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, 2000         Commission file No. 0-24511



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


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

           8301 Washington NE, Suite 5, Albuquerque, New Mexico 87113
           (Address of principal executive offices including zip code)

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

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

Securities registered under Section 12(g) of the Exchange Act:  Common Stock,
                                                                $.001 par value
                                                                (Title of class)

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

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

The issuer's revenues for its most recent fiscal year were $202,200.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
issuer on December  31, 2000 based upon the average bid and asked prices of such
stock on that date was  $13,004,917.  The  number of  issuer's  shares of Common
Stock outstanding as of December 31, 2000 was 61,928,176.

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


<PAGE>



                                TABLE OF CONTENTS

Forward Looking Statements

                                     PART I

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

                                     PART II

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

                           PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
          Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions

                            PART IV

Item 13. Exhibits, Financial Statements and Financial Statement Schedules, and
          Reports on Form 8-K

                                   SIGNATURES


                                       2

<PAGE>

Forward - Looking Statements

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

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

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


                                     PART I


                         ITEM 1. DESCRIPTION OF BUSINESS

General

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

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

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

Products

Advanced Optics Electronics, Inc. is a technology company whose primary focus is
the development, production and sales of its electronic flat panel displays. The
primary  initial  product  will be  marketed  to  users of  outdoor  advertising
billboards.  We believe that our product line has the  potential to create a new
segment of the outdoor advertising industry. Our systems software and electronic
displays represent an innovative approach to advertising that takes advantage of
the recent  technological  convergence of broadcast and billboard  media and the
World Wide Web.



                                       3
<PAGE>

Our goal is to create a product line based on  technology  that is scalable both
in terms of size and resolution to meet a wide range of requirements  related to
site,  economics  and  use  from  our  potential  customers.  We also  plan  the
development of a leasing program and an Owned & Operated group.

The major advantages and features of the Display are:

     o    Brightest display ever available (35,000 nits)

     o    Widest viewing angle available

     o    Smallest dot pitch  available for outdoor  large-scale  displays (8 mm
          dot pitch)

     o    High definition picture quality

     o    Modular  assembly (1 meter  increments)  for  scaleable  and shapeable
          architectures

     o    True Color (24 bit)

     o    Full motion video (up to 120 frames per second)

     o    Transportable for mobile operations

     o    Weather resistant for outdoor applications

     o    Modest power requirements

     o    Minimum 5 year continual use lifetime

     o    Real-time live video feeds

     o    Broadcast/simulcast applications

     o    Supports streaming video

     o    Uses  industry  standard  DVI protocol for high speed data linking and
          digital video interfacing

     o    Satellite linkable

Proprietary Billboard software capabilities are:

     o    Manage and update display content remotely

     o    Works with all image file formats and digital  video  editors

     o    Secure Internet or WAN communications

     o    WEB-based  status  monitoring

     o    Provides time, temperature and other dynamic content inserts

The company has recently set the price for its units at $395,000 and  $1,490,000
respectively  for its 2 meter x 3  meter  and its 3 meter x 8 meter  flat  panel
displays.


Marketing

After researching  various markets including laptop computers,  HDTV flat screen
industries,  and  Outdoor  Advertising/Billboards,  management  has  decided  to
concentrate  its full  efforts and  attention  on  marketing  to the  Electronic
Outdoor  Advertising/Billboards  industry.  The Billboard segment of the outdoor
advertising market exceeds $2 Billion per year.

According to the Outdoor Advertising Association of America, Inc., total outdoor
advertising  revenues were $5.2 billion in the year 2000. Up a healthy 8 percent
from the prior year.  The industry  revenue is projected to grow by nearly 10% a
year.

Management  believes that, due to the Highway  Beautification Act, the number of
billboards  nationwide will not increase  dramatically but should remain stable.
Advertisers  will  place  increased  focus  on  securing



                                       4
<PAGE>

and developing  prime billboard  locations.  The customer base for billboards is
diversifying  as more  advertisers  are  attracted to this media.  The billboard
industry is experiencing  rapid  consolidation  through mergers and acquisitions
driven by the top providers.  Management's market penetration  analysis is based
on capturing existing sites in a stable market.

It is anticipated that the company's product and marketing  strategy will create
a new segment of the outdoor  advertising market while leveraging the underlying
growth  and  excellent  fundamentals  of the  existing  market.  There are other
markets and  applications  that represent  opportunities  and are being explored
such as e-cinema, lighting sources, stadium and sports applications and systems,
control and status monitoring.

The  company  has  completed a  marketing  film that is being  distributed  on a
national and international basis. The recipients who would receive this film are
institutional  investors  and  qualified  potential  buyers  of the  flat  panel
displays.

Revenues will be derived from a combination of direct sales,  owned and operated
billboards, leasing, licensing, and partnerships.

Customers

Over the past ten years,  there has been  considerable  consolidation in Outdoor
Advertising.   The  four   leaders  in  the  industry   currently   account  for
approximately  48% of the billboard  market.  Media  companies  have been buying
billboard  owners in order to offer  packages  of TV,  radio and newly  acquired
outdoor  space  to  advertisers.  The top  ten  companies  represent  61% of the
billboard market. The 39% that constitutes the balance of the market is composed
of smaller  individual  companies that nevertheless  control prime  high-traffic
billboard  locations  and, as such,  represent a  significant  component  of our
target market.

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

Competition

Advanced  Optics  Electronics,  Inc. will compete against  established  forms of
electronic  display  technology.  Management  believes that its planned products
will be superior to these established products. Management nevertheless believes
that its products and technologies will be subject to substantial competition as
the market and technologies evolve.

The Company will compete with the existing  Billboard display techniques of hand
painted  or  printed  and  pasted  signs.  Recently,  the trend has been  toward
creating the art  digitally,  but these images are still printed on large sheets
and  pasted up in the same  manner as before  World War I.  Management  believes
these forms of billboard  presentations  will, in the future,  only be viable in
low density/low traffic areas.

Approximately  65% of billboards were booked on 12-month  contracts.  This could
potentially  limit the access to desirable  sites  during the  start-up  period.
However, the trend is to go to shorter-term contracts.

Research and Development Activities

In fiscal 2000,  which ended  December 31, 2000,  $732,029 was spent on research
and development


                                       5
<PAGE>

activities.  In 1999 $239,029 was spent on research and development  activities.
The expenditures are primarily the result of costs associated with the Company's
increased efforts in developing its proprietary flat panel display.

Employees

As of December 31, 2000, the Company has  approximately  11 full-time  employees
and one part-time employee. The Company also contracted with other personnel and
subcontractors for various projects on an as-needed basis.

ITEM 2. DESCRIPTION OF PROPERTY

The company increased its headquarters  facility to 7,500 square feet from 5,000
square feet at 8301 Washington NE, Suite 5 in Albuquerque, New Mexico during the
year. This includes the executive offices, research and development facility and
manufacturing  plant. The facility is in good condition with no material defects
or deferred maintenance.  The facility is leased from unaffiliated third parties
under a lease that was  extended and now expires  February 28, 2002.  Management
believes that its existing  facility space  currently  under lease is sufficient
for its current activities and potential growth in the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

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

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

There were no matters  submitted  to a vote of the  Company's  security  holders
during the fourth quarter of the fiscal year ended December 31, 2000.


                                       6
<PAGE>



                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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

                                            Common Stock Bid
------------------------------ ------------------------ --------------------
                                       High                    Low
------------------------------ ------------------------ --------------------
Fiscal 1999:
------------------------------ ------------------------ --------------------
                  1st Quarter                     $.16                 $.05
------------------------------ ------------------------ --------------------
                  2nd Quarter                      .12                 .065
------------------------------ ------------------------ --------------------
                  3rd Quarter                      .49                .0825
------------------------------ ------------------------ --------------------
                  4th Quarter                     .875                  .25
------------------------------ ------------------------ --------------------
Fiscal 2000:
------------------------------ ------------------------ --------------------
                  1st Quarter                    $1.53                $.687
------------------------------ ------------------------ --------------------
                  2nd Quarter                     1.09                 .406
------------------------------ ------------------------ --------------------
                  3rd Quarter                      .60                 .285
------------------------------ ------------------------ --------------------
                  4th Quarter                      .46                  .21
------------------------------ ------------------------ --------------------


As of  December  31, 2000 the Company  estimates  that there were  approximately
13,000 shareholders directly and in street name. The Company has never paid cash
dividends on its Common Stock and does not  anticipate  paying cash dividends in
the near future.

ITEM 6.  MANAGEMENT DISCUSSION AND ANALYSIS

Liquidity and Capital Resources

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

BioModa is a biomedical development company. The Company's ownership of BioModa,
as of December 31, 2000, was 16.4%.  No immediate  family members of officers or
directors  of  Advanced  Optics  Electronics,  Inc.  are  securities  holders of
BioModa.

It is believed that sales of securities will provide adequate capital  resources
to meet the anticipated  developmental stage requirements through the first half
of fiscal year 2001. At that time it is anticipated  that sales of displays will
begin and contribute to operating revenues.



                                       7
<PAGE>

During the fiscal  year  ended  December  31,  2000  $176,608  was spent for the
purchase of equipment.  Product development  expenditures were $732,029 in 2000.
Funds for operations, product development and capital expenditures were provided
from the sale of securities and cash reserves.

In August 1998 Advanced Optics Electronics,  Inc. entered into a lease agreement
for the  financing of equipment  for the  development  of its flat panel display
systems. The Company is required to repay the $101,000 in equal monthly payments
of the lease.  Monthly payments on the lease are approximately  $2,850. The term
of the  lease is 3 years  and is backed  by the  credit  of the  Company.  As of
December 31, 2000, the balance on the lease is $22,800.

Results of Continuing Operations

Fiscal 2000 Compared to Fiscal 1999

Revenue.  Since our  inception,  we have been in the  development  and prototype
stage and have had only limited revenue.  Contact revenues decreased to $202,200
in 2000 from $310,345 in 1999 due to  conservative  estimates on the  percentage
completion on the contract and the associated revenues that were booked.

Product Development. Product development expenses consist primarily of personnel
expenses,  consulting fees and depreciation of the equipment associated with the
development and enhancement of our flat panel displays. Research development and
technical  costs  increased  to  $732,029  in 2000 from  $239,029  in 1999.  The
increase in these costs is due primarily to increased  research and  development
efforts  and  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.

General and  Administrative.  General  and  administrative  expenses  consist of
expenses for executive and administrative  personnel,  facilities,  professional
services,  travel,  general  corporate  activities,  and  the  depreciation  and
amortization  of  office  furniture  and  leasehold  improvements.  General  and
administrative costs increased to $2,340,179 in 2000 from $1,952,600 in 1999 due
to increases in salary expense  related to increased  personnel and increases in
professional fees. Due to the growth of our business and continuing expansion of
our staff, we expect general and administrative costs to increase in the future.
The costs  associated with being a publicly traded company and future  strategic
acquisitions will also be a contributing factor to increases in this expense.

Other Income  (Expense).  Other income (expense)  consists of interest and other
income and expense. Interest income increased to $18,614 in 2000 from $10,865 in
1999. The increase in interest  income was due to an increase in our average net
cash and cash equivalents  balance.  Interest  expense  increased to $459,027 in
2000 from $189,374 in 1999. The increase in interest expense is due primarily to
non-cash  charges to interest  expense from the  accounting  calculation  of the
intrinsic  value  of  the  conversion  feature  of  the  convertible   debenture
financings that were done during 2000.

Fiscal 1999 Compared to Fiscal 1998

Revenues  increased to $310,345 in 1999 from $178,200 in 1998.  The increase was
due primarily to revenues from the contract in place.

Research  development  and  technical  costs  increased to $239,029 in 1999 from
$148,123 in 1998.  The increase in these costs is due  primarily to research and
development efforts.



                                       8
<PAGE>

General and  administrative  costs increased to $1,952,600 in 1999 from $490,296
in 1998 due to increases in salaries  related to increases in engineering  staff
and increases in professional fees.

Accounting Matters

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

ITEM 7.   FINANCIAL STATEMENTS

The financial statements and notes thereto,  together with the report thereon of
Atkinson & Co.,  Ltd.  (the  Company's  accountants)  dated  February  23, 2001,
included  elsewhere in this report,  are  incorporated by reference in answer to
this Item 7.

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

The Company changed accountants from Neff & Ricci to Atkinson & Co., Ltd. in the
first quarter of 2001 prior to the  preparation  of the 2000 audit.  The Company
filed an 8K disclosing the change.


                                       9
<PAGE>



                                    PART III

ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth  information,  as of December 31, 2000,  concerning the
Company's directors and executive officers:

Name                 Age   Position                                Since
Michael Pete         55    President, Treasurer, Director          July 1994
Leslie S. Robins     62    Exec. Vice Pres., Secretary, Chairman   November 1992
John J. Cousins      44    Vice President-Finance                  June 1999
Harold C. Herman     75    Director                                December 1998
Richard Josephberg   54    Director                                April 2000

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

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

John J.  Cousins,  Vice  President of Finance - 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 holds  undergraduate  degrees  from Boston  University  and the
Lowell Institute School at MIT.

Harold C. Herman has been a director of the Company since December 1998. He is a
member of the State Bar in New York and  California.  From 1980 to the  present,
Mr.  Herman has been general  partner of numerous  limited  partnerships  owning
commercial  properties,  including  apartment  complexes,  shopping  centers and
malls,  in the  Northeastern  area of the United States.  From 1969 to 1980, Mr.
Herman was a senior partner of the law firm of Herman,  Mcginnis and Kass Esqs.,
located in New York City,  handling  business and legal matters relating to real
estate,  corporations  and securities  law. Mr. Herman has a B.S. in Physics and
B.E.E.  in  Electrical  Engineering  from City  College of New York,  an M.S. in
Applied  Mathematics  from New York  University and an L.L.D.  from Brooklyn Law
School.

Mr.  Josephberg has been a member of our Board of Directors  since April,  2000.
From 1986 to the present,


                                       10
<PAGE>

Mr.  Josephberg has been a principal in the investment and merchant banking firm
of  Josephberg  Grosz & Co.,  Inc.  in New York  City.  From  1980 to 1984,  Mr.
Josephberg  was a  member  of the New  York  Stock  Exchange.  He has a B.A.  in
business  administration from the University of Cincinnati and has completed all
the coursework towards an M.B.A. from Bernard Baruch College.

ITEM 10.   EXECUTIVE COMPENSATION

The following table discloses the annual and long-term  compensation  earned for
services  rendered in all capacities by the Company's  Chairman of the Board and
President and the Company's other most highly compensated executive officers for
1998, 1999 and 2000:

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
------------------- --------- ----------------------------------------- --------------------------- ----------- -----------------
                              Annual Compensation                         Long-Term Compensation
                                                                                  Awards
------------------- --------- ------------- ----------- --------------- ---------------- ---------------  ----------- --------------
                                                        Other Annual      Restricted     Securities      LTIP          All Other
                                                        Compensation    Stock Award(s)   Underlying      Payouts      Compensation
                                                        (1)                              Options
------------------- --------- ------------- ----------- --------------- ---------------- ---------------  ----------- --------------
<S>                        <C>        <C>            <C>           <C>           <C>        <C>            <C>         <C>
     Name and                  Year   Salary ($)      Bonus ($)         ($)             ($)   (#)               ($)           ($)
     Principal Position
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
     Michael Pete,
     President,
     Director
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
                               2000         $38,700      --            --              --         275,000       --            --
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
                               1999         $36,000      --            --            $7,350       800,000       --            --
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
                               1998         $30,000      --            --              --            --         --            --
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
     Leslie S. Robins,
     Chairman of the
     Board and Exec. VP
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
                               2000         $82,830      --          $8,986(1)         --       4,850,000       --            --
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
                               1999        $109,340      --          $7,352(1)     $131,915     5,000,000       --            --
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
                               1998         $67,600      --          $2,448(1)         --            --         --            --
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
     John J. Cousins,
     VP Finance
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
                               2000         $95,072      --            --              --         400,000       --            --
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
                               1999         $41,495      --            --            $3,375       300,000       --            --
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
                               1998            --        --            --              --            --         --            --
     -------------------   --------   -------------   -------      --------      ----------  ------------  ---------   -----------
</TABLE>

(1) Represents the amount of an automobile lease for the benefit of Mr. Robins.



                                       11
<PAGE>


OPTION GRANTS IN FISCAL YEAR 2000

<TABLE>
<CAPTION>
Name                    Number of             % of Total Options
                        Securities            Granted to
                        Underlying Options    Employees in           Exercise Price
Name                    and Warrants          Fiscal Year(1)         ($/Sh)                Expiration Date
----------------------- --------------------- --------------------   --------------------- --------------------
<S>                                <C>                     <C>                      <C>             <C>
Michael Pete                         275,000                4.62%                   $0.34           10/18/2004
----------------------- --------------------- --------------------   --------------------- --------------------
Leslie Robins                      1,900,000               31.93%                   $0.34           10/18/2004
----------------------- --------------------- --------------------   --------------------- --------------------
Leslie Robins                      2,000,000               33.61%                   $0.37             8/9/2005
----------------------- --------------------- --------------------   --------------------- --------------------
Leslie Robins                        950,000               15.97%                   $0.34           10/18/2005
----------------------- --------------------- --------------------   --------------------- --------------------
John Cousins                         300,000                5.04%                   $0.34           10/18/2004
----------------------- --------------------- --------------------   --------------------- --------------------
John Cousins                         100,000                1.68%                   $0.34           10/18/2005
----------------------- --------------------- --------------------   --------------------- --------------------
</TABLE>
-------------------
(1)  We granted options for an aggregate of 2,775,000 shares to our officers and
     key  employees  during the fiscal  year ended  December  31,  2000,  and we
     granted  warrants for an aggregate  of 3,175,000  shares  during the fiscal
     year ended December 31, 2000 for a total of 5,950,000.


                 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2000
                     AND OPTION VALUES AT DECEMBER 31, 2000

The following table provides summary information concerning the shares of common
stock  represented  by  outstanding  stock  options held by our Chief  Executive
Officer and two other executive officers as of December 31, 2000.

                             Year-End Option Values

<TABLE>
<CAPTION>
                                                         Number of Securities Underlying          Value of Unexercised
                                                               Unexercised Options                In-the-Money Options
                                                               December 31, 2000(1)               December 31, 2000(1)
                       Shares Acquired   Value         ----------------------------------     ----------------------------------
Name                   on Exercise (#)   Realized ($)  Exercisable (#)   Unexercisable (#)    Exercisable ($)   Unexercisable ($)
----                   ---------------   ------------  ---------------   -----------------    ---------------   -----------------
<S>                       <C>              <C>                <C>               <C>               <C>                  <C>
Michael Pete                                                575,000             ---               $130,000             ---
Leslie Robins             1,850,000        $715,500       2,050,000             ---               $445,500             ---
John Cousins                                                600,000             ---                $42,000             ---
</TABLE>

-------------------
(1)  The value of the  unexercised  "in-the-money"  options is based on the fair
     market  value as of December  31, 2000 (the  closing  price on 12/29/00 was
     $0.21)  minus the  exercise  price,  multiplied  by the  numbers  of shares
     underlying the option.

                            LONG-TERM INCENTIVE PLANS

As of December 31, 2000 there is no long-term incentive plan.


                                       12
<PAGE>

                              Director Compensation

Non-employee  directors of the Company  received in 2000 a $1500 annual retainer
and $1500 for each board meeting attended.


ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  following  table sets forth certain  information  known to the Company with
respect to beneficial ownership of the Company's Common Stock as of December 31,
2000 by (1) each person known to the Company to beneficially  own more than five
percent  of the  Company's  Common  Stock,  (2)  each  Director,  (3) the  Named
Executive  Officers,  and (4) all Directors  and executive  officers as a group.
Unless otherwise  indicated in the footnotes to the table, the beneficial owners
named have, to the knowledge of the Company,  sole voting and  investment  power
with respect to the shares  beneficially  owned,  subject to community  property
laws where  applicable.  As of December  31, 2000 there were  61,848,881  shares
outstanding.


                                                                     Percent
                                              Number of Shares     Beneficially
       Name of Beneficial Owner (1)           Beneficially Owned      Owned
-----------------------------------------     ------------------   ------------
Leslie Robins                                    11,006,500(2)         17.80%
Michael Pete                                      1,250,000(3)          2.02%
John Cousins                                        850,000(4)          1.37%
Harold Herman                                       975,000(5)          1.58%
Richard A. Josephberg                               200,000(6)             *
All directors and executive officers
as a group (5 persons)                           14,281,500

-------------------
*    Less than 1.0%.

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

(2)  Includes 2,050,000 shares of common stock issuable upon exercise of options
     which are  currently  exercisable,  and  5,950,000  shares of common  stock
     issuable upon exercise of warrants which are currently exercisable.

(3)  Includes  575,000  shares of common stock issuable upon exercise of options
     which are currently exercisable and 500,000 shares of common stock issuable
     upon exercise of warrants which are currently exercisable.

(4)  Includes  600,000  shares of common stock issuable upon exercise of options
     which are currently exercisable and 100,000 shares of common stock issuable
     upon exercise of a warrant which is currently exercisable.

(5)  Includes  225,000  shares of common stock issuable upon exercise of options
     which are currently exercisable and 600,000 shares of common stock issuable
     upon exercise of warrants which are currently exercisable.

(6)  Includes 125,000 shares of common stock issuable upon exercise of a warrant
     which is currently exercisable.


                                       13
<PAGE>

      COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities  Exchange Act of 1934, as amended,  requires our
officers and directors,  and persons who own more than 10% of a registered class
of our equity  securities to file with the  Securities  and Exchange  Commission
reports  detailing their ownership of existing equity  securities and changes in
such  ownership.  Officers,  directors  and greater  than 10%  stockholders  are
required by the  Securities  and Exchange  Commission  regulations to furnish us
with copies of all filed Section 16(a) forms.

Based  solely on review of the copies of such forms  furnished to us, we believe
that all officers, directors and greater than 10% stockholders complied with the
filing  requirements  of Section  16(a),  except that Mr. Pete filed two reports
late with respect to ten  transactions,  Mr.  Robins filed two reports late with
respect to  twenty-four  transactions,  Mr.  Cousins filed two reports late with
respect to nine transactions,  Mr. Herman filed two reports late with respect to
twenty-one  transactions,  Mr. Josephberg filed two reports late with respect to
three  transactions,  and a former  director  and  former  10%  stockholder  who
resigned in November 1998 and is no longer available never filed any reports.


ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In 1998 the Company issued 315,000 shares to Leslie S. Robins, an officer of the
Company,  in exchange for a note receivable of $29,000.  The note bears interest
at the rate of 7% with interest due  semiannually  and the principal due July of
2001.  In June 2000,  we issued to Leslie  Robins,  our  Chairman  of the Board,
Executive Vice President and Secretary,  1,000,000 shares of Common Stock as the
result of exercising  options with an exercise  price of $0.12 in exchange for a
promissory note in the principal amount of $120,000.  The note bears interest at
10% per annum due  quarterly  and the  principal is due in June 2003.  In August
2000,  we issued to Mr. Robins  450,000  shares of Common Stock as the result of
exercising  options with an exercise price of $0.12 in exchange for a promissory
note in the principal  amount of $54,000.  The promissory note bears interest at
10.0%  per annum due  quarterly  and the  principal  is due in August  2003.  In
September  2000, we issued to Mr. Robins  400,000  shares of Common Stock as the
result of exercising  options with an exercise  price of $0.12 in exchange for a
promissory  note in the principal  amount of $48,000.  The promissory note bears
interest at 10.0% per annum due  quarterly and the principal is due in September
2003.


                                       14
<PAGE>

                                     PART IV

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

Financial Statements and Financial Statement Schedules

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



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

                               Reports on Form 8-K

During the 2000 fiscal year, the Company filed no reports on Form 8-K.


                                       15
<PAGE>

                   Appendix A to Item 601(c) of Regulation S-B
                       Commercial and Industrial Companies
                           Article 5 of Regulation S-X

<TABLE>
<CAPTION>
      Item Number                              Item Description                                       Amount
------------------------   --------------------------------------------------------------   -----------------------------
<S>                        <C>                                                              <C>
5-02(1)                    Cash and cash items                                                                  $516,713
------------------------   --------------------------------------------------------------   -----------------------------
5-02(2)                    Marketable securities                                                                     N/A
------------------------   --------------------------------------------------------------   ----------------------------
5-02(3)(a)(1)              Notes and accounts receivable-trade                                                  $672,872
------------------------   --------------------------------------------------------------   ----------------------------
5-02(4)                    Allowances for doubtful accounts                                                          N/A
------------------------   --------------------------------------------------------------   ----------------------------
5-02(6)                    Inventory                                                                                 N/A
------------------------   --------------------------------------------------------------   ----------------------------
5-02(9)                    Total current assets                                                               $1,189,585
------------------------   --------------------------------------------------------------   ----------------------------
5-02(13)                   Property, plant and equipment                                                        $447,699
------------------------   --------------------------------------------------------------   ----------------------------
5-02(14)                   Accumulated depreciation                                                           ($182,714)
------------------------   --------------------------------------------------------------   ----------------------------
5-02(18)                   Total assets                                                                       $2,736,557
------------------------   --------------------------------------------------------------   ----------------------------
5-02(21)                   Total current liabilities                                                            $358,407
------------------------   --------------------------------------------------------------   ----------------------------
5-02(22)                   Bonds, mortgages and similar debt                                                  $1,215,677
------------------------   --------------------------------------------------------------   ----------------------------
5-02(28)                   Preferred stock-mandatory redemption                                                      N/A
------------------------   --------------------------------------------------------------   ----------------------------
5-02(29)                   Preferred stock-no mandatory redemption                                                   N/A
------------------------   --------------------------------------------------------------   ----------------------------
5-02(30)                   Common stock                                                                          $61,928
------------------------   --------------------------------------------------------------   ----------------------------
5-02(31)                   Other stockholder's equity                                                          8,322,586
------------------------   --------------------------------------------------------------   ----------------------------
5-02(32)                   Total liabilities and stockholder's equity                                         $2,736,557
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)1(a)                Net sales of tangible products                                                       $202,200
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)1                   Total revenues                                                                       $202,200
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)2(a)                Cost of tangible goods sold                                                        $3,658,591
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)2                   Total costs and expenses applicable to sales and revenues                          $3,658,591
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)3                   Other costs and expenses                                                             $386,744
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)5                   Provision for doubtful accounts and notes                                                 N/A
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)8                   Interest and amortization of debt discount                                         ($459,027)
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)10                  Income before taxes and other items                                              ($3,843,135)
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)11                  Income tax expense                                                                        N/A
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)14                  Income/loss continuing operations                                                ($3,456,391)
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)15                  Discontinued operations                                                                   N/A
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)17                  Extraordinary items                                                                       N/A
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)18                  Cumulative effect-changes in accounting principals                                        N/A
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)19                  Net income or loss                                                               ($3,199,935)
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)20                  Earnings per share -- primary                                                         ($0.055)
------------------------   --------------------------------------------------------------   ----------------------------
5-03(b)20                  Earnings per share -- fully diluted                                                        N/A
------------------------   --------------------------------------------------------------   ----------------------------
</TABLE>


                                       16
<PAGE>

                                   SIGNATURES


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


Dated:    March 21, 2001

ADVANCED OPTICS ELECTRONICS, INC.

                                  BY:/s/John J. Cousins
                                  John J. Cousins
                                  Vice President of Finance
                                  (Principal Accounting Officer)


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

                                       17
<PAGE>


FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS'

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

                                December 31, 2000


                                       18
<PAGE>

                                 C O N T E N T S



                                                                            Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS...................................................................1

FINANCIAL STATEMENTS

     BALANCE SHEET............................................................2

     STATEMENTS OF OPERATIONS.................................................3

     STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY.............................4

     STATEMENTS OF CASH FLOWS...............................................6-7

     NOTES TO FINANCIAL STATEMENTS.........................................7-22


                                       19
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
Advanced Optics Electronics, Inc.
(A Development Stage Company)

We have audited the accompanying  balance sheet of Advanced Optics  Electronics,
Inc. (A  Development  Stage  Company),  as of December 31, 2000, and the related
statements of operations,  changes in stockholders'  equity,  and cash flows for
the year then ended.  These financial  statements are the  responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial  statements based on our audit.  The financial  statements of Advanced
Optics  Electronics,  Inc.  as of  December  31,  1999,  and for the year  ended
December 31, 1999, and for the 1996,  1997, 1998 and 1999 portions of the period
from inception (May 22, 1996) through  December 31, 1999,  were audited by other
auditors  whose reports dated  February 18, 2000 and February 5, 1998  expressed
unqualified opinions on those statements.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Advanced Optics  Electronics,
Inc. (A  Development  Stage Company) as of December 31, 2000, and the results of
its  operations and its cash flows for the year ended December 31, 2000, and for
the 2000 portion of the period from  Inception  (May 22, 1996) through  December
31, 2000, in conformity with generally accepted accounting principles.



                                                            Atkinson & Co., Ltd.
Albuquerque, New Mexico
February 23, 2001



<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

BALANCE SHEET

                                December 31, 2000

                                     ASSETS

CURRENT ASSETS
  Cash and cash equivalents                        $409,287
  Certificates of deposit                           107,426
  Costs and estimated earnings in excess of
    billings on uncompleted contract                672,872
                                                 ----------

          Total current assets                    1,189,585
                                                 ----------

PROPERTY AND EQUIPMENT, net                         259,175
                                                 ----------

DEFERRED TAX ASSET                                  643,200
                                                 ----------

OTHER ASSETS
  Intangible assets, net                            318,727
  Investment in Bio Moda, Inc.                      207,335
  Other assets                                       74,042
  Note receivable from officer and shareholder       44,493
                                                 ----------

          Total other assets                        644,597
                                                 ----------


          Total assets                           $2,736,557
                                                 ==========



<PAGE>


<TABLE>
<CAPTION>
  LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                            <C>
CURRENT LIABILITIES
  Accounts payable                                                             $198,186
  Accrued liabilities                                                            18,040
  Current portion of long-term
    obligations                                                                  49,799
  Allowance for loss on contract                                                 92,382
                                                                            -----------

          Total current liabilities                                             358,407
                                                                            -----------

LONG-TERM PORTION OF LONG-TERM
  DEBT AND CAPITAL LEASE OBLIGATION                                              48,080

CONVERTIBLE DEBENTURES                                                        1,215,677

STOCKHOLDERS' EQUITY
  Capital stock -- Preferred Series A, 7.5%  cumulative,  convertible into
    common stock at a rate  determined by dividing the purchase  price of
    the  preferred  shares by the  conversion  price of the common stock;
    $.001 par value; authorized 10,000,000 shares, no shares
    issued or outstanding                                                          --
  Common stock -- Authorized 150,000,000 shares, $.001
    par value; 61,928,175 shares issued and 61,863,075
    shares outstanding                                                           61,928
  Additional paid-in capital                                                  8,322,586
  Deficit accumulated during the development stage                           (7,022,120)
  Treasury stock, at cost                                                       (54,574)
   Notes receivable from officer for exercise of stock options                 (193,427)
                                                                            -----------

          Total stockholders' equity                                          1,114,393
                                                                            -----------

          Total liabilities and stockholders' equity                         $2,736,557
                                                                            ===========
</TABLE>

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

                                      -2-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                            STATEMENTS OF OPERATIONS

                     Years ended December 31, 2000 and 1999
                  and the Period from May 22, 1996 (Inception)
                            through December 31, 2000

<TABLE>
<CAPTION>
                                                                                                                      May 22, 1996
                                                                                                                       (Inception)
                                                                                                                         Through
                                                                                                                       December 31,
                                                                               2000                  1999                 2000
                                                                           ------------          ------------          ------------
<S>                                                                            <C>                   <C>                   <C>
Revenues
  Contract revenue                                                             $202,200              $310,345              $762,745

Costs and expenses
  General and administrative                                                  2,340,179             1,952,600             4,912,914
  Contract costs                                                                586,383               468,221             1,327,744
  Research and development                                                      732,029               239,029             1,160,176
                                                                           ------------          ------------          ------------

          Total costs and expenses                                            3,658,591             2,659,850             7,400,834
                                                                           ------------          ------------          ------------

Operating loss                                                               (3,456,391)           (2,349,505)           (6,638,089)
                                                                           ------------          ------------          ------------

Other income (expenses)
  Interest income                                                                18,614                10,865                30,330
  Gain (loss) on marketable
    equity securities                                                             4,191               (26,684)              (29,368)
  Other investment gains                                                         59,784                  --                  59,784
  Loss on Bio Moda, Inc.                                                           --                (108,086)             (176,510)
  Loss on disposal of assets                                                    (10,306)                 --                 (10,306)
  Interest expense                                                             (459,027)             (189,374)             (655,462)
                                                                           ------------          ------------          ------------

          Total other expenses                                                 (386,744)             (313,279)             (781,532)
                                                                           ------------          ------------          ------------

          Net loss before cumulative effect of
            change in accounting principle                                   (3,843,135)           (2,662,784)           (7,419,621)
                                                                           ------------          ------------          ------------

Cumulative effect of change in
  accounting principle                                                             --                 (63,020)              (63,020)

Provision for income tax benefit                                                643,200                  --                 643,200
                                                                           ------------          ------------          ------------

          Net loss                                                          $(3,199,935)          $(2,725,804)          $(6,839,441)
                                                                           ============          ============          ============

Net loss per share before cumulative effect
  of change in accounting principle                                              $(.055)               $(.070)               $(.247)

Cumulative effect of change in
  accounting principle                                                             --                   (.002)                (.002)
                                                                                                 ------------          ------------

Net loss per share                                                               $(.055)              $(0.072)               $(.249)
                                                                           ============          ============          ============

Weighted average shares outstanding                                          58,029,724            37,809,084            27,649,615
                                                                           ============          ============          ============
</TABLE>


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


                                      -3-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                  For the Period from May 22, 1996 (Inception)
                            through December 31, 2000

<TABLE>
<CAPTION>
                                                                               Common Stock                    Preferred Stock
                                                                       -------------------------      -----------------------------
                                                                                          Par                               Par
                                                                         Shares          Value          Shares             Value
                                                                       -----------      --------      -----------      ------------
<S>                                                                     <C>             <C>                  <C>       <C>
Balance, May 22, 1996                                                         --        $   --               --        $
Stock issued to incorporators for cash                                     500,000           500             --                --
Stock issued for the net assets of PLZ Tech, Inc.                        4,500,000         4,500             --                --
Net loss                                                                      --            --               --                --
                                                                       -----------      --------      -----------      ------------

Balance, December 31, 1996                                               5,000,000         5,000             --                --
Stock issued in public offering                                          2,281,212         2,281             --                --
Net loss                                                                      --            --               --                --
                                                                       -----------      --------      -----------      ------------

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

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

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

Balance, December 31, 2000                                              61,928,175       $61,928             --        $       --
                                                                       ===========      ========      ===========      ============
</TABLE>


                                      -4-
<PAGE>


<TABLE>
<CAPTION>
                 Treasury Stock                                      Equity (Deficit)
        ------------------------------------                                                     Notes
                                                   Additional           During the             Receivable              Total
                                                     Paid-In            Development              From               Stockholders'
              Shares               Cost              Capital               Stage                Officer                Equity
        ------------------    --------------     --------------    --------------------    ------------------    ------------------
                 <S>            <C>                <C>                <C>                     <C>                    <C>
                         -       $         -        $         -        $             -         $            -        $           -
                         -                 -             24,500                      -                      -               25,000
                         -                 -            281,096                      -                      -              285,596
                         -                 -                  -               (76,902)                      -             (76,902)
        ------------------    --------------     --------------    --------------------    ------------------    ------------------

                         -                 -            305,596               (76,902)                      -              233,694
                         -                 -            362,720                      -                      -              365,001
                         -                 -                  -               (84,690)                      -             (84,690)
        ------------------    --------------     --------------    --------------------    ------------------    ------------------

                         -                 -            668,316              (161,592)                      -              514,005
                         -                 -          1,281,728                      -                      -            1,292,707
                         -                 -            293,719                      -                      -              296,470
                         -                 -             28,685                      -                      -               29,000
                         -                 -           (39,913)                      -                      -             (40,385)
                         -                 -                  -              (752,111)                      -            (752,111)
        ------------------    --------------     --------------    --------------------    ------------------    ------------------

                         -                 -          2,232,535              (913,703)                      -            1,339,686
                         -                 -            855,101                      -                      -              863,783
                         -                 -          1,469,320                      -                      -            1,486,414

                         -                 -            174,610                      -                      -              174,610
                         -                 -            125,000                      -                      -              125,000
                         -                 -           (10,643)                      -                      -             (11,132)
                 (229,000)          (41,760)                  -                      -                      -             (41,760)
                    85,000            11,130             24,334                      -                      -               35,464
                         -                 -                  -            (2,725,804)                      -          (2,725,804)
        ------------------    --------------     --------------    --------------------    ------------------    ------------------

                 (144,000)          (30,630)          4,870,257            (3,639,507)                      -            1,246,261
                         -                 -          1,012,710                      -                      -            1,013,493
                         -                 -          1,726,197                      -                      -            1,730,152
                  (63,500)          (46,486)                  -                      -                      -             (46,486)
                   142,400            22,542             54,771                      -                      -               77,313
                        -                 -             220,150                      -             (193,427)                28,573
                        -                 -             159,677                      -                      -              159,677
                        -                 -             533,678                      -                      -              542,878
                        -                 -             263,830                      -                      -              263,830
                        -                 -           (417,101)              (224,678)                      -            (641,780)
                        -                 -           (101,583)                 42,000                      -             (59,583)
                        -                 -                   -            (3,199,935)                      -          (3,199,935)
        ------------------    --------------     --------------    --------------------    ------------------    ------------------
                  (65,100)       $  (54,574)        $ 8,322,586        $   (7,022,120)         $   (193,427)         $   1,114,393
        ==================    ==============     ==============    ====================    ==================    ==================
</TABLE>

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


                                      -5-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                            STATEMENTS OF CASH FLOWS

                     Years ended December 31, 2000 and 1999
                  and the Period from May 22, 1996 (Inception)
                            through December 31, 2000

<TABLE>
<CAPTION>
                                                                                                                        May 22, 1996
                                                                                                                        (Inception)
                                                                                                                          Through
                                                                                                                        December 31,
                                                                                   2000                1999                2000
                                                                                -----------         -----------         -----------
<S>                                                                             <C>                 <C>                 <C>
Cash flows from operating activities
  Net loss                                                                      $(3,199,935)        $(2,725,804)        $(6,847,695)
  Adjustments to reconcile net loss to net cash
    provided by operating activities
      Provision for deferred tax asset                                             (643,200)               --              (643,200)
      Intrinsic value of conversion features                                        466,728                --               466,728
      Depreciation                                                                   80,572              87,755             275,098
      Amortization                                                                   26,747                --                26,747
      Write-off of organization costs                                                  --                63,020              63,020
      Amortization of discounts on
        convertible notes                                                           159,677             135,532             295,209
      (Gain) loss on marketable securities                                           (4,191)             26,684              29,368
      Loss on disposal of assets                                                     10,306                --                10,306
      Loss on Bio Moda, Inc.                                                           --               108,086             176,510
      Issuance of common stock for services                                       1,730,152           1,486,414           3,513,036
      Issuance of notes for services                                                   --                50,000              50,000
      Increase (decrease) in excess of costs and earnings
        over billings on uncompleted contract                                      (112,327)           (310,345)           (672,872)
      Increase (decrease) in other receivables                                         --               (22,477)            (79,874)
      Increase (decrease) in inventory                                                 --               (35,293)            (35,293)
      Increase (decrease) in allowance for loss
        on contract                                                                  20,837              71,545              92,382
      Increase (decrease) in accrued liabilities
        and accounts payable                                                        135,846              44,967             224,479
      Other non-cash expenses                                                        33,447                --                33,447
      Accrued interest                                                               30,667                --                30,667
                                                                                -----------         -----------         -----------

          Net cash provided by (used in)
            operating activities                                                 (1,264,674)         (1,019,916)         (2,991,937)
                                                                                -----------         -----------         -----------

Cash flows from investing activities
  Purchase of equipment                                                             (39,903)           (133,824)           (352,243)
  Investment in Bio Moda, Inc.                                                         --               (25,000)           (383,845)
  Sale of marketable securities                                                      40,665                --                40,665
  Purchase of marketable securities                                                    --                  --               (70,034)
  Increase in certificate of deposits                                                (2,844)            (54,582)           (107,426)
  Purchase of other assets                                                         (136,705)             (9,650)           (233,132)
  Redemption of (investment in) Wizard Technologies                                  65,000             (65,000)               --
                                                                                -----------         -----------         -----------

          Net cash provided by (used in)
            investing activities                                                    (73,787)           (288,056)         (1,106,015)
                                                                                -----------         -----------         -----------
</TABLE>


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

                                      -6-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                      STATEMENTS OF CASH FLOWS - CONTINUED

                     Years ended December 31, 2000 and 1999
                  and the Period from May 22, 1996 (Inception)
                            through December 31, 2000

<TABLE>
<CAPTION>
                                                                                                                        May 22, 1996
                                                                                                                        (Inception)
                                                                                                                          Through
                                                                                                                        December 31,
                                                                                  2000                1999                 2000
                                                                              -----------          -----------          -----------
<S>                                                                           <C>                  <C>                  <C>
Cash flows from financing activities
  Additions to notes payable                                                       50,000              478,050              622,776
  Payments on notes payable and capital
    lease obligations                                                             (50,532)             (30,658)            (172,108)
  Issuance of capital stock                                                     1,013,493              863,783            3,559,984
  Collection of notes receivable from officer                                      28,573                 --                 28,573
  Sale of treasury stock                                                           77,313               35,464              112,777
  Purchase of treasury stock                                                      (46,486)             (52,892)            (129,763)
  Proceeds from issuance of convertible preferred stock                           485,000                 --                485,000
                                                                              -----------          -----------          -----------

          Net cash provided by financing activities                             1,557,361            1,293,747            4,507,239
                                                                              -----------          -----------          -----------

          NET INCREASE (DECREASE) IN CASH                                         218,900              (14,225)             409,287

Cash and cash equivalents, beginning of period                                    190,387              204,612                 --
                                                                              -----------          -----------          -----------

Cash and cash equivalents, end of period                                      $   409,287          $   190,387          $   409,287
                                                                              ===========          ===========          ===========
</TABLE>

Advanced Optics Electronics, Inc.

                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                                December 31, 2000


               NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant  accounting policies consistently applied
in the preparation of the accompanying financial statements follows.

Description of Business

Advanced  Optics  Electronics,  Inc.  (the  Company)  is a  developmental  stage
technology company with its principal focus on the development and production of
large-scale  flat panel  displays.  The  Company  is  currently  continuing  its
research and development of this product. Upon substantial


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


                                      -7-
<PAGE>


completion of the research and development of the large flat panel display,  the
Company  plans to make the  transition  from a  developmental  stage  company to
selling and producing this product.  The market for the  large-scale  flat panel
displays will include advertising billboards,  flat panel computer monitors, and
cockpit  displays.  The  Company  plans to focus on  producing  and  selling the
large-scale flat panel displays for outdoor advertising billboards.

The  Company  has  obtained  a  contract  to  produce  two  outdoor  advertising
billboards using its flat panel display technology. This is the first commercial
application of the Company's technology.  The success of the Company will depend
on its ability to commercialize its technology and complete this contract. As of
December 31, 2000, completion of this contract was behind schedule.

While management  believes the contract will ultimately be completed,  there can
be no certainty  that this will be  accomplished  because the technology has not
yet been used in a  commercial  application.  In  addition,  the  Company may be
required to obtain  additional  capital in order to fund the  completion  of the
contract.

Cash and Cash Equivalents

Cash  and  cash  equivalents   include  all  cash  balances  and  highly  liquid
instruments with original maturities of three months or less. The Company's cash
deposits are maintained in local branches of national financial institutions and
are insured by the Federal Deposit Insurance  Corporation up to $100,000 at each
institution.  Cash balances may from time to time exceed these insurance limits,
but  management  believes  the  Company is not  exposed to any risk of loss from
these deposits.


                                      -8-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

    Revenue and Cost Recognition

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

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

    The  contract  to produce  two outdoor  advertising  billboards  totals $1.7
    million,  with  $885,000  assigned to the first unit.  An estimated  loss of
    approximately $565,000 from production of the first unit has been recognized
    through  December 31, 2000.  The Company's  estimated cost to complete as of
    December  31,  2000 is  $122,255  which is  expected to be funded with cash,
    billings on the contract and contributed capital.

    In  accordance  with the  contract,  the Company will bill the customer when
    certain  milestones are met.  Billings and collections  through December 31,
    2000 have totaled $89,873.

    Adjustments  to the original  estimates of total  contract  revenues,  total
    contract  costs,  and the extent of  progress  toward  completion  are often
    required as work progresses under the contract, and as experience is gained,
    even though the scope of the work may not change.  The nature of  accounting
    for  contracts  is such  that  refinements  of the  estimating  process  for
    continuously  changing  conditions and new developments are a characteristic
    of the process. Accordingly,  provisions for losses on contracts are made in
    the period in which they become  evident under the  percentage-of-completion
    method.  It is at least reasonably  possible that the estimate of completion
    costs for this contract will be further revised in the near-term.

    Investment

    As of December 31, 2000, the Company owned 16.4% of the  outstanding  common
    stock of Bio Moda, Inc., an  unconsolidated  investment  accounted for using
    the cost method.  Prior to December 31, 1999,  the  Company's  ownership was
    sufficient for the investment to be accounted for using the equity method.

                                       -9-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

    Investment-Continued

    The carrying value of the investment as of December 31, 2000 is the original
    investment cost adjusted by the Company's  proportionate  interest in losses
    reported by the investee through December 31, 1999.

    Property, Plant and Equipment

    Property,  plant and equipment are carried at cost.  Repair and  maintenance
    costs are charged against income as incurred. Asset additions,  renewals and
    betterments are capitalized at cost and depreciated  using the straight-line
    method over estimated useful lives ranging from 3 to 15 years.

    Other Assets

    Intangible  assets  are  carried  at  historical  cost,  net of  accumulated
    amortization.  Patents are  amortized  on a  straight-line  basis over their
    estimated  useful lives of 17 years.  Goodwill is  amortized  over 40 years.
    Debt origination costs are amortized over 3 years.

    Certain assets previously  classified as inventory are no longer used in the
    Company's on-going production  processes,  and are held for sale. Management
    estimates  that  the net  realizable  value  of these  items  exceeds  their
    carrying value as of December 31, 2000.

    Research and Development Costs

    Research and development costs are expensed as incurred.

    Income Taxes

    The Company  accounts for income  taxes using the  liability  method,  under
    which,  deferred  tax  liabilities  and assets are  determined  based on the
    difference  between the  financial  statement  carrying  amounts and the tax
    bases of assets and  liabilities  using  enacted  tax rates in effect in the
    years in which the  differences  are  expected to  reverse.  The Company has
    recorded a deferred  tax benefit  relating to its  incurrance  of  operating
    losses  since  inception.  A valuation  allowance  has been  provided due to
    uncertainty regarding realizability of the tax asset.


                                      -10-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

    Loss Per Share

    Loss per share is computed on the basis of the  weighted  average  number of
    common shares  outstanding  during the period and did not include the effect
    of potential  common stock as their  inclusion  would reduce loss per share.
    The numerator for the computation is the net loss and the denominator is the
    weighted  average shares of common stock  outstanding.  Certain  options and
    warrants  outstanding were not included in the computation of loss per share
    because their inclusion would reduce loss per share.

    Use of Estimates

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

    Stock-Based Compensation

    The Company has elected to apply the  provisions  of  Accounting  Principles
    Board  Opinion No. 25,  Accounting  for Stock  Issued to  Employees,  and to
    furnish  the  proforma   disclosures  required  by  Statement  on  Financial
    Accounting  Standards No. 123, Accounting for Stock Based Compensation.  See
    note 10.

    Reclassifications

    Certain  reclassifications  have been made to 1999 information to conform to
    the 2000 presentation.

    Comprehensive Income

    In 2000 and 1999,  the  Company had no changes in equity  which  constituted
    components of other comprehensive income.


                                      -11-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 2.  NOTES RECEIVABLE

    Notes receivable at December 31, 2000, consist of the following:

     Due from officer                                               $29,493
     Note receivable from former shareholder,
       interest at 8% and due on demand                              15,000
                                                                    -------
                                                                    $44,493
                                                                    =======


    The Company  also has notes  receivable  from an officer  totaling  $193,427
    which bear interest at 10% per annum,  and are due in 2003. These notes were
    received as consideration upon exercise of stock options.


NOTE 3.  INVESTMENTS

    As of December 31, 2000, the Company owned 879,707 or 16.4% of the 5,373,858
    outstanding  shares of Bio Moda, Inc. The Company's interest in Bio Moda has
    declined  from 22% in 1998 to its  present  level,  as Bio  Moda has  issued
    additional shares in the course of its financing activities.  As of December
    31, 2000,  the Company had options to purchase an additional  187,000 shares
    at .485 cents per share.

    Bio Moda,  Inc. is a  development  stage company  involved  primarily in the
    development  of  technology  for the early  detection of lung  cancer.  As a
    development  stage company,  Bio Moda, Inc. has not had any revenues and, as
    of December 31, 2000, was in the process of conducting clinical trials.

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




                                      -12-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 3.  INVESTMENTS - CONTINUED

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

     Original cost                                               $ 383,845
     Share of net loss                                            (134,010)
     Amortization of excess of cost
       over book value                                             (42,500)
                                                                 ---------
     Carrying value of investment in Bio Moda, Inc.              $ 207,335
                                                                 =========


    In August 1999,  the Company  issued  200,000  shares of its common stock to
    Wizard  Technologies,  Inc.  for $88,580.  The Company  then  purchased a 10
    percent  ownership  in Wizard  for  $65,000  with the  proceeds.  During the
    quarter  ending  March  31,  2000,  the  Company  sold all of its  shares of
    Wizard's common stock to Wizard for its original investment of $65,000.


NOTE 4.  LONG-TERM OBLIGATIONS

    As of  December  31,  2000,  the  Company's  long-term  obligations  were as
    follows:

     Notes  payable  to a  financial  institution,
     due in  monthly  payments aggregating  $3,221
     through October 2003, bearing interest at bank
     prime rate plus 1.5%,  collateralized  by
     operating  equipment and a vehicle                            $80,276

                           Capital lease obligation                 17,603
                                                                   -------
                                                                    97,879

                             Less:  Current portion                (49,799)
                                                                   -------
                                                                   $48,080
                                                                   =======


                                      -13-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 4.  LONG-TERM OBLIGATIONS - CONTINUED

    The Company is  obligated  under a long-term  capital  lease which  requires
    monthly   minimum  lease   payments  of  $2,810  through  May  2001.  As  of
    December 31, 2000, the leased equipment has a net book value of $50,850.

    Future  principle  payments on  long-term  obligations  for the years ending
    December 31, are as follows:

                  2001                              $49,799
                  2002                               31,496
                  2003                               16,584
                                                    -------
                                                    $97,879
                                                    =======


NOTE 5.  CONVERTIBLE DEBENTURES

    On June 3, 1999, the Company issued $500,000 in convertible notes which bear
    interest at an annual rate of 8 percent and mature  (principal and interest)
    on May 31, 2001.  Effective  August 1, 1999, the notes were convertible into
    shares of common stock at a 25 percent  discount to the closing bid price of
    a share of common stock at the time of  conversion  or the time of exercise.
    The notes were issued in  exchange  for  $430,000 in cash,  $50,000 in legal
    services and $20,000 in commissions.  The commissions  have been capitalized
    as debt  origination  costs  and are  being  amortized  over the life of the
    notes. The notes are unsecured.

    The intrinsic  value of the conversion  feature of the principal and accrued
    interest was estimated to be $174,610. This has been recorded as an increase
    in paid-in  capital and a discount to the  convertible  notes payable,  with
    related  amortization  being  charged to interest  expense.  The discount is
    being amortized over a one-year  period,  which is management's  estimate of
    time before any conversion  will be exercised.  The  convertible  notes also
    include detachable  warrants for the purchase of 12,500,000 shares of common
    stock at the  lower of 75  percent  of the  closing  bid price of a share of
    common  stock at the time of exercise or  September  1, 1999.  The  warrants
    expire on June 3, 2002.  Management  estimates that  approximately  half the
    warrants will be exercised prior to expiration.

    Management estimated the fair market value of these warrants at $125,000 and
    recorded this amount as an increase in paid-in capital and a discount to the
    convertible notes payable. The discount is being amortized over the two-year
    life of the notes.


                                      -14-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 5.  CONVERTIBLE DEBENTURES - CONTINUED

    A significant  contingency  required by the aforementioned  convertible note
    and warrant agreements is the registration of the underlying shares with the
    Securities and Exchange  Commission.  The Company is to use its best efforts
    to register these shares and is in the process of preparing the registration
    statement.

    On June 12, 2000,  the Company  entered into an agreement  that modified the
    convertible  notes agreement entered into on June 3, 1999. The result of the
    modified  agreement  was the issuance of 9,200,000  shares of the  Company's
    common stock upon conversion of the convertible  notes plus accrued interest
    through June 12, 2000, which totaled $542,878.  This transaction constituted
    a conversion of the outstanding  convertible  notes, and as such, $40,058 of
    unamortized  intrinsic  value  of the  conversion  feature  was  charged  to
    interest  expense during the quarter.  In addition,  the modified  agreement
    voided the related  12,500,000  detachable  warrants,  and, as a result, the
    unamortized  discount  of  $72,917 on the  estimated  fair  market  value of
    $125,000  for the  warrants  was  charged  to  interest  expense  during the
    quarter.

    On  September  15,  2000,  the Company  entered into an agreement to issue a
    total of $10,000,000  in convertible  notes which bear interest at an annual
    rate of 8 percent. The Company has authorized the initial sale of $2,000,000
    of the convertible  notes,  and has entered into a structured  facility with
    purchasers  in which the  purchasers  shall be  obligated  to  purchase  the
    remaining  $8,000,000 of convertible  notes.  The Company's right to require
    the Purchasers to purchase notes  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 notes. The related
    agreement  provides for a limit on the amount of  obligation  notes that the
    Company may require the Purchasers to purchase in a given month.

    On September 15, 2000, the Company issued $500,000 of the initial $2,000,000
    in convertible  notes which bear interest at an annual rate of 8 percent and
    mature  (principal and interest) on September 15, 2003.  Effective as of the
    issuance date, the notes 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.  The
    notes  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  over the life of the
    notes. The notes are unsecured.


                                      -15-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 5.  CONVERTIBLE DEBENTURES - CONTINUED

    The intrinsic  value of the conversion  feature of the principal and accrued
    interest was estimated to be $238,830. This has been recorded as an increase
    in paid-in  capital and a discount to the  convertible  notes payable,  with
    related  amortization  being  charged to interest  expense.  The discount is
    being amortized over a one-year  period,  which is management's  estimate of
    time before any conversion  will be exercised.  The  convertible  notes also
    include  detachable  warrants for the  purchase of 500,000  shares of common
    stock.  Management  has estimated the fair market value of these warrants at
    $25,000 and  recorded  this  amount as an increase in paid-in  capital and a
    discount to the convertible  notes payable.  The discount is being amortized
    over the three-year life of the notes.

    A significant  contingency required by the aforementioned  convertible notes
    is the  registration  of the  underlying  shares  with  the  Securities  and
    Exchange  Commission.  The  Company is to use its best  efforts to  register
    these shares and the registration statement has been filed.

    On November 7, 2000, the Company entered into an agreement that modified the
    outstanding  convertible  preferred agreements entered into on March 8, 2000
    and  August  2,  2000.  The  new  agreement  resulted  in  the  exchange  of
    outstanding preferred stock plus additional  consideration for the Company's
    7.5 percent convertible debentures due November 7, 2003. The total amount of
    the  debentures  is $740,667,  including  accrued  interest of $30,667.  The
    debentures are convertible  into shares of common stock at the lessor of the
    stocks closing price on March 8, 2000 and 77.5 percent of the average of the
    five lowest closing bid prices for 20 days before November 2, 2000.

    The intrinsic  value of the conversion  feature of the principal and accrued
    interest was  estimated  to be $227,898.  The  convertible  debentures  also
    include  detachable  warrants  for the  purchase of 71,000  shares of common
    stock.  Management  has estimated the fair market value of these warrants at
    $3,550.


                                      -16-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 6.  FAIR VALUE OF FINANCIAL INSTRUMENTS

    The Company's  carrying  values and  methodologies  for  estimating the fair
    values of its financial instruments are as follows:

        Cash, cash equivalents, and certificates of deposit, costs and estimated
        loss in  excess  of  billings  on  uncompleted  contract,  and  accounts
        payable. The carrying amounts reported in the accompanying balance sheet
        approximate fair values.

        Notes  receivable.  Management  estimates that the carrying  amounts are
        reasonable estimates of their fair values.

        Long-term  obligations.  Notes payable to bank have variable  rates that
        reflect currently  available terms for similar debt, and accordingly the
        carrying  values are reasonable  estimates of their fair values.  Due to
        the short-term maturity of the capital lease,  management estimates that
        the carrying value approximates its fair value.

        Convertible  debentures.  Management  estimates  the carrying  values to
        approximate their fair values.

        Notes  receivable from officer.  Management  estimates these notes to be
        fully collectible, and that the carrying values are reasonable estimates
        of their fair values.

    The carrying amounts and fair values of the Company's financial  instruments
    as of December 31, 2000 are as follows:

                                                                   Estimated
                                                     Carrying        Fair
                                                      Amount         Value
                                                   ----------    -----------

     Cash and cash equivalents                     $  409,287    $  409,287
     Certificates of deposit                          107,426       107,426
     Costs and estimated loss in excess
       of billings on uncompleted contract            672,872       672,872
     Notes receivable                                  44,493        44,493
     Accounts payable                                 198,186       198,186
     Long-term obligations                             97,879        97,879
     Convertible debentures                         1,215,677     1,215,677
     Notes receivable from officer                    193,427       193,427


                                      -17-
<PAGE>


                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000

NOTE 7.  INCOME TAXES

     The Company has  recorded a deferred  tax asset in the amount of  $643,200,
     net of a valuation allowance on $2,316,800, reflecting the expected benefit
     of  approximately  $7,400,000 in net  operating  loss  carryforwards  which
     expire in varying  amounts  between 2016 through 2020.  Realization of this
     asset  is  dependent  on  generating  sufficient  taxable  income  prior to
     expiration of the loss carryforwards.  Although realization is not assured,
     management  believes it is more likely than not that the deferred tax asset
     will  be  realized.  The  amount  of  the  deferred  tax  asset  considered
     realizable,  however,  could be  reduced or  increased  in the near term if
     estimates  of future  taxable  income  during the  carryforward  period are
     revised.


NOTE 8.  OPERATING LEASES

     The  Company  occupies  administrative,   engineering,   and  manufacturing
     facilities under operating leases which expire in February 2002. The leases
     call for aggregate minimum monthly lease payments of $4,225.  Lease expense
     totaled $48,975 and $34,600 in 2000 and 1999, respectively,  and $97,209 in
     the period from May 22, 1996 (inception) through December 31, 2000.

    Future  minimum lease payments  under the long-term  operating  lease are as
    follows:

                     2001                        $50,700
                     2002                          8,450
                                                 -------

                                                 $59,150


NOTE 9.  EQUITY TRANSACTIONS

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

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

    During 1998, the Company  repurchased  472,200 of its  outstanding  stock in
    exchange  for  $10,000 in notes  receivable  and  $20,385 in cash in various
    transactions. This stock was subsequently retired.


                                      -18-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 9.  EQUITY TRANSACTIONS - CONTINUED

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

    In 1998, the Company issued 2,751,000 shares of common stock in exchange for
    services from contractors,  officers and others. These shares were valued at
    the estimated fair market value for similar  issuances of stock and amounted
    to  $296,470.  The  Company  also  issued  315,000  shares to an  officer in
    exchange for a note  receivable of $29,000.  The 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.

    The Company  also sold  8,681,624  shares for  $863,782 in cash,  and issued
    17,094,313 shares for services from contractors,  officers and others, which
    were valued at $1,486,414.

    During the quarter ending March 31, 2000, the Company sold 782,000 shares of
    its common stock for $368,495 in cash,  and issued  1,791,733  shares of its
    common stock for services from contractors,  officers and others, which were
    valued at $1,120,233. The value of the services is included in the costs and
    expenses on the Statements of Operations.

    Also during this  quarter,  the Company  sold 25,000  shares of its treasury
    stock for $49,770 and repurchased  6,500 shares for $7,683.  The repurchased
    shares have been recorded at cost.

    On March 14, 2000, the Company issued 550 shares of its Series A convertible
    preferred  stock for $550,000.  Related  finders fees and attorney fees were
    $65,000, and were netted against the proceeds for a net increase in cash and
    equity of $485,000.  Effective  June 14, 2000,  the shares were  convertible
    into shares of common  stock at the lesser of 110 percent of the closing bid
    price of a share of common  stock on March 13,  2000 or 77.5  percent of the
    average of the five lowest  closing bid prices for the common  stock for the
    twenty trading days immediately preceding the conversion date.


                                      -19-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 9.  EQUITY TRANSACTIONS - CONTINUED

    Management  estimated the intrinsic  value of the  conversion  feature to be
    $159,677.  This has been  recorded as an  increase in paid-in  capital and a
    discount to the convertible preferred stock, with related amortization being
    charged to retained  earnings as  constructive  dividends.  The  discount is
    being  amortized over a 90-day period,  which is the period from the date of
    issuance  to the point at which the  preferred  shares can be  converted  to
    common shares.  The  convertible  preferred  stock also includes  detachable
    warrants  for the  purchase of 55,000  shares of common  stock at a purchase
    price per share equal to 110 percent of the closing bid price for the common
    stock on the closing date (March 8, 2000).  The warrants  expire on March 8,
    2005.  The  detachable  warrants  have not been  valued in the  accompanying
    financial statements,  as management estimates their fair market value to be
    immaterial.

    During the quarter ended June 30, 2000, the Company issued  1,247,970 shares
    of its common  stock for  services  from  contractors,  officers and others,
    which were valued at $385,429.  The value of the services is included in the
    costs and  expenses  on the  Statements  of  Operations.  The  Company  also
    repurchased  44,000  shares of its  outstanding  common stock for $33,817 in
    cash.  These  shares  remained in treasury at June 30,  2000,  and have been
    recorded at cost.

    Also during this  quarter,  an officer of the  Company  exercised  1,000,000
    stock  options  at a price of $0.12 per  share.  The  Company  issued a note
    receivable to the officer in the amount of $120,000 for the shares. Interest
    for the first quarter was prepaid.

    During the quarter ended  September  30, 2000,  the Company  issued  300,000
    shares of its common  stock for  services  from  contractors,  officers  and
    others,  which were valued at $90,260. The value of the services is included
    in the costs and expenses on the Statements of Operations.  The Company also
    sold 45,000 shares of its  outstanding  common stock for $27,543 in cash and
    repurchased 13,000 shares of its outstanding common stock for $4,986.  These
    shares remained in treasury at September 30, 2000, and have been recorded at
    cost.

    An officer of the  Company  exercised  850,000  stock  options at a price of
    $0.12 per share.  The Company issued notes  receivable to the officer in the
    amount of $102,000 for the shares.

    Also,  during the quarter the Company  issued 160 shares of preferred  stock
    for $160,000 in cash.

    During the quarter  ended  December 31,  2000,  the Company  issued  615,500
    shares of common stock for services from contractors,  officers, and others,
    valued at $130,275.


                                      -20-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 10.  STOCK PLANS

    On January 4, 1999, the Company established the Incentive Stock Option Plan.
    Pursuant to the Plan, up to 10,000,000  shares of the Company's common stock
    may be granted as options to key employees.  The shares issued upon exercise
    of the options may be authorized  and unissued  shares or shares held by the
    Company in its  treasury.  The exercise  date of the options is based on the
    related agreement as approved by the Board of Directors. The Incentive Stock
    Option Plan expires on January 4, 2009.  Options awarded under the Plan have
    four-year  terms  and  vest  ratably  over one to two  year  periods.  As of
    December 31, 2000,  there were 6,175,000 shares available under the Plan for
    future awards.

    The Company  applies APB Opinion No. 25 in its accounting for the Plan, and,
    accordingly,  no compensation cost has been recognized for its stock options
    in the financial  statements.  Had the Company determined  compensation cost
    based on the fair  value at the  grant  date  for its  stock  options  under
    Statement of Financial  Accounting Standards No. 123, the Company's net loss
    and loss per  share  would  have  been  increased  to the  proforma  amounts
    indicated as follows:

                                          2000            1999            1998
                                      ------------    ------------    ----------
     Net loss, as reported            $(3,199,935)    $(2,725,804)    $(752,111)
     Proforma net loss                 (3,575,534)     (2,940,633)     (752,111)

     Loss per share, as reported           (0.055          (0.072        (0.055)
     Proforma loss per share               (0.061   1      (0.078        (0.055)

    The fair value of each option  grant for the above  proforma  disclosure  is
    estimated  on the date of the grant using the  Black-Scholes  option-pricing
    model with the following weighted-average  assumptions:  dividends of $0 per
    year;  expected  volatility of 42.3 percent;  risk-free interest rate of 6.0
    percent; and expected lives of four years.

    During the year ended December 31, 2000, the Company granted 5,825,000 stock
    options to certain key employees,  cancelled and replaced 2,775,000 options,
    and had  2,000,000  options  exercised,  resulting  in total  stock  options
    granted and  unexercised  of 3,825,000  as of December 31, 2000.  The shares
    issued upon exercise of the options may be authorized and unissued shares or
    shares held by the Company in its  treasury.  The  exercise  date of options
    granted is based upon the  related  agreement  as  approved  by the Board of
    Directors.


                                      -21-
<PAGE>

                        Advanced Optics Electronics, Inc.
                          (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                                December 31, 2000


NOTE 10.  STOCK PLANS - CONTINUED

    The Company also issued Stock Purchase Warrants to key employees.  The total
    number of "warrant  shares"  issued  under these  agreements  was  3,425,000
    shares,  exercisable  at any time until they  expire on June 15,  2004.  The
    price established for the shares ranges from $0.15 to $0.41 per share.

    A summary of the common  stock option and warrant  activity  for  employees,
    directors and officers is as follows:

                                                         Weighted
                                            Warrants     Average
                                              and        Exercise
                                            Options       Prices     Exercisable
                                           ---------      ------     -----------

     Balance, December 31, 1997              153,954     $0.58          153,954
     Balance, December 31, 1998              153,954      0.58          153,954

          Granted                          6,900,000      0.16
          Expired                           (153,954)     0.58
                                           ---------

     Balance, December 31, 1999            6,900,000      0.16        6,185,000
                                                                      =========

          Cancelled                       (2,775,000)     0.72
          Replacement                      2,775,000      0.34
          Granted                          6,200,000      0.72
          Exercised                       (2,000,000)     0.12
                                           ---------

     Balance, December 31, 2000           11,100,000      0.27        9,517,500
                                          ==========                  =========

    The option price  established for the shares upon exercise ranges from $0.12
    to $0.34 per share, and expire through October 2004.



                                      -22-