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, 2003         Commission file No. 0-24511

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

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

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

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

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

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

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X   No
                                                             ---    ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
                 ---

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
issuer on March 3, 2004 was  approximately  $50,000,000  based upon the  closing
price of such stock on that date of approximately $ 0.02. The number of issuer's
shares of Common Stock  outstanding  including shares issued to affiliates as of
March 3, 2004 was 2,917,736,349.

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




<PAGE>


                                TABLE OF CONTENTS

Forward Looking Statements

                                     PART I

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

                                     PART II

Item 5.  Market for Common Equity, Related Stockholder Matters and Small
           Business Issuer Purchases Equity Securities
Item 6.  Management's Discussion and Analysis or Plan of Operations
Item 7.  Financial Statements
Item 8.  Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure
Item 8A. Controls and Procedures

                                    PART III

Item 9.  Directors and Executive Officers of the Registrant
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and
           Management and Related Stockholder Matters
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
Item 14. Principal Accountant Fees and Services

                                   SIGNATURES


                                                                               2
<PAGE>


FORWARD - LOOKING STATEMENTS

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

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

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

                                     PART I

                         ITEM 1. DESCRIPTION OF BUSINESS

General
-------
Advanced Optics Electronics,  Inc. (ADOT-OTC BB) (the "Company") 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 is currently  investigating  other  applications of this core technology
and different products related to optics and image recognition and analysis.

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

Company  Overview
----------------
We are a developmental  stage  technology  company with our primary focus on the
development,  production and sales of our large-scale flat panel displays, which
utilize our patented  technology.  We are  currently  continuing  our  research,
development,  prototyping,  and manufacturing of our products and the underlying
technology.  We are in the process of making the transition from a developmental
stage  company to producing  and selling our product  line.  We plan to focus on
producing and selling our large-scale flat panel desplays for the outdoor


                                                                               3
<PAGE>

advertising  billboard  industry,  which will  represent the first time that our
technology will be available to this industry.  There are other applications and
technologies  that the company has been  investigating  in the past year using a
different approach to our core technical patents.

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

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

Industry Background
-------------------
Our flat  panel  displays  fit into a  growing  niche  that is part of the broad
visual communications market, which includes printing, photography,  television,
billboard, etc. In particular,  our flat panel displays fit within the billboard
sub-category  of the broad  visual  communications  market.  Billboards  include
various  niches  commonly  identified as painted signs,  architectural  signage,
electric signs,  programmable  signs and large video displays.  According to the
Outdoor Advertising  Association of America ("OAAA"),  outdoor advertising was a
$5.5 billion industry in 2003, which was 5.2% higher than the previous year. The
OAAA  stated  that the  billboard  segment  of the  outdoor  advertising  market
represents 62% of total outdoor  expenditures  and topped $3.41 billion in 2003.
We believe  that the  advantages  of our flat  panel  displays  for the  outdoor
advertising billboard industry will be significant. Our flat panel displays have
the  benefit in  comparison  to  traditional  printed  billboards  of  providing
dynamic, eye-catching ads and rapid change of display images from a remote site.
Billboard  companies could benefit by increasing revenues per sign by being able
to sell the same space to different  advertisers  at different  times during the
day, with the ability to immediately  access and change each sign via the remote
site.  Advertisers  could  benefit  substantially  because they would be able to
reach their target audience with greater precision.

Strategy
--------
After  conducting  extensive  research in various  industries,  including laptop
computers,  high definition televisions and outdoor advertising  billboards,  to
determine  which market would be best suited for producing and selling  products
utilizing our technology,  we decided to concentrate our complete  attention and
efforts on marketing to the outdoor electronic  advertising  billboard industry.
According  to the  OAAA,  advertising  space was sold on  approximately  390,000
billboards  in 2003.  Our goal is to  create a line of  products  utilizing  our
technology  that is scalable both in terms of size and resolution to meet a wide
range of  requirements  related to  potential  customers'  economics,  billboard
locations and intended use.

We believe that, due to the Highway Beautification Act, the number of billboards
nationwide  will not  increase  dramatically  but  should  remain  stable in the
future.  We expect that  advertisers  will increase  their focus on securing and
developing  prime  billboard  locations.  The customer  base for  billboards  is

                                                                               4
<PAGE>


diversifying  as more  advertisers  are  attracted  to this  media.  Our  market
penetration  analysis is based on capturing and  converting  existing sites in a
stable market and expanding the indoor market.

In September 2000, we received payment of  approximately  $90,000 to produce and
install  two  large-scale  flat panel  displays,  which is the first  commercial
application of our electro-optic array technology. After the completion of these
two flat panel displays (estimated to be November 2004), we intend to target the
outdoor advertising billboard industry in phases.

The first phase will be targeting the prime  billboard  locations  that generate
monthly advertising revenues of approximately  $25,000 or more per location.  It
is estimated that there are  approximately  700 of these locations in the United
States and another 1,500 outside of the United States. We estimate that we could
begin  supplying  flat  panel  displays  to meet the  initial  demand  for these
locations  within five to seven  months of  installing  our first two flat panel
displays  under our  existing  commitment  and  obtaining  funding  for  ongoing
development and commercialization. Once demand in these prime locations has been
met and increased  manufacturing  volumes have lowered the production  costs per
display, we will target the remaining outdoor advertising billboard market.

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

OUR MANAGEMENT TEAM HAS EXTENSIVE EXPERIENCE IN FINANCE,  MARKETING AND RESEARCH
RELATED TO DEVELOPING AND RAPIDLY GROWING TECHNOLOGY BUSINESSES.

Products and Markets
--------------------
Our  primary  initial  product  that will be  marketed  to users of the  outdoor
advertising  industry is the flat panel  display.  Our flat panel  displays will
provide an image measuring  approximately three meters by eight meters, which is
similar  in size to  existing  printed  billboards.  We  believe  that the major
advantages  of  our  flat  panel  displays   include  better  viewing   quality,
affordability,  customer system  integrity,  and an almost  immediate  change of
display  images from a remote site. We believe that our flat panel  displays and
underlying  software system represent an innovative approach to advertising that
take  advantage of the recent  technological  convergence  of  billboard  media,
broadcast media and the Internet.

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

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

Subsequent to year-end,  the Company has contracted  with  Indesign,  a contract
engineering  firm to provide  electronic,  mechanical  and  systems  engineering
services.

                                                                               5
<PAGE>

Subsequent  to  year-end,  the  Company is in the  process of  developing  a new
generation  handheld electronic color recognition system. It is currently in the
prototyping stage.

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

Manufacturing, Distribution, Installation and Maintenance of Our Products
-------------------------------------------------------------------------
We  have  limited  established  commercial   manufacturing  facilities  for  the
production of our flat panel displays,  although we intend to establish a larger
manufacturing facility for assembling our flat panel displays in preparation for
larger scale  operations.  Our flat panel displays will be shipped directly from
our manufacturing  facilities to our customers, and we intend to promote, market
and sell our products through direct sales channels.  Our plan is to install the
first 10 to 20 flat panel  displays  that we sell.  We also plan to maintain and
repair  our  products  for a  specific  warranty  period  and offer  maintenance
contracts beyond the warranty period. In addition,  we intend to investigate the
possibility  of  contracting  with United States and  international  third party
service providers for on-site  installation,  maintenance and repair of our flat
panel displays.

Customers
---------
According to the OAAA, there were approximately 151,000 30-sheet billboards that
measure  approximately  12 feet by 24 feet  and  approximately  106,000  8-sheet
billboards that measure  approximately 6 feet by 12 feet in the United States in
2003.  We believe that many of these  billboards  represent  potential  retrofit
sites for the installation of our flat panel displays.

It is estimated that the four leaders in this industry account for approximately
half of the  outdoor  advertising  billboard  market  and the top ten  billboard
owners represent 61% of this market. The 39% that constitutes the balance of the
outdoor advertising billboard market is composed of smaller individual companies
that nevertheless  control prime high-traffic  billboard locations and, as such,
represent a  significant  component  of our target  market.  We  consider  these
companies to be our potential primary customers.  In addition to upgrading their
billboard sites to attract higher revenue generating  advertising  accounts,  we
believe that these potential  customers are  considering  new potential  outdoor
venues in  locations  such as Times  Square in New York City,  which would be an
additional  source of  revenue  for us.  Media  companies  have  been  acquiring
billboard  owners  in order to offer  packages  of  television,  radio and newly
acquired  outdoor space to  advertisers.  We believe that the  concentration  of
ownership and the convergence of media are beneficial  trends to market and sell
our flat panel.

We intend to initiate customer contact by directly  communicating with potential
customers,  including  the four  leaders of the  outdoor  advertising  billboard
industry,  and providing them the marketing film that we have produced about our
flat panel  displays.  We are  developing  a  marketing  department  to initiate
contact,   process  each  transaction  and  coordinate  with  our  manufacturing
department for production and delivery of our flat panel displays.

                                                                               6
<PAGE>

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

We  will  compete  against  other  established   forms  of  electronic   display
technology,  and we believe that our products and technologies  will continue to
face substantial competition as the market and technologies evolve. Existing and
potential  competitors such as Toshiba,  Sharp,  Hitachi and Mitsubishi  possess
substantially greater product development capabilities and financial, technical,
marketing or human resources than we do. These companies manufacture  electronic
displays  that  utilize  liquid  crystal  displays,  or passive  Liquid  Crystal
Displays technology such as lap-top computer screens, and cathode ray tubes such
as  traditional  TV  set  display  technology,   which  currently  dominate  the
electronic  billboard  market.  However,  we believe that the products  based on
these technologies are limited and new technologies  being developed,  including
ours, will significantly  improve the performance of electronic  displays in the
future and displace existing products in the electronic  billboard market.  Many
companies, including Daktronics, Inc., SI Diamond Technology, Inc. and Universal
Display Corporation have, or are developing, other technologies utilizing carbon
field emissions,  incandescent  lamps,  inorganic  electroluminescence,  organic
light emitting diodes,  polymeric light emitting  diodes,  gas plasma and vacuum
fluorescent  lamps.  Furthermore,  although  we  believe  our  products  will be
superior to established  advertising  billboard  products,  we cannot assure you
that business customers will prefer our technology sufficiently to be willing to
pay for it at the price at which it will be offered.  We recently  set the sales
prices of our flat panel displays  measuring  approximately  three meters by two
meters  and  three  meters  by  eight   meters  at  $395,000   and   $1,490,000,
respectively.

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

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

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

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

     o    Cathode Ray Tubes and  passive  Liquid Crystal  Displays  that  have a
          long useful life and an existing manufacturing base, but are expensive
          to produce.

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

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

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

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

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

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<PAGE>

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

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

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

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

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

Our success will depend on our ability to protect our proprietary technology and
other  intellectual  property  rights.  We acquired  the patent  relating to the
transverse  pixel  format  when we acquired  all the assets of PLZTech,  Inc. in
November 1996. The patent  pending that relates to the  Electro-Optic  Array was
assigned to us by its  inventor in February  2000,  and the patent  pending that
relates to the LED Configuration for Large-Scale  Displays was assigned to us by
its  inventors  in February  2001.  Although we have been awarded the patent and
have filed two  applications  for patents,  the degree of protection  offered by
these  patents  or the  likelihood  that  pending  patents  will  be  issued  is
uncertain.  Any unauthorized  use of our proprietary  technology could result in
costly and time-consuming litigation to enforce our proprietary rights.

Research and Development Activities
-----------------------------------
In fiscal  2003,  approximately  $61,000 was spent on research  and  development
activities.  In 2002 approximately $66,000 was spent on research and development
activities.   This  reduction   reflects  our  transition  from  development  to
production  and  manufacturing  and  attention to cost cutting  initiatives.  We
believe,  however,  that continued investment in product development is critical
to  attaining  our  strategic  objectives  and,  as  a  result,  expect  product
development  expenses to increase  significantly  in future periods.  We expense
product  development  costs  as  they  are  incurred.   Estimated  research  and
development expenditures for 2004 are $300,000.

Employees
---------

As of December 31, 2003, the Company has approximately 7 full-time employees and
3 part-time  employees.  The Company also  contracted  with other  personnel and
subcontractors for various projects on an as-needed basis. None of the Company's
employees  are  represented  by  a  labor  union.   The  Company   believes  its
relationship with its employees is satisfactory.

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


                                                                               8
<PAGE>

also obtain copies of reports files with the SEC, free of charge, on our website
at  HTTP://WWW.ADOTSITE.COM.  The  Company's  headquarters  are  located at 8301
Washington St NE, Suite 5, Albuquerque,  NM 87113. The Company's phone number at
that address is 505-797-7878.

The Company's  operations are  concentrated in a single building in Albuquerque,
New Mexico. The Company's  operations could be interrupted by fire,  earthquake,
power loss,  telecommunications failure and other events beyond our control. The
Company  does not have a detailed  disaster  recovery  plan.  In  addition,  the
Company does not carry sufficient business interruption  insurance to compensate
the Company for all losses that may occur and any losses or damages  incurred by
us could  have a  material  adverse  effect  on our  business  and/or  financial
results.

ITEM 2. DESCRIPTION OF PROPERTY

The  company  leases its  headquarters  facility  of 7,500  square  feet at 8301
Washington NE, Suite 5 in Albuquerque,  New Mexico.  This includes the executive
offices,   research   and   development   facility  and   manufacturing   plant,
approximately  500 square  feet of which is sublet to  Biomoda,  Inc. (a related
party and Company investee).  The facility is in good condition with no material
defects or deferred maintenance.  The facility is leased from unaffiliated third
parties under a lease that is currently on month to month status.  Management is
in the process of negotiating for a larger and more efficient space.

ITEM 3. LEGAL PROCEEDINGS

The  Company  may be  involved  from time to time in various  claims,  lawsuits,
disputes with third parties,  actions involving allegations of discrimination or
breach of contract actions in the normal course of the business operations.  The
Company  is  currently  not  involved  in  any  such  litigation  or  any  legal
proceedings pending, that management believes could have material adverse affect
on the Company's financial position or results of operations.

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

None


                                                                               9
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES

The  Company's  Common Stock began being  quoted on the NASDAQ  Over-the-counter
Bulletin Board ("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 reflect inter-dealer prices
without  adjustment  for retail  mark-up,  markdown  or  commission  and may not
necessarily represent actual transactions.

                                       COMMON STOCK BID
                                   High                 Low
Fiscal 2002:

        1st Quarter              $0.032              $ 0.0140

        2nd Quarter               0.014                0.0030

        3rd Quarter               0.007                0.0006

        4th Quarter               0.008                0.0007

Fiscal 2003:

        1st Quarter              $0.007              $ 0.0010

        2nd Quarter               0.003                0.0010

        3rd Quarter               0.051                0.0020

        4th Quarter               0.086                0.0039


As of  December  31, 2003 the Company  estimates  that there were  approximately
10,000  shareholders  and the closing  price of the  Company's  common stock was
$.0128.  Many of the shares of the  Company's  common  stock are held in "street
name" and consequently reflect numerous additional owners. The Company has never
paid cash  dividends  on its Common  Stock and does not  anticipate  paying cash
dividends in the near future.

Penny Stock
-----------
Until the  Company's  shares  qualify for  inclusion in the NASDAQ  system,  the
public  trading,  if  any,  of the  Company's  Common  Stock  will be on the OTC
Bulletin Board.  As a result,  an investor may find it more difficult to dispose
of, or to obtain  accurate  quotations  as to the  price,  of the  Common  Stock
offered.  The  Company's  Common Stock is subject to provisions of Section 15(g)
and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"),  commonly  referred to as the "penny stock rule."  Section 15(g) sets for
the certain  requirements  for  transactions in penny stocks,  and Rule 15g-9(d)
incorporates the definition of "penny stock" that is found in Rule 3a51-1 of the
Exchange Act. The SEC generally  defines "penny stock" to be any equity security
that  has a  market  price  less  than  $5.00  per  share,  subject  to  certain
exceptions. If the Company's Common Stock is deemed to be a penny stock, trading
in the shares  will be subject to  additional  sales  practice  requirements  on
broker-dealers who sell penny stock to persons other than established  customers
and  accredited  investors.  "Accredited  investors"


                                                                              10
<PAGE>

are  persons  with assets in excess of  $1,000,000  or annual  income  exceeding
$200,000 or $300,000  together with their spouse.  For  transactions  covered by
these rules,  broker-dealers must make a special  suitability  determination for
the purchase of such security and must have the  purchaser's  written consent to
the  transaction  prior  to the  purchase.  Additionally,  for  any  transaction
involving penny stock,  unless exempt, the rules require the delivery,  prior to
the purchase.  Additionally, for any transaction involving a penny stock, unless
exempt the rules require the delivery,  prior to the first transaction of a risk
disclosure document,  prepared by the SEC, relating to the penny stock market. A
broker-dealer   also  must  disclose  the   commissions   payable  to  both  the
broker-dealer and the registered  representative  and current quotations for the
securities.  Finally,  monthly  statements must be sent disclosing  recent price
information  for the penny  stocks  held in an account  and  information  to the
limited  market in penny  stocks.  Consequently,  these rules may  restrict  the
ability of  broker-dealer  to trade  and/or  maintain a market in the  Company's
Common Stock and may affect the ability of the  Company's  shareholders  to sell
their shares.

Recent Sales of Unregistered Securities
---------------------------------------

Common Stock
------------

During  October 2003,  the Company sold  111,500,000  shares of common stock for
$1,271,735 in cash; all shares were sold for less than $0.02.

During  November 2003, the Company sold  109,450,000  shares of common stock for
$1,552,499 in cash; all shares were sold for less than $0.03.

During  December  2003, the Company sold  59,700,000  shares of common stock for
$729,932 in cash; all shares were sold for less than $0.03.

During October 2003, the Company  issued  35,400,000  shares of common stock for
services,  which were valued at $566,545  (based on the closing  market price on
the date of grant,  which was between $0.01 - $0.03).

During November 2003, the Company issued  23,900,000  shares of common stock for
services,  which were valued at $329,833  (based on the closing  market price on
the date of grant, approximated $0.01).

During December,  2003, the Company issued 16,800,000 shares of common stock for
services,  which were valued at $191,856  (based on the closing  market price on
the date of grant, which approximated  $0.01).

During October 2003, in accordance with the applicable  convertible note payable
agreement, the Company issued approximately 29,500,000 shares of common stock at
conversion  prices of less than $0.01 in connection with the conversion of notes
payable principal approximating $86,000 and accrued interest.

During November 2003, in accordance with the applicable convertible note payable
agreement, the Company issued approximately 34,853,389 shares of common stock at
conversion  prices of less than $0.01 in connection with the conversion of notes
payable principal approximating $239,000 and accrued interest.


                                                                              11
<PAGE>


During October 2003, the Company  purchased  1,000,000  shares of its own common
stock for approximately $21,700, which is being held as treasury stock.

During  November  2003, the Company  purchased  525,000 shares of its own common
stock for appriximately $10,600, which is being held as treasury stock.

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

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

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

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

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

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

--------------------------------------------------------------------------------
                        EQUITY COMPENSATION PLANS
--------------------------------------------------------------------------------
Plan Category     Number of          Weighted-Average      Remaining available
                  Securities to      Exercise Price of     for future issuance
                  be issued upon     outstanding           under equity
                  exercise of        Options, Warrants     compensation plans
                  outstanding        and Rights ($)        (excluding securities
                  Options,                                 reflected in column
                  Warrants and                             (A)) (#)
                  Rights (#)
--------------------------------------------------------------------------------
Equity            3,175,000          $0.30                 3,725,000
Compensation
Plans approved
by security
holders
--------------------------------------------------------------------------------
Equity            8,646,000          $0.25                 N/A
Compensation
Plans not
approved by
security
holders
--------------------------------------------------------------------------------
Total            11,821,000                                3,725,000
--------------------------------------------------------------------------------

From time to time the Company issues  warrants to employees and to third parties
pursuant to various agreements, which are not pre-approved by the shareholders.

See  discussion  of  Plan  approval  by the  shareholders  in  the  accompanying
financial statements.

                                                                          12
<PAGE>

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 may provide additional liquidity.

Biomoda is a biomedical  development  company. The Company's direct ownership of
Biomoda,  as of December  31, 2003,  was  approximately  16.0%.  Two officers of
Advanced Optics Electronics,  Inc. are securities holders of Biomoda in addition
to the ADOT ownership.  Biomoda has filed a revised SB2  registration  statement
with the Securities and Exchange  Commission,  which has been declared effective
July 11, 2003.  Biomoda is offering  5,000,000 shares at $6.00 per share (for an
aggregate  offering of $30,000,000).  It is anticipated that a public market for
Biomoda's  securities will be created in the third quarter of 2004. A market for
Biomoda's shares has not been established;  therefore the potential value of the
Company's  investment cannot be measured.  There can be no assurance that if the
Company was to sell such  investment that it would be able to on terms favorable
to the Company or for the initial  offering  price.  Factors  such as  dilution,
blockage and a lack of a market may be encountered.

During the  fiscal  year  ended  December  31,  2003  $65,000  was spent for the
purchase of equipment.  Research and  development  expenditures  were $61,000 in
2003.  Funds for operations,  research and development and capital  expenditures
were provided from the sale of securities and cash reserves.

During the first quarter 2004, Advanced Optics  Electronics,  Inc. has purchased
33,000,000  shares of Genomed,  Inc., which represents  approximately 21% of the
outstanding  shares of Genomed,  Inc. The shares are restricted and must be held
for one year.  Genomed is a publicly  traded biotech company working in genomics
based disease  management.  This is a  third-party  unrelated  investment.  Such
investment  will be  accounted  for under the  equity  method  and could  have a
significant impact on the Company's future financial statements.

General
-------
Overall, the Company had positive cash flows of $3,910,004 for the twelve months
ended  December  31,  2003  resulting  from  $1,642,739  used  in the  Company's
operating  activities,  $417,428 used in the Company's investing  activities and
$5,970,171 of cash provided by financing activities.

Cash Flows From Operating Activities
------------------------------------
Net cash used in operating  activities of $1,642,739 for the twelve months ended
December 31, 2003 was  primarily due to  $3,236,000  in operating  expenses,  of
which  $1,266,000  is General and  Administrative  and  $61,000 is Research  and
Development.  Primary  non-cash  components  of Net income  include  $1,832,095,
representing  approximately  367,259,000 shares of stock issued for professional
services rendered and an increase in allowance for loss on contract of $50,000.

Cash Flows From Investing Activities
------------------------------------
Net cash used in investing  activities  of $417,428 for the twelve  months ended
December 31, 2003 was  primarily  due to purchase of property and  equipment for
approximately  $65,000,  purchase of  marketable  securities  for  approximately
$39,000,  an increase  in notes  receivable  of $35,000,  and an increase in the
notes receivable from Biomoda in the amount of approximately $278,000.

                                                                              13
<PAGE>

Cash Flows From Financing Activities
------------------------------------
Net cash provided by financing  activities  of $5,970,171  for the twelve months
ended  December  31, 2003 was  primarily  due to the  proceeds of  approximately
$6,031,000 , representing  the issuance of approximately  592,246,000  shares of
common stock,  and proceeds from issuance of convertible  debt of  approximately
$211,000.  Cash uses by  financing  activities  in the  amount of  approximately
$328,000  represented  principal payments on notes payable and convertible debt,
and the purchase of treasury stock.

The Company is actively pursuing all potential  financing options as it looks to
secure  additional  funds to both  stabilize  and grow its business  operations.
Management will review any financing options at its disposal and will judge each
potential  source of funds on its individual  merits.  There can be no assurance
that the  Company  will be able to secure  additional  funds from debt or equity
financing,  or if they can, that it will be on terms favorable to the Company or
existing stockholders.

Results of Continuing Operations
--------------------------------

Fiscal 2003 Compared to Fiscal 2002
-----------------------------------

Contract Revenue
----------------
During the quarter ended March 31, 2001, the Company  changed the accounting for
our  contract  to the  completed  contract  method.  According  to  this  way of
accounting for contracts,  we are booking no revenue until the completion of the
contract.  Please  note that the  revenue  for the same  period in 2000 has been
restated  and is now $0.  Billings  and  collections  through  December 31, 2001
totaled $89,873. There were no developments in this category during 2003.

Assets and Liabilities
----------------------
Assets  increased  by  $4,329,575  from  $1,006,297  as of December  31, 2002 to
$5,335,872 as of December 31, 2003. The increase  relates  primarily an increase
in Cash and  cash  equivalents  of  $3,967,000  and the  increase  in the  notes
receivable  from Biomoda in the amount of $273,000.  Primary uses of assets were
an increase in the reserve for contract loss, depreciation, and equity treatment
related to the  investment  in Biomoda  resulting  in a decrease  in the Biomoda
investment by approximately $49,500.

Liabilities  decreased by $751,000  from  $1,795,466  as of December 31, 2002 to
$1,044,074  as of December  31, 2003.  This  decrease  relates  primarily to the
reduction of convertible debt debentures in the amount of $671,000.

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
decreased to $60,838 in 2003 from  $65,989 in 2002.  We believe,  however,  that
continued  investment  in product  development  is  critical  to  attaining  our
strategic  objectives and, as a result,  expect product development  expenses to
increase  significantly in future periods.  We expense product development costs
as they are incurred.

Operating Expenses
------------------
Operating  expenses  increased by  $2,335,580  to  $3,236,358  during the twelve
months ended  December 31, 2003 compared to $880,778 for the twelve months ended

                                                                              14
<PAGE>

December  31,  2002.  This was  primarily  due to  approximately  $2,000,000  in
expenses related to additional stock issuance and the related professional fees.
Increases in payroll also played a significant  roll increasing from $367,482 in
2002 to  $835,156  in 2003 or  approximately  $468,000  increase  which  reflect
management's  efforts to ramp up the  organization and place systems in place in
preparation   for  the   manufacturing   phase  of  the  company.   General  and
administrative  expenses  consist of expenses for executive  and  administrative
personnel,   facilities,   professional  services,   travel,  general  corporate
activities,  and the  depreciation  and  amortization  of office  furniture  and
leasehold improvements

The Company had a net loss of $3,449,994 or $.002 loss per share, and $1,285,830
or $.01 loss per share,  for the twelve months ended December 31, 2003 and 2002,
respectively.

Other Income (Expense)
----------------------
Other  income  (expense)  consists of  interest  and other  income and  expense.
Interest  income  decreased  to $10,987 in 2003 from  $15,426 in 2002.  Interest
expense  increased  to $165,246 in 2003 from  $107,912 in 2002.  The increase in
interest expense is due primarily to settlement of the convertible debentures.

Stockholders' Equity
--------------------
Stockholders'  equity  increased by $3,502,000  from a deficit of $789,169 as of
December 31, 2002 to a positive $4,291,798 as of December 31, 2003. The increase
was primarily  attributable  to the current year equity  activity  offset by the
current year net loss.

Inflation
---------
Management  believes  that  inflation  has  not  had a  material  effect  on the
Company's results of operations.

Accounting Matters
------------------

Off-Balance Sheet Arrangements
------------------------------
We have no off-balance sheet arrangements, as defined in Regulation S-B Section
303.

Critical Accounting Policies
----------------------------
In December 2001, the SEC requested  that all  registrants  list their "three to
five most critical  accounting  policies" in the MD&A.  The SEC indicated that a
'critical  accounting policy" is one which is both important to the portrayal of
the Company's  financial condition and results,  and requires  management's most
difficult,  subjective or complex  judgements,  often as a result of the need to
make  estimates  about the effect of matters that are inherently  uncertain.  We
believe that our following accounting policies fit this definition:

Revenue Recognition
-------------------
In accordance  with Statement of Position 81-1,  "ACCOUNTING  FOR PERFORMANCE OF
CONSTRUCTION-TYPE AND CERTAIN  PRODUCTION-TYPE  CONTRACTS," the Company accounts
for  revenue  and costs  related  to its  long-term  contract  in process by the
completed-contract   method,  whereas  during  the  period  from  May  22,  1996
(Inception)  to December  31,  1999,  revenue and costs were  determined  by the
percentage-of-completion method. The completed-contract method of accounting was
adopted  in  2001  due to the  Company's  uncertainty  regarding  contract  cost
estimates.  The financial statements of the period from May 22, 1996 (Inception)
to December 31,  1999,  were  restated to apply the  completed  contract  method
retroactively.  The effect of the accounting change had no effect on net loss or
loss per share previously  reported for 1999 or for the period from May 22, 1996
(Inception) to December 31, 1999.

                                                                              15
<PAGE>

Under the completed  contract method of accounting,  contract revenues and costs
are recognized when the contract is completed,  with estimated losses recognized
when it becomes  evident  that  contract  costs will exceed  contract  revenues.
Contract  costs include all direct  material and labor costs and those  indirect
costs  related  to  contract  performance,  such as  indirect  labor,  supplies,
overhead, equipment depreciation and interest.

Costs in excess of amounts  billed are  classified as current assets under costs
and estimated  earnings in excess of billings on  uncompleted  contract based on
the estimated product delivery date.

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

ITEM 7.   FINANCIAL STATEMENTS

The financial statements and notes thereto,  together with the report thereon of
Squar,  Milner,  Reehl & Williamson,  LLP (the Company's  principal  independant
accountants)  dated  February 27, 2004  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.

On November 21, 2002,  Advanced  Optics  Electronics  Inc. (the  "Company")  was
formally  notified of the  resignation  of their  auditors,  Atkinson & Company.
Atkinson & Company cited the significant new regulations and oversight  required
upon pubic  registrants and the accounting firms who serve as their auditors and
their decision to discontinue their public registrant audit practice.

The audit reports of Atkinson & Company on the Registrant's financial statements
for the fiscal year ending December 31, 2001 did not contain any adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.

In connection  with the audits for the two fiscal years ending December 31, 2000
and December 31, 2001 and through November 21, 2002, there were no disagreements
with  Atkinson & Company on any matter of  accounting  principles  or practices,
financial  statement   disclosure,   or  auditing  scope  or  procedure,   which
disagreements  if not resolved to the  satisfaction  of Atkinson & Company would
have  caused them to make  reference  thereto in their  report on the  financial
statements for such years.  During the two fiscal years ending December 31, 2000
and  December  31,  2001 and  through  November  21,  2002,  there  have been no
reportable events as defined in Regulation S-B Item 304(a)(1)(iv).

The Registrant  has requested  that Atkinson & Company  furnish it with a letter
addressed to the SEC stating whether or not it agrees with the above statements.
A copy of such letter,  dated November 22, 2002,  was previously  filed with the
SEC.

Effective  December 19, 2002, the Board of Directors of the Company approved the
engagement of Squar, Milner, Reehl & Williamson,  LLP Public Accountants ("Squar
Milner") as its independent auditors for the fiscal year ended December 31, 2002
and future  years to replace  Atkinson & Co. The Company  did not  consult  with
Squar Milner on any matters prior to their retention.

                                                                              16
<PAGE>


ITEM 8A.  EVALUATION OF CONTROLS AND PROCEDURES

The Company  carried out an  evaluation of the  effectiveness  of the design and
operation of the Company's  disclosure  controls and  procedures  (as defined in
Exchange Act Rules  13a-15(e)  and  15d-15(e))  as of December  31,  2003.  This
evaluation was carried out under the supervision and with the  participation  of
the  Company's  management,  including Mr. John  Cousins,  the  Company's  Chief
Financial  Officer.  Based upon the  evaluation,  the Company's  Chief Financial
Officer concluded that the Company's  disclosure controls and procedures were of
limited effectiveness.

Subsequent  to December 31, 2003,  the Company  hired an  independant  3rd party
consultant  to  re-evaluate  and  revise  its  existing   control  policies  and
procedures and to implement new disclosure  controls and procedures.  As part of
such plan and implementation,  the Company is re-evaluating and re-designing and
documenting  policies and  procedures,  putting such procedures in operation and
monitoring the effectiveness of the procedures.

Changes in Controls and Procedures
----------------------------------
There were no significant  changes made in our internal  controls over financial
reporting  during the  quarter  ended  December  31,  2003 that have  materially
affected or are reasonably likely to materially affect these controls.

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


                                                                              17
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

The following sets forth  information,  as of December 31, 2003,  concerning the
Company's directors and executive officers:


Name                 Age  Position                                 Since
-------------------  ---  -------------------------------------    -------------
Michael Pete         59   President, Director                      July 1994
Leslie S. Robins     66   Exec. Vice Pres., Secretary, Chairman    November 1992
John J. Cousins      47   Vice President, Treasurer                June 1999
Richard Josephberg   57   Director                                 April 2000


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

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

LESLIE S. ROBINS has been  Executive Vice  President,  Secretary and Chairman of
the Board of the Company  since May 1996,  and prior to joining us, he served in
the same capacities  with the Company's  predecessor,  PLZ Tech,  since November
1992.  Mr.  Robins  currently  is a member of the board of directors of Biomoda,
Inc. (a related  party and  Company  investee)  since  April  1999,  and is Vice
President  since April 2002. From November 1989 to December 1992, Mr. Robins was
Managing  Partner of Coronado  Group,  performing  analyses of small  technology
companies,  and from May 1986 to June 1989, he was Executive  Vice  President of
Triton  Productions  Inc. From  September  1978 to October 1987,  Mr. Robins was
Managing  Partner of Longview  Management;  serving as  investment  managers for
individuals  in the  entertainment  industry.  Mr.  Robins  has a B.S.  from the
University of Miami and attended Harvard Business School.

JOHN J. COUSINS, Vice President of Finance and Treasurer - Mr. Cousins began his
business   career  as  a  design  engineer  for  Ampex  Corp  and  the  American
Broadcasting Company. Mr. Robins currently is a member of the board of directors
of Biomoda, Inc. (a related party and Company investee). After receiving his MBA
from the Wharton School he held several senior  financial  management  positions
focusing on capital  markets and business  development.  He is also President of
Biomoda,  Inc. and Chairman of the Board of Directors since April 2002. He holds
undergraduate  degrees from Boston University and the Lowell Institute School at
MIT.

                                                                              18
<PAGE>

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

Compliance With Section 16(A) of  the Securities Exchange
---------------------------------------------------------
Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
directors and executive  officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the SEC initial
reports of  ownership  and reports of changes in  ownership  of common stock and
other equity securities of the Company. Officers, directors and greater than ten
percent shareholders are requited by SEC regulations to furnish the Company with
copies of all Sections 16(a) forms they file. To the Company's knowledge,  based
solely on the review of copies of such  reports  furnished  to the  Company  and
written  representations  that no other reports were required and to the best of
its knowledge, during the year ended December 31, 2003, all Section 16(a) filing
requirements  applicable to the Company's  officers,  directors and greater than
ten percent shareholders were complied with.

Family Relationships
--------------------
There are no family  relationships  between  or among the  directors,  executive
officers or persons  nominated or charged by the Company to become  directors or
executive officers.

Involvement in Legal Proceedings
--------------------------------
To the best of the Company's knowledge,  during the past five years, none of the
following  occurred  with  respect to a present or former  director or executive
officer of the  Company:  (1) Any  bankruptcy  petition  filed by or against any
business of which such person was a general partner or executive  officer either
at the time of the  bankruptcy  or within two years prior to that time;  (2) Any
conviction  in a criminal  proceeding  or being  subject  to a pending  criminal
proceeding  (excluding traffic  violations and other minor offenses);  (3) Being
subject to any order, judgment or decree, not subsequently  reversed,  suspended
or  vacated,  of  any  court  of  any  competent  jurisdiction,  permanently  or
temporarily enjoining barring, suspending or other wise limiting his involvement
in any type of business,  securities or banking activities;  and (4) Being found
by a  court  of  competent  jurisdiction  (in a  civil  action),  the SEC or the
Commodities  Futures  Trading  Commission  to have  violated  a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.

Code of Ethics
--------------
For the year ended  December 31, 2003,  the Company did not have formal  written
values and ethical standards.  However,  the Company management does communicate
values and ethical  standards during company wide meetings.  Such standards will
be outlined in the human resource manual to be completed before the end of 2004.

                                                                              19
<PAGE>

Audit Committee Financial Expert
--------------------------------
The  Company  does not have an audit  committee.  Since our  securities  are not
currently  listed  on  or  with  a  national  securities  exchange  or  national
securities  association,  we are  not  required  to have  an  independent  audit
committee.  Therefore,  the  Company  has  not  designated  an  audit  committee
financial  expert.  The  Company  currently  is in the  process  of  identifying
independent  audit committee  members,  including a financial expert to serve on
our audit committee and we expect to continue this process in 2004.

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
2001, 2002 and 2003:

<TABLE>
<CAPTION>
                                                     SUMMARY COMPENSATION TABLE
-------------------|------|--------------------------------------|-----------------------------|---------|----------------|
                   |      |         Annual Compensation          |   Long-Term Compensation    |         |                |
                   |      |                                      |           Awards            |         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
                   |      |           |          |  Other Annual | Restricted | Securities     | LTIP    | All Other      |
                   |      |           |          |  Compensation | Stock      | Underlying     | Payouts | Compensation   |
                   |      |           |          |  (1)          | Award(s)   | Options        |         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
Name and           | Year |  Salary   |  Bonus   | ($)           | ($)        | (#)            | ($)     | ($)            |
Principal Position |      |  ($)      |  ($)     |               |            |                |         |                |

<S>                <C>    <C>       <C>       <C>            <C>         <C>              <C>      <C>
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
Michael Pete,      |      |           |          |               |            |                |         |                |
President,         |      |           |          |               |            |                |         |                |
Director           |      |           |          |               |            |                |         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
                   | 2003 |   $13,325 |          |               |            |                |         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
                   | 2002 |    $5,975 |          |               |            |     150,000    |         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
                   | 2001 |   $15,600 |   ----   |    ----       |    ----    |       ----     |   ----  |       ----     |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
Leslie S. Robins,  |      |           |          |               |            |                |         |                |
Chairman of the    |      |           |          |               |            |                |         |                |
Board and Exec. VP |      |           |          |               |            |                |         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
                   | 2003 |  $162,444 | $390,000 |    $8,500(1)  |            |                |         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
                   | 2002 |   $86,223 |          |    $2,451(1)  |            |   1,100,000 (2)|         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
                   | 2001 |   $62,133 |   ----   |   $10,387(1)  |    ----    |       ----     |   ----  |       ----     |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
John J. Cousins,   |      |           |          |               |            |                |         |                |
VP Finance         |      |           |          |               |            |                |         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
                   | 2003 |  $113,965 |          |               |            |                |         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
                   | 2002 |  $109,797 |          |               |            |     250,000    |         |                |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
                   | 2001 |  $109,406 |   ----   |    ----       |    ----    |       ----     |   ----  |       ----     |
-------------------|------|-----------|----------|---------------|------------|----------------|---------|----------------|
</TABLE>

(1) Represents the amount of an automobile  lease for the benefit of Mr. Robins.
(2) Exercised  during  2002 for a note   receivable  plus  interest,  which  was
    cancelled and the shares were returned during fiscal 2003.

                                                                              20
<PAGE>

Option Grants in Fiscal Year 2003
---------------------------------

None.

Aggregated  Option  Exercises in Fiscal Year 2003 and Option  Values At December
--------------------------------------------------------------------------------
31, 2003
--------

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, 2003.

<TABLE>
<CAPTION>
                             Year-end Option Values

                                                           Number of Securities
                                                          Underlying Unexercised            Value of Unexercised
                                                                  Options                   In-the-money Options
                                                             December 31, 2003                December 31, 2003
                                                       -----------------------------     ---------------------------
Name                   Shares Aqcuired   Value          Exercisable    Unexercisable     Exercisable   Unexercisable
                       On Exercise (#)   Realized ($)       (#)             (#)              ($)            ($)
-----------------------------------------------------------------------------------------------------------------------
<S>                    <C>               <C>            <C>                 <C>             <C>            <C>
Michael Pete                                               425,000          ---              ---            ---
Leslie Robins                                            1,900,000          ---              ---            ---
John Cousins                                               550,000          ---              ---            ---

-------------------
</TABLE>

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

                            LONG-TERM INCENTIVE PLANS

As of December 31, 2003 there is no long-term incentive plan.

                              DIRECTOR COMPENSATION

Non-employee directors of the Company received in 2003 a $3,750 annual retainer.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENIFICIAL OWNERS AND MANAGEMENT

The  following  table sets forth certain  information  known to the Company with
respect to beneficial  ownership of the  Company's  Common Stock as of March 15,
2004 by (a) each person known to the Company to beneficially  own more than five
percent  of the  Company's  Common  Stock,  (b)  each  Director,  (c) the  Named
Executive  Officers,  and (d) all Directors  and executive  officers as a group.
Unless otherwise  indicated in the footnotes to the table, the beneficial owners
named have, to the knowledge of the Company,  sole voting and  investment  power
with respect to the shares  beneficially  owned,  subject to community  property
laws where applicable.  As of December 31, 2003 there were 2,755,136,349  shares
issued and outstanding.


                                                                              21
<PAGE>

<TABLE>
<CAPTION>
                                                                                     Percent
                                                          Number of Shares         Beneficially
            Name of Beneficial Owner (1)                  Beneficially Owned          Owned
------------------------------------------------------------------------------------------------
<S>                                                       <C>                      <C>
Leslie Robins*......................................           12,731,546(2)            *
Michael Pete*.......................................            1,100,000(3)            *
John Cousins*.......................................              650,000(4)            *
Richard A. Josephberg*..............................              350,000(5)            *
*All directors and executive officers as a group               14,831,546               *
(4 persons)
------------------
</TABLE>

     *Less than 1.0%.

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

(2)      Includes  1,900,000  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  425,000  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  550,000  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  275,000  shares of  common  stock  issuable  upon  exercise
         of a warrant, which is currently exercisable.

Compliance With Section 16(A) of the Securities Exchange Act of 1934
--------------------------------------------------------------------
The Company  believes that the  beneficial  owners of  securities  listed above,
based on information  furnished by such owners,  have sole investment and voting
power with respect to such  shares,  subject to  community  property  laws where
applicable.  Beneficial  ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with respect to
securities.   Shares  of  stock   subject  to  options  or  warrants   currently
exercisable,  or exercisable within 60 days, are deemed outstanding for purposes
of computing the percentage of the person holding such options or warrants,  but
are not deemed outstanding for purposes of computing the percentage of any other
person.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Notes Receivable
----------------
As of  December  31, 2003 and 2002,  the Company had net  advances to an officer
approximating  $67,300. The advances accrue interest at rates ranging from 5% to
6%  (approximately  $3,900 and $0 of interest  income has been  recorded for the
year ended December 31, 2003 and 2002,  respectively)  and are due on demand. As
these notes receivable are with a shareholder and a Company officer, the Company
has classified these amounts as a decrease to  stockholders'  equity at December
31, 2003.


                                                                              22
<PAGE>

During fiscal 2003, the Company advanced  approximately $280,000 to Biomoda (see
below) under an existing line of credit  agreement  (the  "Line").  The advances
accrue interest at 5%, are due on demand and the Line has no established advance
limit.  The Company is committed to advancing  Biomida capital until Biomoda has
raised sufficient capital under its initial offering.

Investment in Biomoda, Inc
--------------------------
As of December 31, 2003, the Company owned  1,072,285 or 15.92% of the 6,737,282
outstanding shares of Biomoda, a development stage company involved primarily in
the  development  of  technology  for the early  detection of lung cancer.  As a
development  stage company,  Biomoda has not had any revenues as of December 31,
2003.

Biomoda has filed a SB-2 registration statement with the Securities and Exchange
Commission, in which they are offering 5,000,000 shares of its common stock. The
initial offering price is $6.00 per share,  however the price that Biomoda,  and
the Company,  will be able to sell the shares is not determinable,  as no shares
have been issued as of the filing of these  financial  statements.  A market for
Biomoda's shares has not been established;  therefore the potential value of the
Company's  investment cannot be measured.  There can be no assurance that if the
Company was to sell such  investment that it would be able to on terms favorable
to the Company or for the initial  offering  price.  Factors  such as  dilution,
blockage and a lack of market may be encountered.

For the year ended December 31, 2001, the Company reported it's investment under
the cost method since its ownership was not  sufficient for the investment to be
accounted for using the equity method. During 2002, the Company's influence over
Biomoda  increased such that the investment  qualified for accounting  under the
equity  method.  The  Company  has  recognized  the  proportionate  interest  in
Biomoda's net loss for the year ended December 31, 2003 and 2002.

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.

--------------------------------------------------------------------------------
EXHIBITS
--------------------------------------------------------------------------------
2    Plan of Acquisition, Reorganization,             None
     arrangement, 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               Incorporated by reference
     holders, including Indentures                    to Exhibit 3.2
--------------------------------------------------------------------------------
7    Opinion re: liquidation preference               Incorporated by reference
                                                      to Exhibit 3.2
--------------------------------------------------------------------------------



                                                                              23
<PAGE>

--------------------------------------------------------------------------------
10.1 Incentive Stock Option Plan                      Filed Herewith
--------------------------------------------------------------------------------
10.2 Lease Agreement Advanced Optics                  Incorporated by reference
     Electronics, Inc. and JMP Company Inc            to Exhibit 10.2 of the
                                                      Company's Registration
                                                      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
--------------------------------------------------------------------------------
31.1 Certification pursuant to Securities             Filed Herewith
     Exchange Act Rules 13A-14 and 15D-14
     as adopted pursuant to Section 302
     of the  Sarbannes  Oxley Act of 2002
--------------------------------------------------------------------------------
31.2 Certification pursuant to Securities             Filed Herewith
     Exchange Act Rules 13A-14 and 15D-14
     as adopted pursuant to Section 302
     of the  Sarbannes  Oxley Act of 2002
-------------------------------------------------------------------------------
32.1 Certification Pursuant To 18 U.S.C.ss.1350,      Filed Herewith
     As Adopted Pursuant To Section 906 of The
     SARBANES-OXLEY ACT OF 2002
--------------------------------------------------------------------------------
32.2 Certification Pursuant To 18 U.S.C.ss.1350,      Filed Herewith
     As Adopted Pursuant To Section 906 Of The
     SARBANES-OXLEY ACT OF 2002
--------------------------------------------------------------------------------


Reports On Form 8-K
--------------------
None.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents fees for professional  services  rendered by Squar,
Milner,  Reehl &  Williamson  LLP ("Squar  Milner")  for the annual audit of our
consolidated  financial  statements  as of and for the years ended  December 31,
2003,  and 2002 and fees  billed for other  services  rendered  by Squar  Milner
during such years:

                          For the Years Ended December 31,
                          --------------------------------
                               2003                2002
                             -------             -------

Audit Fees                   $45,000             $29,000
Audit Related Fees                -                   -
Tax Fees                       3,000               2,500
All Other Fees                    -                   -
                             ---------------------------
                              48,000              31,500
                             ---------------------------

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

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


                                                                              24
<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 30, 2004

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)


                                                                              25

<PAGE>









                        ADVANCED OPTICS ELECTRONICS, INC.

                              FINANCIAL STATEMENTS

                                DECEMBER 31, 2003










<PAGE>







                          INDEX TO FINANCIAL STATEMENTS





Independent Auditors' Report................................................F-1

Balance Sheet...............................................................F-2

Statements of Operations....................................................F-3

Statements of Stockholders' Equity and Other Comprehensive Loss.............F-4

Statements of Cash Flows....................................................F-6

Notes to Financial Statements...............................................F-8






<PAGE>






                          INDEPENDENT AUDITORS' REPORT


         To the Board of Directors
         Advanced Optics Electronics, Inc.

         We have  audited the  accompanying  balance  sheets of Advanced  Optics
         Electronics,  Inc. (the "Company"),  a development stage company, as of
         December  31,  2003,   and  the   related   statements  of  operations,
         stockholder's  equity and  other  comprehensive loss and cash flows for
         each of the two years in  the period ended  December  31,  2003.  These
         financial   statements  are   the   responsibility   of  the  Company's
         management.  Our  responsibility  is  to  express  an  opinion on these
         financial  statements based on  our audits. The financial statements of
         Advanced  Optics  Electronics,  Inc.  for  the period from May 22, 1996
         (Inception)  through December 31, 2001,  were audited by other auditors
         who expressed unqualified opinions on those periods.

         We conducted our audits in accordance with auditing standards generally
         accepted in the United States of America.  Those standards require that
         we plan and  perform  the audit to obtain  reasonable  assurance  about
         whether the financial statements are free of material misstatement.  An
         audit  includes  examining,  on a test basis,  evidence  supporting the
         amounts and  disclosures  in the  financial  statements.  An audit also
         includes  assessing  the  accounting  principles  used and  significant
         estimates  made  by  management,  as  well as  evaluating  the  overall
         financial statement presentation.  We believe that our audits provide 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. as of December 31, 2003,  and the results of
         its  operations  and its cash  flows  for each of the two  years in the
         period ended December 31, 2003 in conformity with accounting principles
         generally accepted in the United States of America.


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

         February 27, 2004
         Newport Beach, California

Page F-1
<PAGE>

--------------------------------------------------------------------------------
                   ADVANCED OPTICS ELECTRONICS, INC.
                     (A Development Stage Company)
                             BALANCE SHEET
                           DECEMBER 31, 2003
--------------------------------------------------------------------------------
                                ASSETS

Current Assets
    Cash                                                         $  3,959,862
    Costs in excess of billings on uncompleted contract               795,000
    Marketable securities                                              56,749
    Other current assets                                               40,438
                                                                 ------------
            Total current assets                                    4,852,049

Property and Equipment, Net                                           116,751

Other Assets
    Investment in and advances to Biomoda, Inc.                       332,072
    Notes receivable                                                   35,000
                                                                 ------------
                                                                      367,072

                                                                 $  5,335,872
                                                                 ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
    Accounts payable                                             $    181,624
    Accrued expenses                                                  266,653
    Convertible debentures                                            595,797
                                                                 ------------

         Total current liabilities                                  1,044,074
                                                                 ------------
Commitments and Contingencies

Stockholders' Equity
    Preferred stock, $0.001 par value, 10,000,000 shares
      authorized; no shares issued and outstanding                        --
    Common stock, $0.001 par value, 2,950,000,000 shares
      authorized; 2,755,136,349 shares issued and outstanding       2,755,136
    Treasury stock, 4,509,000 shares at cost                          (43,731)
    Notes receivable officer                                          (67,299)
    Additional paid in capital                                     15,956,321
    Accumulated other comprehensive income                             17,449
    Deficit accumulated during the development stage              (14,326,078)
                                                                 ------------

         Total stockholders' equity                                 4,291,798
                                                                 ------------
                                                                 $  5,335,872
                                                                 ============


--------------------------------------------------------------------------------
Page F-2                     See Accompanying Notes to the Financial Statements.


<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                            STATEMENTS OF OPERATIONS
        For the Years Ended December 31, 2003 and 2002 and For Rhe Period
             From May 22, 1996 (Inception) Through December 31, 2003
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                        MAY 22, 1996
                                                                                                         (INCEPTION)
                                                                                                           THROUGH
                                                                                                         DECEMBER 31,
                                                                      2003               2002               2003
                                                                ---------------    ---------------    ---------------
<S>                                                             <C>                <C>                <C>
CONTRACT REVENUES                                               $            --    $            --    $            --

OPERATING EXPENSES
  General and administrative                                         (2,340,364)          (447,307)        (9,152,458)
  Payroll and related                                                  (835,156)          (367,482)          (835,156)
  Research and development                                              (60,838)           (65,989)        (1,392,911)
  Asset impairment                                                           --                 --           (227,570)
                                                                ---------------    ---------------    ---------------
                                                                     (3,236,358)          (880,778)       (11,608,095)

ESTIMATED LOSS ON CONTRACT                                              (50,000)          (297,000)        (1,255,000)
                                                                ---------------    ---------------    ---------------

OPERATING LOSS                                                       (3,286,358)        (1,177,778)       (12,863,095)
                                                                ---------------    ---------------    ---------------
OTHER (EXPENSE) INCOME
  Interest income                                                        10,987             15,426             82,369
  Loss on marketable equity securities                                       --                 --            (29,368)
  Other investment gains                                                     --                 --             59,784
  Loss from investment in Biomoda, Inc.                                 (49,548)           (15,566)          (339,298)
  Loss on disposal of assets                                                 --                 --             (4,306)
  Gain on extinguishment of debt                                         40,171                 --             40,171
  Interest expense                                                     (165,246)          (107,912)        (1,209,315)
                                                                ---------------    ---------------    ---------------
                                                                       (163,636)          (108,052)        (1,399,963)
                                                                ---------------    ---------------    ---------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
  IN ACCOUNTING PRINCIPLE                                            (3,449,994)        (1,285,830)       (14,263,058)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
   PRINCIPLE                                                                 --                 --            (63,020)
                                                                ---------------    ---------------    ---------------

NET LOSS                                                        $    (3,449,994)   $    (1,285,830)   $   (14,326,078)
                                                                ===============    ===============    ===============
Basic and diluted net loss before cumulative effect of change
  in accounting principle available to common shareholder
  per common share                                              $         (0.00)   $         (0.01)

Cumulative effect of change in accounting principle                        --                 --
                                                                ---------------    ---------------

Basic and diluted net loss available to common shareholder      $         (0.00)   $         (0.01)
  per common share                                              ===============    ===============

Basic and diluted weighted average common shares
  outstanding                                                     1,568,587,985        208,684,389
                                                                ===============    ===============
</TABLE>

--------------------------------------------------------------------------------
Page F-3                     See Accompanying Notes to the Financial Statements.

<PAGE>
--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
         STATEMENTS OF STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE LOSS
     For The Period From May 22, 1996 (Inception) Through December 31, 2003
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                            Preferred Stock            Common Stock                Treasury Stock
                                          -------------------   ---------------------------  --------------------------
                                            Shares    Amount        Shares         Amount       Shares         Amount
                                          ---------  --------   -------------    ----------  -------------   ----------
<S>                                      <C>        <C>          <C>            <C>          <C>              <C>

Balance at May 22, 1996 (Inception)              -   $     -               -     $       -              -            -
Stock issued to incorporators for cash           -         -         500,000           500              -            -
Stock issued for the net assets
  of PLZ Tech, Inc.                              -         -       4,500,000         4,500              -            -
Net loss                                         -         -               -             -              -            -
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                            -         -               -             -              -            -
Comprehensive loss
                                          ---------  --------   -------------    ----------  -------------   ----------
Balance, December 31, 1996                       -         -       5,000,000         5,000              -            -
Stock issued for cash and services               -         -       2,281,212         2,281              -            -
Net loss                                         -         -               -             -              -            -
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                            -         -               -             -              -            -
Comprehensive 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                                         -         -               -             -              -            -
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                            -         -               -             -              -            -
Comprehensive 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                       -         -               -             -       (229,000)     (41,760)
Sale of treasury stock                           -         -               -             -         85,000       11,130
Net loss                                         -         -               -             -              -            -
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                            -         -               -             -              -            -
Comprehensive loss
                                          ---------  --------   -------------    ----------  -------------   ----------

Balance, December 31, 1999                       -         -      46,140,973        46,141       (144,000)     (30,630)
Stock issued for cash                          710         1         782,000           782              -            -
Stock issued for services                        -         -       3,955,202         3,955              -            -
Purchase of treasury stock                       -         -               -             -        (63,500)     (46,486)
Sale of treasury stock                           -         -               -             -        142,400       22,542
Exercise of stock options for
   notes receivable                              -         -       1,850,000         1,850              -            -
Amortizaton of discount of
   convertible preferred stock                   -         -               -             -              -            -
Exercise of preferred stock
   conversion feature                            -         -       9,200,000         9,200              -            -
Issuance of convertible debentures               -         -               -             -              -            -
Exchange of preferred stock
   for convertible debentures                 (710)       (1)              -             -              -            -
Intrinsic value of
   convertible debenture                         -         -               -             -              -            -
De-investment in Wizard
   Technologies                                  -         -               -             -              -            -
Net loss                                         -         -               -             -              -            -
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                            -         -               -             -              -            -
Comprehensive loss
                                          ---------  --------   -------------    ----------  -------------   ----------

Balance, December 31, 2000                       -         -      61,928,175        61,928        (65,100)     (54,574)
Stock issued for cash                            -         -       1,382,778         1,383              -            -
Stock issued for services                        -         -      10,461,498        10,461              -            -
Purchase of treasury stock                       -         -               -             -       (251,700)     (16,215)
Amortization of discount on
   convertible debenture                         -         -               -             -              -            -
Stock issued upon debt conversion                -         -       7,064,886         7,065              -            -
Net loss                                         -         -              -              -              -            -
                                          ---------  --------   -------------    ----------  -------------   ----------

Balance, December 31, 2001                       -         -      80,837,337        80,837       (316,800)     (70,789)
</TABLE>
<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
         STATEMENTS OF STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE LOSS
     For The Period From May 22, 1996 (Inception) Through December 31, 2003
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                        Deficit
                                                                        Accumulated     Accumulated
                                          Additional                    During the      Other           Other          Total
                                            Paid In         N/R         Development     Comprehensive   Comprehensive  Stockholders'
                                           Capital      Stockholder     Stage           Loss            Loss           Deficit
                                          -----------   -----------    -------------    -------------   ------------   ------------
<S>                                      <C>           <C>             <C>              <C>

Balance at May 22, 1996 (Inception)       $        -    $        -     $          -     $          -    $         -    $         -
Stock issued to incorporators for cash        24,500             -                -                -              -         25,000
Stock issued for the net assets
  of PLZ Tech, Inc.                          281,096             -                -                -              -        285,596
Net loss                                          -              -          (76,902)               -              -        (76,902)
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                             -              -                -                -              -             -
                                                                                                        ------------
Comprehensive loss                                                                                      $         -
                                          -----------   -----------    -------------    -------------   ------------   ------------

Balance, December 31, 1996                   305,596             -          (76,902)               -              -        233,694
Stock issued for cash and services           362,720             -                -                -              -        365,001
Net loss                                          -              -          (84,690)               -              -        (84,690)
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                             -              -                -                -              -             -
                                                                                                        ------------
Comprehensive loss                                                                                      $         -
                                          -----------   -----------    -------------    -------------   ------------   ------------

Balance, December 31, 1997                   668,316             -         (161,592)               -              -        514,005
Stock issued for cash                      1,281,728             -                -                -              -      1,292,707
Stock issued for services                    293,719             -                -                -              -        296,470
Stock issued in exchange for
  note receivable                             28,685             -                -                -              -         29,000
Purchase and retirement of
  treasury stock                             (39,913)            -                -                -              -        (40,385)
Net loss                                           -             -         (752,111)               -              -       (752,111)
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                             -              -                -                -              -             -
                                                                                                        ------------
Comprehensive loss                                                                                      $         -
                                          -----------   -----------    -------------    -------------   ------------   ------------

Balance, December 31, 1998                 2,232,535             -         (913,703)               -              -      1,339,686
Stock issued for cash                        855,101             -                -                -              -        863,783
Stock issued for services                  1,469,320             -                -                -              -      1,486,414
Intrinsic value of beneficial
  conversion feature of notes payable        174,610             -                -                -              -        174,610
Fair value of warrants related
   to notes payable                          125,000             -                -                -              -        125,000
Purchase and retirement of
   treasury stock                            (10,643)            -                -                -              -        (11,132)
Purchase of treasury stock                         -             -                -                -              -        (41,760)
Sale of treasury stock                        24,334             -                -                -              -         35,464
Net loss                                           -             -       (2,765,862)               -              -     (2,765,862)
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                             -              -                -                -              -             -
                                                                                                        ------------
Comprehensive loss                                                                                      $         -
                                          -----------   -----------    -------------    -------------   ------------   ------------

Balance, December 31, 1999                 4,870,257             -       (3,679,565)               -              -      1,206,203
Stock issued for cash                      1,012,710             -                -                -              -      1,013,492
Stock issued for services                  1,726,197             -                -                -              -      1,730,152
Purchase of treasury stock                         -             -                -                -              -        (46,486)
Sale of treasury stock                        54,771             -                -                -              -         77,313
Exercise of stock options for
   notes receivable                          220,150      (193,427)               -                -              -         28,573
Amortizaton of discount of
   convertible preferred stock               159,677             -                -                -              -        159,677
Exercise of preferred stock
   conversion feature                        533,678             -                -                -              -        542,878
Issuance of convertible debentures           263,830             -                -                -              -        263,830
Exchange of preferred stock
   for convertible debentures               (869,678)            -                -                -              -       (869,678)
Intrinsic value of
   convertible debenture                     227,898             -                -                -              -        227,898
De-investment in Wizard
   Technologies                              (59,583)            -                -                -              -        (59,583)
Net loss                                           -             -       (3,827,873)               -              -     (3,827,873)
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                             -              -                -                -              -             -
                                                                                                        ------------
Comprehensive loss                                                                                      $         -
                                          -----------   -----------    -------------    -------------   ------------   ------------


Balance, December 31, 2000                 8,139,907      (193,427)      (7,507,438)               -              -        446,396
Stock issued for cash                         66,844             -                -                -              -         68,227
Stock issued for services                    412,284             -                -                -              -        422,745
Purchase of treasury stock                         -             -                -                -              -        (16,215)
Amortization of discount on
   convertible debenture                     143,875             -                -                -              -        143,875
Stock issued upon debt conversion            147,008             -                -                -              -        154,073
Net loss                                           -             -       (1,985,142)               -              -     (1,985,142)
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                             -              -                -                -              -             -
                                                                                                        ------------
Comprehensive loss                                                                                      $         -
                                          -----------   ----------     -------------    -------------   ------------   ------------

Balance, December 31, 2001                 8,909,918      (193,427)      (9,492,580)               -              -       (766,041)

</TABLE>
--------------------------------------------------------------------------------
Page F-4                     See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                           Preferred Stock             Common Stock                Treasury Stock
                                          -------------------   ---------------------------  --------------------------
                                            Shares    Amount        Shares         Amount       Shares         Amount
                                          ---------  --------   -------------    ----------  -------------   ----------
<S>                                      <C>        <C>        <C>              <C>         <C>             <C>
Stock issued for cash                            -         -     315,845,000       315,845              -            -
Stock issued for services                        -         -     115,768,000       115,768              -            -
Purchase of treasury stock                       -         -              -             -      (1,400,000)      (8,732)
Sale of treasury stock                           -         -              -             -         507,800       72,887
Exercise of stock options for
   notes receivable                              -         -       1,100,000         1,100              -            -
Advances to officer                              -         -              -             -               -            -
Reclass of accrued interest
   with note receivable                          -         -              -             -               -            -
Stock issued upon debt conversion                -         -      78,695,566        78,696              -            -
Retroactive application of
   equity method for investment
   in Bio Moda, Inc.                             -         -              -             -               -            -
Net loss                                         -         -              -             -               -            -
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                            -         -               -             -              -            -
Comprehensive loss
                                          ---------  --------   -------------    ----------  -------------   ----------

Balance, December 31, 2002                       -         -     592,245,903       592,246     (1,209,000)      (6,634)
Stock issued for cash                            -         -    1,477,760,00     1,477,760              -            -
Stock issued for services                        -         -     367,249,994       367,250              -            -
Purchase of treasury stock                       -         -              -             -     (13,250,000)     (61,943)
Sale of treasury stock                           -         -              -             -       9,950,000       24,846
Accrued interest on advances
   to officer                                    -         -              -             -               -            -
Cancellation of stock issued
   for note receivable                           -         -      (2,950,000)       (2,950)
Stock issued upon debt conversion,
   including $67,000 of interest                 -         -     320,830,452       320,830              -            -
Net loss                                         -         -
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                            -         -               -             -              -            -
Comprehensive loss
                                          ---------  --------   -------------    ----------  -------------   ----------

Balance, December 31, 2003                       -   $     -    2,755,136,34   $ 2,755,136     (4,509,000)   $ (43,731)
                                          =========  ========   =============    ==========  =============   ==========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                        Deficit
                                                                        Accumulated     Accumulated
                                          Additional                    During the      Other           Other          Total
                                            Paid In         N/R         Development     Comprehensive   Comprehensive  Stockholders'
                                           Capital      Stockholder     Stage           Loss            Loss           Deficit
                                          -----------   -----------    -------------    -------------   ------------   -------------
<S>                                       <C>          <C>              <C>             <C>

Stock issued for cash                        229,816             -                -                -              -         545,661
Stock issued for services                    366,301             -                -                -              -         482,069
Purchase of treasury stock                         -             -                -                -              -          (8,732)
Sale of treasury stock                       (65,058)            -                -                -              -           7,829
Exercise of stock options for
   notes receivable                           20,900       (22,000)               -                -              -              -
Advances to officer                                -       (34,300)               -                -              -         (34,300)
Reclass of accrued interest
   with note receivable                            -       (59,175)               -                -              -         (59,175)
Stock issued upon debt conversion            348,324             -                -                -              -         427,020
Retroactive application of
   equity method for investment
   in Bio Moda, Inc.                               -             -          (97,674)               -              -         (97,674)
Net loss                                           -             -       (1,285,830)               -              -      (1,285,830)
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                             -              -                -                -              -             -
                                                                                                        ------------
Comprehensive loss                                                                                      $         -
                                          -----------   -----------    -------------    -------------   ------------   -------------

Balance, December 31, 2002                 9,810,201      (308,902)     (10,876,084)               -              -        (789,173)
Stock issued for cash                      4,553,055             -                -                -              -       6,030,815
Stock issued for services                  1,464,845             -                -                -              -       1,832,095
Purchase of treasury stock                         -             -                -                -              -         (61,943)
Sale of treasury stock                        31,707             -                -                -              -          56,553
Accrued interest on advances
   to officer                                      -        (2,397)               -                -              -          (2,397)
Cancellation of stock issued
   for note receivable                      (241,050)      244,000                -                -              -              -
Stock issued upon debt conversion,
   including $67,000 of interest             337,563             -                -                -              -         658,393
Net loss                                                                 (3,449,994)               -              -      (3,449,994)
Other comprehensive loss,
  net of income taxes:
Unrealized holding gain on available
  for sale securities                             -              -                -           17,449         17,449          17,449
                                                                                                        ------------
Comprehensive loss                                                                                      $    17,449              -
                                          -----------   -----------    -------------    -------------   ============   -------------

Balance, December 31, 2003               $15,956,321    $  (67,299)    $(14,326,078)    $     17,449                   $  4,291,798
                                          ===========   ===========    =============    =============                  =============
</TABLE>
--------------------------------------------------------------------------------
Page F-5                     See accompanying notes to the financial statements.

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
        for the Years Ended December 31, 2003 and 2002 and for the Period
             From May 22, 1996 (Inception) Through December 31, 2003
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                                MAY 22, 1996
                                                                                                                 (INCEPTION)
                                                                                                                   THROUGH
                                                                                                                 DECEMBER 31,
                                                                                   2003            2002             2003
                                                                               ------------    ------------    ------------
<S>                                                                            <C>             <C>             <C>
Cash flows from operating activities:
         Net loss                                                              $ (3,449,994)   $ (1,285,830)   $(14,326,078)
         Adjustments to reconcile net loss to net cash
           used in operating activities:
                Intrinsic value of conversion features                                   --              --         610,603
                Write off of organization costs                                          --              --          63,020
                Amortization of discount on convertible notes and
                  preferred stock                                                        --              --         295,209
                Loss on marketable securities                                            --              --          29,368
                Loss on disposal of assets                                               --              --           4,306
                Loss on investment in Biomoda, Inc.                                  49,548          15,566         339,298
                Issuance of common stock for services                             1,832,095         482,069       6,249,946
                Issuance of notes payable for services                                   --              --          50,000
                Increase in excess of costs and earnings over billings
                on uncompleted contract                                            (169,651)       (309,785)     (2,050,000)
                Increase in allowance for loss on contract                           50,000         297,000       1,255,000
                Gain on extinguishment of debt                                      (40,170)             --         (40,170)
                Interest accrued on convertible debentures                           81,058         107,229         309,504
                Interest earned on note receivable from stockholder and
                  related parties                                                    (2,397)        (15,426)        (17,823)
                Depreciation and amortization                                        73,604          93,355         611,564
                Bad debt expense                                                         --          15,000          15,000
                Asset impairment                                                         --              --         227,570
                Other non-cash expenses                                                  --              --          33,447
                Accrued interest                                                         --              --          30,667
         Changes in operating assets and liabilities:
                Other current assets                                                 11,804          28,442         (74,923)
                Accounts payable and accrued expenses                               (78,636)         59,221         254,144
                                                                               ------------    ------------    ------------
         Net cash used in operating activities                                   (1,642,739)       (513,159)     (6,130,348)
                                                                               ------------    ------------    ------------
Cash flows from investing activities:
         Purchases of property and equipment                                        (65,105)         (7,240)       (454,937)
         Proceeds from sale of property and equipment                                    --              --          23,800
         Investment in Biomoda, Inc.                                                     --              --        (383,845)
         Proceeds from sale of Biomoda, Inc. stock                                       --          28,930          28,930
         Advances to Biomoda, Inc.                                                 (278,023)        (38,432)       (316,455)
         Sale of marketable securities                                                   --              --          40,665
         Purchases of marketable securities                                         (39,300)             --        (109,334)
         Decrease in certificates of deposit                                             --              --              --
         Increase in notes receivable                                               (35,000)             --         (35,000)
         Purchase of other assets                                                        --              --        (245,579)
                                                                               ------------    ------------    ------------
         Net cash used in investing activities                                     (417,428)        (16,742)     (1,451,755)
                                                                               ------------    ------------    ------------
Continued....
</TABLE>

--------------------------------------------------------------------------------
Page F-6                     See Accompanying Notes to the Financial Statements.

<PAGE>

<TABLE>
<CAPTION>
                                                                                                                MAY 22, 1996
                                                                                                                 (INCEPTION)
                                                                                                                   THROUGH
                                                                                                                 DECEMBER 31,
                                                                                   2003            2002             2003
                                                                               ------------    ------------    ------------
<S>                                                                            <C>             <C>             <C>
Cash  flows from financing activities:
         Principal repayments on notes payable and capital leases                   (38,110)         (8,111)       (269,987)
         Proceeds from notes payable                                                     --              --         622,776
         Issuance of common stock for cash                                        6,030,815         545,661      10,204,687
         (Increase) decrease in note receivable stockholder                              --         (34,300)         (5,422)
         Proceeds from sale of treasury stock                                        56,553           7,829         177,159
         Purchase of treasury stock                                                 (61,943)         (8,732)       (216,653)
         Proceeds from issuance of convertible debt                                 210,965              --       1,270,965
         Principal repayments on convertible debt                                  (228,109)        (13,451)       (241,560)
                                                                               ------------    ------------    ------------
         Net cash provided by financing activities                                5,970,171         488,896      11,541,965
                                                                               ------------    ------------    ------------
Net (decrease) increase in cash                                                   3,910,004         (41,005)      3,959,862
Cash at beginning of period                                                          49,858          90,863              --
                                                                               ------------    ------------    ------------
Cash at end of period                                                          $  3,959,862    $     49,858    $  3,959,862
                                                                               ============    ============    ============
Supplemental  disclosure  of cash flow  information  -
        Cash paid during the year for:
                Interest                                                       $     23,221    $        683
                                                                               ============    ============
                Income taxes                                                   $         50    $        800
                                                                               ============    ============
</TABLE>

See accompanying  notes to the financial  statements for additional  information
relating to non-cash  investing and financing  activities during the years ended
December 31, 2003 and 2002.


--------------------------------------------------------------------------------
Page F-7                     See Accompanying Notes to the Financial Statements.

<PAGE>




--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations
-------------------------------------

Advanced  Optics  Electronics,  Inc.  (the  "Company")  is a  development  stage
technology company with its principal focus on the development and production of
large-scale  flat panel  displays  and trades on the Over The  Counter  Bulletin
Board  under the  symbol  "ADOT."  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,  complete  this  contract and
obtain  additional  contracts.  As of  December  31,  2003,  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.

Since May 22, 1996 ("Inception"),  the Company has primarily been engaged in the
research and  development of its product.  Once the research and  development is
complete,  the Company will begin to manufacture  and obtain new contracts.  The
Company is in the  development  stage and has not  generated  revenues  from any
product  sales.  The Company  believes  that its planned  products  will produce
sufficient revenues in the future.  There are no assurances,  however,  that the
Company will be able to produce such products, or if produced, that they will be
accepted in the market place.

Development Stage
-----------------

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

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

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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Development Stage (continued)
-----------------------------

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

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

     o    The Company is seeking new contracts.

     o    The Company has an equity  method  investment  in a start-up  company,
          which management hopes will be profitable (see Note 4).

     o    The Company is seeking investment capital through the public markets
          (see Note 9).

Management  plans to  obtain  revenues  from  product  sales,  but  there are no
significant  commitments for purchases of any of the proposed  products.  In the
absence  of  significant  sales  and  profits,  the  Company  may  seek to raise
additional  funds  to  match  its  working  capital   requirements  through  the
additional sales of debt and equity  securities,  there is no assurance that the
Company will be able to obtain sufficient additional funds when needed, although
such funds,  if  available,  will be  obtainable  on terms  satisfactory  to the
Company.  The successful  outcome of future  activities  cannot be determined at
this time and there is no  assurance  that if  achieved,  the Company  will have
sufficient  funds to execute its  intended  business  plan or generate  positive
operating results.

The accompanying  financial  statements have been prepared  assuming the Company
will continue as a going concern,  which  contemplates,  among other things, the
realization  of assets and  satisfaction  of liabilities in the normal course of
business.  As of December 31, 2003, the Company has positive  working capital of
$3,808,000 including approximately  $3,960,000 of cash. Management believes that
such cash balance at December  31, 2003 will be  sufficient  to satisfy  working
capital needs through December 31, 2004.

Concentrations of Credit Risk
-----------------------------

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

From time to time the  Company  maintains  cash  balances  at certain  financial
institutions in excess of the Federal  Deposit  Insurance  Corporation  ("FDIC")
limit of $100,000.  At December 31,  2003,  such  balances in excess of the FDIC
limit approximated $3,600,000.

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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Risks and Uncertainties
-----------------------

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

Use of Estimates
----------------

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

Property and Equipment
----------------------

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

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

Investment  in  Biomoda,  Inc.  ("Biomoda")  is  accounted  for under the equity
method.  During fiscal 2001,  the  investment was recorded under the cost method
since the  Company's  ownership  was not  sufficient  for the  investment  to be
accounted for under the equity method (see Note 4) and  management  believes the
Company did not exercise significant influence during such period.


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Long-Lived Assets
-----------------

Statement of Financial  Accounting  Standards ("SFAS") No. 144,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
Of," which supercedes SFAS 121, addresses financial accounting and reporting for
the  impairment  or  disposal  of  long-lived  assets.  SFAS 144  requires  that
long-lived  assets be  reviewed  for  impairment  whenever  events or changes in
circumstances  indicate that their carrying  amounts may not be recoverable.  If
the cost  basis of a  long-lived  asset is  greater  than the  projected  future
undiscounted net cash flows from such asset (excluding interest),  an impairment
loss is recognized.  Impairment losses are calculated as the difference  between
the cost basis of an asset and its estimated fair value.  SFAS 144 also requires
companies  to  separately  report  discontinued   operations  and  extends  that
reporting  to a  component  of an entity  that  either has been  disposed of (by
sales,  abandonment or in a distribution to owners) or is classified as held for
sale.  Assets to be disposed are reported at the lower of the carrying amount or
fair value less costs to sell.  The provisions of this statement for assets held
for sale or other  disposal  generally are required to be applied  prospectively
after the  adoption  date to newly  initiated  commitments  to plan to sell such
assets, as defined, by management.  As a result, management cannot determine the
potential  effects  that  adoption  of  SFAS  144  will  have  on the  financial
statements  with respect to future disposal  decisions,  if any. At December 31,
2003,  management has determined that no such review for impairment was required
and  therefore,  no  adjustments  have  been  made  to the  carrying  values  of
long-lived assets.  There can be no assurance,  however,  that market conditions
will not change or demand for the Company's  products or services will increase,
which could result in impairment of long-lived assets.


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------
1. ORGANIZATIN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition
-------------------

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin  101 ("SAB  101"),  "Revenue  Recognition,"  which  outlines  the basic
criteria  that  must be met to  recognize  revenue  and  provides  guidance  for
presentation  of revenue  and for  disclosure  related  to  revenue  recognition
policies  in  financial  statements  filed  with  the  Securities  and  Exchange
Commission.  As the Company  accounts for  long-term  contracts in accordance to
Statements of Position  ("SOP") 81-1 (see below),  management  believes that the
Company's revenue recognition policy conforms to SAB 101.

In accordance with SOP 81-1,  "Accounting  for Performance of  Construction-Type
and Certain  Production-Type  Contracts,"  the Company  accounts for revenue and
costs  related to its  long-term  contract in process by the  completed-contract
method,  whereas during the period from Inception to December 31, 1999,  revenue
and  costs  were  determined  by  the   percentage-of-completion   method.   The
completed-contract method of accounting was adopted in 2000 due to the Company's
uncertainty  regarding contract cost estimates.  The financial statements of the
period from Inception to December 31, 1999, were restated to apply the completed
contract method retroactively. The effect of the accounting change had no effect
on net loss or loss per share  previously  reported  for 1999 or for the  period
from Inception to December 31, 1999.

Under the completed  contract method of accounting,  contract revenues and costs
are recognized when the contract is completed,  with estimated losses recognized
when it becomes  evident  that  contract  costs will exceed  contract  revenues.
Contract  costs include all direct  material and labor costs and those  indirect
costs  related  to  contract  performance,  such as  indirect  labor,  supplies,
overhead, equipment depreciation and interest.

Costs in excess of amounts  billed are  classified as current assets under costs
in excess of billings on uncompleted contract.

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
$1,255,000  from  production  of the  first  unit  has been  recognized  through
December 31, 2003, which includes a current year loss approximating $50,000. The
Company's estimated cost to complete, as of December 31, 2003 is $240,000, which
is expected to be funded with cash,  billings on the contract and proceeds  from
the issuance of the Company's common stock.

The  anticipated   delivery  date  of  the  first  unit  is  in  November  2004.
Unanticipated  delays have postponed  delivery  resulting in an amended delivery
date.  During the contract period,  the Company is entitled to bill the customer
as the following milestones are met:


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition (continued)

Completion of board design                          $   65,000
Production                                             265,000
Completion                                             265,000
Acceptance after installation                          290,000
                                                    -----------
                                                    $   885,000
                                                    ===========

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 completed-contract  method. It is at least reasonably possible
that the estimate of completion  costs for this contract will be further revised
in the near-term.

Research and Development Costs
------------------------------

Research and development costs are expensed as incurred.

Income Taxes
------------

Under  SFAS  109,  "Accounting  for  Income  Taxes,"  deferred  tax  assets  and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered or settled. A valuation allowance is provided for significant deferred
tax  assets  when it is more  likely  than  not  that  such  assets  will not be
recovered.

Basic and Diluted Loss Per Common Share
---------------------------------------

Under SFAS 128,  "Earnings  Per  Share,"  basic  earnings  per  common  share is
computed by dividing  income  available to common  stockholders  by the weighted
average  number of common shares  assumed to be  outstanding  during the period.
Diluted  earnings  per share is  computed  similar to basic  earnings  per share
except the  denominator is increased to include the number of additional  common
shares that would have been  outstanding if the potential common shares had been
issued and if the  additional  common  share were  dilutive  (using the treasury
stock  method).  There were no  additional  potential  shares of common stock at
December 31, 2003 and 2002.  Because the Company has incurred net losses,  basic
and diluted loss per share are the same as  additional  potential  common shares
would be anti-dilutive.

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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock Based Compensation
------------------------

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

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

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

FASB  Interpretation  No. 44 ("FIN 44"),  "Accounting  for Certain  Transactions
Involving  Stock  Compensation,  an  Interpretation  of APB  25"  clarifies  the
application of APB 25 for (a) the definition of employee for purpose of applying
APB 25, (b) the  criteria  for  determining  whether a plan  qualifies  as a non
compensatory plan, (c) the accounting  consequence for various  modifications to
the terms of a previously fixed stock option or award and (d) the accounting for
an exchange of stock compensation awards in a business  combination.  Management
believes that the Company accounts for transactions involving stock compensation
in accordance with FIN 44.

SFAS 148, "Accounting for Stock-Based  Compensation - Transition and Disclosure,
an  amendment  of FASB  Statement  No.  123,"  provides  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for stock-based employee  compensation.  In addition,  this statement amends the
disclosure  requirements  of SFAS 123 to require  prominent  disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.

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

<PAGE>

--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock Based Compensation (continued)
------------------------------------

At December 31, 2003, the Company has one stock-based employee compensation plan
(the "Plan"),  which is described more fully in Note 7. The Company accounts for
the Plan under the recognition and measurement principles of APB 25, and related
interpretation.  No  stock-based  compensation  cost is  recognized in net loss.
Stock options  granted  under the Plan have exercise  prices equal to the market
value of the underlying  common stock on the dates of grant. The following table
illustrates  the  effect on net  income  and loss per share if the  Company  had
applied  the  fair  value  recognition  provisions  of SFAS  123 to  stock-based
employee compensation.

                                                2003           2002
                                            -------------  -------------

Net loss:
  As reported                               $ (3,449,994)  $ (1,285,830)
  Deduct: Total stock-based employee
     compensation expense determined
     under fair value based method
     for all awards                                   -         (30,000)
                                            -------------  -------------
 Pro forma                                  $ (3,449,994)  $ (1,315,830)
                                            =============  =============

Basic and diluted net loss per common share:
  As reported                               $      (0.00)  $      (0.01)
                                            =============  =============
  Pro forma                                 $      (0.00)  $      (0.01)
                                            =============  =============

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

Fair Value of Financial Instruments
-----------------------------------

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


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

The  Company   classifies   its   investments   in   marketable   securities  as
"available-for sale" in accordance with the provisions of Statement of Financial
Accounting  Standards No. 115,  "Accounting for Certain  Investments in Debt and
Equity  Securities"  (SFAS  115).  The  Company  does not  have any  investments
classified as "trading" or "held to maturity".

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

Comprehensive Loss
------------------

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

Advertising
-----------

The Company  expenses the cost of advertising when incurred.  Advertising  costs
for the years ended December 31, 2003 and 2002 were  immaterial to the financial
statements,  and are  included  in general  and  administrative  expenses in the
accompanying statement of operations.

Significant Recent Accounting Pronouncements
--------------------------------------------

SFAS 146,  "Accounting for Costs Associated with Exit and Disposal  Activities,"
was  issued  in June  2002 and is  effective  for exit and  disposal  activities
initiated  after December 31, 2002. The Company did not have any such activities
during  fiscal  2003.  SFAS No. 147  relates  exclusively  to certain  financial
institutions, and thus does not apply to the Company.

In November 2002, the Financial  Accounting  Standards Board (the "FASB") issued
FASB  Interpretation  ("FIN") No. 45,  "Guarantor's  Accounting  and  Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others." FIN No. 45 clarifies that a guarantor is required to recognize,  at the
inception  of a  guarantee,  a  liability  for the fair value of the  obligation
undertaken in issuing the guarantee.  The initial  recognition  and  measurement
provisions of FIN No. 45 are  applicable  on a  prospective  basis to guarantees
issued or modified  after December 31, 2002,  while the disclosure  requirements
became  applicable  in 2002.  The  Company  is  complying  with  the  disclosure
requirements of FIN No. 45. The other requirements of this pronouncement did not
materially affect the Company's financial statements.

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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Significant Recent Accounting Pronouncements (continued)
--------------------------------------------------------

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

In April 2003,  the FASB issued SFAS No. 149,  "Amendments  of Statement  133 on
Derivative  Instruments  and Hedging  Activities,"  which  amends and  clarifies
financial accounting and reporting for derivative instruments, including certain
derivative  instruments  embedded in other contracts and for hedging  activities
under SFAS No. 133. This  pronouncement is effective for contracts  entered into
or  modified  after June 30,  2003 (with  certain  exceptions),  and for hedging
relationships  designated  after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on the Company's financial statements.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics  of both Liabilities and Equity." SFAS No. 150
establishes  standards  for  how  a  company  classifies  and  measures  certain
financial  instruments with  characteristics of both liabilities and equity, and
is effective for public  companies as follows:  (i) in November  2003,  the FASB
issued  FASB Staff  Position  ("FSP") FAS 150-03  ("FSP  150-3"),  which  defers
indefinitely (a) the measurement and classification guidance of SFAS No. 150 for
all  mandatorily  redeemable   non-controlling  interests  in  (and  issued  by)
limited-life  consolidated  subsidiaries,  and (b)  SFAS No.  150's  measurement
guidance for other types of mandatorily  redeemable  non-controlling  interests,
provided  they  were  created  before  November  5,  2003;  (ii)  for  financial
instruments  entered  into or  modified  after May 31, 2003 that are outside the
scope of FSP 150-3; and (iii)  otherwise,  at the beginning of the first interim
period  beginning  after June 15, 2003. The Company  adopted SFAS No. 150 on the
aforementioned  effective dates. The adoption of this pronouncement did not have
a material impact on the Company's results of operations or financial condition.


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Significant Recent Accounting Pronouncements (continued)
--------------------------------------------------------

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

Reclassifications
-----------------

Certain   amounts   presented  in  the  2002  financial   statements  have  been
reclassified to conform to the current year's presentation.


2. COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS

Costs and  billings  on  uncompleted  contracts  are  summarized  as  follows at
December 31, 2003:


Costs incurred on uncompleted contract               $  2,140,000
Billings on uncompleted contract                          (90,000)
Less allowance for loss on contract                    (1,255,000)
                                                     -------------

                                                     $    795,000
                                                     =============


3. PROPERTY AND EQUIPMENT

Property and equipment  consist  approximately  of the following at December 31,
2003:

Machinery and equipment                              $    344,000
Furniture and fixtures                                     84,000
Automobiles                                                43,000
Leasehold improvements                                     21,000
                                                     -------------
                                                          492,000

Less accumulated depreciation and amortization           (375,000)
                                                     -------------

                                                     $    117,000
                                                     =============



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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

4. RELATED PARTY TRANSACTIONS

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

As of  December  31, 2003 and 2002,  the Company has net  advances to an officer
approximating  $67,300. The advances accrue interest at rates ranging from 5% to
6% (interest income was  insignificant for the years ended December 31, 2003 and
2002) and are due on demand.  As these notes  receivable  are with the  majority
shareholder and a Company officer, the Company has classified these amounts as a
decrease to stockholders' equity at December 31, 2003.

In August 2003, the Company advanced an aggregate of $35,000 to third parties as
notes receivable.  The advances, including interest ranging from 5% to 7% mature
through July 2004.

During fiscal 2003, the Company advanced  approximately $280,000 to Biomoda (see
below) under an existing line of credit  agreement  (the  "Line").  The advances
accrue interest at 5%, are due on demand and the Line has no established advance
limit.  The Company is committed to advancing  Biomoda capital until Biomoda has
raised  sufficient  capital under its initial offering (see below).  The related
advances  are  included  in  investment  in  and  advances  to  Biomoda  in  the
accompanying balance sheet.

Investment In and Advances To Biomoda, Inc.
-------------------------------------------

As of December 31, 2003, the Company owned  approximately  1,072,000 or 15.9% of
the  6,737,000  outstanding  shares of  Biomoda,  a  development  stage  company
involved  primarily in the  development of technology for the early detection of
lung cancer. In addition,  two of the Company's  officers own approximately 15%,
collectively,  of the  outstanding  shares  of  common  stock of  Biomoda.  As a
development  stage company,  Biomoda has not had any revenues as of December 31,
2003.

Biomoda filed a SB-2  registration  statement  with the  Securities and Exchange
Commission,  in which they are offering  5,000,000 shares of their common stock.
The initial  offering price is $6.00 per share,  however the price that Biomoda,
and the  Company,  will be able to sell the  shares is not  determinable,  as no
shares have been issued as of the filing of these financial statements. A market
for Biomoda's shares has not been established;  therefore the potential value of
the Company's  investment cannot be measured.  There can be no assurance that if
the  Company  was to sell  such  investment  that it  would  be able to on terms
favorable  to the Company or for the initial  offering  price.  Factors  such as
dilution, blockage and a lack of market may be encountered.

For the year ended December 31, 2001, the Company reported it's investment under
the cost method since its ownership was not  sufficient for the investment to be
accounted for using the equity method. During 2002, the Company's influence over
Biomoda  increased such that the investment  qualified for accounting  under the
equity  method.  The  Company  has  recognized  the  proportionate  interest  in
Biomoda's  net  loss  for the  years  ended  December  31,  2003 and 2002 in the
accompanying  statements of operations.  Retroactive  recognition of the Biomoda
losses prior to fiscal 2002 amounted to $97,674 and was recorded directly to the
Company's deficit accumulated during the development stage at December 31, 2002.

The  carrying  value of the  investment  as of December 31, 2003 is the original
investment  cost  adjusted  by the  Company's  proportionate  interest in losses
reported by the investee through December 31, 2003.




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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------


4. RELATED PARTY TRANSACTIONS (continued)

Investment In and Advances To Biomoda, Inc. (continued)
-------------------------------------------------------

During the year ended  December  31,  2002,  the  Company  sold a portion of its
interest in Biomoda to an individual for proceeds of $28,930.

A summary of the investment is as follows:

       Original cost                                    $  383,845
       Equity in loss of investment                       (296,798)
       Amortization of excess of cost over book value      (42,500)
       Sale of investment                                  (28,930)
       Advances on line of credit                          316,455
                                                        ----------
                                                        $  332,072
                                                        ==========

5.  CONVERTIBLE DEBENTURES

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

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


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------


5. CONVERTIBLE DEBENTURES (continued)

On November  7, 2000,  the  Company  entered  into an  agreement  that  modified
outstanding convertible preferred agreements.  The new agreement resulted in the
exchange of  outstanding  preferred  stock for the  Company's  7.5%  convertible
debentures  and  other  consideration.  The  total  amount  of  the  convertible
debentures approximated $741,000,  including $31,000 of interest. The debentures
are convertible into shares of common stock at the lesser of the stock's closing
price on March 8, 2000 and 77.5% of the average of the five  lowest  closing bid
prices  for 20  days  before  November  2,  2000.  The  intrinsic  value  of the
conversion  feature  was  estimated  to be  approximately  $228,000,  which  was
immediately  charged  to  expense.  The  convertible   debentures  also  include
detachable  warrants for the purchase of 71,000  shares of common  stock,  which
value was insignificant.  The principal balance of the convertible debentures at
December 31, 2003 totaled approximately $546,000.

During 2001, the Company issued convertible  debentures  totaling $500,000.  The
debentures are  convertible  into shares of common stock at the lesser of (i) 75
percent of the average of the three lowest closing bid prices for 30 days before
August 30 and  November  19, 2001 or (ii) 80% of the average of the three lowest
closing  bids  during the 90 days prior to the  conversion  date.  The  embedded
intrinsic  value  of the  beneficial  conversion  feature  was  estimated  to be
$143,875 and immediately charged to interest expense. The convertible debentures
also include  detachable  warrants for the purchase of 500,000  shares of common
stock,  of which 300,000 shares are  exercisable at $0.31 and 200,000 shares are
$0.33 and vested immediately.  Management has determined that the estimated fair
market  value of these  warrants was  insignificant.  The  principal  balance at
December 31, 2003 totaled approximately $50,000.

During the years ending  December 31, 2003 and 2002,  approximately  320,830,000
and  78,696,000   shares  of  common  stock  were  issued  upon   conversion  of
approximately  $658,000  and  $430,000  of  debenture  principal  and  interest,
respectively (see Note 7).


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

6. INCOME TAXES

During  fiscal  2003 and  2002,  the  provision  for  taxes  (substantially  all
deferred)  differs from the amounts computed by applying the U.S. Federal income
tax  rate of 34% to  income  before  provision  for  taxes  as a  result  of the
following:

<TABLE>
<CAPTION>

                                                                   2003            2002
                                                              -------------   -------------
<S>                                                         <C>               <C>

Computed "expected" tax (benefit) expense                     $ (1,139,000)   $   (435,000)

Addition to (reduction) in income   taxes resulting from:
    State income taxes, net of federal benefit                    (195,000)        (85,000)
    Change in deferred tax asset valuation allowance             1,297,000         402,000
    Other                                                           37,000         118,000
                                                              -------------     -----------
                                                              $          -      $        -
                                                              =============     ===========
</TABLE>

The total  valuation  allowance  increased by $1,297,000 and $402,000 during the
years ended December 31, 2003 and 2002, respectively.

The effects of temporary  differences that give rise to significant  portions of
the deferred taxes at December 31, 2003 are presented below:


Deferred tax asset:
    Tax net operating loss carryforwards                $     4,933,000
    Allowance for doubtful accounts                             502,000
                                                        ----------------
                                                              5,435,000
Deferred tax asset valuation allowance                       (5,435,000)
                                                        ----------------
                                                        $            -
                                                        ================

At December 31, 2003,  the Company had tax net operating loss  carryforwards  of
approximately  $12,840,000  and  $6,420,000  available to offset future  taxable
federal and state income, respectively. If not utilized to offset future taxable
income,  the  carryforwards  will expire in various  years  through 2023. In the
event the Company was to  experience  a greater  than 50% change in ownership as
defined in Section 382 of the Internal  Revenue  Code,  the  utilization  of the
Company's tax net operating loss carryforwards could be severely restricted.



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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

7. STOCKHOLDERS' EQUITY

Preferred Stock
---------------

The Company's  articles of  incorporation  authorize up to 10,000,000  shares of
$0.001 par value preferred stock. Shares of preferred stock may be issued in one
or more classes or series at such time as the Board of Directors  determine.  As
of December 31, 2003, there were no shares of preferred stock outstanding.

Treasury Stock
--------------

During the year ended December 31, 2003, the Company purchased 13,250,000 shares
of treasury stock for approximately $62,000 in cash.

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

Common Stock
------------

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

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

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

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

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

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



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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------
7. STOCKHOLDERS' EQUITY (continued)

Common Stock (continued)
------------------------

During the year ended December 31, 2002, the Company issued 96,048,000 shares of
common stock for services,  which were valued at $155,321  (based on the closing
market  price on the date of  grant,  which was less than  $0.01).  The  Company
recorded such amounts in the accompanying statement of operations.

During the year ended December 31, 2002, the Company issued 10,820,000 shares of
common stock for services,  which were valued at $123,318  (based on the closing
market  price on the date of  grant,  which  approximated  $0.01).  The  Company
recorded such amounts in the accompanying statement of operations.

During the year ended December 31, 2002, the Company issued  8,900,000 shares of
common stock for services,  which were valued at $203,430  (based on the closing
market  price on the date of  grant,  which  approximated  $0.02).  The  Company
recorded such amounts in the accompanying statement of operations.

During the year ended  December 31, 2002,  the Company  issued 205,850 shares of
common stock  (based on the fair market value on the dates of grant,  which were
less than $0.01) held as treasury stock for cash totaling  $1,151 on a first-in,
first-out basis.

During the year ended  December 31, 2002,  the Company  issued 225,150 shares of
common  stock  (based on the fair  market  value on the  dates of  grant,  which
approximated  $0.01)  held as  treasury  stock  for cash  totaling  $4,448  on a
first-in, first-out basis.

During the year ended  December 31, 2002,  the Company  issued  76,800 shares of
common  stock  (based on the fair  market  value on the  dates of  grant,  which
approximated  $0.03)  held as  treasury  stock  for cash  totaling  $2,230  on a
first-in, first-out basis.

During the year ended December 31, 2002, the Company  repurchased 735,000 shares
of its  outstanding  common  stock  (based on the fair market value on the dates
repurchase,  which were less than $0.01) for cash totaling $1,427.  These shares
are included in the  accompanying  balance  sheet under  treasury  stock and are
recorded at cost.

During the year ended December 31, 2002, the Company  repurchased 660,000 shares
of its  outstanding  common  stock  (based on the fair market value on the dates
repurchase, which approximated $0.01) for cash totaling $7,134. These shares are
included in the accompanying balance sheet under treasury stock and are recorded
at cost.


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

7. STOCKHOLDERS' EQUITY (continued)

Common Stock (continued)
------------------------

In January 2002, the Company issued 1,100,000 shares of its outstanding stock in
connection with the exercise of stock options by an officer of the Company for a
note  receivable,  which is due on demand,  totaling  $22,000  (see Note 4). The
Company has recorded the note receivable as an increase to stockholders' deficit
in the accompanying balance sheet.

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

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

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

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

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

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

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

During the year ended  December  31,  2003,  the  Company  issued  approximately
251,650,000  shares  of  common  stock  for  services,   which  were  valued  at
approximately  $555,000 (based on the closing market price on the date of grant,
which  was  less  than  $0.01).   The  Company  recorded  such  amounts  in  the
accompanying statement of operations.


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

7. STOCKHOLDERS' EQUITY (continued)

Common Stock (continued)
------------------------

During the year ended  December  31,  2003,  the  Company  issued  approximately
87,600,000   shares  of  common  stock  for  services,   which  were  valued  at
approximately  $713,000 (based on the closing market price on the date of grant,
which approximated $0.01). The Company recorded such amounts in the accompanying
statement of operations.

During the year ended  December  31,  2003,  the  Company  issued  approximately
20,500,000   shares  of  common  stock  for  services,   which  were  valued  at
approximately  $367,000 (based on the closing market price on the date of grant,
which approximated $0.02). The Company recorded such amounts in the accompanying
statement of operations.

During the year ended  December  31,  2003,  the  Company  issued  approximately
7,500,000   shares  of  common  stock  for   services,   which  were  valued  at
approximately  $197,000 (based on the closing market price on the date of grant,
which approximated $0.03). The Company recorded such amounts in the accompanying
statement of operations.

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

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

Stock Options
-------------

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

In January 2002, the Company granted  1,500,000 options to three officers of the
Company.  The exercise  price of the options is $0.02 per share (the fair market
value  of  the  Company's  common  stock  on  the  date  of  grant)  and  vested
immediately.  The  options  expire  four years from the date of grant.  As noted
above,  1,100,000 of the options were  exercised  during the year ended December
31, 2002.

In August 2002,  in  connection  with a settlement  agreement  (see Note 8), the
Company  granted  750,000  options  to a former  employee  of the  Company.  The
exercise  price of the  options is $0.09 per share and were  valued at $0 (using
the Black  Scholes  option  pricing  model).  The options  vested upon grant and
expired in August 2003.


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

7. STOCKHOLDERS' EQUITY (continued)

Stock Options (continued)

The following is a status of the stock options  outstanding at December 31, 2003
and the changes during the two years then ended:
<TABLE>
<CAPTION>


                                             Year Ended December 31,   Year Ended December 31,
                                                        2003                      2002
                                             -----------------------   -----------------------
<S>                                        <C>             <C>        <C>           <C>


                                                            Weighted                  Weighted
                                                             Average                   Average
                                                Options       Price      Options       Price
                                             ------------   --------   -----------    --------

Outstanding, beginning of year                 4,975,000       $0.23    3,825,000        $0.27

Granted                                               -           -     2,250,000         0.04

Exercised                                             -           -    (1,100,000)        0.02

Cancelled/Terminated                          (1,800,000)       0.11           -            -
                                             ------------   --------   -----------    --------

Outstanding and exercisable, end of year       3,175,000       $0.30    4,975,000        $0.23
                                             ============   ========   ===========    ========



Weighted average fair value of options
granted                                                                                  $0.01
                                                                                      ========
</TABLE>


The following table summarizes  information related to stock options outstanding
at December 31, 2003:

                          Options Outstanding              Options Exercisable
                   -----------------------------------   -----------------------
                                Weighted
                                 Average     Weighted                 Weighted
                                Remaining    Average                  Average
                               Contractual   Exercise                 Exercise
  Exercise Price    Number     Life (Years)  Price        Number      Price
  --------------   -------------------------------------------------------------

      $0.02          400,000       2.04      $  0.02        400,000    $  0.02
      $0.34        2,775,000       0.80         0.34      2,775,000       0.34
                   ---------                 --------     ---------    --------

                   3,175,000                 $  0.30      3,175,000    $  0.30
  --------------   -------------------------------------------------------------


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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------


7. STOCKHOLDERS' EQUITY (continued)

Stock Options (continued)

The following  outlines the significant  assumptions  used to calculate the fair
market value information  presented  utilizing the  Black-Scholes  pricing model
during fiscal 2002, as there were no issuances in fiscal 2003:

                                                Year Ended
                                             December 31, 2002
                                           ---------------------

Discount rate                                      3.50%

Volatility                                         365%

Expected life                                     4 years

Expected dividend yield                              -
                                           ---------------------

Warrants
--------

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

In January 2002, the Company issued  warrants to purchase  300,000 shares of the
Company's  common stock to two directors.  The exercise price of the warrants is
$0.02 per share (the fair market value of the Company's common stock on the date
of grant) and vested  immediately.  The warrants expire five years from the date
of issuance.

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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

7. STOCKHOLDERS' EQUITY (continued)

Warrants (continued)
--------------------

The following  represents a summary of warrants  outstanding for the years ended
December 31, 2003 and 2002:
<TABLE>
<CAPTION>

                                          Year Ended December 31,  Year Ended December 31,
                                                     2003                    2002
                                           ---------------------   ---------------------

                                                        Weighted                Weighted
                                                         Average                 Average
                                            Warrants      Price     Warrants      Price
                                           ----------   --------   ----------   ---------
<S>                                       <C>          <C>        <C>          <C>

Outstanding, beginning of year              8,646,00       $0.25    8,346,000      $0.25

Granted                                            -          -       300,000       0.02

Exercised                                          -          -            -          -

Cancelled/Terminated                               -          -            -          -
                                           ----------   --------   ----------   --------

Outstanding and exercisable, end of year    8,646,000      $0.25    8,646,000      $0.25
                                           ==========   ========   ==========   ========


Weighted average fair value of warrants
granted                                                                            $0.02
                                                                                ========
</TABLE>


The following table summarizes  information  related to warrants  outstanding at
December 31, 2003:

                        Warrants Outstanding               Warrants Exercisable
                   ----------------------------------     ----------------------
                                Weighted
                                 Average     Weighted                  Weighted
                                Remaining    Average                   Average
                               Contractual   Exercise                  Exercise
  Exercise Price     Number    Life (Years)   Price        Number       Price
  --------------   -------------------------------------------------------------

  $0.02 - $0.15    4,650,000          0.88    $  0.13     4,650,000     $  0.13
  $0.34 - $0.43    3,941,000          1.68       0.37     3,941,000        0.37
      $1.62           55,000          1.19       1.62        55,000        1.62
                   ---------                 --------     ---------   ----------

                   8,646,000                  $  0.25     8,646,000     $  0.25
  --------------   -------------------------------------------------------------



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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

7. STOCKHOLDERS' EQUITY (continued)

Warrants (continued)
--------------------

The following  outlines the significant  assumptions  used to calculate the fair
market value information  presented  utilizing the  Black-Scholes  pricing model
during fiscal 2002, as there were no issuances in fiscal 2003:

                                                 Year Ended
                                              December 31, 2002
                                            --------------------

Discount rate                                       3.50%

Volatility                                          365%

Expected life                                      4 years

Expected dividend yield                               -
                                            --------------------


8. COMMITMENTS AND CONTINGENCIES

Leases
------

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

Rental  expense for operating  leases  approximated  $51,000 for the years ended
December  31,  2003 and 2002  and  approximated  $250,000  for the  period  from
Inception through December 31, 2003. Rental income from the sublease to Biomoda,
Inc.  approximated  $3,600 and $2,400 for the year ended  December  31, 2003 and
2002,  respectively,  and $6,000 for the period from Inception  through December
31,  2003  and has been  included  in  operating  expenses  in the  accompanying
statement of operations.

Legal
-----

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



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

<PAGE>


--------------------------------------------------------------------------------
                        ADVANCED OPTICS ELECTRONICS, INC.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2003
--------------------------------------------------------------------------------

9. SUBSEQUENT EVENTS

In January  2004,  the Company  entered  into a stock  purchase  agreement  (the
"Agreement"),  whereby the Company purchased approximately  33,000,000 shares of
restricted common stock of Genomed, Inc. (which represents  approximately 21% of
the  outstanding  shares of common  stock of  Genomed,  Inc.) for  $900,000.  In
accordance with the Agreement, the Company is to remit all amounts due within 60
days following the closing of the Agreement, as defined.

In January 2004, the Company entered into a facility  lease.  Lease payments for
the  office  facility  approximate  $2,500  per month and the lease  expires  in
February 2006.

In March 2004, the Company settled with a former employee on amounts owed to the
employee.  No additional accrual was necessary as of December 31, 2003.

Common Stock
------------
In January  2004,  the Company sold  approximately  39,800,000  shares of common
stock for cash  approximating  $456,000.  All shares were sold for approximately
$0.01 per share.

In January 2004, the Company issued  approximately  19,800,000  shares of common
stock for services,  which were valued at approximately  $211,000 (the estimated
fair market value on the dates of the grant), which approximated $0.01.

In February  2004, in accordance  with the applicable  convertible  note payable
agreements,  the Company issued approximately  25,000,000 shares of common stock
at  conversion  prices of less then $0.01 in connection  with the  conversion of
notes payable principal and interest.


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