1998           62,237        23,670            --                        23,670
Net loss                                                                                              (295,948)      (295,948)
                                                        -----------   -----------   -----------    -----------    -----------
BALANCE, DECEMBER 31, 1998                                3,851,707       372,293            --       (388,872)       (16,579)
Issuance of Common Stock, January 30, 1999                  180,000        87,300            --                        87,300
Issuance of Common Stock, for the month of March, 1999      310,000       150,300            --                       150,300
Issuance of Common Stock, May 29, 1999                       51,546        25,000            --                        25,000
Issuance of Common Stock, June 2, 1999                       95,092        50,000            --                        50,000
Issuance of Common Stock, September 30, 1999                 51,546        25,000            --                        25,000
Issuance of Common Stock, December 29, 1999                  92,005        50,143            --                        50,143
Net loss                                                                                              (303,956)      (303,956)
                                                        -----------   -----------   -----------    -----------    -----------
BALANCE, DECEMBER 31, 1999                                4,631,896       760,036            --       (692,828)        67,208

Exercise of Common Stock Options, February 24, 2000         166,535        80,770            --                        80,770
Issuance of Common Stock, May 12, 2000                      253,609        56,000            --                        56,000
Exercise of Common Stock Options, June 8, 2000               62,497        30,312            --                        30,312
Issuance of Common Stock, for the month of
     September, 2000                                         96,745        21,086            --                       21,086
Exercise of Common Stock Options, November 3, 2000           66,000         7,491            --                         7,491
Issuance of Common Stock for Services, December 8, 2000      40,000        19,400            --                        19,400
Net loss                                                                                              (257,139)      (257,139)
                                                        -----------   -----------   -----------    -----------    -----------
BALANCE, DECEMBER 31, 2000                                5,317,282       975,095            --       (949,967)        25,128

Issuance of Common Stock for Services, January 25, 2001       5,000         2,425            --                         2,425
Issuance of Common Stock, January 31, 2001                  160,000        24,000            --                        24,000
Issuance of Common Stock for Services, April 6, 2001         15,000         7,276            --                         7,276
Issuance of Common Stock, for the month of April, 2001      120,000        58,200            --                        58,200
Issuance of Common Stock, June 28, 2001                      20,000         9,700            --                         9,700
Issuance of Common Stock, for the month of August, 2001     110,000        53,500            --                        53,500
Issuance of Common Stock, November 7, 2001                   10,000         5,000            --                         5,000
Net loss                                                                                              (372,655)      (372,655)
                                                        -----------   -----------   -----------    -----------    -----------
BALANCE, DECEMBER 31, 2001                                5,757,282     1,135,196            --     (1,322,622)      (187,426)
Net loss                                                                                               (83,689)       (83,689)
                                                        -----------   -----------   -----------    -----------    -----------
BALANCE, DECEMBER 31, 2002                                5,757,282     1,135,196            --     (1,406,311)      (271,115)

Exercise of stock options, July 11, 2003                    980,000       147,000       147,000
Net loss                                                                                              (311,233)      (311,233)
                                                        -----------   -----------   -----------    -----------    -----------
BALANCE, DECEMBER 31, 2003                                6,737,282     1,282,196            --     (1,717,544)      (435,348)

Issuance of Common Stock for Service, February 9, 2004       35,000         5,250            --                         5,250
Exercise of Common stock Options, February 9, 2004           60,000        30,000            --                        30,000
Issuance of Common Stock for Services, August 5, 2004        85,000        12,750                                      12,750
Exercise of Common stock Options, September 27, 2004        200,000        30,000                                      30,000
Net loss, December 31, 2004                                                                           (758,945)      (758,945)
                                                        -----------   -----------   -----------    -----------    -----------
BALANCE, DECEMBER 31, 2004                                7,117,282   $ 1,360,196   $        --    $(2,476,489)   $(1,116,293)
                                                        -----------   -----------   -----------    -----------    -----------
</TABLE>

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

F-5

<PAGE>

                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
    AND FOR THE PERIOD FROM JANUARY 3, 1990 (INCEPTION) TO DECEMBER 31, 2004

<TABLE>
<CAPTION>
                                                                                                         January 3, 1990
                                                           Year Ended               Year Ended           (Inception) to
                                                        December 31, 2004        December 31, 2003      December 31, 2004
                                                        ------------------       -----------------      -----------------
<S>                                                     <C>                      <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                 $  (758,945)             $  (311,233)             $(2,404,031)
Adjustments to reconcile net loss to
     net cash used in operating activities:
Stock options expense                                             --                  147,000                  147,000
Issuance of common stock for services                          5,250                       --                   17,500
Issuance of common stock for bonuses to employees             12,750                       --                   10,710
Loss on sale of assets                                            --                       --                      358
Foreign currency transactions                                     --                       --                    3,247
Non-cash loss on debt settlement                               4,893                       --                       --
Deprecation and amortization                                  15,347                   11,658                   60,759
Changes in operating assets and liabilities:
Accounts receivable                                               --                       --                   (4,425)
Other Assets                                                      --                    1,184                   (4,548)
Accounts payable and accrued liabilities                     169,776                  (88,907)                 269,860
Advances from stockholders                                        --                    9,564                   15,700
                                                         -----------              -----------              -----------
Net cash flows used in operating activities                 (550,929)                (230,734)              (1,887,870)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment                           (14,180)                  (1,867)                 (24,177)
Sale of property and equipment                                    --                       --                    1,139
Organizational costs                                              --                       --                     (560)
Patent, trademark and license fee                            (63,742)                 (40,830)                (262,371)
                                                         -----------              -----------              -----------
Net cash flows used in investing activities                  (77,922)                 (42,697)                (285,969)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stockholders' advances                              --                       --                   86,014
Proceeds from line of credit from an affiliated entity       625,464                  278,023                1,005,089
Issuance of common stock for cash                                 --                       --                1,084,096
                                                         -----------              -----------              -----------
Net cash flows provided by financing activities              625,464                  278,023                2,175,199
Net (decrease) increase in cash                               (3,387)                   4,592                    1,360
Cash, beginning of period                                      4,747                      155                       --
                                                         -----------              -----------              -----------
Cash, end of period                                      $     1,360              $     4,747              $     1,360
                                                         ===========              ===========              ===========
Supplemental disclosure of cash flow information:
Cash paid for :
      Interest                                           $        --              $        --              $        --
                                                         ===========              ===========              ===========
      Income Taxes                                       $        --              $        --              $        --
                                                         ===========              ===========              ===========
</TABLE>

See accompanying notes to consolidated financial statements for more information
on non-cash investing and financing activities during the periods ended December
31, 2004 and 2003, and for the period from January 3, 1990  (Inception)  through
December 31, 2004.

F-6

<PAGE>


--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

1.  ORGANIZATION

FORMATION AND NATURE OF BUSINESS

Biomoda,  Inc.  ("Biomoda") is a development  stage company  incorporated in the
state of New Mexico on January 3, 1990 (Inception). In 2002, the Chief Executive
Officer  ("CEO") and the Chief  Financial  Officer  ("CFO") of  Advanced  Optics
Electronics,  Inc.  ("ADOT")  replaced  Biomoda's  management team,  affecting a
change in control.  ADOT 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.   Biomoda  and  Biomoda  Holdings,  Inc.  are  hereinafter
collectively referred to as the "Company".

The  Company's  primary  focus  is on early  cancer  detection  technology.  The
Company's 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.  The Company  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, the Company filed a new U.S.  provisional patent application  defining the
ability  of the  Company's  version  of the  TCPP to  detect  pre-cancerous  and
cancerous   conditions   in  all   human   tissue.   The   Company   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.

On May 11, 2004,  the Company's  board of directors  approved an increase in the
number of shares of common stock  authorized  from  15,000,000  to  100,000,000.
Pursuant to a registration statement on Form SB-2 (the "Registration Statement")
under the Securities  Act of 1933, as amended,  the Company is offering for sale
up to  6,000,000  shares of its  common  stock at a price of $3 per  Share.  The
Registration Statement was declared effective on February 11, 2005. The Offering
will  terminate  on the  earlier of  February  11, 2008 or the date on which the
maximum  number of shares have been sold. The Company has not sold any shares as
of March 31, 2005.

DEVELOPMENT STAGE AND GOING CONCERN

The  Company has been in the  development  stage  since it began  operations  on
January 3, 1990 and has not generated any revenues from  operations and there is
no assurance of any future revenues. As of December 31, 2004, the Company had an
accumulated deficit of approximately $2,476,000 and a working capital deficit of
approximately $1,337,000.

--------------------------------------------------------------------------------
F-7

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

1.  ORGANIZATION (continued)

DEVELOPMENT STAGE AND GOING CONCERN (continued)

In addition,  the Company did not generate any cash from  operations  and had no
cash reserve dedicated to fund expenditures.  These factors create a substantial
doubt as to the Company's ability to continue as a going concern.

The Company will require substantial  additional funding for continuing research
and development,  obtaining regulatory approval and for the commercialization of
its  products.  Management  expects to be able to raise enough funds to meet its
working  capital  requirements  through the sale of the  Company's  common stock
offered in its Registration Statement. ADOT will continue to provide the Company
with bridge financing needed to fund the day-to-day operations until the Company
has raised sufficient capital to fund its operations (See Note 6).

There  is 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.  The  consolidated  financial
statements  do not include any  adjustments  that might be necessary  should the
Company be unable to continue as a going concern.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant  accounting  policies  presented below is designed to
assist in understanding the Company's  consolidated  financial statements.  Such
consolidated financial statements and accompanying notes are the representations
of Company's management, who is responsible for their integrity and objectivity.
These accounting policies conform to accounting principles generally accepted in
the United States of America  ("GAAP") in all material  respects,  and have been
consistently  applied  in  preparing  the  accompanying  consolidated  financial
statements.

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include the accounts of Biomoda and its
wholly owned subsidiary,  Biomoda Holdings,  Inc. All significant  inter-company
accounts and transactions have been eliminated in consolidation.

USE OF ESTIMATES

The Company  prepares its consolidated  financial  statements in conformity with
GAAP,  which requires  management to make estimates and assumptions  that affect
the reported amounts of assets and liabilities,  disclosure of contingent assets
and  liabilities  at the  date of the  financial  statements,  and the  reported
amounts of revenues and expenses during the reporting period.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

--------------------------------------------------------------------------------
F-8

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

USE OF ESTIMATES (continued)

Significant estimates made by management include, among others, realizability of
long-lived  assets  and  estimates  for  deferred  income  tax  asset  valuation
allowances. Actual results could differ from those estimates.

RISKS AND UNCERTAINTIES

The Company has a limited operating  history.  The Company has not yet generated
significant revenue from its business  operations.  As a new operating entity in
its current  form,  the Company  faces risks and  uncertainties  relating to its
ability to successfully implement its strategy.  Among other things, these risks
include the ability to develop and sustain revenue growth;  managing operations;
competition;   attracting,   retaining  and  motivating   qualified   personnel;
maintaining  and  developing  new  strategic  relationships;  and the ability to
anticipate  and adapt to the changing  bio-technology  market and any changes in
government  regulations.  The Company has no experience in obtaining  regulatory
clearance of these types of products.  Therefore,  the Company may be subject to
the risks of delays in obtaining or failing to obtain  regulatory  clearance and
other uncertainties, including financial, operational, technological, regulatory
and other risks  associated with an emerging  business,  including the potential
risks of business failure.

Biotech  companies in general,  and anti-cancer  biopharmaceutical  companies in
particular,  are stronger than they have ever been both in terms of products and
finances.  The Company is competing  against  companies  with the  financial and
intellectual  resources and expressed intent of performing  rapid  technological
innovation and  substantial  scientific  research.  The Company's  resources are
limited and must be allocated to very focused objectives in order to succeed.

The area of  biopharmaceutical  research  is  subject  to rapid and  significant
technological  changes.  Developments  and  advances in the medical  industry by
either  competitors  or neutral  parties  can affect the  Company's  business in
either a positive or negative manner.

Developments  and changes in  technology  that are  favorable to the Company may
significantly advance the potential of the Company's research while developments
and advances in research  methods outside of the methods the Company uses we are
using may severely hinder, or halt completely the Company's development.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

--------------------------------------------------------------------------------
F-9

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

RISKS AND UNCERTAINTIES (continued)

Before  marketing  any of the  Company's  products,  the  Company  will  need to
complete one or more clinical  investigations  of each product.  There can be no
assurance that the results of such clinical  investigations will be favorable to
the Company.  During each investigative  study and prior to its completion,  the
results of the investigations will remain blinded to ensure the integrity of the
study.  The  Company  will not know  the  results  of any  study,  favorable  or
unfavorable to the Company, until after the study has been completed.  Such data
must be submitted to the FDA as part of any regulatory  filing seeking  approval
to market the product.  Even if the results are  favorable,  the FDA may dispute
the claims of safety, efficacy, or clinical utility and not allow the product to
be  marketed.  The sale  price of the  product  may not be enough to recoup  the
amount of our investment in conducting the investigative studies.

The Company is a small  company in terms of  employees,  technical  and research
resources and capital.  These factors could hinder the Company's ability to meet
changes in the medical  industry as rapidly or effectively  as competitors  with
substantially more resources.

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

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

--------------------------------------------------------------------------------
F-10

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

CONCENTRATIONS

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.  As of December 31, 2004,  no such balances were in excess of
the FDIC limit.

FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting Standards ("SFAS") No. 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.  Management believes that the carrying amounts of the Company's financial
instruments,   consisting  primarily  of  cash,  accounts  payable  and  accrued
liabilities approximated their fair values as of December 31, 2004, due to their
short-term nature.

The fair value of related party  transactions  are not determinable due to their
related-party nature.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and are being  depreciated  using the
straight-line  method over the  estimated  useful  lives of the related  assets,
which generally range between three and ten years.  Leasehold  improvements  are
amortized  on a  straight-line  basis over the shorter of the  estimated  useful
lives of the assets or the remaining  lease terms.  The Company has assumed that
leases  with  terms of less than five  years  will be  renewed  and has used the
estimated renewal time frame for amortization purposes.  Maintenance and repairs
are charged to expense as incurred.  Significant  renewals and  betterments  are
capitalized.  At the time of  retirement,  other  disposition  of  property  and
equipment or termination of a lease,  the cost and accumulated  depreciation are
removed from the accounts and any resulting gain or loss is reflected in results
of operations.

--------------------------------------------------------------------------------
F-11

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

LONG-LIVED ASSETS

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of  Financial  Accounting  Standards  ("SFAS")  No.  144,  "ACCOUNTING  FOR  THE
IMPAIRMENT OF LONG-LIVED  ASSETS AND FOR  LONG-LIVED  ASSETS TO BE DISPOSED OF."
SFAS No. 144 addresses financial  accounting and reporting for the impairment or
disposal of long-lived  assets.  SFAS No. 144 requires that long-lived assets be
reviewed for impairment  whenever  events or changes in  circumstances  indicate
that  their  carrying  amount  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 No. 144 also  requires  companies to
separately  report  discounted  operations  and  extends  that  reporting  to  a
component of an entity that either has been disposed of (by sale, abandonment or
in a  distribution  to owners) or is classified  as held for sale.  Assets to be
disposed of are  reported at the lower of the carrying  amount or the  estimated
fair value less costs to sell. There can be no assurance,  however,  that market
conditions will not change which could result in impairment of long-lived assets
in the future.

GOODWILL AND INTANGIBLE ASSETS

SFAS No. 142,  "GOODWILL AND OTHER  INTANGIBLE  ASSETS",  which is effective for
fiscal years beginning after December 15, 2001,  addresses how intangible assets
that  are  acquired  individually  or with a group  of other  assets  should  be
accounted for in the consolidated  financial  statements upon their  acquisition
and after they have been initially recognized in the financial statements.  SFAS
No. 142 requires that goodwill and intangible assets that have indefinite useful
lives not be amortized  but rather be tested at least  annually for  impairment,
and  intangible  assets that have finite  useful lives be  amortized  over their
estimated  useful  lives.  SFAS No. 142 provides  specific  guidance for testing
goodwill and  intangible  assets that will not be amortized for  impairment.  In
addition,  SFAS No. 142 expands the disclosure  requirements  about goodwill and
other intangible assets in the years subsequent to their acquisition. Impairment
losses for goodwill and indefinite-life  intangible assets that arise due to the
initial  application  of SFAS No.  142 are to be  reported  as from a change  in
accounting  principle.  SFAS  No.  142  has  not had a  material  effect  on the
Company's  consolidated financial statements since the Company does not have any
goodwill or non-amortizable intangible assets.

--------------------------------------------------------------------------------
F-12

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

PATENTS

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

ADVERTISING

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

RESEARCH AND DEVELOPMENT

Research  and  development  costs are charged to  operations  as  incurred.  The
Company incurred  approximately  $437,000,  $50,000 and $565,000 of research and
development  expenses for the years ended December 31, 2004 and 2003 and for the
period from Inception  through December 31, 2004.

INCOME TAXES

The Company  accounts  for income  taxes under the  provisions  of SFAS No. 109,
"ACCOUNTING FOR INCOME TAXES". SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected  future tax  consequences of events that
have been  included in the  consolidated  financial  statements  or tax returns.
Under this method deferred tax  liabilities  and assets are determined  based on
the  difference  between  the  financial  statement  and tax bases of assets and
liabilities  using enacted tax rates for the year in which the  differences  are
expected to reverse (See Note 9).

--------------------------------------------------------------------------------
F-13

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

COMPREHENSIVE INCOME

The  Company  reports  comprehensive  income in  accordance  with SFAS No.  130,
"REPORTING  COMPREHENSIVE  INCOME".  SFAS No. 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.  Through  December 31, 2004 the Company had no items of  comprehensive
income.

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
("APB") Opinion No. 25,  "ACCOUNTING  FOR STOCK ISSUED TO EMPLOYEES."  Under the
intrinsic value based method, compensation expense is the excess, if any, of the
fair  value of the stock at the grant  date or other  measurement  date over the
amount an employee must pay to acquire the stock.  Compensation expense, if any,
is recognized over the applicable  service period,  which is usually the vesting
period.

SFAS No. 123,  "ACCOUNTING  FOR  STOCK-BASED  COMPENSATION,"  if fully  adopted,
changes the method of accounting for employee  stock-based  compensation  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 No. 123 is optional and the
Company has elected to account for stock-based  compensation issued to employees
using APB No. 25; however, pro forma disclosures,  as if the Company adopted the
cost recognition  requirement  under SFAS No. 123, are required to be presented.
For stock-based compensation issued to non-employees,  the Company uses the fair
value method of accounting under the provisions of SFAS No. 123.

--------------------------------------------------------------------------------
F-14

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

STOCK BASED COMPENSATION (continued)

SFAS  No.  148,  "ACCOUNTING  FOR  STOCK-BASED  COMPENSATION  -  TRANSITION  AND
DISCLOSURE,  AN AMENDMENT  OF SFAS NO. 123," was issued in December  2002 and is
effective for fiscal years ending after December 15, 2002. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee  compensation.  In addition,  SFAS
No. 148 amends the disclosure  requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim  consolidated  financial statements about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported  results.  See Note 7 for additional  information on
stock options.

In December 2004,  the FASB issued SFAS No. 123R,  "Accounting  for  Stock-Based
Compensation".  SFAS No.  123R  establishes  standards  for the  accounting  for
transactions  in which an entity  exchanges its equity  instruments for goods or
services.  This Statement  focuses  primarily on accounting for  transactions in
which an entity obtains employee services in share-based  payment  transactions.
SFAS No.  123R  requires  that the fair  value  of such  equity  instruments  be
recognized  as expense in the  historical  financial  statements as services are
performed.  Prior to SFAS No. 123R,  only certain pro forma  disclosures of fair
value were required. SFAS No. 123R shall be effective for small business issuers
as of the beginning of the first interim or annual  reporting period that begins
after December 15, 2005. The adoption of this new  accounting  pronouncement  is
not  expected  to have a  material  impact on the  financial  statements  of the
Company during the calendar year 2006.

FASB  Interpretation  No. 44 ("FIN 44"),  "ACCOUNTING  FOR CERTAIN  TRANSACTIONS
INVOLVING  STOCK  COMPENSATION,  AN  INTERPRETATION  OF APB 25,"  clarifies  the
application  of APB No. 25 for (a) the  definition  of  employee  for purpose of
applying APB No. 25, (b) the criteria for  determining  whether a plan qualifies
as  a  non-compensatory   plan,  (c)  the  accounting   consequence  of  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.

The  following  table  illustrates  the  effect on net  income  (loss) as if the
Company had applied the fair value  recognition  provisions  of SFAS No. 123 for
its stock-based employee compensation plans.

                                                        2004             2003
                                                     ---------        ---------
Net income (loss), as reported                       $(758,945)       $(311,233)
Stock based compensation, net of tax                        --               --
                                                     ---------        ---------
Net income (loss), pro forma                         $(758,945)       $(311,233)
                                                     =========        =========

--------------------------------------------------------------------------------
F-15

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

No options  that can be valued were issued in the year ended  December 31, 2004.
In 2003,  options to purchase 75,000 shares at a yet to be determined price were
granted to an  employee.  The effects of applying  SFAS No. 123 in the pro forma
disclosure  are not  likely to be a  representation  of the pro forma  effect on
reported  net  income  (loss)  for  future  years.  See  Note  7 for  additional
disclosures related to the Company's common stock plans.

BASIC AND DILUTED LOSS PER COMMON SHARE

The Company  computes  loss per common  share using SFAS No. 128  "EARNINGS  PER
SHARE".  Basic loss per share is  computed  by dividing  net loss  available  to
common  shareholders by the weighted average number of common shares outstanding
for the reporting period. Diluted loss per share reflects the potential dilution
that could occur if  securities  or other  contracts,  such as stock options and
warrants to issue common stock,  were  exercised or converted into common stock.
There were no dilutive  potential common shares as of December 31, 2004 or 2003.
Because the Company has incurred  net losses and there are no  potential  common
shares, basic and diluted loss per common share are the same.

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS

SFAS  No.  143,  "ACCOUNTING  FOR  ASSET  RETIREMENT  OBLIGATIONS,"  establishes
standards  associated with the retirement of tangible  long-lived assets and the
associated asset retirement  costs. This statement is effective for consolidated
financial  statements  for  fiscal  years  beginning  after June 15,  2002.  The
adoption  of SFAS No. 143 did not have an impact on the  Company's  consolidated
financial statements.

SFAS  No.  146,   "ACCOUNTING  FOR  COSTS   ASSOCIATED  WITH  EXIT  OR  DISPOSAL
ACTIVITIES," is effective for such activities initiated after December 31, 2002.
Activities of this type include restructurings (such as relocation of a business
and fundamental  reorganizations  of a business itself),  which may give rise to
costs such as contract cancellation provisions, employee relocation and one-time
termination costs. SFAS No. 146 prohibits liability  recognition based solely on
management's intent, and requires that liabilities be measured at estimated fair
value.  The  adoption  of SFAS No.  146 did not have an impact on the  Company's
consolidated financial statements.

In  November  2002,  the  FASB  issued  FASB  Interpretation   ("FIN")  No.  45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of Others." FIN No. 45 clarifies  that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the  estimated  fair  value of the  obligation  undertaken  in  issuing  the
guarantee.

--------------------------------------------------------------------------------
F-16

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The initial recognition and measurement  provisions of FIN No. 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002,
while the  disclosure  requirements  became  applicable in 2002.  The Company is
complying with the disclosure requirements of FIN No. 45. The other requirements
of this  pronouncement  did not  materially  affect the  Company's  consolidated
financial statements.

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)

Other  recent  accounting  pronouncements  issued  by  the  FASB,  the  American
Institute of  Certified  Public  Accountants,  and the  Securities  and Exchange
Commission  did not or are not believed by management to have a material  impact
on the Company's present or future consolidated financial statements.

RECLASSIFICATIONS

Certain amounts in the December 31, 2003 consolidated  financial statements have
been reclassified to conform to the December 31, 2004 presentation.

3. PATENTS

The Company 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,  the Company 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.  The  Company has not  incurred  any royalty
expense during the period from January 3, 1990 (inception) to December 31, 2004.
The  Company  also pays an annual  fee in the  amount of  $15,000  to renew such
license  agreement.  As of December 31, 2004, the company was in full compliance
with the provisions of this agreement.

4.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts  payable and  accrued  liabilities  consisted  of the  following  as of
December 31, 2004:

Trade accounts payable                              $   70,390
Accrued expense and contingency                        137,922
Accrued taxes payable                                   23,199
                                                    ----------
                                                    $  231,511
                                                    ==========

--------------------------------------------------------------------------------
F-17

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

5.  ADVANCES FROM STOCKHOLDERS

As of  December  31,  2004,  the Company 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 represents the gain on forgiveness of debt in
the accompanying  statements of operations.  In 2004, he accepted 200,000 shares
of common stock as repayment of the remaining balance.  Interest expense related
to such  advances  for the years  ended  December  31, 2004 and 2003 and for the
period from  Inception  through  December 31, 2004 were  approximately  $12,000,
$27,000 and $123,000, respectively.

6.  LINE OF CREDIT FROM AN AFFILIATED ENTITY

On May 1,  2002,  the  Company  entered  into a line of  credit  agreement  (the
"Agreement")  with ADOT with an annual  interest  rate of 5%. On May 1, 2003 the
Agreement  was amended to be payable on demand.  As of December  31,  2004,  the
Company had a balance of approximately $975,000 on this line of credit. Interest
expense  related to such a line of credit for the years ended December 31, 2004,
2003  and  for  the  period  from  Inception   through  December  31,  2004  was
approximately $27,000, $7,000 and $34,000, respectively.

7. EQUITY TRANSACTIONS

PREFERRED STOCK

On June 19, 1991,  the Company  authorized  the issuance of 4,000,000  shares of
preferred  stock.  The  Company  designated  2,000,000  shares  as the  series A
convertible   preferred  stock  ("Series  A").  Series  A  has  liquidation  and
redemption  values  of $1.50 and $1.80  per  share,  respectively.  The stock is
subject to redemption at the  discretion  of the Company.  Prior to  redemption,
each share of the Series A can be  converted  into one share of common  stock at
the discretion of the stockholders.  The holders of Series A will be entitled to
dividends  equal to the amount of  dividends  for the number of shares of common
stock into which it is entitled to be  converted.  As of December 31, 2004,  the
Company has not issued any preferred shares.

--------------------------------------------------------------------------------
F-18

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

7. EQUITY TRANSACTIONS (continued)

COMMON STOCK

During  2004,  the Company  authorized  an increase in the number of  authorized
shares of common stock from 15,000,000 to 100,000,000.

On August 5, 2004 the Company issued 85,000 shares of restricted common stock to
three of its  employees  for  bonuses at  approximately  $12,750  (estimated  by
management to be the fair value at the date of grant).

OPTIONS

On July 11, 2003, the two officers exercised their options for 980,000 shares of
the  Company's  common stock at an exercise  price of $0.15 per share in lieu of
deferred salary in the amount of $147,000. In December 2003, the Company granted
options to purchase  75,000 shares of common stock to an employee.  Such options
will  ultimately  vest  over four  years,  10% at the end of six  months  and an
additional 15% at the end of the first year,  thereafter vesting 25% per year on
a monthly basis. Such stock options expire ten years from the date of grant.

On September 29, 2004 one of the  stockholders  of the Company  exercised  stock
options  to  purchase  200,000  shares of  common  stock at a price of $0.15 per
share.  Advances  payable to that  stockholder  as of that date in the amount of
approximately  $25,000 were applied  against the exercise price of such options.
The  Company  recorded  the  difference  of  approximately  $5,000  as  loss  on
settlement of debt in 2004.

                                                                WEIGHTED-AVERAGE
                                             NUMBER OF SHARES    EXERCISE PRICE
                                             ----------------------------------
Options outstanding and exercisable at         2,630,000            $   0.19
       December 31, 2002
             Granted                              75,000                 --
             Exercised
                                                (980,000)           $   0.15
                                               ---------
                                               1,725,000            $   0.23
Options outstanding and exercisable at
       December 31, 2003
                                               =========
            Expired                              (60,000)           $   0.50
            Exercised                           (260,000)           $   0.50
                                               ---------
Options outstanding and exercisable at
         December 31, 2004                     1,405,000            $   0.20
                                               =========

--------------------------------------------------------------------------------
F-19

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

7. EQUITY TRANSACTIONS (continued)

The number of  outstanding  and  exercisable  options as of December 31, 2004 is
provided below:

<TABLE>
<CAPTION>
                                           OUTSTANDING AND EXERCISABLE
                           ------------------------------------------------------------
                                              WEIGHTED-AVERAGE     WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES   NUMBER OF SHARES    EXERCISE PRICE   REMAINING LIFE (YEARS)
---------------------------------------------------------------------------------------
<S>                        <C>                     <C>                   <C>
       $0.15                      1,080,000        $0.15                 5.21
       $0.50                        250,000        $0.50                 3.53
                           ----------------
    undetermined                     75,000         n/a                  8.93
                           ----------------
                                  1,405,000
                           ================
</TABLE>

8.  OTHER RELATED PARTY TRANSACTION

On May 1, 2002,  the Company  entered  into an  agreement  with ADOT to sublease
office space for $300 a month.  The lease is on a  month-to-month  basis and the
Company is to abide with all relevant covenants of the master lease.

On December 1, 2003,  the Company  entered into an agreement  with ADOT to lease
certain lab equipment for $500 a month.

9. INCOME TAXES

The  components  of the  provision  (benefit)  for income taxes  consists of the
following for the years ended December 31:

                              2004        2003
                           ---------------------
Current:
     Federal               $     --      $    --
     State                       --           --
                           ---------------------
     Total Current               --           --
Deferred:
      Federal                    --           --
     State                       --           --
                           ---------------------
     Total Deferred        $     --      $    --
                           =====================

--------------------------------------------------------------------------------
F-20

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

For the years ended  December 31, 2004 and 2003,  and the period from  Inception
through  December 31, 2004, the Company had no  significant  current or deferred
net income tax  expense.  The Company has  recorded a 100% on all  deferred  tax
assets.

The net  deferred  income tax asset  (liability)  consists of the  following  at
December 31, 2004:

Net Operating Losses                 $   783,225
Valuation allowance                     (783,225)
                                     -----------
                                              --
Deferred income tax liabilities               --
                                     -----------
                                     $        --
                                     ===========

Based upon the net operating  losses  incurred since  inception,  management has
determined  that it is more  likely than not that the  deferred  tax asset as of
December  31,  2004  will  not be  recognized.  Consequently,  the  Company  has
established a valuation  allowance  against the entire  deferred tax asset.  The
allowance  for deferred tax assets  increased by  approximately  $96,000  during
2004.

As of December 31, 2004, the Company had various federal and state net operating
loss carry forward of  approximately  $2,304,000 that have initial carry forward
periods between five and twenty years.

The  utilization  of some or all of the Company's  net  operating  losses may be
severely restricted now or in the future by a significant change in ownership as
defined  under the  provisions  of Section 382 of the  Internal  Revenue Code of
1986,  as amended.  In addition,  utilization  of the Company's  California  net
operating  losses for the years  beginning  in 2002 and 2003 has been  suspended
under state law.

A reconciliation  of income taxes computed at the U.S. Federal  Statutory income
tax rate to the provision (benefit) for income taxes is as follows:

                                                        2004             2003
                                                     ---------        ---------
U.S. Federal Statutory tax at 34%                    $(244,159)       $(105,820)
State Taxes, net of federal benefit                    (43,087)         (18,674)
         Valuation Allowance                           287,246          124,494
                                                     ---------        ---------
Provision (benefit) for income taxes                 $      --        $      --
                                                     =========        =========

--------------------------------------------------------------------------------
F-21

<PAGE>

--------------------------------------------------------------------------------
                          BIOMODA, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

10.  LOSS PER COMMON SHARE

The following is a  reconciliation  of the  numerators and  denominators  of the
basic and diluted  loss per common  share  computations  for the  periods  ended
December 31:

<TABLE>
<CAPTION>
                                                               2004           2003
                                                           -----------    -----------
<S>                                                        <C>            <C>
Numerator for basic and diluted loss per
         common share:
     Net loss charged to common stockholders               $  (783,945)   $  (311,233)
Denominator for basic and diluted loss per common share:

     Weighted average number of shares                       6,928,151      6,228,060
                                                           -----------    -----------
Basic and diluted loss per common share                    $     (0.11)   $     (0.05)
                                                           ===========    ===========
</TABLE>

The Company  reported a net loss for the years ended December 31, 2004 and 2003.
As a result,  1,725,000  and  1,650,000  shares of common  stock  issuable  upon
exercise of stock  options have been excluded  from the  calculation  of diluted
loss per common share for the  respective  years  because the  inclusion of such
stock options would be antidilutive.

11. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

On November 10, 2003, the Company entered into a one-year lease agreement,  with
one year renewal options,  to lease a laboratory  facility comprised of two labs
and four  offices.  A one year renewal was  executed on November  10, 2004.  The
monthly rental payment is in the amount of approximately $2,500.

Total rent  expense for the years ended  December  31, 2004 and 2003 and for the
period from  inception  through  December  31, 2004 was  approximately  $45,400,
$9,400 and $79,000, respectively.

LEGAL MATTERS

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

--------------------------------------------------------------------------------
F-22