**U.
          S. SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
          D.C. 20549**
  **FORM
            10-KSB**
 
 ANNUAL
          REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
          1934
 
 **For
          the fiscal year ended: December 31, 2006**
 **Commission
          file No.0-24511**
  
 **ADVANCED
          OPTICS ELECTRONICS, 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
o
 
 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. o
 
 Indicate
          by check mark whether the company is a shell company (as defined in Rule
          12-b2
          of the Exchange Act) Yes oNo x
 
 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 April 16, 2007 was approximately $3,230,364 based upon the closing
            price of
            such stock on that date of approximately $ 0.0002. The number of issuer’s shares
            of Common Stock outstanding including shares issued to affiliates as
            of April
            16, 2007 was 16,163,877,749.
 
 Transitional
          Small Business Disclosure Format (check one): Yes  oNo x
   
 Table
              of Contents
  **TABLE
          OF CONTENTS**
 
 **Forward
          Looking Statements**
 **PART
          I**
  Item
                      1.
                  Description
                    of Business
                  3Item
                      2.
                  Description
                      of Property
                  10Item
                      3.
                  Legal
                    Proceedings
                  10Item
                      4.
                  Submission
                      of Matters to a Vote of Security Holders
                  10**PART
                      II**Item
                      5.
                  Market
                    for Common Equity and Related Stockholder
                    Matters
                  11Item
                      6.
                  Management's
                      Discussion and Analysis of Financial Condition
                      and Results of Operations
                  12Item
                      7.
                  Financial
                    Statements
                  F-1
                      to F-21Item
                      8.
                  Changes
                      in and Disagreements with Accountants on Accounting
                      and Financial Disclosure
                  16Item
                      8A.
                  Evaluation
                      of Controls and Procedures
                  16**PART
                      III**Item
                      9.
                  Directors
                    and Executive Officers of the
                    Registrant
                  17Item
                      10.
                  Executive
                      Compensation
                  18Item
                      11.
                  Security
                      Ownership of Certain Beneficial Owners and
                      Management and Related Stockholder Matters
                  19Item
                      12.
                  Certain
                      Relationships and Related Transactions
                  20Item
                      13.
                  Exhibits
                      List
                  20Item
                      14.
                  Principal
                      Accountant Fees and Services
                  21Signatures
  Table
              of Contents
  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.
   2
 Table
              of Contents
 
 **PART
          I**
 
 **ITEM1.
          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 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.
 
 3
 Table
              of Contents
  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 $6.8
          billion industry in 2006, which was 8% higher than the previous year. The
          billboard segment of the outdoor advertising market represents 64% of total
          outdoor expenditures and topped $4.34 billion in 2006. 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 will establish marketing arrangements
          for the distribution to retail locations after a supply has been manufactured
          and inventoried.
 
 Strategy
 
 After
          conducting extensive research in various industries, including laptop computers,
          high definition televisions and outdoor advertising billboards to determine
          which market would be best suited for producing and selling products utilizing
          our technology, we decided to concentrate our complete attention and efforts
          on
          marketing to the outdoor electronic advertising billboard industry. According
          to
          the Outdoor Advertising Association of America, advertising space was sold
          on
          approximately 372,000 billboards in 2006. 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 medium. 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.
  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.
 
 4
 Table
              of Contents
  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
          takes advantage of the recent technological convergence of billboard media,
          broadcast media and the Internet.
  Our
          principal product market consists of the outdoor advertising billboard
          industry,
          which until now has primarily relied on printed billboards for outdoor
          advertising. We believe that the user base for outdoor billboards is
          diversifying and growing as more advertisers are attracted to this medium
          of
          advertising, and this industry is experiencing rapid consolidation through
          mergers and acquisitions driven by the larger billboard companies. Our
          product
          and marketing strategy includes leveraging the underlying growth and excellent
          fundamentals of the existing outdoor advertising market. We anticipate
          that this
          strategy will also create a new segment of the outdoor advertising billboard
          market for our flat panel displays. We have completed a film that is being
          distributed as a marketing tool throughout the outdoor advertising billboard
          industry to potential purchasers of our flat panel displays both in the
          United
          States and internationally.
  In
          addition, there are other markets and applications that represent opportunities
          for additional sources of business, and we are beginning to explore these
          markets and applications, such as e-cinema, lighting sources, stadium and
          sports
          applications and systems, control and status monitoring.
  The
          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.
 
 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.
 
 We
          plan
          to outsource manufacturing of Color-Chek out to 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.
  5
 Table
              of Contents
  Customers
 
 *Panels*
 
 According
          to the Outdoor Advertising Association of America, there were approximately
          173,000 30-sheet billboards that measure approximately 12 feet by 24 feet
          and
          approximately 30,000 8-sheet billboards that measure approximately 6 feet
          by 12
          feet in the United States in 2006. 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 balance of the outdoor advertising billboard
          market is composed of smaller individual companies that nevertheless control
          prime high-traffic billboard locations and, as such, represents 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. 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 possess substantially
          greater product development capabilities and financial, technical, marketing
          or
          human resources than we do. These companies manufacture electronic displays
          that
          utilize liquid crystal displays, or passive LCD technology such as lap-top
          computer screens, and cathode ray tubes such as traditional TV set display
          technology, which currently dominate the electronic billboard market. However,
          we believe that the products based on these technologies are limited and
          new
          technologies being developed, including ours, will significantly improve
          the
          performance of electronic displays in the future and displace existing
          products
          in the electronic billboard market. Many companies, including Daktronics,
          Inc.,
          SI Diamond Technology, Inc. and Universal Display Corporation have, or
          are
          developing, other technologies utilizing carbon field emissions, incandescent
          lamps, inorganic electroluminescence, organic light emitting diodes, polymeric
          light emitting diodes, gas plasma and vacuum fluorescent lamps. Furthermore,
          although we believe our products will be superior to established advertising
          billboard products, we cannot assure you that business customers will prefer
          our
          technology sufficiently to be willing to pay for it at the price at which
          it
          will be offered. We recently set the sales prices of our flat panel displays
          measuring approximately three meters by two meters and three meters by
          eight
          meters at $395,000 and $1,490,000, respectively.
  6
 Table
              of Contents
  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:
  ·
              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;  ·
              Incandescent
                  bulbs that are high maintenance and offer poor
                  graphics;  ·
              Electromechanical
                  systems that have poor image qualities and limited colors;
                  and  ·
              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:
  ·
              The
                  brightest electronic billboard display at 35,000 nits and the widest
                  viewing angle;  ·
              The
                  smallest dot pitch for outdoor large-scale displays at eight millimeter
                  dot pitch, providing high definition television picture
                  quality;  ·
              24-bit
                  true color and full motion video at up to 120 frames per
                  second;  ·
              Broadcast
                  and simulcast applications including real-time live video and streaming
                  video feeds with operation from a remote
                  site;  ·
              Use
                  of digital visual interface, or DVI, industry standard protocol
                  for high
                  speed data linking and digital video
                  interfacing;  ·
              Satellite
                  linkage for the ability to operate multiple flat panel displays
                  from a
                  single remote site;  ·
              Modular
                  assembly in one meter increments for scaleable and shapeable architectures
                  and ease of transportability for mobile operations and use;
                  and  ·
              Weather
                  resistance for outdoor applications and a continual use life of
                  at least
                  five years.  *Color-Chek*
  There
          are
          a number of competitors in the optical recognition to speech device market.
          At
          least 11 of these companies have products on the market currently with
          several
          more that have announced plans to release products in the next few years.
          All of
          the competitors products are more expensive and in some cases less functional
          that the Company’s product Color-Chek.
 
 Intellectual
          Property and Other Proprietary Rights (Status)
 
 Advanced
          Optics holds the following patent:
 ·  Patent
          #5,198,920 relating to a Transverse Pixel Formation for Spatial Light
          Modulator..
 
 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.
 
 7
 Table
              of Contents
  Research
          and Development Activities
 
 In
          the
          year ended December 31, 2006, $ 502,222 was spent on research and development
          activities. In 2005 $422,707 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, 2006, the Company has 6 full-time employees. The Company also
          contracted with other personnel and subcontractors for various projects
          on an
          as-needed basis. The Company hired a full time controller in 2005 in order
          to
          support our efforts in meeting new reporting requirements. 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.
 
 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 main office is located at 8301 Washington St NE,
          Suite 5, Albuquerque, NM 87113. The Company’s phone number at that address is
          505-797-7878.
 
 **Biomoda**
 
 Beginning
          with its 2005 annual report on form 10-KSB, the Company has consolidated
          its
          financial statements with Biomoda, Inc.’s (Biomoda) in accordance with FIN 46,
          which became effective for years ending after December 15, 2004. The nature
          of
          Biomoda's business is substantially different from that of Advanced Optics
          Electronics, Inc. More information about Biomoda is available in Biomoda's
          2006
          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 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. 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
          developed nations of Europe, North America, and Japan. We are also pursuing
          markets in India, Russia, and Eastern Europe. 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.
 
 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 2006.  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 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.
 
 8
 Table
              of Contents
  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 would 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.
  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 $600,000 .
 
 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 $400,000 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 a minimum
          of
          $2 to $3 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 2006.  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.
          See item 6, below, for discussion of estimated costs and timetables for
          development of these tests.
 
 9
 Table
              of Contents
  **ITEM2.
          DESCRIPTION OF PROPERTY**
 
 The
          company leases its headquarters facility of approximately 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.
 
 **ITEM3.
          LEGAL PROCEEDINGS**
 
 In
          December 2004, the Company and another entity filed a lawsuit in the State
          of
          New Mexico and a companion lawsuit in the State of Nevada against several
          individuals (“the Defendants”) seeking to recover $13,500,000 for damages and
          injunctive relief arising out of the intentionally tortuous conduct of
          the
          Defendants which the Company asserted was responsible for irreparable damage
          to
          the Company, its Shareholders and the price of the Company’s openly traded
          securities.
 
 In
          April
          2005 the Company was awarded damages in the sum of $13,500,269 as a result
          of a
          two separate judgments against two of the three Defendants in the above
          referenced litigation.  The Court’s order also provides that the Defendants
          must pay the Company an additional $905,794 as pre-judgment
          interest.
 
 The
          Defendants 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 and the Company’s co-Plaintiff. These
          statements were published on public chat rooms, such as Raging Bull, as
          well as
          various Blogs.
 
 Although
          negotiations are underway to allow the Defendants to commence making payments
          in
          exchange for a reduction of the overall sum owed to the Company, ranging
          from
          fifty percent to sixty-two percent, the Company has nevertheless not accounted
          for the now $14,000,000+ judgment, or any portion of it, because the amount
          to
          be collected is still uncertain.  To be conservative, the Company has
          assigned a zero value to this asset at this time.
 
 **ITEM4.
          SUBMISSION OF MATTERS TO A VOTE OF SECURITY
          HOLDERS**
 
 None
  10
 Table
              of Contents
  
 **PART
          II**
 
 **ITEM5.
          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
                      2006:1stQuarter
                  
                  $.0012
                  
                  $.00022ndQuarter
                  
                  .001
                  
                  .00043rdQuarter
                  
                  .0005
                  
                  .00034thQuarter
                  
                  .0003
                  
                  .0002Fiscal
                      2005:1stQuarter
                  
                  .002
                  
                  .0012ndQuarter
                  
                  .001
                  
                  .00053rdQuarter
                  
                  .001
                  
                  .00024thQuarter
                  
                  .001
                  
                  .0002
   As
          of
          December 31, 2006 the Company estimates that there were approximately 10,000
          shareholders and the closing price of the Company's common stock was $.0002.
          The
          Company has never paid cash dividends on its Common Stock and does not
          anticipate paying cash dividends in the near future.
 
 Penny
          Stock
 
 Until
          the
          Company’s shares qualify for inclusion in the NASDAQ system, the public trading,
          if any, of the Company’s Common Stock will be on the OTC Bulletin Board. As a
          result, an investor may find it more difficult to dispose of, or to obtain
          accurate quotations as to the price, of the Common Stock offered. The Company’s
          Common Stock is subject to provisions of Section 15(g) and Rule 15g-9 of
          the
          Securities Exchange Act of 1934, as amended (the “Exchange Act”), commonly
          referred to as the “penny stock rule.” Section 15(g) sets for the certain
          requirements for transactions in penny stocks, and Rule 15g-9(d) incorporates
          the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange
          Act. The SEC generally defines “penny stock” to be any equity security that has
          a market price less than $5.00 per share, subject to certain exceptions.
          If the
          Company’s Common Stock is deemed to be a penny stock, trading in the shares will
          be subject to additional sales practice requirements on broker-dealers
          who sell
          penny stock to persons other than established customers and accredited
          investors. “Accredited investors” are persons with assets in excess of
          $1,000,000 or annual income exceeding $200,000 or $300,000 together with
          their
          spouse. For transactions covered by these rules, broker-dealers must make
          a
          special suitability determination for the purchase of such security and
          must
          have the purchaser’s written consent to the transaction prior to the purchase.
          Additionally, for any transaction involving 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
 
 During
          the year ended December 31, 2006, the Company issued 6,110,000,000 shares
          for
          cash of $1,280,500 and 65,000,000 shares of common stock for services valued
          at
          $13,000.
 
 As
          of
          December 31, 2006, the status of the common stock of the Company was:
          13,000,000,000 shares authorized and 12,198,836,349 shares issued and
          outstanding.
 
 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.
 11
 Table
              of Contents
  **ITEM6.
          MANAGEMENT’S DISCUSSION AND
          ANALYSIS**
 
 **Advanced
          Optics**
 
 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. Overall, the Company had negative cash flows of $11,378 for
          the year
          ended December 31, 2006 resulting from $1,621,442 used in the Company’s
          operating activities, $282,583 provided by the Company’s investing activities
          and $1,327,481 of cash provided by financing activities.
 
 Net
          cash
          used in operating activities of $1,621,442 for the year ended December
          31, 2006
          was primarily due to $2,760,547 in operating expenses, of which $1,848,124
          is
          general and administrative, $502,222 is research and development expense
          and
          $332,675 is professional fees.
 
 Net
          cash
          provided by investing activities of $282,583 for the year ended December
          31,
          2006 was primarily due to proceeds of sale of GenoMed stock of $315,392.
          In
          2005, a significantly smaller amount of cash of $119,855 was provided by
          investing, as proceeds of sales of GenoMed were $184,046.
 
 During
          the first quarter of 2004, Advanced Optics Electronics, Inc. purchased
          33,354,230 shares of GenoMed, Inc., for $900,000. This represented 17.09%
          of the
          outstanding shares of GenoMed, Inc. at that time. At December 31, 2006
          the
          Company held 4,878,000 shares. GenoMed, Inc. is a publicly traded biotech
          company working in genomics based disease management.
 
 Net
          cash
          provided by financing activities of $1,327,481 for the year ended December
          31,
          2006 was primarily due to the proceeds of $1,280,500, from the sale of
          6,110,000,000 shares of common stock.
 
 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.
  As
          of
          December 31, 2006, The Company had a marketable securities portfolio valued
          at
          $78,048.  This
          represents approximately one month of operating funds. 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.
 
 Results
          of Operations
 
 There
          are
          no expected sales of significant equipment.
 
 We
          have
          encountered many developmental 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
 
 Operating
          expenses increased by $655,482 to $2,760,547 during the year ended December
          31,
          2006 compared to $2,105,065 for the year ended December 31, 2005. Professional
          fees increased by $249,501 primarily due to greater non-administrative
          legal
          fees and research and development increased by $79,515 because of higher
          payroll
          burden. General and administrative increased by $316,792 from $1,531,332
          to
          $1,848,124 from 2005 to 2006,  due
          to an
          increase in Biomoda’s G & A, mostly from fees associated with promotion of
          its stock. 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 increased substantially
          in 2006, from $2,105,065 to $2,760,547, as explained above, by classification.
          Gain on marketable securities decreased approximately 216,000 from declining
          market value. Other income (expense) consists primarily of interest, gain
          or
          loss on marketable securities and the gain on issuance of stock in subsidiary,
          which was $671,475 in 2006 and zero in 2005.
 
 12
 Table
              of Contents
  **Biomoda,
          Inc.**
 
 Biomoda
          is a biomedical development company. The Company’s direct ownership of Biomoda,
          as of December
          31, 2006, was approximately 30%. Two officers of Advanced Optics Electronics,
          Inc. are securities holders of Biomoda in addition to the ADOT
          ownership.  On
          July
          19, 2006, Biomoda closed its offering under a revised Form SB-2 registration
          statement effective February 11, 2006 for up to 6,000,000 shares of its
          common
          stock pursuant to a registration statement on Form SB-2 (the "Registration
          Statement") under the Securities Act of 1933, as amended, declared effective
          on
          February 11, 2005. The Company’s market maker filed Form 211 with NASD
          Regulation to initiate quotations in its common stock on the OTC Bulletin
          Board.
          The request was cleared on October 19, 2006.
 
 Biomoda
          has been in the development stage since its inception 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, 2006, Biomoda had accumulated deficit
          of
          $4,908,557 and a working capital deficit of $2,105,908. 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.
 
 Liquidity
          and Capital Resources
 
 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, 2006 it had raised net proceeds of
          approximately $4,371,000, of which approximately $1,319,000 was loaned
          by ADOT
          as of December 31, 2006. 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 positive cash flows of $92 for the year ended December 31, 2006 resulting
          from $808,744 used in Biomoda’s operating activities, $25,104 used in Biomoda’s
          investing activities and $833,940 provided by financing activities. Cash
          used in
          operating activities was primarily $1,711,919 in operating expenses, of
          which
          $938,199 is general and administrative, $487,893 is research and development
          and
          $235,181 is professional fees. Cash used in investing activities was for
          payments for patents and intangibles . Cash
          provided by financing activities was due to the proceeds from a line of
          credit
          from an affiliated entity.
 
 Biomoda’s
          total assets are $243,921 at December 31, 2006. Of this, $243,140 is patent
          costs, net of accumulated amortization of $88,717. Its liabilities of 2,109,265
          primarily consist of its debt to Advanced Optics of $1,318,623 and payables
          and
          accrued liabilities of $580,050. Stockholders’
          deficit as of December 31, 2006 is $1,865,344.
 
 Results
          of Operations
 
 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, 2006, Biomoda had accumulated deficit
          of
          approximately $4,908,557 and a working capital deficit of approximately
          $2,105,908. 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
          has recorded no revenue from its inception through December 31, 2006. In
          2006,
          the net loss was $1,807,312. The loss from operations was $1,711,919 in
          2006 and
          $4,586,768 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 $487,893 in 2006 and $2,186,643 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.
 
 Operating
          expenses increased by $1,173,364 or 218% to $1,711,919 during the year
          ended
          December 31, 2006 compared to $538,555 for the year ended December 31,
          2005.
          This was due largely to significant increases in general and administrative,
          research and development and professional fee expenses.
 
 General
          and administrative expenses consist of expenses for executive and administrative
          personnel, facilities, professional services, travel and general corporate
          activities. General and administrative costs increased to $938,199 in 2006
          from
          $141,284 in 2005 for reasons discussed above. We expect general and
          administrative costs to increase in the future as our business matures
          and
          develops.
 
 13
 Table
              of Contents
  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
                  $600,000.   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 $400,000 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 a minimum
          of
          $2 to $3 million will be required
   b.
              Bladder:
                  Validation is projected to be complete by 4th 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 $200,000 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 2008. 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 $200,000 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.
  14
 Table
              of Contents
  **Inflation**
 
 Management
          believes that inflation has not had a material effect on the Company’s results
          of operations.
 
 **Accounting
          Matters**
 
 Critical
          Accounting Policies
 
 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.
 
 Research
          and Development
 
 Research
          and development costs are charged to operations as incurred. The Company
          incurred approximately $502,222, $422,707 and $3,026,578 of research and
          development expenses for the years ended December 31, 2006, 2005 and for
          the
          period from Inception through December 31, 2006.
 
 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.
 
 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 the primary beneficiary of Biomoda, Inc. because of various
          factors,
          including common ownership between the Company and Biomoda, outlined in
          FIN 46
          As a result, Biomoda is consolidated in accordance with FIN 46.
   15
 Table
              of Contents
  **ITEM7.
          CONSOLIDATED FINANCIAL STATEMENTS**
  Index
 Report
                      Of Independent Registered Public Accounting Firm
                F-1Consolidated
                    Balance Sheet
                F-2Consolidated
                    Statements of Operations
                F-3Consolidated
                    Statements of Stockholders' Equity (Deficit) and Comprehensive
                    Income
                    (Loss)
                F-4Consolidated
                  Statements of Cash FlowsYears
                  Ended December 31, 2006 and 2005 and for the PeriodFrom
                  May 22, 1996 (Inception) Through December 31, 2006
                F-5Notes
                    To Consolidated Financial Statements
                F-6




**REPORTOF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM**
 To
          the
          Board of Directors
 Advanced
          Optics Electronics, Inc.
 (A
          Development Stage Company)
 Albuquerque,
          New Mexico
 
 We
          have
          audited the accompanying consolidated balance sheet of Advanced Optics
          Electronics, Inc. (a development stage company) as of December 31, 2006,
          and the
          related consolidated statements of operations, stockholders' equity (deficit)
          and comprehensive income (loss) and cash flows for the two years then ended
          and
          for the period from May 22, 1996 (inception) to December 31, 2006. These
          financial statements are the responsibility of Advanced Optics Electronics,
          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 May 22, 1996 (inception) through December 31, 2004
          were
          audited by other auditors whose reports expressed unqualified opinions
          on those
          statements. The consolidated financial statements for the period from May
          22,
          1996 (inception) through December 31, 2004 include total revenues and net
          loss
          of $0 and $19,825,110, respectively. Our opinion on the consolidated statements
          of operations, stockholders' deficit and cash flows for the period from
          May 22,
          1996 (inception) through December 31, 2005, insofar as it relates to amounts
          for
          prior periods through December 31, 2004, 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 Advanced Optics Electronics,
          Inc. as of December 31, 2006, and the results of its operations and its
          cash
          flows for the periods described above 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. As discussed in Note 2, 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
          2. 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
 
 April
          13,
          2007






F-1





**ADVANCEDOPTICS
                ELECTRONICS, INC.****(A
                Development Stage Company)****CONSOLIDATED
                BALANCE SHEET**




**December
                  31, 2006****ASSETS****Current
                  Assets**Cash
              $
              81,140Marketable
                  securities
              
              78,086Other
                  current assets
              
              21,057Total
                  current assets
              
              180,283**Intangibles**,
                  net of accumulated amortization of $88,717
              
              201,822**Property
                  and Equipment**,
                  net of accumulated depreciation of $468,214
              
              90,495**Notes
                  receivable and deposits**
              
              58,298$
              530,898**LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIT)****Current
                  Liabilities**Accounts
                  payable
              $
              231,910Accrued
                  expenses
              
              553,849Common
                  stock subscribed
              
              45,750Advances
                  from shareholders
              
              164,842Convertible
                  debentures
              
              95,218Total
                  current liabilities
              
              1,091,569**Commitments
                  and Contingencies****Stockholders'
                  Equity (Deficit)**Preferred
                  stock, $0.001 par value, 10,000,000 shares authorized;no
                  shares issued and outstanding
              
              -Common
                  stock, $0.001 par value, 13,000,000,000 and 7,000,000,000 sharesauthorized;
                  12,198,836,349 issued and outstanding
              
              12,198,836Treasury
                  stock, at cost
              
              (27,269
              )Additional
                  paid in capital
              
              11,444,751Accumulated
                  other comprehensive income (loss)
              
              (54,042
              )Deficit
                  accumulated during the development stage
              
              (24,122,947
              )Total
                  stockholders' equity (deficit)
              
              (560,671
              )$
              530,898


See
        accompanying summary of accounting policies and
        notes
        to financial statements




F-2
 Table
          of Contents


**ADVANCEDOPTICS
          ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **Years
          Ended December 31, 2006 and 2005 and For The Period**
 **From
          May 22, 1996 (Inception) Through December 31, 2006**
  **2006**
              
              **2005**
              
              **May
                  22, 1996 (Inception) Through December 31, 2006****OPERATING
                  EXPENSES**General
                  and administrative
              
              $
              1,848,124
              
              $
              1,531,332
              
              $
              15,517,216Research
                  and development
              
              
              502,222
              
              
              422,707
              
              
              3,026,578Professional
                  fees
              
              
              332,675
              
              
              83,174
              
              
              586,230Depreciation
                  & amortization
              
              
              46,651
              
              
              52,727
              
              
              224,858Licensing
                  fees
              
              
              30,875
              
              
              15,125
              
              
              83,976Inventory
                  write-off
              
              
              -
              
              
              -
              
              
              29,293Asset
                  impairment
              
              
              -
              
              
              -
              
              
              592,884Total
                  operating expense
              
              
              2,760,547
              
              
              2,105,065
              
              
              20,061,035**LOSS
                  ON CONTRACT**
              
              
              -
              
              
              -
              
              
              2,255,944**OPERATING
                  LOSS**
              
              
              (2,760,547
              )
              
              (2,105,065
              )
              
              (22,316,979
              )**OTHER
                  INCOME (EXPENSES)**Interest
                  income
              
              
              4,042
              
              
              4,572
              
              
              88,995Realized
                  gain (loss) on marketable equity securities
              
              
              (132,363
              )
              
              84,099
              
              
              (176,192
              )Other
                  investment gains
              
              
              -
              
              
              -
              
              
              59,784Loss
                  from investment in Biomoda, Inc.
              
              
              -
              
              
              -
              
              
              (289,750
              )Gain
                  (loss) on disposal of assets
              
              
              -
              
              
              -
              
              
              (3,520
              )Gain
                  (loss) on settlement of debts
              
              
              16,064
              
              
              -
              
              
              (540,024
              )Interest
                  expense
              
              
              (40,729
              )
              
              (39,385
              )
              
              (1,364,987
              )Gain
                  on issuance of stock in subsidiary
              
              
              671,475
              
              
              -
              
              
              671,475Other
                  income
              
              
              -
              
              
              -
              
              
              551Total
                  other income (expenses)
              
              
              518,489
              
              
              49,286
              
              
              (1,553,668
              )**NET
                  LOSS BEFORE CUMULATIVE EFFECT OF CHANGE****IN
                  ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS**
              
              
              (2,242,058
              )
              
              (2,055,779
              )
              
              (23,870,647
              )**EXTRAORDINARY
                  LOSS**
              
              
              -
              
              
              -
              
              
              (189,280
              )**CUMULATIVE
                  EFFECT OF CHANGE IN ACCOUNTING****PRINCIPLE**
              
              
              -
              
              
              -
              
              
              (63,020
              )**NET
                  LOSS**
              
              
              (2,242,058
              )
              
              (2,055,779
              )
              
              (24,122,947
              )**OTHER
                  COMPREHENSIVE GAIN (LOSS)**Unrealized
                  gain (loss) on marketable securities
              
              
              (218,831
              )
              
              174,480
              
              
              (54,042
              )**COMPREHENSIVE
                  LOSS**
              
              $
              (2,460,889
              )
              $
              (1,881,299
              )
              $
              (24,176,989
              )**Basic
                  and diluted net loss available to common shareholder**
              
              $
              (0.000
              )
              $
              (0.000
              )**per
                  common share****Basic
                  and diluted weighted average common shares****outstanding**
              
              
              8,847,877,445
              
              
              4,379,768,678




See
        accompanying summary of accounting policies and
        notes
        to financial statements


F-3
 Table
          of Contents




**ADVANCEDOPTICS
                  ELECTRONICS, INC.****(A
                  Development Stage Company)****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
                  INCOME
                  (LOSS)****For
                  The Period From May 22, 1996 (Inception) Through December 31,
                  2006****Deficit****Additional**
              
              
              
              **Other**
              
              **Accumulated**
              
              **Total****Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **Treasury
                  Stock**
              
              **Paid
                  In**
              
              **N/R**
              
              **Comprehensive**
              
              **During
                  the**
              
              **Stockholders'****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Capital**
              
              **Stockholder**
              
              **Income**
              
              **Development
                  Stage**
              
              **equity
                  (deficit)****Balance
                  at May 22, 1996 (Inception)**
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Stock
                  issued to incorporators for cash
              
              
              -
              
              
              -
              
              
              500,000
              
              
              500
              
              
              -
              
              
              -
              
              
              24,500
              
              
              -
              
              
              -
              
              
              -
              
              
              25,000Stock
                  issued for the net assets of PLZTech, Inc.
              
              
              -
              
              
              -
              
              
              4,500,000
              
              
              4,500
              
              
              -
              
              
              -
              
              
              281,096
              
              
              -
              
              
              -
              
              
              -
              
              
              285,596Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (76,902
              )
              
              (76,902
              )**Balance,
                  December 31, 1996**
              
              
              -
              
              
              -
              
              
              5,000,000
              
              
              5,000
              
              
              -
              
              
              -
              
              
              305,596
              
              
              -
              
              
              -
              
              
              (76,902
              )
              
              233,694Stock
                  issued for cash and services
              
              
              -
              
              
              -
              
              
              2,281,212
              
              
              2,281
              
              
              -
              
              
              -
              
              
              362,720
              
              
              -
              
              
              -
              
              
              -
              
              
              365,001Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (84,690
              )
              
              (84,690
              )**Balance,
                  December 31, 1997**
              
              
              -
              
              
              -
              
              
              7,281,212
              
              
              7,281
              
              
              -
              
              
              -
              
              
              668,316
              
              
              -
              
              
              -
              
              
              (161,592
              )
              
              514,005Stock
                  issued for cash
              
              
              -
              
              
              -
              
              
              10,979,275
              
              
              10,979
              
              
              -
              
              
              -
              
              
              1,281,728
              
              
              -
              
              
              -
              
              
              -
              
              
              1,292,707Stock
                  issued for services
              
              
              -
              
              
              -
              
              
              2,751,000
              
              
              2,751
              
              
              -
              
              
              -
              
              
              293,719
              
              
              -
              
              
              -
              
              
              -
              
              
              296,470Stock
                  issued in exchange for note receivable
              
              
              -
              
              
              -
              
              
              315,000
              
              
              315
              
              
              -
              
              
              -
              
              
              28,685
              
              
              -
              
              
              -
              
              
              -
              
              
              29,000Purchase
                  and retirement of treasury stock
              
              
              -
              
              
              -
              
              
              (472,200
              )
              
              (472
              )
              
              -
              
              
              -
              
              
              (39,913
              )
              
              -
              
              
              -
              
              
              -
              
              
              (40,385
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (752,111
              )
              
              (752,111
              )**Balance,
                  December 31, 1998**
              
              
              -
              
              
              -
              
              
              20,854,287
              
              
              20,854
              
              
              -
              
              
              -
              
              
              2,232,535
              
              
              -
              
              
              -
              
              
              (913,703
              )
              
              1,339,686Stock
                  issued for cash
              
              
              -
              
              
              -
              
              
              8,681,624
              
              
              8,682
              
              
              -
              
              
              -
              
              
              855,101
              
              
              -
              
              
              -
              
              
              -
              
              
              863,783Stock
                  issued for services
              
              
              -
              
              
              -
              
              
              17,094,313
              
              
              17,094
              
              
              -
              
              
              -
              
              
              1,469,320
              
              
              -
              
              
              -
              
              
              -
              
              
              1,486,414Intrinsic
                  value of beneficial conversion feature of notes payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              174,610
              
              
              -
              
              
              -
              
              
              -
              
              
              174,610Fair
                  value of warrants related to notes payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              125,000
              
              
              -
              
              
              -
              
              
              -
              
              
              125,000Purchase
                  and retirement of treasury stock
              
              
              -
              
              
              -
              
              
              (489,251
              )
              
              (489
              )
              
              -
              
              
              -
              
              
              (10,643
              )
              
              -
              
              
              -
              
              
              -
              
              
              (11,132
              )Purchase
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (229,000
              )
              
              (41,760
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (41,760
              )Sale
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              85,000
              
              
              11,130
              
              
              24,334
              
              
              -
              
              
              -
              
              
              -
              
              
              35,464Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,765,862
              )
              
              (2,765,862
              )**Balance,
                  December 31, 1999**
              
              
              -
              
              
              -
              
              
              46,140,973
              
              
              46,141
              
              
              (144,000
              )
              
              (30,630
              )
              
              4,870,257
              
              
              -
              
              
              -
              
              
              (3,679,565
              )
              
              1,206,203Stock
                  issued for cash
              
              
              710
              
              
              1
              
              
              782,000
              
              
              782
              
              
              -
              
              
              -
              
              
              1,012,710
              
              
              -
              
              
              -
              
              
              -
              
              
              1,013,493Stock
                  issued for services
              
              
              -
              
              
              -
              
              
              3,955,202
              
              
              3,955
              
              
              -
              
              
              -
              
              
              1,726,197
              
              
              -
              
              
              -
              
              
              -
              
              
              1,730,152Purchase
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (63,500
              )
              
              (46,486
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (46,486
              )Sale
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              142,400
              
              
              22,542
              
              
              54,771
              
              
              -
              
              
              -
              
              
              -
              
              
              77,313Exercise
                  of stock options for notes receivable
              
              
              -
              
              
              -
              
              
              1,850,000
              
              
              1,850
              
              
              -
              
              
              -
              
              
              220,150
              
              
              -
              
              
              -
              
              
              -
              
              
              222,000Amortization
                  of discount of convertible preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              159,677
              
              
              (193,427
              )
              
              -
              
              
              -
              
              
              (33,750
              )Exercise
                  of preferred stock conversion feature
              
              
              -
              
              
              -
              
              
              9,200,000
              
              
              9,200
              
              
              -
              
              
              -
              
              
              533,678
              
              
              -
              
              
              -
              
              
              -
              
              
              542,878Issuance
                  of convertible debentures
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              263,830
              
              
              -
              
              
              -
              
              
              -
              
              
              263,830Exchange
                  of preferred stock for convertible debentures
              
              
              (710
              )
              
              (1
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (869,678
              )
              
              -
              
              
              -
              
              
              -
              
              
              (869,679
              )Intrinsic
                  value of convertible debenture
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              227,898
              
              
              -
              
              
              -
              
              
              -
              
              
              227,898De-investment
                  in Wizard Technologies
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (59,583
              )
              
              -
              
              
              -
              
              
              -
              
              
              (59,583
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,827,873
              )
              
              (3,827,873
              )**Balance,
                  December 31, 2000**
              
              
              -
              
              
              -
              
              
              61,928,175
              
              
              61,928
              
              
              (65,100
              )
              
              (54,574
              )
              
              8,139,907
              
              
              (193,427
              )
              
              -
              
              
              (7,507,438
              )
              
              446,396Stock
                  issued for cash
              
              
              -
              
              
              -
              
              
              1,382,778
              
              
              1,383
              
              
              -
              
              
              -
              
              
              66,844
              
              
              -
              
              
              -
              
              
              -
              
              
              68,227Stock
                  issued for services
              
              
              -
              
              
              -
              
              
              10,461,498
              
              
              10,461
              
              
              -
              
              
              -
              
              
              412,284
              
              
              -
              
              
              -
              
              
              -
              
              
              422,745Purchase
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (251,700
              )
              
              (16,215
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (16,215
              )Amortization
                  of discount on convertible debentures
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              143,875
              
              
              -
              
              
              -
              
              
              -
              
              
              143,875Stock
                  issued upon debt conversion
              
              
              -
              
              
              -
              
              
              7,064,886
              
              
              7,065
              
              
              -
              
              
              -
              
              
              147,008
              
              
              -
              
              
              -
              
              
              -
              
              
              154,073Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,985,142
              )
              
              (1,985,142
              )**Balance,
                  December 31, 2001**
              
              
              -
              
              
              -
              
              
              80,837,337
              
              
              80,837
              
              
              (316,800
              )
              
              (70,789
              )
              
              8,909,918
              
              
              (193,427
              )
              
              -
              
              
              (9,492,580
              )
              
              (766,041
              )Stock
                  issued for cash
              
              
              -
              
              
              -
              
              
              315,845,000
              
              
              315,845
              
              
              -
              
              
              -
              
              
              229,816
              
              
              -
              
              
              -
              
              
              -
              
              
              545,661Stock
                  issued for services
              
              
              -
              
              
              -
              
              
              115,768,000
              
              
              115,768
              
              
              -
              
              
              -
              
              
              366,301
              
              
              -
              
              
              -
              
              
              -
              
              
              482,069Purchase
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,400,000
              )
              
              (8,732
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,732
              )Sale
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              507,800
              
              
              72,887
              
              
              (65,058
              )
              
              -
              
              
              -
              
              
              -
              
              
              7,829Exercise
                  of stock options for notes receivable
              
              
              -
              
              
              -
              
              
              1,100,000
              
              
              1,100
              
              
              -
              
              
              -
              
              
              20,900
              
              
              (22,000
              )
              
              -
              
              
              -
              
              
              -Advances
                  to officer
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (34,300
              )
              
              -
              
              
              -
              
              
              (34,300
              )Reclass
                  of accrued interest with note receivable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (59,175
              )
              
              -
              
              
              -
              
              
              (59,175
              )Stock
                  issued upon debt conversion
              
              
              -
              
              
              -
              
              
              78,695,566
              
              
              78,696
              
              
              -
              
              
              -
              
              
              348,324
              
              
              -
              
              
              -
              
              
              -
              
              
              427,020Retroactive
                  application of equity method for investment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -in
                  Biomoda, Inc.
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (97,674
              )
              
              (97,674
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,285,830
              )
              
              (1,285,830
              )**Balance,
                  December 31, 2002**
              
              
              -
              
              
              -
              
              
              592,245,903
              
              
              592,246
              
              
              (1,209,000
              )
              
              (6,634
              )
              
              9,810,201
              
              
              (308,902
              )
              
              -
              
              
              (10,876,084
              )
              
              (789,173
              )Stock
                  issued for cash
              
              
              -
              
              
              -
              
              
              1,477,760,000
              
              
              1,477,760
              
              
              -
              
              
              -
              
              
              4,553,055
              
              
              -
              
              
              -
              
              
              -
              
              
              6,030,815Stock
                  issued for services
              
              
              -
              
              
              -
              
              
              367,249,994
              
              
              367,250
              
              
              -
              
              
              -
              
              
              1,464,845
              
              
              -
              
              
              -
              
              
              -
              
              
              1,832,095Purchase
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (13,250,000
              )
              
              (61,943
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (61,943
              )Sale
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,950,000
              
              
              24,846
              
              
              31,707
              
              
              -
              
              
              -
              
              
              -
              
              
              56,553Accrued
                  interest on advances to officer
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,397
              )
              
              -
              
              
              -
              
              
              (2,397
              )Cancellation
                  of stock issued for note receivable
              
              
              -
              
              
              -
              
              
              (2,950,000
              )
              
              (2,950
              )
              
              -
              
              
              -
              
              
              (241,050
              )
              
              244,000
              
              
              -
              
              
              -
              
              
              -Stock
                  issued upon debt conversion, including $67,000 of interest
              
              
              -
              
              
              -
              
              
              320,830,452
              
              
              320,830
              
              
              -
              
              
              -
              
              
              337,563
              
              
              -
              
              
              -
              
              
              -
              
              
              658,393Gain
                  on sale of available for sale securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              17,449
              
              
              -
              
              
              17,449Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,900,959
              )
              
              (3,900,959
              )Comprenhesive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,883,510
              )**Balance,
                  December 31, 2003**
              
              
              -
              
              
              -
              
              
              2,755,136,349
              
              
              2,755,136
              
              
              (4,509,000
              )
              
              (43,731
              )
              
              15,956,321
              
              
              (67,299
              )
              
              17,449
              
              
              (14,777,043
              )
              
              3,840,833Stock
                  issued for cash
              
              
              -
              
              
              -
              
              
              462,800,000
              
              
              462,800
              
              
              -
              
              
              -
              
              
              656,231
              
              
              -
              
              
              -
              
              
              -
              
              
              1,119,031Stock
                  issued for services
              
              
              -
              
              
              -
              
              
              47,200,000
              
              
              47,200
              
              
              -
              
              
              -
              
              
              207,580
              
              
              -
              
              
              -
              
              
              -
              
              
              254,780Purchase
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (9,800,000
              )
              
              (41,724
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (41,724
              )Sale
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              14,100,000
              
              
              48,260
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              48,260Stock
                  issued upon debt conversion, including $166,240 of
                  interest
              
              
              -
              
              
              -
              
              
              103,000,000
              
              
              103,000
              
              
              -
              
              
              -
              
              
              1,022,790
              
              
              -
              
              
              -
              
              
              -
              
              
              1,125,790Unrealized
                  gain (loss) on marketable securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (27,140
              )
              
              -
              
              
              (27,140
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (5,048,067
              )
              
              (5,048,067
              )Comprenhesive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,075,207
              )**Balance,
                  December 31, 2004**
              
              
              -
              
              
              -
              
              
              3,368,136,349
              
              
              3,368,136
              
              
              (209,000
              )
              
              (37,195
              )
              
              17,842,922
              
              
              (67,299
              )
              
              (9,691
              )
              
              (19,825,110
              )
              
              1,271,763Stock
                  issued for cash
              
              
              -
              
              
              -
              
              
              2,634,700,000
              
              
              2,634,700
              
              
              -
              
              
              -
              
              
              (1,487,526
              )
              
              -
              
              
              -
              
              
              -
              
              
              1,147,174Purchase
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (22,205,000
              )
              
              (15,926
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (15,926
              )Sale
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,804,000
              
              
              40,461
              
              
              (39,267
              )
              
              -
              
              
              -
              
              
              -
              
              
              1,194Expense
                  advances to officer, net of accrued interest
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              67,299
              
              
              -
              
              
              -
              
              
              67,299Stock
                  issued upon debt conversion
              
              
              -
              
              
              -
              
              
              21,000,000
              
              
              21,000
              
              
              -
              
              
              -
              
              
              10,122
              
              
              -
              
              
              -
              
              
              -
              
              
              31,122Unrealized
                  gain (loss) on marketable securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              174,480
              
              
              -
              
              
              174,480Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,055,779
              )
              
              (2,055,779
              )Comprenhesive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,881,299
              )**Balance,
                  December 31, 2005**
              
              
              -
              
              
              -
              
              
              6,023,836,349
              
              
              6,023,836
              
              
              (20,610,000
              )
              
              (12,660
              )
              
              16,326,251
              
              
              -
              
              
              164,789
              
              
              (21,880,889
              )
              
              621,327Stock
                  issued for cash
              
              
              -
              
              
              -
              
              
              6,110,000,000
              
              
              6,110,000
              
              
              -
              
              
              -
              
              
              (4,829,500
              )
              
              -
              
              
              -
              
              
              -
              
              
              1,280,500Stock
                  issued for services
              
              
              -
              
              
              -
              
              
              65,000,000
              
              
              65,000
              
              
              -
              
              
              -
              
              
              (52,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              13,000Purchase
                  of treasury stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (41,375,000
              )
              
              (14,609
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (14,609
              )Unrealized
                  gain (loss) on marketable securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (218,831
              )
              
              -
              
              
              (218,831
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,242,058
              )
              
              (2,242,058
              )Comprenhesive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,460,889
              )**Balance,
                  December 31, 2006**
              
              
              -
              
              $
              -
              
              
              12,198,836,349
              
              $
              12,198,836
              
              
              (61,985,000
              )
              $
              (27,269
              )
              $
              11,444,751
              
              $
              -
              
              $
              (54,042
              )
              $
              (24,122,947
              )
              $
              (560,671
              )




See
      accompanying summary of accounting policies and
      notes
      to financial statements




F-4
 Table
          of Contents




**ADVANCEDOPTICS
        ELECTRONICS, INC.**
 **(A
        Development Stage Company)**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **Years
        Ended December 31, 2006 and 2005 and For The Period**
 **From
        May 22, 1996 (Inception) Through December 31, 2006**


**2006**
                
                **2005**
                
                **May
                    22, 1996 (Inception) Through December 31, 2006**Cash
                    flows from operating activities:Net
                    loss
                
                $
                (2,242,058
                )
                $
                (2,055,779
                )
                $
                (24,122,947
                )Adjustments
                    to reconcile net loss to net cashused
                    in operating activities:Intrinsic
                    value of conversion features
                
                
                -
                
                
                -
                
                
                610,603Write
                    off of organization costs/goodwill
                
                
                -
                
                
                -
                
                
                63,020Extraordinary
                    loss
                
                
                -
                
                
                -
                
                
                189,280Inventory
                    write off
                
                
                -
                
                
                -
                
                
                29,293Amortization
                    of discount on convertible notes andpreferred
                    stock
                
                
                -
                
                
                -
                
                
                295,209(Gain)
                    loss on marketable securities
                
                
                131,221
                
                
                (84,099
                )
                
                175,050Loss
                    on disposal of assets
                
                
                -
                
                
                -
                
                
                3,520Loss
                    on investment in Biomoda, Inc.
                
                
                -
                
                
                -
                
                
                289,750Issuance
                    of common stock for services
                
                
                13,000
                
                
                -
                
                
                6,517,726Issuance
                    of Biomoda common stock and options for services
                
                
                -
                
                
                -
                
                
                165,000Issuance
                    of notes payable for services
                
                
                -
                
                
                -
                
                
                50,000Exchange
                    of investment securities for services
                
                
                163,350
                
                
                153,428
                
                
                316,778Increase
                    in excess of costs and earnings over billingson
                    uncompleted contract
                
                
                -
                
                
                -
                
                
                (2,050,000
                )Increase
                    in allowance for loss on contract
                
                
                -
                
                
                -
                
                
                2,050,000Loss
                    (Gain) on extinguishment of debt
                
                
                -
                
                
                -
                
                
                556,088Interest
                    accrued on convertible debentures
                
                
                -
                
                
                8,481
                
                
                317,985Interest
                    earned on note receivable from stockholder andrelated
                    parties
                
                
                -
                
                
                -
                
                
                (17,823
                )Depreciation
                    and amortization
                
                
                46,651
                
                
                52,727
                
                
                762,818Bad
                    debt expense
                
                
                -
                
                
                -
                
                
                15,000Asset
                    impairment
                
                
                -
                
                
                -
                
                
                592,884Other
                    non-cash expenses
                
                
                -
                
                
                1,476
                
                
                34,923Expense
                    advances to officer
                
                
                -
                
                
                67,299
                
                
                67,299Gain
                    on forgiveness of debt to officer
                
                
                -
                
                
                (51,351
                )
                
                (51,351
                )Changes
                    in operating assets and liabilities:Decrease
                    (Increase) in other current assets
                
                
                3,195
                
                
                (6,806
                )
                
                (15,824
                )Decrease
                    in inventory
                
                
                -
                
                
                -
                
                
                (35,293
                )(Decrease)
                    Increase in accounts payable and accrued expenses
                
                
                263,199
                
                
                180,553
                
                
                500,359Net
                    cash used in operating activities
                
                
                (1,621,442
                )
                
                (1,734,071
                )
                
                (12,690,653
                )Cash
                    flows from investing activities:Purchases
                    of property and equipment
                
                
                -
                
                
                (3,780
                )
                
                (521,860
                )Additions
                    to Patent, trademark and license fee, net of extraordinary
                    gain
                
                
                (24,064
                )
                
                (34,106
                )
                
                (138,942
                )Investment
                    in GenoMed
                
                
                
                
                
                (21,478
                )
                
                (921,478
                )Proceeds
                    from sale of GenoMed
                
                
                315,392
                
                
                184,046
                
                
                499,438Investment
                    in Biomoda, Inc.
                
                
                
                
                
                -
                
                
                (383,845
                )Proceeds
                    from sale of Biomoda, Inc. stock
                
                
                -
                
                
                -
                
                
                28,930Advances
                    to Biomoda, Inc.
                
                
                -
                
                
                -
                
                
                (38,432
                )Advances
                    from shareholders
                
                
                -
                
                
                -
                
                
                14,009Sale
                    of marketable securities
                
                
                -
                
                
                -
                
                
                192,787Purchases
                    of marketable securities
                
                
                (4,853
                )
                
                -
                
                
                (650,187
                )Cash
                    of variable entity on consolidation
                
                
                -
                
                
                -
                
                
                155Increase
                    in notes receivable
                
                
                (3,892
                )
                
                (4,827
                )
                
                (58,298
                )Purchase
                    of other assets
                
                
                -
                
                
                -
                
                
                (245,579
                )Net
                    cash provided by (used in) investing activities
                
                
                282,583
                
                
                119,855
                
                
                (2,223,302
                )Cash
                    flows from financing activities:Principal
                    repayments on notes payable and capital leases
                
                
                -
                
                
                (38,359
                )
                
                (308,346
                )Proceeds
                    from notes payable
                
                
                -
                
                
                -
                
                
                622,776Issuance
                    of common stock for cash
                
                
                1,280,500
                
                
                1,147,173
                
                
                13,751,391Issuance
                    of Biomoda common stock for cash
                
                
                -
                
                
                -
                
                
                60,000Advances
                    from Biomoda stockholders
                
                
                15,840
                
                
                -
                
                
                15,840(Increase)
                    decrease in note receivable stockholder
                
                
                -
                
                
                
                
                
                (5,422
                )Proceeds
                    from sale of treasury stock
                
                
                -
                
                
                1,194
                
                
                226,613Purchase
                    of treasury stock
                
                
                (14,609
                )
                
                (15,926
                )
                
                (288,912
                )Proceeds
                    from issuance of convertible debt
                
                
                -
                
                
                -
                
                
                1,270,965Principal
                    repayments on convertible debt
                
                
                -
                
                
                -
                
                
                (395,560
                )Incease
                    in common stock subscribed
                
                
                45,750
                
                
                -
                
                
                45,750Net
                    cash provided by financing activities
                
                
                1,327,481
                
                
                1,094,082
                
                
                14,995,095Net
                    (decrease) increase in cash
                
                
                (11,378
                )
                
                (520,134
                )
                
                81,140Cash
                    at beginning of period
                
                
                92,518
                
                
                612,652
                
                
                -Cash
                    at end of period
                
                $
                81,140
                
                $
                92,518
                
                $
                81,140Supplemental
                    disclosure of cash flow information -Cash
                    paid during the year for:Interest
                
                $
                -
                
                $
                -Income
                    taxes
                
                $
                -
                
                $
                -Non-cash
                    transactions:Stock
                    issued for debt conversion
                
                $
                -
                
                $
                31,122Unrealized
                    gain (loss) on marketable securities
                
                $
                (218,831
                )
                $
                174,480


See
        accompanying summary of accounting policies and
        notes
        to financial statements




F-5
 Table
          of Contents









**ADVANCEDOPTICS
      ELECTRONICS, INC.**


**(A
      Development Stage Company)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**







**1.
      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





***Organization
      and Nature of Operations***





Advanced
      Optics Electronics, Inc. (the “Company”) and Biomoda, Inc (“Biomoda”), a
      consolidated entity, are development stage technology companies focusing
      respectively 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 intends 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 products. 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.
      A significant amount of additional capital will be necessary to advance the
      development of our products to the point that they may become commercially
      viable. 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 2006 has not completed the initial
      product as expected. Completion of the product is now expected in the first
      half
      of 2008.





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.
      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, 2006, the Company owned 2,683,756 or 29.54% of the 9,086,253
      outstanding shares of Biomoda. Two of the Company’s officers own 9.02%,
      collectively, of Biomoda’s outstanding shares. 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 primary 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 losses, called herein as the
      variable interest entity, expected losses. Since Biomoda and the Company are
      considered entities under common control for accounting purposes, the Company
      measures the assets and liabilities of Biomoda at their carrying amounts in
      consolidation. (Note 6)




F-6
 Table
          of Contents




**ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**




Biomoda’s
      primary focus is on early cancer detection technology. Its novel cell-labeling
      technology is globally patented for the detection of pre-cancerous and cancerous
      conditions in human fluid samples and 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. Biomoda received its first patent
      in the Company’s name (patent 6,838,248) issued on January 4, 2006 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 2007.





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 the
      later
      half of 2007. 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.




***Principles
      of Consolidation***





The
      consolidated financial statements include accounts of the Company and the
      accounts of the variable interest entity, Biomoda, Inc. (Note 6), in accordance
      with FIN 46. All significant inter-company accounts and transactions have been
      eliminated in consolidation.





***Going
      Concern***





The
      accompanying financial statements have been prepared assuming that Advanced
      Optics will continue as a going concern. As discussed in Note 2 to the financial
      statements, Advanced Optics suffered losses from operations and has a working
      capital deficiency, which raises substantial doubt about its ability to continue
      as a going concern. Management’s plans regarding those matters also are
      described in the financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.





***Risks
      and Uncertainties***





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




F-7
 Table
          of Contents




**ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**


***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***





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, 2006:




**Cost
                  Basis**
              ****
              ****
              **Fair
                  Value**
              ****
              ****
              **Unrealized
                  Loss**Marketable
                securities-Common stock
              $
              132,090
              
              $
              78,048
              
              $
              54,042




Available-for-sale
      securities consist of securities in GenoMed and are carried at fair value with
      the unrealized gain or loss, net of tax, reported in accumulated other
      comprehensive income. The fair value of marketable securities was determined
      based on available market information. During the year ended December 31, 2006,
      the Company transferred 4,950,000 shares valued at $163,350 to consultants
      in
      exchange for services.





F-8
 Table
          of Contents




**** **ADVANCED
              OPTICS ELECTRONICS, INC.**
 **(A
              Development Stage Company)**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
              31, 2006**
 ****




***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, 2006, there were no such balances in excess of the
      FDIC.





***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
      supersedes SFAS 121, addresses financial accounting and reporting for the
      impairment or disposal of long-lived assets. SFAS 144 requires that long-lived
      assets be reviewed for impairment whenever events or changes in circumstances
      indicate that their carrying amounts may not be recoverable. If the cost basis
      of a long-lived asset is greater than the projected future undiscounted net
      cash
      flows from such asset (excluding interest), an impairment loss is recognized.
      Impairment losses are calculated as the difference between the cost basis of
      an
      asset and its estimated fair value. SFAS 144 also requires companies to
      separately report discontinued operations and extends that reporting to a
      component of an entity that either has been disposed of (by sales, abandonment
      or in a distribution to owners) or is classified as held for sale. Assets to
      be
      disposed are reported at the lower of the carrying amount or fair value less
      costs to sell. The provisions of this statement for assets held for sale or
      other disposal generally are required to be applied prospectively after the
      adoption date to newly initiated commitments to plan to sell such assets, as
      defined, by management. As a result, management cannot determine the potential
      effects that adoption of SFAS 144 will have on the financial statements with
      respect to future disposal decisions, if any. Although no provision for
      impairment was recorded in 2006, a year-end total loss on impairment since
      inception was $592,884. 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.





F-9
 Table
          of Contents




**** **ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**


***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 2006, the Company recorded a gain of $16,064 on
      settlement of debt. The Company has determined that gain 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.





***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 4 for additional information about patents. Costs related
      to patents pending are amortized beginning upon issuance of the related
      patents.





F-10
 Table
          of Contents


**** **ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**




***Research
      and Development Costs***





Research
      and development costs are expensed as incurred. The Company incurred
      approximately $502,222, $422,707 and $3,026,578 of research and development
      expenses for the years ended December 31, 2006 and 2005 and for the period
      from
      Inception through December 31, 2006.





***Income
      Taxes***





Advanced
      Optics recognizes deferred tax assets and liabilities based on differences
      between the financial reporting and tax bases of assets and liabilities using
      the enacted tax rates and laws that are expected to be in effect when the
      differences are expected to be recovered. Advanced Optics provides a valuation
      allowance for deferred tax assets for which it does not consider realization
      of
      such assets to be more likely than not.





***Basic
      and Diluted Net Loss Per Common Share***





Basic
      and
      diluted net loss per share calculations are presented in accordance with
      Financial Accounting Standards Statement 128, and are calculated on the basis
      of
      the weighted average number of common shares outstanding during the year. They
      include the dilutive effect of common stock equivalents in years with net
      income. Basic and diluted loss per share are the same due to the absence of
      common stock equivalents.





***Stock-Based
      Compensation***





Effective
      January 1, 2006, the Advanced Optics adopted SFAS No. 123 R,
      “Share-Based Payment,”which
      was
      issued in December 2004. SFAS No. 123R
      revises SFAS No. 123 “Accounting for Stock Based Compensation,” and
      supersedes APB No. 25, “Accounting for Stock Issued to Employees,” and its
      related interpretations. SFAS No. 123R
      requires recognition of the cost of employee services received in exchange
      for
      an award of equity instruments in the financial statements over the period
      the
      employee is required to perform the services in exchange for the award
      (presumptively the vesting period). SFAS No. 123R
      also requires measurement of the cost of employee services received in exchange
      for an award based on the grant-date fair value of the award. SFAS
      No. 123R
      also amends SFAS No. 95 “Statement of Cash Flows,” to require that excess
      tax benefits be reported as financing cash inflows, rather than as a reduction
      of taxes paid, which is included within operating cash flows. The Company did
      not grant any options during the years ended December 31, 2006 and
      2005.





Biomoda
      issues stock options to employees when and as deemed appropriate by management.
      The table in Note 11, below indicates balances and activity in these options
      for
      the last two years.




Prior
      to
      2006, Biomoda’s stock-based compensation was accounted for under the intrinsic
      value method under APB Opinion No. 25. Under this method, there was no
      compensation expense for stock granted when the underlying number of shares
      is
      known and the exercise price of the option is greater than or equal to the
      fair
      market value of the stock on the grant date. Had compensation expense been
      accounted for under the fair value method, Advanced Optics’ net loss and net
      loss per share for the year ended December 31, 2005 would have
      been:





F-11
 **ADVANCED
            OPTICS ELECTRONICS, INC.**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**


Net
                loss, as reported
            $
            (2,055,799
            )Add:
                stock-based compensation expense determined under intrinsic value
                method
            
            -Deduct:
                stock-based compensation expense determined under fair value based
                method
            
            (4,158
            )Pro
                forma net loss
            $
            (2,059,957
            )Net
                loss per share, basic and diluted:As
                reported
            $
            (0.00
            )Pro
                forma
            $
            (0.00
            )





***Comprehensive
      Income***





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





***Reporting
      Segments***





Statement
      of financial accounting standards No. 131, *Disclosures
      about segments of an enterprise and*  *related
      information* (SFAS
      No. 131), which superseded statement of financial accounting standards No.
      14, *Financial
      reporting for segments of a business enterprise* ,
      establishes standards for the way that public enterprises report information
      about operating segments in annual financial statements and requires reporting
      of selected information about operating segments in interim financial statements
      regarding products and services, geographic areas and major customers. SFAS
      No.
      131 defines operating segments as components of an enterprise about which
      separate financial information is available that is evaluated regularly by
      the
      chief operating decision maker in deciding how to allocate resources and in
      assessing performances. The Company allocates resources and assesses the
      performance based upon information from two reporting units, Advanced Optics
      Electronics, Inc. and Biomoda, Inc.





***Advertising***





The
      Company expenses the cost of advertising when incurred. Advertising costs for
      the years ended December 31, 2006 and 2005 were immaterial to the financial
      statements, and are included in general and administrative expenses in the
      accompanying statement of operations.





***Recently
      Issued Accounting Pronouncements***





Advanced
      Optics does not expect the adoption of recently issued accounting pronouncements
      to have a significant impact on Advanced Optics results of operations, financial
      position or cash flow.





F-12
 Table
          of Contents




**ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**


***Sale
      of stock by subsidiary***





When
      a
      subsidiary sells unissued shares, and in certain other situations issues shares,
      to parties other than its parent at a value in excess of the parent’s carrying
      value, a gain is reflected in the consolidated income statement of the parent.
      During 2006, Biomoda issued 722,500 shares of common stock for services valued
      at $646,475 and granted stock options valued at $35,042. Advanced Optics
      recognized a gain of $671,475, which represents the value of the issuances
      in
      excess of the carrying value.





**2.
      GOING CONCERN**





As
      shown
      in the accompanying financial statements, Advanced Optics incurred net losses
      of
      $2,242,058 and $2,055,779 for the years ended December 31, 2006 and 2005,
      respectively. In addition, the Company has an accumulated deficit of $24,122,947
      and a working capital deficit of $911,286 as of December 31, 2006. These
      conditions raise substantial doubt as to Advanced Optics ability to continue
      as
      a going concern. Management is working to raise additional through the sale
      of
      common stock. The financial statements do not include any adjustments that
      might
      be necessary if Advanced Optics is unable to continue as a going
      concern.





**3.
      PROPERTY AND EQUIPMENT**





Property
      and equipment consist of the following at December 31, 2006:




Machinery
                and equipment
            $
            386,862Furniture
                and fixtures
            
            107,183Automobiles
            
            43,313Leasehold
                improvements
            
            21,351558,709Less
                accumulated depreciation and amortization
            
            (468,214
            )$
            90,495





**4.
      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, 2006. Biomoda also pays an
      annual fee in the amount of $15,000 to renew such license agreement.





All
      patent costs are held in Biomoda. The gross carrying amount is $290,539 and
      accumulated amortization is $88,717. Patents are amortized over their useful
      lives of seventeen years. Amortization expense for 2006 is $16,817. Amortization
      expense for the Company’s intangible assets over the next five fiscal years is
      estimated to be $16,817 per year for each year.






F-13
 Table
          of Contents




**** **ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**




**5.
      RELATED PARTY TRANSACTIONS**





***Advances
      from shareholders***




***Other
      Related Party Transactions***


In
        2006,
        Biomoda received consulting services from a company controlled by a person
        related to the Vice-President in the amount of $20,850





As
      of
      December 31, 2006, Biomoda had advances and accrued interest of approximately
      $165,000 payable to two of its stockholders. Such advances historically bore
      interest at 10% per annum. Interest expense related to such advances for the
      years ended December 31, 2006 and 2005 and for the period from Inception through
      December 31, 2006 were approximately $16,000, $14,000, and $153,000
      respectively.





**6.
      INVESTMENT IN GENOMED, INC.**





On
      January 8, 2004, the Company entered into a Stock Purchase 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. At December 31, 2006, Advanced Optics owned 4,878,000 shares of GenoMed
      valued at $78,086.





**7.
      VARIABLE INTEREST ENTITY-BIOMODA, INC.**





At
      December 31, 2006, the Company owned 2,683,756 or 29.54% of the 9,086,253
      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 9%,
      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 $1,318,623 at December 31, 2006, which was
      eliminated in consolidation. During 2006, Biomoda issued 1,176,471 shares of
      its
      no par value common stock in exchange for forgiveness of $1,000,000 of the
      balance on the line of credit. The Company is consolidated in accordance with
      FIN 46 as Advanced Optics 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.





The
      accounts of Biomoda that have been consolidated with the Company as per
      Interpretation 46 of ARB 51 at December 31, 2006 are as follows:




Cash
              $
              116Other
                  current assets
              
              3,241Patents,
                  net
              
              201,822Property
                  and equipment, net
              
              6,424Accounts
                  payable
              
              150,217Accrued
                  expenses
              
              429,833Advances
                  from Biomoda stockholders
              $
              164,842


F-14
 Table
          of Contents




**ADVANCED
              OPTICS ELECTRONICS, INC.**
 **(A
              Development Stage Company)**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
              31, 2006**


From
      inception through December 31, 2006, Biomoda has generated no revenues.





**8.
      ACCRUED EXPENSES**





Accrued
      expenses consisted of the following as of December 31, 2006:




Accrued
                  payroll
              $
              333,575Payroll
                    taxes
              
              130,147Contingency
              
              20,000Accrued
                  expense
              
              40,127License
                  fees
              
              30,000$
              553,849


**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. At December 31, 2006, the balance owed, including
      accrued interest was $95,218.





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 expired in September 2006.
      Management 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. At December 31, 2006,
      all
      such warrants had expired.





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, 2006 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 for the year.





During
      the year ended December 31, 2005, the Company issued 21,000,000 shares of common
      stock for its convertible debentures. Conversion price per share shall be the
      lesser of 75% of the average of the three lowest closing bid prices during
      the
      30 trading days prior to but not including the issue date of the debentures
      and
      80% of the average of the three lowest closing bid prices during the 90 trading
      days immediately prior to but not including the conversion date, which is
      approximately $0.01 per share. These shares were valued at approximately
      $31,000. At December 31, 2006, the outstanding balance was $83,041.





The
      following table summarizes this transaction:





Shares
                issued to retire debentures
            
            21,000,000Approximate
                value per share
            $
            0.0015Total
                value of shares issued
            
            31,122Cash
                payments rendered
            
            -0-Carrying
                value of debt retired
            
            31,122Gain
                (loss) on retirement of debt
            $
            -0-




F-15
 Table
          of Contents




**ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**


**10.
      INCOME TAXES**




Advanced
      Optics uses the liability method, where deferred tax assets and liabilities
      are
      determined based on the expected future tax consequences of temporary
      differences between the carrying amounts of assets and liabilities for financial
      and income tax reporting purposes.   During 2006 and 2005, Advanced
      Optics incurred net losses and, therefore, has no tax liability.  The net
      deferred tax asset generated by the loss carry-forward has been fully
      reserved.  The cumulative net operating loss carry-forward is approximately
      $24,520,000 at December 31, 2006, and will expire in various years through
      2024.






At
      December 31, 2006, deferred tax assets consisted of the following:




Deferred
                  tax assetsNet
                  operating
                  losses
              $
              8,336,820Less: 
                  valuation
                  allowance
              
              (8,336,820
              )Net
                  deferred tax
                  asset
              $
              0


**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, 2006, there were no shares of preferred stock
      outstanding.





***Treasury
      Stock***





During
      the year ended December 31, 2006 the Company purchased 41,375,000 shares of
      its
      common stock as treasury shares for approximately $15,000. In 2005, the Company
      purchased 24,605,000 shares for approximately $16,000 and sold 1,804,000 shares
      for approximately $1,200. At December 31, 2006, the balance of treasury stock
      was $27,269.





***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 PLZTech, 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 PLZTech,
      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.






F-16
 Table
          of Contents




**** **ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**


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. 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.





F-17
 Table
          of Contents




**** **ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**




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.





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.





F-18
 Table
          of Contents




**** **ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**


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.





During
      the year ended December 31, 2005, the Company issued 1,551,700,000 shares of
      common stock for cash, which were valued at approximately $935,000.





During
      the year ended December 31, 2005, the Company issued 21,000,000 shares of common
      stock for its convertible debentures. Conversion price per share shall be the
      lesser of 75% of the average of the three lowest closing bid prices during
      the
      30 trading days prior to but not including the issue date of the debentures
      and
      80% of the average of the three lowest closing bid prices during the 90 trading
      days immediately prior to but not including the conversion date, which is
      approximately $0.01 per share. These shares were valued at approximately
      $31,000.





During
      2006, the Company issued 6,110,000,000 shares of common stock for cash
      of $1,280,500 and issued 65,000,000 shares for services valued at
      $13,000.





During
      the year ended December 31, 2006, the Company increased its authorized shares
      to
      13,000,000,000 .





***Advanced
      Optics 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 the status of the stock options outstanding at December 31, 2006
      and 2005 and the changes during the two years then ended:




**Year
                Ended December 31,****2006**
            
            
            **2005******
            **Options**
            ****
            ****
            **Weighted
                Average Price**
            ****
            ****
            **Options**
            ****
            ****
            **Weighted
                Average Price**Outstanding,
                beginning of year
            
            400,000
            
            $
            0.02
            
            
            400,000
            
            $
            0.02Granted
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            -
            
            
            -
            
            
            -
            
            
            -Cancelled/Terminated
            
            (400,000
            )
            $
            0.02
            
            
            -
            
            
            -Outstanding
                and exercisable, end of year
            
            -
            
            
            -
            
            
            400,000
            
            $
            0.02







F-19
 Table
          of Contents




**** **ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**


**Biomoda
      Stock Options**





Biomoda
      issues stock options to employees when and as deemed appropriate by management.
      The table below indicates balances and activity in these options for the last
      two years.





On
      January 1, 2006, Biomoda adopted SFAS No. 123(R), “Share-Based Payment”. SFAS
      123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R)
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the financial statements based on their
      fair
      values.





The
      weighted average fair value of the stock options granted during the years ended
      December 31, 2006 and 2005 was $0.86 and $0.90, respectively. Variables used
      in
      the Black-Scholes option-pricing model include (1) risk-free interest rates
      of
      4.4% and 4.4%, respectively, (2) expected option life is the actual remaining
      life of the options as of each period end, (3) expected volatility is 244%
      to
      772% respectively, and (4) zero expected dividends.





On
      July
      11, 2003, the two officers exercised their options for 980,000 shares of
      Biomoda'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, Biomoda 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 Biomoda 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.
      Biomoda recorded the difference of approximately $5,000 as loss on settlement
      of
      debt in 2004.





On
      September 1, 2005, Biomoda granted to an employee of ADOT options to purchase
      60,000 shares at a price of $0.90.





On
      October 18, 2006, Biomoda granted to an officer options to purchase 200,000
      shares at a price of $0.85.




**Number
                  of
                  Shares**
              
              
              **Weighted-Average
                  Exercise Price**Options
                  outstanding and exercisable at December 31, 2004
              1,405,000
              
              $
              0.21Granted
              60,000
              
              
              0.90Expired
              (50,000
              )
              
              0.50Options
                  outstanding and exercisable at December 31, 2005
              1,415,000
              
              
              0.21Granted
              200,000
              
              
              0.85Options
                  outstanding and exercisable at December 31, 2006
              1,615,000
              
              $
              0.30
 F-20
 Table
            of Contents
  **ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**




***Warrants***





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





In
      January 2002, the Company issued warrants to two directors to purchase 300,000
      shares of the Company’s common stock. 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, 2006 and 2005:


****
              **Year
                  Ended December 31,******
              **2006**
              ****
              **2005******
              **Warrants**
              ****
              **Weighted
                  Average Price**
              ****
              **Warrants**
              ****
              **Weighted
                  Average Price**Outstanding,
                  beginning of year
              800,000
              
              $0.03
              
              4,796,000
              
              $0.11Granted
              -
              
              -
              
              -
              
              -Exercised
              -
              
              -
              
              -
              
              -Cancelled/Terminated
              (800,000
              )
              0.03
              
              (3,996,000
              )
              0.13Outstanding
                  and exercisable, end of year
              -
              
              -
              
              800,000
              
              $0.03




**12.
      COMMITMENTS AND CONTINGENCIES**





***Leases***





The
      Company leases the facilities in which it operates. Payments for the office
      facility are $4,350 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 6), in which the Company
      is
      to receive $300 per month.





The
      Company leases its West Coast office. Monthly rental is $2,976. Minimum annual
      rentals subsequent to December 31, 2006 are as follows:





**Year**
              
              **Amount**2007
              
              $
              35,7122008
              
              
              35,712Total
              
              $
              71,424




F-21
 Table
          of Contents


**** **ADVANCED
          OPTICS ELECTRONICS, INC.**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**


Rental
      expense for operating leases approximated $80,000 and $63,000 for the years
      ended December 31, 2006 and 2005 respectively and approximated $470,000 for
      the
      period from Inception through December 31, 2006.




***Litigation
      and subsequent events*** ******




From
      time
      to time, the Company may be involved in various claims, lawsuits, disputes
      with
      third parties, actions involving allegations of 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
      results from operations.




The
      Company joined Biomoda, Inc. and settled a lawsuit that they and two other
      plaintiffs had filed against a former employee of Biomoda, Inc. A gain to the
      Company of $16,064 was the result of a settlement of a declaratory action filed
      in 2005 by the Company, as plaintiff and others against a former employee of
      the
      Company. A settlement in June, 2006 required the defendant and the defendant’s
      spouse to transfer 60,000 shares of the Company’s common stock to the Company.
      The settlement also required that the former employee accept $80,000 out of
      $96,064 that the Company had accrued for the defendant former employee. At
      December 31, 2006 the remaining balance to be paid to the defendant former
      employee was $20,000, payable $10,000 per month without interest. In order
      to
      enable Biomoda, Inc. to achieve this non-recurring gain and acquire 60,000
      of
      its shares for $50,000, the Company allowed 6,400,000 shares of GenoMed, Inc.
      that the Company holds as an investment to be held by the Company's attorneys
      as
      collateral to secure the payment of the remaining balance of the settlement. The
      contingency is reflected on the balance sheet .




In
      April
      2005, the Company was awarded damages in the amount of $13,500,269 as a result
      of two separate judgments in favor of the Company against two party defendants.
      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
      13.**  **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 impaired; (2) early cancer detection technology.
      The
      accounting policies of the segments are the same as those described in the
      summary of significant accounting policies. The Company evaluates performance
      based on sales, gross profit margins and operating profit before income
      taxes.





The
      following is information for the Company’s reportable segments for the years
      ended December 31, 2006 and 2005 (in thousands):




**2006**
            ****
            **2005**
            ********
            ****
            **ADOT**
            ****
            ****
            **Biomoda**
            ****
            ****
            **Total**
            ****
            ****
            **ADOT**
            ****
            ****
            **Biomoda**
            ****
            ****
            **Total**Revenue
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Loss
                on Operations
            
            
            (1,056
            )
            
            (1,705
            )
            
            (2,761
            )
            
            (1,566
            )
            
            (539
            )
            
            (2,105
            )Depreciation
                and amortization
            
            
            27
            
            
            20
            
            
            47
            
            
            32
            
            
            21
            
            
            53Interest
                expense
            
            
            7
            
            
            34
            
            
            41
            
            
            13
            
            
            26
            
            
            39Capital
                expenditure
            
            
            -
            
            
            21
            
            
            21
            
            
            4
            
            
            35
            
            
            39Net
                Loss
            
            $
            (519
            )
            $
            (1,723
            )
            $
            (2,242
            )
            $
            (1,491
            )
            $
            (565
            )
            $
            (2,056
            )





F-22
 Table
          of Contents





**ITEM8.
        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE.**
 
 In
        a
        Current Report on Form 8-K filed on February 6, 2006, we dismissed our former
        auditor, Kabani & Co., Inc. and retained Malone & Bailey, PC in a
        Current Report on Form 8-K filed on February 10, 2006, 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.
 
 **ITEM8A** . **CONTROLS
        AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
  Our
        disclosure controls and procedures are designed to ensure that information
        required to be disclosed in reports that we file or submit under the Securities
        Exchange Act of 1934 is recorded, processed, summarized and reported within
        the
        time periods specified in the rules and forms of the United States Securities
        and Exchange Commission. Our Chief Executive Officer and Chief Financial
        Officer
        have reviewed the effectiveness of our disclosure controls and procedures
        (as
        defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c))
        within the last ninety days. Based on this review, our Chief Executive Officer
        and Chief Financial Officer have concluded that such disclosure controls
        and
        procedures were not effective to ensure that information required to be
        disclosed by us in reports that we file or submit under the Exchange Act
        is
        recorded, processed, summarized and reported within the time periods specified
        in Securities and Exchange Commission rules and forms, because of several
        adjustments required by our auditors predominantly in the areas accrued
        expenses. Specifically, our auditors identified deficiencies in our internal
        controls and disclosure controls related to the expense recognition. Appropriate
        adjustments and footnote disclosures have been recorded and disclosed in
        our
        Annual Report on Form 10-KSB. We are evaluating a remediation plan to improve
        and strengthen our control processes and procedures to fully remedy these
        deficiencies. Our management and directors will continue to work with our
        auditors and other outside advisors to ensure that our controls and procedures
        are adequate and effective.
  **Changes
        in Internal Controls over Financial Reporting**
  There
        have been no changes in the Company's internal control over financial reporting
        during the last quarterly period covered by this report that have materially
        affected, or are reasonably likely to materially affect, the Company's internal
        control over financial reporting.
 
 **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.
  16
 Table
            of Contents
 **PART
        III**
 
 **ITEM9.
        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, 2006, concerning the
        Company’s directors and executive officers:
 
 **Name**
              ****
              **Age**
              ****
              **Position**
              ****
              **Since**Michael
                  Pete
              
              63
              
              President,
                  Director
              
              July
                  1994Leslie
                  S. Robins
              
              69
              
              Exec.
                  Vice Pres., Secretary, Chairman
              
              November
                  1992John
                  J. Cousins
              
              50
              
              Vice
                  President, Treasurer
              
              June
                  1999Dr.
                  Linda Obenour
              
              64
              
              Director
              
              June
                  2005
  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, PLZTech, 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, PLZTech, 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.
 
 **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, 2006, 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.
 
 17
 Table
            of Contents
  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, 2006, 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 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 2007.
 
 **ITEM10.
        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
        2004, 2005 and 2006:
 
 **Summary
        Compensation Table**
 **Annual
                    Compensation**
                
                **Long-Term
                    Compensation Awards****Other
                    Annual Compensation**
                
                **Restricted
                    Stock Award(s)**
                
                **Securities
                    Underlying Options**
                
                **LTIP
                    Payouts**
                
                **All
                    Other Compensation**Name
                    and Principal Position
                
                **Year**
                
                **Salary
                    ($)**
                
                **Bonus
                    ($)**
                
                **($)**
                
                **($)**
                
                **(#)**
                
                **($)**
                
                **($)**Michael
                    Pete, President, Director2006
                
                $
                3,0002005
                
                $
                24,0002004
                
                $
                38,500Leslie
                    S. Robins, Chairman of the Board and Exec. VP2006
                
                $
                257,103
                
                
                
                
                
                
                
                
                
                
                
                200,0002005
                
                $
                222,7672004
                
                $
                356,331John
                    J. Cousins,VP
                    Finance2006
                
                $
                109,4062005
                
                $
                109,4062004
                
                $
                112,335Dr.
                    Linda Obenour, Director
                
                
                2006
                
                
                
                
                
                
                
                $
                1,0002005
                
                
                
                
                
                
                
                $
                16,000
 18
 Table
              of Contents
 Other
        annual compensation for Dr. Obenour consists of director’s fees. The securities
        underlying options for Mr. Robins are Biomoda no par value common
        stock.
 
 OPTION
        GRANTS IN FISCAL YEAR 2006
  **Option/SAR
                    Grants in Last Fiscal Year**Individual
                    Grants(a)
                
                
                (b)
                
                
                (c)
                
                
                (d)
                
                (e)Name
                
                
                Number
                    of Securities Underlying Options/SARs Granted (#)
                
                
                %
                    of Total Options/SARs Granted to Employees in Fiscal Year
                
                
                Exercise
                    or Base Price ($/Sh)
                
                Expiration
                    DateCEO
                
                
                200,000
                
                
                82
                
                $
                0.85
                
                10/18/10ABCD
 Biomoda
        no par common stock underlie the above options.
 
 **Long-Term
        Incentive Plans**
 
 As
        of
        December 31, 2006 there is no long-term incentive plan.
 
 **Director
        Compensation**
 
 Non-employee
        directors of the Company received $1,000 in 2006 for Directors Fees.
 
 **ITEM11.
        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
        MANAGEMENT AND RELATED STOCKHOLDER MATTERS**
 
 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 31, 2007 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, 2006 there were 12,198,836,349 shares
        outstanding.
  **Name
                  of Beneficial Owner**
              ****
              **Number
                  of Shares Beneficially Owned**
              ****
              **PercentBeneficially****Owned**Leslie
                  Robins
              
              11,910,000
              
              *Michael
                  Pete
              
              175,000
              
              *John
                  Cousins
              
              150,000
              
              **All
                  directors and executive officers as a group
              
              12,060,000
              
              *
 __________________
 All
        persons in the above table own less than 1% of total shares
        outstanding.
 The
        address of all persons who are executive officers or directors of the Company
        is
        in care of the Company, 8301 Washington Street NE, Suite 5, Albuquerque New
        Mexico 87113.
 
 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.
 
 19
 Table
            of Contents
  **ITEM12.
        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
        DIRECTOR INDEPENDENCE**
 
 Investment
        In Biomoda, Inc
 
 As
        of
        December 31, 2006, the Company owned 2,683,756 or 29.54% of the 9,086,253
        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,
        2006. In compliance with FASB FIN 46, Advanced Optics Electronics, Inc. has
        consolidated its financial statements with those of Biomoda at December 31,
        2006
        and 2005.
 
 At
        December 31, 2006, the Company advanced approximately $1,319,000 to Biomoda
        under a line of credit agreement. The advances accrue interest at 5% and
        are due
        on demand.
 
 Advances
        from shareholders
 
 As
        of
        December 31, 2006, Biomoda had advances and accrued interest of approximately
        $165,000 payable to two of its stockholders. Such advances historically bore
        interest at 10% per annum. Interest expense related to such advances for
        the
        years ended December 31, 2006 and 2005 and for the period from Inception
        through
        December 31, 2006 were approximately $16,000, $14,000, and $153,000
        respectively.
 
 Director
        Independence
 
 The
        Board
        of Directors consists of Leslie Robins, Michael Pete, John Cousins and Dr.
        Linda
        Obenour. Only Dr. Obenour is independent as defined by NASD rule 4200, defining
        director independence.
 
 **ITEM13.
        EXHIBITS**
  Indexes
        to financial statements appear after the signature page to this Form
        10-KSB.
  **Exhibits**2
                Plan
                    of Acquisition, Reorganization, arrangement, liquidation, or
                    succession
                None3.1
                Articles
                    of Incorporation
                Incorporated
                    by reference to Exhibit 3(I) of the Company’s Registration Statement
                    No.1000-24511 on Form 10-SB filed June 23,1998.3.2
                By-Laws
                Incorporated
                    by reference to Exhibit 3(ii) of the Company’s Registration Statement
                    No.1000-24511 on Form 10-SB filed June 23,1998.4
                Instruments
                    defining the rights of holders, including Indentures
                Incorporated
                    by reference to Exhibit 3.27
                Opinion
                    re: liquidation preference
                Incorporated
                    by reference to Exhibit 3.210.1
                Incentive
                    Stock Option Plan
                Incorporated
                    by reference to Exhibit 10.110.2
                Lease
                    Agreement Advanced Optics Electronics, Inc. and JMP Company
                    Inc
                Incorporated
                    by reference to Exhibit 10.2 of the Company’s Registration Statement
                    No.1000-24511 on Form 10-SB filed June 23,1998.10.3
                State
                    of Nevada Corporate Charter
                Incorporated
                    by reference to Exhibit 10.3 of the Company’s Registration Statement
                    No.1000-24511 on Form 10-SB filed June 23,1998.24
                Power
                    of Attorney
                Incorporated
                    by reference to Exhibit 3.231.1
                Certification
                    of Chief Executive Officer pursuant to Section 302 of the Sarbanes
                    Oxley
                    Act of 2002
                Filed
                    Herewith31.2
                Certification
                    of Chief Financial Officer pursuant to Section 302 of the Sarbanes
                    Oxley
                    Act of 2002
                Filed
                    Herewith32.1
                Certification
                    Pursuant To 18 U.S.C. §1350, As Adopted Pursuant To Section 906 Of The
                    SARBANES-OXLEY ACT OF 2002
                Filed
                    Herewith32.2
                Certification
                    Pursuant To 18 U.S.C. §1350, As Adopted Pursuant To Section 906 Of The
                    SARBANES-OXLEY ACT OF 2002
                Filed
                    Herewith
  20
 Table
            of Contents
  **ITEM14.
        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, 2005 and 2006 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, 2005 and 2006.
 
 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, 2005 and 2006 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.
  21
 Table
            of Contents
  
 **SIGNATURES**
 
 
 In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this report on Form 10KSB to be signed on its behalf by the undersigned,
        thereunto duly authorized.
 
 
 Dated:
        April 16 , 2007
   **ADVANCED
                OPTICS ELECTRONICS, INC.**By:
              /s/ John
                J.
                CousinsJohn J. CousinsVice
                President of Finance(Principal Accounting
                Officer)
 
 **ADVANCED
                  OPTICS ELECTRONICS, INC.**By:
                /s/ Leslie
                  S.
                  RobinsLeslie S. RobinsExecutive
                  Vice President(Principal Executive
                  Officer)
   22
 Table
            of Contents