SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
                    ANNUAL REPORT UNDER SECTION 13 OR 15 (d)
                   OF THE SECURITIES AND EXCHANGE ACT OF 1934


For the fiscal year ended:                               Commission file number:
      March 31, 2005                                             0-19485

                         ADVANCED ENERGY RECOVERY, INC.
                  --------------------------------------------
                 (Name of small business issuer in its charter)


            DELAWARE                                     84-1069416
 ------------------------------              ----------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

                      5799 Broadmoor, Ste 750, Mission, KS         66218
                     --------------------------------------       --------
                    (Address of principal executive offices)     (Zip Code)

                    Issuer's telephone number (913) 535-1072

              Securities registered under Section 12(g) of the Act:
                               Title of Each Class
                               -------------------
                          Common Stock $.003 par value

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities and 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 there is no disclosure of delinquent files in response to Item 405
of Regulation S-B if 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.  X
                                     -----

     Issuer's revenues for the fiscal year ended March 31, 2005 were $144,884.

     The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock on March
31, 2005 and as of the date of filing this Annual Report was $0.

     State the number of shares outstanding of each of the issuer's classes of
common equity as of March 31, 2005--2,396,503.

     Check whether the issuer has filed all documents and reports to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court.  Yes  X  No
                                       -----  -----

     Transactional Small Business Disclosure Format   Yes     No  X
                                                         -----  -----

<PAGE>


                                TABLE OF CONTENTS
                                -----------------

ITEM                                                                        PAGE

Part I
------

         Item  1 -      Description of Business                               3

         Item  2 -      Description of Property                               8

         Item  3 -      Legal Proceedings                                     8

         Item  4 -      Submission of Matters to a Vote of Security Holders   8

Part II
-------

         Item  5 -      Market for Common Equity and Related Stockholder
                        Matters                                               9

         Item  6 -      Management's Discussion and Analysis or Plan of
                        Operation                                             9

         Item  7 -      Financial Statements                                  14


Part III
--------

         Item  9 -      Directors, Executive Officers, Promoters and
                        Control Persons; Compliance With Section 16(a)
                        Of The Exchange Act                                   37

         Item 10 -     Executive Compensation                                 38

         Item 11 -     Security Ownership of Certain Beneficial Owners
                         and Management                                       39

         Item 12 -     Certain Relationships and Related Transactions         40

Part IV
-------

         Item 13 -     Exhibits and Reports                                   41

Signatures                                                                    44
----------

Certification-Section 302

Certification-Section 906

                                       2

<PAGE>
<TABLE>
<CAPTION>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS
         -----------------------

History of the Company and Subsidiaries
---------------------------------------

Advanced Energy Recovery, Inc. (Formerly known as Advanced Financial, Inc.) (the
"Company" or "AER") is a Delaware corporation formed in September 1986. Advanced
Financial, Inc. operated in the financial services sector through March 31,
2004. The Company, through its two wholly owned subsidiaries, AIH Receivable
Management Services and AIH Early Recovery Systems ("AIH"), collected debts for
others for a fee and purchased charged-off credit card debt to collect at a
profit from debtors located throughout the United States. Through AIH, the
Company was also engaged in the business of collecting nonperforming receivables
on behalf of third parties. During the year 2004, the Company changed its focus
and growth efforts to the energy industry with its primary emphasis on natural
gas and entered into various agreements to dispose of the AIH operations.

Advanced Energy Recovery, Inc., currently owns 100% of Allen Drilling
Acquisition Company ("ADAC"). In addition, as of October 14, 2004, through ADAC,
the Company owns 52.5% of Elgin Holdings, LLC ("Elgin"). ADAC and Elgin are
engaged in operations in the energy industry.

The AIH operations resulted in significant losses through the fiscal year ending
March 31, 2004 despite the efforts by the Company to restructure and reorganize
various AIH segment operations. These losses were funded by a related entity,
ARGUS.

The following sets forth in summary form the consolidated results of operations
for five years:

                       Fiscal Year    Fiscal Year    Fiscal Year    Fiscal Year    Fiscal Year
Financial Position       03/31/00       03/31/01       03/31/02       03/31/03       03/31/04
                       -----------    -----------    -----------    -----------    -----------
<S>                    <C>            <C>            <C>            <C>            <C>
Total assets           $ 1,139,576    $   742,348    $   562,750    $   435,032    $   332,697
Total liabilities        1,027,060      1,272,620      1,589,521      1,873,184      2,234,107
Stockholders' equity   $   112,516    $  (530,272)   $(1,026,771)   $(1,438,152)   $(1,901,410)

Amounts due to ARGUS   $   560,000    $   765,840    $ 1,129,772    $ 1,318,709    $ 1,442,618

Operations
Total revenues         $   977,439    $ 1,423,153    $ 1,152,171    $ 1,128,441    $   987,819
Total expenses           1,898,423      2,119,914      1,648,669      1,539,822      1,361,077
Net loss               $  (920,984)   $  (696,761)   $  (496,498)   $  (411,381)   $  (373,258)


The consolidated operations for the fiscal year ended March 31, 2004 included
amounts with respect to the Company's wholly owned subsidiary's , (ADAC)
participation in the Madisonville Project, later described herein. For the
fiscal year then ended, ADAC reported net income of $105,616.

As set forth in the summarized results of operations above, the Company had
accumulated significant losses since its emergence from a Chapter XI filing in
1999. As of December 31, 2003, the accumulation of debt to ARGUS had grown to a
point where the Company could no longer service this outstanding debt given the
downsizing of the Company that was the result of the reorganization and
restructuring of the various AIH segment operations. Also during these years,
and to the current date, the current President and Treasurer of the Company did
not draw a salary, nor were any amounts accrued with respect thereto. As
discussed later, under Change In Business Strategy, with the Madisonville
Project investment, and the joint venture with GulfWest Energy Inc., the Company
had determined during the 2004 fiscal year that the ability to generate
long-term value for the common shareholders could be enhanced if the Company's

                                       3
</TABLE>

<PAGE>


AIH operations were sold and the Company concentrated its growth efforts in the
energy industry focusing primarily on natural gas. In accordance with this
business strategy, an agreement was entered into with ARGUS, subject to common
shareholder approval, wherein the common shares of AIH would be exchanged for an
assumption by ARGUS of all of the AIH liabilities (the "Exchange Transaction").
The Board of Directors engaged an investment banking firm (Morgan Stanley) to
determine the fair market value of the AIH operations on a going concern basis.
Morgan Stanley, through its SPARDATA affiliate, determined such value to be
$345,000.

Under date of February 27, 2004, the Company, through an Information Statement
pursuant to Section 14 (c) of the Securities Exchange Act and Regulation 14A,
solicited the consents of the common stockholders (the "Solicitation") to effect
several transactions in an effort, among other things, to restructure the
Company, to dispose of the financial service operations which have accumulated
significant losses and to change its focus and growth efforts to the energy
industry with its primary emphasis on natural gas. The consents solicited
included the following:

1.   To adopt an amendment to the Company's Certificate of Incorporation to; (i)
     change the name of the corporation to "Advanced Energy Recovery, Inc.";
     (ii) effect a 1 for three reverse split of the outstanding Common Stock of
     the Company; and (iii) set the authorized Common Stock of the Company at
     10,000,000 common shares.

2.   To obtain Stockholders' consent to an exchange of 100% of the outstanding
     stock of AIH for an assumption by the primary secured lender of the Company
     of all of the AIH liabilities.

3.   To obtain Stockholders' consent and ratification of the engagement by the
     Board of Directors of Weaver and Martin L.P. as the Company's independent
     public accountants.

4.   To obtain Stockholders' consent and ratification of the appointment by the
     Board of Directors of two directors to fill two vacancies created by
     resignations. Such directors will serve until the next annual meeting of
     Stockholders.


On March 24, 2004, the Company, under a Form 8-K under date thereof, announced
that it had received the requisite affirmative consent votes from the common
shareholders to effect the four proposals set forth in the February 27, 2004
Solicitation.

The Exchange Transaction was completed in August of 2004, but was effective as
of 12:01 AM April 1, 2004.

Change In Business Strategy
---------------------------

AFi Capital Corporation  Agreement

In July, 2001, the Company entered into a four year Agreement with AFI Capital
Corporation ("Capital") a Nebraska corporation. Pursuant to the Agreement,
Capital provided financial, acquisition, and general public company business
consulting services in other than the financial services industry. Compensation
for such services was based on a "successful efforts" basis and primarily
consisted of the Company's common equity and cash performance fees as earned. At
March 31, 2004, $52,815 was due to Capital under the compensation portion of the
Agreement. This amount was converted to 337,500 shares of Common Stock (post
reverse split basis) in August, 2004 in accordance with the provisions of the
Agreement. Upon issuance of the shares, the Agreement was terminated and all
parties released from any obligations arising there from.

                                       4

<PAGE>


Gateway Energy Corporation  Agreement

On March 6, 2003, the Company executed an Agreement which was closed on April
30, 2003, with Gateway Energy Corporation and certain of its subsidiaries of
Houston, Texas ("Gateway") under which it provided, through the Company's
wholly-owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), $900,000
of credit enhancements in the form of Letters of Credit. These credit
enhancements enabled Gateway to obtain additional financing, in the form of a
three year Balloon Note from a Houston bank to complete the construction of
certain natural gas pipeline facilities ("Pipeline Facilities") located in
Madison County, Texas, (The "Madisonville Project"). ADAC secured the Letters of
Credit through the private placement of a new series of participating preferred
stock (the "Series A"), to two investor groups. The Certificate of Designation
for the Series A provides, among other things, for dividend payments to the
named holders thereof, equal to sixty-six and two thirds, (66.67%) of cash
distributions received by ADAC from Gateway, and an unanimous vote of the Series
A to exercise the Equity Participation Option as further described below.

The Agreement provides, among other things, that ADAC will receive, during the
term of the additional financing, one-half (50%) of the price upside portion
only, if any, of the monthly fee to be received by Gateway from the Madisonville
Project. The Agreement also provides that ADAC will have the option to either:
(i) receive at the end of the Balloon Note term a lump-sum payment, which when
added to the payments received, if any, for the price upside portion, will
result in a 15% pre-tax internal rate of return on the $900,000, or (ii) to
exercise the Equity Participation Option by paying off the Balloon Note on or
before the end of the Balloon Note term in exchange for a thirty-three and
one-third (33.33%) ownership interest in the Pipeline Facilities from that date
forward. Gateway is obligated to pay the periodic interest payments on the
Balloon Note during the three year term of the Balloon Note. Further, Gateway
has granted liens to ADAC, subordinate to its banks, on its economic interest in
the Madisonville Project and certain other natural gas operating systems and
natural gas operating assets. The Agreement contains cross collateral and cross
default provisions linking it to an additional Gateway term note at the same
bank, the proceeds of which were used by Gateway to fund the Madisonville
Project.

The Madisonville Project is operated under a long-term agreement between
Gateway, Hanover Compression Limited Partnership, and Redwood Energy Production,
L. P. and is designed to treat gas to remove impurities from the gas to enable
the gas to meet pipeline sales quality specifications. The Madisonville Project
employs the state-of-the-art, patented, absorption based technology developed by
Advanced Extraction Technologies, Inc., for which Gateway has the exclusive U.
S. license, to remove nitrogen from the gas.

To implement the provisions, terms and conditions of the various agreements
including the Certificate of Designation for the ADAC Series A Preferred Stock:
(i) Larry J. Horbach and Christopher D. Davis were appointed to the Board of
Directors of the Registrant to fill the vacancies created by the resignation of
two directors following the Registrant's emergence from it's Chapter XI
Reorganization, serving until elected at the next meeting of shareholders; and
(ii) Mr. Horbach resigned as a director of ADAC, with that position then being
filled by Mr. Davis. The Registrant, as the sole shareholder of ADAC, effected
such ADAC director changes and entered into an agreement to amend the ADAC
By-laws to provide that the number of ADAC directors shall be fixed at three as
long as any Series A Preferred Shares remain outstanding. In addition, Mr. Davis
as well as the Registrant's President, Charles Holtgraves, were elected to the
ADAC board of directors.

Mr. Holtgraves is currently a director of Gateway. Mr. Horbach, who was a
director of Gateway for several years, resigned his directorship on August 27,
2004. Mr. Davis has no affiliation with Gateway. Mr. Holtgraves owns 14.65% of
an entity that owns 55.56% of the ADAC Series A Preferred Stock. Mr. Davis
serves as the Trustee of the Davis Investment Management Trust for the Davis
Investments VI LP, which LP owns 44.44% of the ADAC Series A Preferred Stock.
Mr. Horbach owns no ADAC common stock or Series A Preferred Stock.

                                       5

<PAGE>


GulfWest Energy Inc. Joint Venture

On July 21, 2004, the Company entered into a Letter of Intent, subject to the
execution of definitive agreements, with GulfWest Energy Inc. ("GWEI") located
in Houston, Texas, under which the Company and GWEI, through one or more Joint
Venture LLCs, would develop certain oil and gas assets owned by GWEI in Grimes
and Madison County, Texas. Certain of the Madison County reserves, if developed
and produced, are expected to require treatment similar to that as earlier
described in the Madisonville Project. On October 14, 2004, the Company, through
ADAC, became a member of a Texas LLC (Elgin Holdings, LLC) (the "LLC") ("Elgin")
with GWEI for the purpose of initially developing certain portions of the GWEI
oil and gas asset bases in Madison County and Hardin County, Texas.
Participation in the development of the Grimes County asset base by ADAC was
deferred and will not be a part of this LLC. GWEI contributed certain assets
valued at approximately $540,000, and the Company committed to provide up to
$595,000 in initial capital funding to the LLC as provided for in the LLC's
Regulations. In December 2004 the Company funded $315,000. In March 2005, the
Company funded an additional $170,000, leaving a balance of $110,000 remaining
to be funded in fiscal year 2005. The capital funding is being raised by ADAC
through a private placement of a new series (Series B) of participating
preferred stock. The various agreement transaction requirements were completed
on November 15, 2004. The Company owns 52.5% of the LLC, and holds two of the
three manager positions, such positions filled by Charles A. Holtgraves and
Larry J. Horbach, directors and officers of the Registrant.

The initial capital funding was raised by ADAC through a private placement of
595 shares of a new series preferred stock. The Senior Series B Preferred Stock,
Stated Value $1,000 per share provides, among other things, for a preferential
dividend right based on the Company's proportionate interest in the operations
and cash flow from Elgin, and a preferential liquidation right consisting of a
proportionate share of the Company's Capital Account in Elgin.

Charles Holtgraves, Philip Holtgraves, Larry Horbach and Christopher Davis are
directors of the Registrant. Charles Holtgraves, Philip Holtgraves and Mr.
Horbach are officers of the Registrant. Entities in which these individuals
either control or have an interest in, have subscribed for 577 of the 595
authorized shares.


AER/Elgin and Gateway Energy Corporation Agreement

     On November 15, 2004, AER and Elgin entered into a LICENSE AGREEMENT (the
"Agreement") with Gateway Energy Corporation and certain of its subsidiaries.
The Agreement, provides, among other things, for the granting of a sublicense to
AER and Elgin to enable Elgin to treat the gas produced from the leasehold
interests owned by Elgin in Madison County, Texas, which interests fall within a
defined Area of Mutual Interest, ("AMI"). The AMI is described in certain
agreements with respect to the "The Gateway Energy/Madisonville Project
Agreement" discussed above. In addition, the Agreement provides that AER and
Elgin will dedicate the gas produced from its interests in the AMI to the
Madisonville Project plant and will advance up to $91,250 to Gateway, $30,413 of
which will represent a prepayment by the Company of the license and other fees
due Advanced Extraction Technologies ("AET") for the processing of a minimum of
5,000 Mcf per day. The balance of the advance ($60,837) will be repaid by
Gateway from Gateway's share of the initial project cash flows. The funds were
advanced in December 2004. The Agreement further grants to AER or its designees,
an option to participate pari passu with Gateway, subject to certain
limitations, interests in future projects which require the treatment of natural
gas containing high nitrogen, which projects utilize the AET license held by
Gateway.

                                       6

<PAGE>


     Reference is made to the Registrant's SEC Form 8-K filed on November 19,
2004 for additional information with respect to the above.



Risks Related To New Business Strategy
--------------------------------------

The Company will be subject to all of the energy industry common and traditional
risks associated with the economic production of hydrocarbons including, but not
limited to, acquisition of reserves that can produce adequate returns to attract
the necessary investment capital to develop such reserves, the petroleum
engineering of underground oil and gas reserves, drilling of the wells, and the
fluctuation of hydrocarbon prices. In addition, the Company has limited capital
resources and management has limited experience with respect to this segment of
the energy industry. Accordingly, the Company is utilizing the joint venture
approach to mitigate these risks.



Nature of the Business Conducted By the Company through March 31, 2004
----------------------------------------------------------------------

The following information is provided in order to provide a historical
perspective of the Company's operations since emergence from its Chapter XI
filing and executive management's operating strategy. It should be noted,
however, that the following business discussions relate to the AIH operations
that were included in the Exchange Transaction.

Delinquent Debt Recovery
------------------------

The majority of the Company's revenue was derived from the collection of
delinquent accounts receivable for AIH's clients. AIH provided its services to
clients that included various health care providers, financial institutions, and
retail firms. All of AIH's clients were based in the states of Kansas and
Missouri with the majority located in the Kansas City metro area. AIH earned a
25%-50% contingency fee depending on the size, age, and AIH's assessment of the
collectability of the accounts placed for collection.

Litigation Management
---------------------

The Company realized that to provide effective and thorough receivable
management services to clients, it needed to establish other services and
systems to support its core operations. At times the Company recommended to its
clients the need to take legal action to increase the probability of recovery of
an account receivable. The Company made this recommendation on accounts with
verified assets and significant balances. AIH had in place a department to
manage all aspects of the litigation. AIH worked closely with a Kansas City law
firm in preparing and filing legal actions on collection accounts and
enforcement of judgments. Once a judgment was entered, AIH pursued the
collection of the judgment by filing liens on the debtor's assets and the
garnishment of wages as applicable. Litigation management services were also
available to all of the AIH's clients.

Consumer Receivables
--------------------

The Company, through AIH and RMS acquired portfolios of charged off consumer
debt and then collected on same for its own account.

                                       7

<PAGE>


Customers
---------

AIH generally had a broad and well-diversified client base that includes
hospitals, medical groups, laboratories, convalescent homes, banks, and credit
unions. Although, AIH had several customers and the loss of any one of these
customers could have a material adverse effect on operations, no customer
comprises more than 10% of the Company's consolidated revenues.

Markets and Competition
-----------------------

AIH maintained a full-time sales representative that continuously solicits
business by pursuing leads from existing clients, multiple business and commerce
directories, and promotional material.

Regulation
----------

The AIH operations were regulated by the Fair Debt Collection Practice Act
(FDCPA) and the Telephone Consumer Protection Act (TCPA), which are enforced by
the Federal Trade Commission (FTC).

Employees
---------

As of March 31, 2005, the Company and its subsidiaries had 3 employees, none of
whom received any compensation during the year.



ITEM 2.  DESCRIPTION OF PROPERTY
         -----------------------

Property, Plant and Equipment
-----------------------------

All property, furniture, and equipment as of March 31, 2004 was owned by AIH and
accordingly included in the Exchange Transaction. At March 31, 2005, property,
plant and equipment, all of which is held in Elgin, consists of approximately
$481,000 related to pipeline and natural gas treating facilities located in
Hardin County, Texas, and $530,000 of acreage and related costs for oil and gas
properties located in Madison County, Texas. In addition Elgin has lease
prepayments of approximately $27,000.

Corporate Property
------------------

In addition to the operating properties described above, the Company leases
office space and certain office equipment in its corporate office located at
5799 Broadmoor, Ste 750, Mission, KS.



ITEM 3.  LEGAL PROCEEDINGS
         -----------------

The Company is not involved in any lawsuits as of March 31, 2005.


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

None.

                                       8

<PAGE>
                                     PART II
                                     -------

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
         --------------------------------------------------------

The Company's common stock is traded on the OTC Pink Sheets under the symbol
AVFI. The following table sets forth the high and low prices for the common
stock as reported on the Pink Sheets for the four quarters of fiscal 2004 and
2005. The prices do not include retail mark-ups, markdowns, or other fees or
commissions, and may not represent actual transactions.

              2004                          High                  Low
----------------------------------   -------------------    -------------------
Quarter ended June 30, 2003                 $0.04                 $.01
Quarter ended September 30, 2003       No transactions        No transactions
Quarter ended December 31, 2003        No transactions        No transactions
Quarter ended March 31, 2004           No transactions        No transactions

              2005                          High                  Low
----------------------------------   -------------------    -------------------
Quarter ended June 30, 2004            No transactions        No transactions
Quarter ended September 30, 2004       No transactions        No transactions
Quarter ended December 31, 2004        No transactions        No transactions
Quarter ended March 31, 2005           No transactions        No transactions



At March 31, 2005, and as of the date of filing this Annual Report, no active
market existed for the Company's common stock. On such date, 325 holders of
record held the Company's common stock.

At March 31, 2005, and as of the date of filing this Annual Report, the Company
had not paid any cash dividends on its common stock. The Company was not subject
to any restrictive covenants or agreements, which limit its ability to pay
dividends. The Company has no plans to pay cash dividends on its common stock in
the near future.



ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
         ---------------------------------------------------------

GENERAL
-------

Effective April 1, 2004, the Company completed a restructuring and changed its
business focus to the energy industry, having disposed of all of its financial
service related operations. Thus, any comparisons of results of operations and
financial condition would be meaningless. However, the prior year's Management's
Discussions are available in the Company's Form 10KSB for the year ended March
31, 2004.

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this report particularly
those dealing with the Exchange Transaction and the Subsequent Events footnote.

This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in any forward-looking statements included herein.  In addition,

                                       9

<PAGE>


because of the change to a new business strategy, the Company will be subject to
all of the energy industry common and traditional risks associated with the
economic production of hydrocarbons including, but not limited to, acquisition
of reserves that can produce adequate returns to attract the necessary
investment capital to develop such reserves, the petroleum engineering of
underground oil and gas reserves, drilling of the wells, and the fluctuation of
hydrocarbon prices. The Company has limited capital resources and management has
somewhat limited experience with respect to this segment of the energy industry.
Accordingly, the Company is utilizing the joint venture approach to mitigate
these risks.

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this report.

RESULTS OF OPERATIONS
---------------------

Year Ended March 31, 2005
-------------------------

Liquidity and Capital Resources
-------------------------------

As of December 31, 2003, the accumulation of debt to ARGUS had grown to a point
where the Company could no longer service this outstanding debt given the
downsizing of the Company that was the result of the reorganization and
restructuring of the various AIH segment operations. Also during these years,
and to the current date, the current President and Treasurer of the Company did
not draw a salary, nor were any amounts accrued with respect thereto. With the
Madisonville Project investment, and the joint venture with GulfWest Energy Inc.
as discussed later, the Company had determined that the ability to generate
long-term value for the common shareholders could be enhanced if the present
Company operations, (AIH) were sold and the Company concentrated its growth
efforts in the energy industry, focusing primarily on natural gas. In accordance
with this business strategy, an agreement was entered into with ARGUS, subject
to common shareholder approval, wherein the common shares of AIH would be
exchanged for an assumption by ARGUS of all of the AIH liabilities (the
"Exchange Transaction"). The Board of Directors engaged an investment banking
firm (Morgan Stanley) to determine the fair market value of the AIH operations
on a going concern basis. Morgan Stanley, through its SPARDATA affiliate,
determined such value to be $345,000. On March 24, 2004, the Company received
the requisite affirmative consent votes from the common shareholders to effect
the Exchange Transaction. The Exchange Transaction was completed in August of
2004, but was effective as of 12:01 AM April 1, 2004. In the Exchange
Transaction, ARGUS assumed $1,661,719 of liabilities, (including $1,308,858 of
notes payable, substantially all of which carried a prime interest rate),
resulting in a gain to the Company on the exchange of $1,569,476, which gain was
reduced by $59,426 as a result of a final settlement of certain payables and
certain additional costs related to the Exchange Transaction during the quarter
ended December 31, 2004.

In the quarter ended December 31, 2004, the Company entered into two
transactions which significantly impacted the Company-

GulfWest Energy Inc. Joint Venture

On July 21, 2004, the Company entered into a Letter of Intent, subject to the
execution of definitive agreements, with GulfWest Energy Inc. ("GWEI") located
in Houston, Texas, under which the Company and GWEI, through one or more Joint
Venture LLCs, would develop certain oil and gas assets owned by GWEI in Grimes
and Madison County, Texas. Certain of the Madison County reserves, if developed
and produced, are expected to require treatment similar to that described in the
Madisonville Project as discussed earlier under the April 30, 2003 Gateway
Energy Corporation Agreement. On October 14, 2004, the Company, through its
wholly owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), became a

                                       10

<PAGE>


member of a Texas LLC (Elgin Holdings, L.L.C.) (the "LLC") ("Elgin") with GWEI
for the purpose of initially developing certain portions of the GWEI oil and gas
asset bases in Madison County and Hardin County, Texas. Participation in the
development of the Grimes County asset base, if any, by ADAC was deferred and
will not be a part of this LLC. GWEI contributed certain assets valued at
approximately $540,000, and the Company committed to provide up to $595,000 in
initial capital funding to the LLC as provided for in the LLC's Regulations. In
December, 2004, the Company funded $315,000. In March 2005, the Company funded
an additional $170,000, leaving a balance of $110,000 remaining to be funded in
fiscal year 2005. The capital funding is being raised by ADAC through a private
placement of a new series (Series B) of participating preferred stock. The
various agreement transaction requirements were completed on November 15, 2004.
The Company owns 52.5% of the LLC, and holds two of the three manager positions,
such positions filled by Charles A. Holtgraves and Larry J. Horbach, directors
and officers of the Registrant

The initial capital funding was raised by ADAC through a private placement of
595 shares of a new series preferred stock. The Senior Series B Preferred Stock,
Stated Value $1,000 per share provides, among other things, for a preferential
dividend right based on the Company's proportionate interest in the operations
and cash flow from Elgin, and a preferential liquidation right consisting of a
proportionate share of the Company's Capital Account in Elgin.

Charles Holtgraves, Philip Holtgraves, Larry Horbach and Christopher Davis are
directors of the Registrant. Charles Holtgraves, Philip Holtgraves and Mr.
Horbach are officers of the Registrant. Entities in which these individuals
either control or have an interest in, have subscribed for 577 of the 595
authorized shares.


The Company/Elgin and Gateway Energy Corporation Agreement

On November 15, 2004, the Company and Elgin entered into a LICENSE AGREEMENT
(the "Agreement") with Gateway Energy Corporation and certain of its
subsidiaries. The Agreement, provides, among other things, for the granting of a
sublicense to the Company and Elgin to enable Elgin to treat the gas produced
from the leasehold interests owned by Elgin in Madison County, Texas, which
interests fall within a defined Area of Mutual Interest, ("AMI"). In addition,
the Agreement provides that the Company and Elgin will dedicate the gas produced
from its interests in the AMI to the Madisonville Project plant and will advance
up to $91,250 to Gateway, $30,413 of which will represent a prepayment by the
Company of the license and other fees due Advanced Extraction Technologies
("AET") for the processing of a minimum of 5,000 Mcf per day. The balance of the
advance ($60,837) will be repaid by Gateway from Gateway's share of the initial
project cash flows. This advance was completed in December 2004. The funds
needed to meet the terms and conditions of the License Agreement were obtained
from a bank term loan, which loan was guaranteed by two officers and directors
of the Company, (Horbach and Holtgraves). The Agreement further grants to the
Company or its designees, an option to participate pari passu with Gateway,
subject to certain limitations, interests in future projects which require the
treatment of natural gas containing high nitrogen, which projects utilize the
AET license held by Gateway.


Operations
----------

The revenues for the year ended March 31, 2005 consisted of the interest and
guaranteed return from the Madisonville Project and a nominal amount of revenue
from sales of gas from the testing of the Saratoga project which project was
deemed in service in late March of 2005. During the year ended March 31, 2005,
the Company's wholly owned subsidiary (ADAC) accrued $135,000, the minimum
guaranteed return, and received $134,190, in price upside payments. These
payments were offset to the accrued minimum guaranteed return. During the year
ended March 31, 2005, ADAC also accrued Series A Preferred Stock dividends

                                       11

<PAGE>


payable of $90,000 representing 66-2/3% of such minimum guaranteed return and
paid cash dividends of $44,321. The dividends are not payable until such time as
ADAC receives project cash distributions from Gateway. The plant was deemed to
be in service on October 1, 2003, which is the date that the price up side
provisions of the agreement became effective.

Operating income for the year was $31,290 after operating and general and
administrative costs of $96,316 and interest of $17,278. Such general and
administrative costs are not indicative of future operations as the sole three
employees/officers of the Company (Charles Holtgraves, Philip Holtgraves and
Larry Horbach) have waived current compensation in order to preserve cash flow
for Company investment in on going projects. For such waiver of current
compensation, these individuals have been given the right to invest on a
pari-passu basis in these initial high risk capital projects along side the
Company and other outside accredited investors. To date, entities in which these
individuals either control or have an interest in, have provided a majority of
all of the capital invested in the initial energy projects described above.

During the three months ended June 30, 2004, the Company recognized a gain on
the Exchange Transaction of $1,569,476. Such gain was the difference between the
ARGUS obligations cancelled and the AIH operation's net assets (assets less
liabilities assumed by ARGUS). During the quarter ended December 31, 2004, this
gain was reduced by $59,426 as a result of a final settlement of certain
payables and certain additional costs related to the Exchange Transaction
resulting in a final reported gain of $1,510,050.

SUBSEQUENT EVENT

On July 26, 2005, ADAC executed an "Amendment To Agreement" (the "Amendment"),
which Amendment modified certain provisions of the March 6, 2003, agreement
between ADAC and Gateway Energy Corporation as related to the Madisonville
Project Pipeline Facilities. The Amendment was necessary to enable Gateway to
sell certain of the Pipeline Facilities. The Amendment provides among other
things for; (a) a waiver of the notification by ADAC of it's election to pay off
the $900,000 Term Note and exercise of the Equity Participation Option; (b)
receipt by ADAC of certain consideration pursuant to a May 7, 2004 amendment to
the 2003 agreement, and; (c) the transfer to a newly formed LLC, which LLC will
be owned by ADAC (33.33%) and by Gateway (66.67%), of the 10" Transportation
System along with certain ancillary equipment, and a Transportation Agreement
between Gateway and the purchaser of the Pipeline Facilities. The transactions
are required to be closed and funded by August 31, 2005.




ACCOUNTING PRONOUNCEMENTS AND
-----------------------------
RECENT REGULATORY DEVELOPMENTS
------------------------------

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. Goodwill and other intangible assets having an indefinite useful life
acquired in business combinations completed after June 30, 2001, are no longer
subject to amortization to earnings. Effective April 1, 2002, all goodwill and
other intangible assets having an indefinite useful life are no longer amortized
to earnings. The useful lives of other intangible assets must be reassessed, and
the remaining amortization periods must be adjusted accordingly. Goodwill and
other intangible assets having an indefinite useful life will be tested for
impairment annually, or more frequently if events or changes in circumstances
indicate that the assets might be impaired, using a two-step impairment
assessment. The first step of the goodwill impairment test compares the fair
value of a reporting unit with its carrying amount, including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not considered impaired, and the second step of the impairment
test is not necessary. If the carrying amount of a reporting unit exceeds its
fair value, the second step of the goodwill impairment test is performed to

                                       12

<PAGE>


measure the amount of impairment loss, if any. The Company adopted the
provisions of SFAS 142 on April 1, 2002. The Company provided an impairment
charge of $90,000 as of March 31, 2004.

In January 2003, the SEC adopted rules implementing Sections 406 and 407 of the
Act. Section 406 of the Act requires public companies to annually disclose
whether the company has adopted a code of ethics for its principal executive and
financial officers, and if it has not, to explain why it has not. Additionally,
the rules will require disclosure on a Form 8-K filing any amendments to or
waivers from the code of ethics relating to those officers. Section 407 of the
Act required public companies to disclose annually whether it has at least one
"audit committee financial expert", as defined in the rules, on the Company's
audit committee, and if so, the name of the audit committee financial expert and
whether the expert is independent of management. A company that does not have an
audit committee financial expert will be required to disclose this fact and
explain why it has no such expert. Both rules are effective for small business
issuers' annual reports for fiscal years ending on or after December 15, 2003.
As of March 31, 2005, because of its recent restructuring and small size of the
Board, the Company did not have on its Board of Directors a member who could
meet the qualifications as defined in the rules for serving on an audit
committee, or a member who could meet the qualifications of an audit committee
financial expert..

In January 2003, the FASB issued interpretation No. 46 "Consolidation of
Variable Interest Entities, and interpretation of Accounting Research Bulletin
No. 51" ("The Interpretation"). The Interpretation requires the consolidation of
variable Interest Entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected returns,
or both, as a result of ownership, contractual or other financial interests in
the entity. The Interpretation was originally immediately effective for variable
interest entities created after January 31, 2003, and effective in the fourth
quarter of the Company's fiscal 2003 for those created prior to February 1,
2003. However, in October 2003, the FASB deferred the effective date for those
variable interest entities created prior to February 1, 2003 until the fourth
quarter of fiscal 2004. The Company has substantially completed the process of
evaluating the Interpretation and believes its adoption will not have a material
impact on its financial position or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS No. 149"). SFAS No.149 amends SFAS No. 133 to provide
clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires that contracts with similar
characteristics be accounted for on a comparable basis. The standard is
effective for contracts entered into or modified after June 30, 2003. The
Company's adoption of SFAS No. 149 did not have a material impact on its
financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity" ("SFAS No. 150") SFAS No.
150 establishes how an issuer classifies and measures certain freestanding
financial instruments with characteristics of liabilities and equity and
requires that such instruments be classified as liabilities. The standard is
effective for financial instruments entered into or modified after May 31, 2003,
and is otherwise effective in the first quarter of the Company's fiscal 2004.
The Company's adoption of SFAS No. 149 did not have a material impact on its
financial position or results of operations.

                                       13

<PAGE>


ITEM 7.  FINANCIAL STATEMENTS
         --------------------

Financial statements for the years ended March 31, 2005 and March 31, 2004 are
presented on the following pages.


                                       14

<PAGE>


                                  CONSOLIDATED
                              FINANCIAL STATEMENTS
                                       AND
                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS

                         ADVANCED ENERGY RECOVERY, INC.
                                AND SUBSIDIARIES


                             March 31, 2005 and 2004


                                       15

<PAGE>


             Report of Independent Registered Public Accounting Firm



Stockholders and Directors
Advanced Energy Recovery, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Advanced Energy
Recovery, Inc. and Subsidiaries as of March 31, 2005 and 2004 and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Energy
Recovery, Inc. and Subsidiaries as of March 31, 2005 and 2004 and the results of
its operations and its cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and is dependent upon the continued sale of its securities or obtaining debt
financing for funds to meet its cash requirements. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are also described in Note B.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.




/s/   Weaver & Martin, LLC
----------------------------------
      Weaver & Martin, LLC
      Kansas City,   Missouri
      August 10, 2005

                                       16

<PAGE>


                              THIS PAGE LEFT BLANK
                              --------------------


                                       17

<PAGE>


                              THIS PAGE LEFT BLANK
                              --------------------


                                       18

<PAGE>
<TABLE>
<CAPTION>


                        ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES
                                  CONSOLIDATED BALANCE SHEETS



                                                                     March 31,     March 31,
                                                                       2005          2004

<S>                                                                <C>            <C>
Cash                                                               $    81,787    $      --
Collection fees ($35,493) and finance receivables ($12,621)               --           48,114
Accrued interest receivable                                            157,742         96,095
Other receivables                                                       13,015           --
Prepaid expenses and other                                              70,413         17,813
                                                                   -----------    -----------
       Current Assets                                                  322,957        162,022
Property, plant and equipment, net                                   1,008,887         36,063
Customer lists, net of amortization of $217,236 in 2004                   --          134,612
Deferred project costs and prepaid lease                                52,458           --
                                                                   -----------    -----------
    Total  Assets                                                  $ 1,384,302    $   332,697
                                                                   ===========    ===========
    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
  Accounts payable                                                 $   175,648    $    35,622
  Checks issued in excess of cash balances                                --          112,489
  Accrued expenses                                                     157,375        361,120
  Accounts payable - related parties                                     7,725         52,815
  Notes payable                                                        366,400      1,594,658
  Dividends accrued-preferred stock of subsidiary                      123,108         77,403
                                                                   -----------    -----------
    Current Liabilities                                                830,256      2,234,107
                                                                   -----------    -----------
Commitments and Contingencies-
   Minority interest                                                   536,148           --
                                                                   -----------    -----------
STOCKHOLDERS' EQUITY
  Preferred Stocks of Subsidiary-
    Series A, $10.00 Par Value;
     900 shares authorized, 900 shares issued and outstanding            9,000          9,000
        Paid in capital, Series A Preferred Stock                      891,000        891,000
        Subscriptions receivable, Series A Preferred Stock            (900,000)      (900,000)
                                                                   -----------    -----------
                                                                          --             --
                                                                   -----------    -----------
    Series B, $10.00 Par Value;
      595 shares authorized, 387.2 shares issued and outstanding         5,950           --
         Paid in capital, Series A Preferred Stock                     589,050           --
        Subscriptions receivable, Series B Preferred Stock            (207,784)          --
                                                                   -----------    -----------
                                                                       387,216           --
                                                                   -----------    -----------
  Preferred stock, Series B, $.005 par value; 1,000,000
    shares authorized, none issued and outstanding                        --             --
                                                                   -----------    -----------

  Common stock, $.003 par value; 10,000,000 shares
    authorized, 2,396,503 and 1,955,379  issued an outstanding           7,189          5,866
  Paid-in capital                                                    1,330,503      1,253,261
  Accumulated deficit                                               (1,707,010)    (3,160,537)
                                                                   -----------    -----------
                                                                      (369,318)    (1,901,410)
                                                                   -----------    -----------
    Total Stockholders' Equity                                          17,898     (1,901,410)
                                                                   -----------    -----------
                                                                   $ 1,384,302    $   332,697
                                                                   ===========    ===========


               The accompanying notes are an integral part of these statements.

                                              19
</TABLE>

<PAGE>


                 ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS



                                                     Year ended     Year ended
                                                      March 31,      March 31,
                                                        2005           2004
                                                     -----------    -----------
REVENUES
  Collection, servicing, and other fees              $         0    $   823,762
  Other                                                    9,884         29,031
  Interest and guaranteed return                         135,000        135,026

                                                     -----------    -----------
     Total Revenues                                      144,884        987,819
                                                     -----------    -----------

EXPENSES
  Operating expenses, including general and
    administrative costs                                  94,583      1,162,323
  Interest                                                17,278         72,299
  Depreciation and amortization                            1,733         36,455
  Impairment charge                                            0         90,000
                                                     -----------    -----------
     Total Expenses                                      113,594      1,361,077
                                                     -----------    -----------

OPERATING  INCOME (LOSS)                                  31,290       (373,258)

   Gain on Exchange Transaction                        1,510,050              0

                                                     -----------    -----------
INCOME  (LOSS) BEFORE INCOME TAXES                     1,541,340       (373,258)
  AND MINORITY INTEREST

   Income taxes                                                0              0

   Minority interest                                       2,187              0

                                                     -----------    -----------
  NET INCOME (LOSS)                                    1,543,527       (373,258)

  Subsidiary preferred stock dividends accrued           (90,000)       (90,000)
                                                     -----------    -----------

  EARNINGS (LOSS) FOR COMMON STOCK                   $ 1,453,527    $  (463,258)
                                                     ===========    ===========

Weighted-average shares outstanding                    2,260,004      1,955,379
                                                     ===========    ===========

 Earnings (Loss) Per Common Share                    $      0.64    $     (0.24)
                                                     ===========    ===========


         The accompanying notes are an integral part of this statement.

                                       20

<PAGE>
<TABLE>
<CAPTION>


                                   ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES
                         CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)



                               Subsidiary Preferred Stock
                                  Series          Series      Common        Paid-in     Accumulated
                                    A               B         stock         capital       deficit          Total
                              -----------    -----------    -----------   -----------   -----------    -----------
<S>                           <C>            <C>            <C>           <C>           <C>            <C>
Balance, March 31, 2003       $         0    $         0    $     5,866   $ 1,253,261   $(2,697,279)   $(1,438,152)

Net loss for the year ended
    March 31, 2004                   --             --             --            --        (373,258)      (373,258)


900 shares authorized             900,000           --             --            --            --          900,000
Subscriptions outstanding        (900,000)          --             --            --            --         (900,000)

Subsidiary preferred stock
 dividends accrued                   --             --             --            --         (90,000)       (90,000)

                              -----------    -----------    -----------   -----------   -----------    -----------
Balance, March 31, 2004                 0              0          5,866     1,253,261    (3,160,537)    (1,901,410)

Net income for year ended
    March 31, 2005                   --             --             --            --       1,543,527      1,543,527

595 shares authorized                --          595,000           --            --            --          595,000
Subscriptions outstanding            --         (207,784)          --            --            --         (207,784)

Issuance of common stock             --             --            1,323        77,242          --           78,565

Subsidiary preferred stock
    dividends accrued                --             --             --            --         (90,000)       (90,000)
                              -----------    -----------    -----------   -----------   -----------    -----------
Balance, March 31, 2005       $         0    $   387,216    $     7,189   $ 1,330,503   $(1,707,010)   $    17,898
                              ===========    ===========    ===========   ===========   ===========    ===========


                           The accompanying notes are an integral part of this statement.

                                                         21
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                       ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES
                            CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                  Year ended    Year ended
                                                                   March 31,     March 31,
                                                                     2005           2004
                                                                 -----------    -----------
<S>                                                              <C>            <C>
Cash flows from operating activities
  Net income ( loss)                                             $ 1,543,527    $  (373,258)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
    Depreciation and amortization                                      1,733         36,455
     Impairment charge                                                  --           90,000
    Common stock issued for services                                  25,750           --
    Gain on Exchange Transaction                                  (1,569,476)          --
    Changes in assets and liabilities-
        Collection fees receivable                                      --           11,626
        Accrued interest receivable                                 (195,837)       (96,095)
        Other receivables                                            (13,015)          --
        Other assets                                                 (45,277)          (222)
        Accounts payable and accrued expenses                        296,868         39,259
                                                                 -----------    -----------
           Net cash used in operating activities                      44,273       (292,235)
                                                                 -----------    -----------

Cash flows from investing activities
  Collections applied to finance receivables                            --           18,375
  Project price upside payments received                             134,190           --
  Acquisitions of property, plant, and equipment                  (1,010,620)          --
  Minority interest contributions                                    536,148           --
  Deferred project costs and other                                   (52,432)          --
                                                                 -----------    -----------
           Net cash provided by (used in) investing activities      (392,714)        18,375
                                                                 -----------    -----------

Cash flows from financing activities
  Change in checks issued in excess of cash balances                   6,733        112,489
  Issuance of subsidiary preferred stock                             387,216           --
  Advances from related party,net                                       --         (442,971)
  Subsidary preferred stock dividends paid                           (44,321)       (12,597)
  Payments on notes payable                                          (20,850)          --
  Proceeds from notes payable                                        101,450        574,743
                                                                 -----------    -----------
           Net cash provided by financing activities                 430,228        231,664
                                                                 -----------    -----------

Net increase (decrease) in cash                                       81,787        (42,196)
Cash, beginning of year                                                 --           42,196
                                                                 -----------    -----------
Cash, end of year                                                $    81,787    $      --
                                                                 ===========    ===========
Supplementary disclosures of cash flow information
  Cash paid for interest                                         $      --      $    23,393
                                                                 ===========    ===========
  Common stock issued for services                               $    25,750    $      --
                                                                 ===========    ===========
  Common stock issued for liabilities                            $    52,816    $      --
                                                                 ===========    ===========


              The accompanying notes are an integral part of these statements.

                                             22
</TABLE>

<PAGE>


                 Advanced Energy Recovery, Inc. and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             March 31, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.

1.   Organization and Principles of Consolidation

Advanced Energy Recovery, Inc. (Formerly known as Advanced Financial, Inc.) (the
"Company" or "AER") is a Delaware corporation formed in September 1986. Advanced
Financial, Inc. operated in the financial services sector through March 31,
2004. Through its two wholly owned subsidiaries, AIH Receivable Management
Services and AIH Early Recovery Systems ("AIH"), the Company collected debts for
others for a fee and purchased charged-off credit card debt to collect at a
profit from debtors located throughout the United States. Through AIH, the
Company was also engaged in the business of collecting nonperforming receivables
on behalf of third parties. During the year 2004, the Company changed its focus
and growth efforts to the energy industry with its primary emphasis on natural
gas.

Advanced Energy Recovery, Inc., currently owns 100% of Allen Drilling
Acquisition Company ("ADAC"). In addition, as of October 14, 2004, through ADAC,
the Company owns 52.5% of Elgin Holdings, LLC ("Elgin"). ADAC and Elgin are
engaged in operations in the energy industry.

Under date of February 27, 2004, the Company, through an Information Statement
pursuant to Section 14 (c) of the Securities Exchange Act and Regulation 14A,
solicited the consents of the common stockholders (the "Solicitation") to effect
several transactions in an effort, among other things, to restructure the
Company, to dispose of the financial service operations which have accumulated
significant losses and to change its focus and growth efforts to the energy
industry with its primary emphasis on natural gas. The consents solicited
included the following:

     1.   To adopt an amendment to the Company's Certificate of Incorporation
          to; (i) change the name of the corporation to "Advanced Energy
          Recovery, Inc."; (ii) effect a 1 for three reverse split of the
          outstanding Common Stock of the Company; and (iii) set the authorized
          Common Stock of the Company at 10,000,000 common shares.

     2.   To obtain Stockholders' consent to an exchange of 100% of the
          outstanding stock of AIH Receivable Management Services, Inc. ("AIH")
          (a wholly owned subsidiary of the Company) for an assumption by the
          primary secured lender of the Company of all of the AIH liabilities
          ("the Exchange Transaction").

     3.   To obtain Stockholders' consent and ratification of the engagement by
          the Board of Directors of Weaver and Martin L.P. as the Company's
          independent public accountants.

     4.   To obtain Stockholders' consent and ratification of the appointment by
          the Board of Directors of two directors to fill two vacancies created
          by resignations. Such directors will serve until the next annual
          meeting of Stockholders.

On March 24, 2004, the Company, under a Form 8-K under date thereof, announced
that it had received the requisite affirmative consent votes from the common
shareholders to effect the four proposals set forth in the February 27, 2004
Solicitation.

                                       23

<PAGE>
<TABLE>
<CAPTION>


The Exchange Transaction was completed in August, but was effective as of 12:01
AM April 1, 2004.

2.   The Exchange Transaction

The AIH operations had resulted in significant losses despite the efforts by the
Company to restructure and reorganize various AIH segment operations. These
losses were funded by ARGUS.

The following sets forth in summary form the consolidated results of operations
for five years:

                       Fiscal Year    Fiscal Year    Fiscal Year    Fiscal Year    Fiscal Year
Financial Position       03/31/00       03/31/01       03/31/02       03/31/03       03/31/04
                       -----------    -----------    -----------    -----------    -----------
<S>                    <C>            <C>            <C>            <C>            <C>
Total assets           $ 1,139,576    $   742,348    $   562,750    $   435,032    $   332,697
Total liabilities        1,027,060      1,272,620      1,589,521      1,873,184      2,234,107
Stockholders' equity   $   112,516    $  (530,272)   $(1,026,771)   $(1,438,152)   $(1,901,410)

Amounts due to ARGUS   $   560,000    $   765,840    $ 1,129,772    $ 1,318,709    $ 1,442,618

Operations
Total revenues         $   977,439    $ 1,423,153    $ 1,152,171    $ 1,128,441    $   987,819
Total expenses           1,898,423      2,119,914      1,648,669      1,539,822      1,361,077
Net loss               $  (920,984)   $  (696,761)   $  (496,498)   $  (411,381)   $  (373,258)


The consolidated operations for the fiscal year ended March 31, 2004, included
amounts with respect to the Company's wholly owned subsidiary's, (ADAC)
participation in the Madisonville Project as described in Note C herein. For the
fiscal year then ended, ADAC reported net income of $105,616.

As of December 31, 2003, the accumulation of debt to ARGUS had grown to a point
where the Company could no longer service this outstanding debt given the
downsizing of the Company that was the result of the reorganization and
restructuring of the various AIH segment operations. Also during these years,
and to the current date, the current President and Treasurer of the Company did
not draw a salary, nor were any amounts accrued with respect thereto. With the
completion of the Madisonville Project investment, and the joint venture with
GulfWest Energy Inc. as discussed later, the Company had determined that the
ability to generate long-term value for the common shareholders could be
enhanced if the present Company operations, (AIH) were sold and the Company
concentrated its growth efforts in the energy industry, focusing primarily on
natural gas. In accordance with this business strategy, an agreement was entered
into with ARGUS, subject to common shareholder approval, wherein the common
shares of AIH would be exchanged for an assumption by ARGUS of all of the AIH
liabilities (the "Exchange Transaction"). The Board of Directors engaged an
investment banking firm (Morgan Stanley) to determine the fair market value of
the AIH operations on a going concern basis. Morgan Stanley, through its
SPARDATA affiliate, determined such value to be $345,000. On March 24, 2004, the
Company received the requisite affirmative consent votes from the common
shareholders to effect the Exchange Transaction. The Exchange Transaction was
effective at the beginning of business on April 1, 2004.

                                       24
</TABLE>

<PAGE>


The following sets forth the opening consolidated balance sheet on April 1,
2004, reflecting the Exchange Transaction :

Condensed  Consolidated Balance Sheet

                                     March 31,2004
                Assets                  Actual       Transaction    April 1,2004
                                      -----------    -----------    -----------
Cash (overdrafts)                     $  (112,489)   $   119,223    $     6,734
Receivables and other                      65,927        (40,791)        25,136
Accrued interest receivable                96,095                        96,095
Property, net                              36,063        (36,063)             0
Customer lists, net                       134,612       (134,612)             0
Escrow deposit                             75,000                        75,000
Escrow depost reserve                     (75,000)                      (75,000)
                                      -----------                   -----------
                                      $   220,208                   $   127,965
                                      ===========                   ===========
              Liabilities
Payables and accrued expenses         $   396,742       (352,861)        43,881
Payables to related parties                52,815  A                     52,815
Notes payable                           1,594,658  B   (1,308,858)      285,800
Preferred stock dividends accrued          77,403                        77,403
                                      -----------                   -----------
     Total                              2,121,618                       459,899
                                      -----------                   -----------
Stockholders Equity (Deficiency)
Subsidary preferred stock                 900,000                       900,000
Subscriptions receivable                 (900,000)                     (900,000)
Series B Preferred stock                        0                             0
Common stock and paid in capital        1,259,126                     1,259,126
Accumulated deficit                    (3,160,536) C    1,569,476    (1,591,060)
                                      -----------                   -----------
     Total                             (1,901,410)                     (331,934)
                                      -----------                   -----------
                                      $   220,208                   $   127,965
                                      ===========                   ===========


Notes to  Condensed  Consolidated Balance Sheet:

     (A) At March 31, 2004, the amounts due to related parties consisted of
$52,815 due to AFI Capital Corporation. In August, 2004, the $52,815 was settled
by the issuance of common stock of the Company.

     (B) Notes payable at March 31, 2004, consisted of the following:

         Due ARGUS, $1,442,618, interest at prime, due on demand, secured by
         substantially all of the Company's assets.

         Due AFI Capital Corporation, $75,000, interest at 8%, unsecured, due on
         demand.

         Due bank, $77,040 under a $100,000 Line of Credit, interest at 2% over
         prime, unsecured, due March 31, 2004, guaranteed by a director of the
         Company.

     The ARGUS note payable included $185,900 which was used to fund general
     Company corporate operations since the Company's emergence from its Chapter
     XI filing in 1999. A new prime interest rate demand note (accrued interest
     of $33,381 with respect to such note is included in accrued expenses above)
     was issued to ARGUS. The balance ($1,308,858) related to the funding of the
     AIH operations and was included in the Exchange Transaction.

                                       25

<PAGE>


     The AFI Capital Corporation note payable consists of two advances to ADAC
     in connection with a proposed acquisition transaction

     The bank note payable relates to the operations of AIH and was included in
     the Exchange Transaction.

(C) The gain to the Company on the Exchange Transaction. Such gain was the
difference between the ARGUS obligations cancelled and the AIH operation's net
assets (assets less liabilities assumed by ARGUS). During the quarter ended
December 31, 2004, this gain was reduced by $59,925 as a result of a final
settlement of certain payables and certain additional costs related to the
Exchange Transaction.

3.   Finance Receivables and Revenue Recognition

The Company accounted for its investment through March 31, 2004, in finance
receivables under the guidance of the American Institute of Certified Public
Accountants Practice Bulletin 6, Amortization of Discounts on Certain Acquired
Loans (PB6) using unique and exclusive static pools. The pools were established
with underlying accounts having similar attributes, based on acquisition timing
and by seller. Once a static pool was established, the accounts in the pool were
not changed. Each pool was initially recorded at cost. Until it was determined
that the amount and timing of collections were reasonably estimable and
collection was probable, PB6 required the receivable be accounted for under the
cost-recovery method. All of the Company's pools were accounted for under the
cost-recovery method. Application of the cost-recovery method required that any
amounts received be applied first against the recorded amount of the pool; when
that amount had been reduced to zero, any additional amounts received were
recognized as income. The discount between the cost of each pool of receivables
purchased and the contractual receivable of the accounts in the pool was not
recorded since the Company expected to collect a relatively small percentage of
each pool's contractual receivable balance. All pools were included in the
Exchange Transaction.

4.   Property, Plant  and Equipment

At March 31, 2005, property, plant and equipment, all of which is held in Elgin,
consisted of approximately $481,000 related to a pipeline and natural gas
treating facilities located in Hardin County, Texas, and $530,000 of acreage and
related costs for oil and gas properties located in Madison County, Texas. The
properties are stated at cost in the case of assets acquired within Elgin and at
fair market value in the case of assets contributed to Elgin by the members.

Property and Equipment
----------------------
All property, furniture, and equipment as of March 31, 2004 was owned by AIH and
accordingly included in the Exchange Transaction and the determination of the
gain thereon. Depreciation is provided on pipelines and treating facilities
using the straight-line method over an estimated useful life of 10 years.

Oil And Gas Properties
----------------------
The Company has elected to use the successful efforts method of accounting for
oil and gas producing activities. Costs to acquire mineral interests in oil and
gas properties, to drill and equip exploratory wells that find proved reserves,
and to drill and equip development wells, will be capitalized. Costs to drill
exploratory wells that do not find proved reserves, and geological and
geophysical costs will be expensed. As the Company acquires significant oil and
gas properties, any unproved property that is considered individually
significant will be periodically assessed for impairment of value, and a loss
will be recognized at the time of impairment by providing an impairment
allowance. Capitalized costs of producing oil and gas properties and support

                                       26

<PAGE>


equipment, after considering estimated dismantlement and abandonment costs and
salvage values, will be depreciated and depleted by the unit-of-production
method. In the event of the sale of an entire interest in an unproved property,
the gain or loss on the sale will be recognized, taking into consideration the
amount of any recorded impairment if the property has been assessed
individually. In the case of a sale of a partial interest in a proved property,
the gain or loss will be recognized, based upon the fair values of the interests
sold and retained.

5.   Income Taxes

The Company accounts for income taxes under the asset and liability method where
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
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are recognized to the extent
management believes that it is more likely than not that they will be realized.

6.   Loss Per Common Share

Loss per common share is based on the weighted average number of common shares
outstanding during the periods presented.

7.   Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of employee stock options exceeds the market price of the underlying stock
on the date of grant, no compensation expense is recorded. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123).

8.   Customer Lists

Intangible assets at March 31, 2004 consisted of customer lists obtained in
acquisitions. During the year ended March 31, 2004, the Company estimated that
the value and future benefits of certain of these customer lists, based on
discounted cash flow, indicated that the cost should be reduced. Accordingly, an
impairment charge of $90,000 was recorded. At March 31, 2005, the Company no
longer has any intangible assets.

9.    Accounting Pronouncements and Recent Regulatory Developments

In January 2003, the SEC adopted rules implementing Sections 406 and 407 of the
Act. Section 406 of the Act requires public companies to annually disclose
whether the company has adopted a code of ethics for its principal executive and
financial officers, and if it has not, to explain why it has not. Additionally,
the rules will require disclosure on a Form 8-K filing any amendments to or
waivers from the code of ethics relating to those officers. Section 407 of the
Act required public companies to disclose annually whether it has at least one
"audit committee financial expert", as defined in the rules, on the Company's
audit committee, and if so, the name of the audit committee financial expert and
whether the expert is independent of management. A company that does not have an
audit committee financial expert will be required to disclose this fact and
explain why it has no such expert. Both rules are effective for small business
issuers' annual reports for fiscal years ending on or after December 15, 2003.
As of March 31, 2004, because of its recent restructuring and small size of the
Board, the Company did not have on its Board of Directors a member who could

                                       27

<PAGE>


meet the qualifications as defined in the rules for serving on an audit
committee, or a member who could meet the qualifications of an audit committee
financial expert.

10.  Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.


NOTE B - GOING CONCERN

At March 31, 2005, the Company's financial statements were subject to "Going
Concern" issues, and the consolidated financial statements with respect thereto
were prepared on going concern basis, which contemplated the Company's
continuity of operations, realization of assets, and liquidation of liabilities
in the ordinary course of business. Those statements, however, did not reflect
adjustments that might result if the Company were unable to continue as a going
concern. To address those issues, early in fiscal year 2004, management of the
Company developed a plan to restructure the Company and to change its focus and
business strategy as later described herein. The plan was implemented throughout
the year, and culminated in the Exchange Transaction in August 2004, which
transaction was effective on April 1, 2004.


NOTE C - ACQUISITIONS AND AGREEMENTS

1.   AFI Capital Corporation Agreement

In July, 2001, the Company entered into a four year Agreement with AFI Capital
Corporation ("Capital") a Nebraska corporation. Pursuant to the agreement,
Capital provided financial, acquisition, and general public company business
consulting services in other than the financial services industry. Compensation
for such services was based on a "successful efforts" basis and primarily
consisted of the Company's common equity and cash performance fees as earned. At
March 31, 2004, $52,815 was due to Capital under the compensation portion of the
Agreement, which amount was converted to 337,500 shares of Common Stock (post
reverse split basis) subsequent to March 31, 2004, in accordance with the
provisions of the Agreement. Upon issuance of the shares, the Agreement was
terminated and all parties released from any obligations arising there from.
Larry J. Horbach, who was appointed assistant secretary of the Company, and
appointed to fill a vacant Company director position in March, 2003, is the
president and a director of AFI Capital Corporation. Mr. Holtgraves is a
founding director and an officer of Capital. Upon issuance of the shares, Mr.
Holtgraves resigned as a director and officer of Capital and his Capital shares
were redeemed by Capital.

2.   The Gateway Energy/Madisonville Project Agreement

On March 6, 2003, the Company executed an Agreement which was closed on April
30, 2003, with Gateway Energy Corporation and certain of its subsidiaries of
Houston, Texas ("Gateway") under which it provided, through the Company's
wholly-owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), $900,000
of credit enhancements in the form of Letters of Credit. These credit
enhancements enabled Gateway to obtain additional financing, in the form of a
three year Balloon Note from a Houston bank to complete the construction of
certain natural gas pipeline facilities ("Pipeline Facilities") located in
Madison County, Texas, (The "Madisonville Project"). ADAC secured the Letters of
Credit through the private placement of a new series of participating preferred
stock (the "Series A"), to two investor groups. The Certificate of Designation

                                       28

<PAGE>


for the Series A provides, among other things, for dividend payments to the
named holders thereof, equal to sixty-six and two thirds, (66.67%) of cash
distributions received by ADAC from Gateway, and an unanimous vote of the Series
A to exercise the Equity Participation Option as further described below.

The Agreement provides, among other things, that ADAC will receive, during the
term of the additional financing, one-half (50%) of the price upside portion
only, if any, of the monthly fee to be received by Gateway from the Madisonville
Project. The Agreement also provides that ADAC will have the option to either:
(i) receive at the end of the Balloon Note term a lump-sum payment, which when
added to the payments received, if any, for the price upside portion, will
result in a 15% pre-tax internal rate of return on the $900,000, or (ii) to
exercise the Equity Participation Option by paying off the Balloon Note on or
before the end of the Balloon Note term in exchange for a thirty-three and
one-third (33.33%) ownership interest in the Pipeline Facilities from that date
forward. Gateway is obligated to pay the periodic interest payments on the
Balloon Note during the three year term of the Balloon Note. Further, Gateway
has granted liens to ADAC, subordinate to its banks, on its economic interest in
the Madisonville Project and certain other natural gas operating systems and
natural gas operating assets. The Agreement contains cross collateral and cross
default provisions linking it to an additional Gateway term note at the same
bank, the proceeds of which were used by Gateway to fund the Madisonville
Project.

The Madisonville Project is operated under a long-term agreement between
Gateway, Hanover Compression Limited Partnership, and Redwood Energy Production,
L. P. and is designed to treat gas to remove impurities from the gas to enable
the gas to meet pipeline sales quality specifications. The Madisonville Project
employs the state-of-the-art, patented, absorption based technology developed by
Advanced Extraction Technologies, Inc., for which Gateway has the exclusive U.
S. license, to remove nitrogen from the gas.

During the year ended March 31, 2005, the Company's wholly owned subsidiary
(ADAC) accrued $135,000, the minimum guaranteed return and received $134,190 in
price upside payments. These payments were offset to the accrued minimum
guaranteed return. During the year ADAC also accrued Series Preferred Stock
dividends payable of $90,000, representing 66-2/3% of such minimum guaranteed
return and paid cash dividends of $44,321. The dividends are not payable until
such time as ADAC receives project cash distributions from Gateway. The plant
was deemed to be in service on October 1, 2003, which is the date that the price
up side provisions of the agreement became effective.

To implement the provisions, terms and conditions of the various agreements
including the Certificate of Designation for the ADAC Series A Preferred Stock:
(i) Larry J. Horbach and Christopher D. Davis were appointed to the Board of
Directors of the Registrant to fill the vacancies created by the resignation of
two directors following the Registrant's emergence from it's Chapter XI
Reorganization, serving until elected at the next meeting of shareholders; and
(ii) Mr. Horbach resigned as a director of ADAC, with that position then being
filled by Mr. Davis. The Registrant, as the sole shareholder of ADAC, effected
such ADAC director changes and entered into an agreement to amend the ADAC
By-laws to provide that the number of ADAC directors shall be fixed at three as
long as any Series A Preferred Shares remain outstanding. In addition, Mr. Davis
as well as the Registrant's President, Charles Holtgraves, were elected to the
ADAC board of directors.

Mr. Holtgraves is currently a director of Gateway. Mr. Horbach, who was a
director of Gateway for several years, resigned his directorship on August 27,
2004. Mr. Davis has no affiliation with Gateway. Mr. Holtgraves owns 14.65% of
an entity that owns 55.56% of the ADAC Series A Preferred Stock. Mr. Davis
serves as the Trustee of the Davis Investment Management Trust for the Davis
Investments VI LP, which LP owns 44.44% of the ADAC Series A Preferred Stock.
Mr. Horbach owns no ADAC common stock or Series A Preferred Stock.

                                       29

<PAGE>


GulfWest Energy Inc. Joint Venture

On July 21, 2004, the Company entered into a Letter of Intent, subject to the
execution of definitive agreements, with GulfWest Energy Inc. ("GWEI") located
in Houston, Texas, under which the Company and GWEI, through one or more Joint
Venture LLCs, would develop certain oil and gas assets owned by GWEI in Grimes
and Madison County, Texas. Certain of the Madison County reserves, if developed
and produced, are expected to require treatment similar to that as earlier
described in the Madisonville Project. On October 14, 2004, the Company, through
ADAC, became a member of a Texas LLC (Elgin Holdings, LLC) (the "LLC") ("Elgin")
with GWEI for the purpose of initially developing certain portions of the GWEI
oil and gas asset bases in Madison County and Hardin County, Texas.
Participation in the development of the Grimes County asset base by ADAC was
deferred and will not be a part of this LLC. GWEI contributed certain assets
valued at approximately $540,000, and the Company committed to provide up to
$595,000 in initial capital funding to the LLC as provided for in the LLC's
Regulations. In December 2004 the Company funded $315,000. In March 2005, the
Company funded an additional $170,000, leaving a balance of $110,000 remaining
to be funded in fiscal year 2005. The capital funding is being raised by ADAC
through a private placement of a new series (Series B) of participating
preferred stock. The various agreement transaction requirements were completed
on November 15, 2004. The Company owns 52.5% of the LLC, and holds two of the
three manager positions, such positions filled by Charles A. Holtgraves and
Larry J. Horbach, directors and officers of the Registrant.

The initial capital funding was raised by ADAC through a private placement of
595 shares of a new series preferred stock. The Senior Series B Preferred Stock,
Stated Value $1,000 per share provides, among other things, for a preferential
dividend right based on the Company's proportionate interest in the operations
and cash flow from Elgin, and a preferential liquidation right consisting of a
proportionate share of the Company's Capital Account in Elgin.

Charles Holtgraves, Philip Holtgraves, Larry Horbach and Christopher Davis are
directors of the Registrant. Charles Holtgraves, Philip Holtgraves and Mr.
Horbach are officers of the Registrant. Entities in which these individuals
either control or have an interest in, have subscribed for 577 of the 595
authorized shares.

AER/Elgin and Gateway Energy Corporation Agreement

On November 15, 2004, AER and Elgin entered into a LICENSE AGREEMENT (the
"Agreement") with Gateway Energy Corporation and certain of its subsidiaries.
The Agreement, provides, among other things, for the granting of a sublicense to
AER and Elgin to enable Elgin to treat the gas produced from the leasehold
interests owned by Elgin in Madison County, Texas, which interests fall within a
defined Area of Mutual Interest, ("AMI"). The AMI is described in certain
agreements with respect to the "The Gateway Energy/Madisonville Project
Agreement" discussed above. In addition, the Agreement provides that AER and
Elgin will dedicate the gas produced from its interests in the AMI to the
Madisonville Project plant and will advance up to $91,250 to Gateway, $30,413 of
which will represent a prepayment by the Company of the license and other fees
due Advanced Extraction Technologies ("AET") for the processing of a minimum of
5,000 Mcf per day. The balance of the advance ($60,837) will be repaid by
Gateway from Gateway's share of the initial project cash flows. The funds were
advanced in December 2004. The Agreement further grants to AER or its designees,
an option to participate pari passu with Gateway, subject to certain
limitations, interests in future projects which require the treatment of natural
gas containing high nitrogen, which projects utilize the AET license held by
Gateway.

                                       30

<PAGE>


NOTE D - FINANCE RECEIVABLES
AIH purchased defaulted consumer receivables at a discount from the actual
principal balance. The following summarizes the change in finance receivables
for the year ended March 31, 2004. (The finance receivables were included in the
Exchange Transaction) :


                                                                         2004
                                                                       --------
Beginning balance, acquisition                                         $ 30,996

Purchase of finance receivables                                               0
Collections applied to principal on finance
  receivables                                                           (18,375)
                                                                       --------
Balance, March 31, 2004,  included in Exchange Transaction             $ 12,621
                                                                       ========


To the extent that the carrying amount of a pool of receivables exceeded its
fair value, a valuation allowance would be recognized in the amount of such
impairment. As of March 31, 2004, no provision for loss had been recorded.


NOTE E - NOTES PAYABLE

The following summarizes the Company's notes payable at:
                                                         March  31      March 31
                                                           2004           2005
                                                           ----           ----
Borrowings under a  line of credit
  from ARGUS, interest at prime, secured
  by substantially all of the Company's assets           $1,442,618         -

Due ARGUS, interest at prime, due on demand,
  secured  by substantially all of the assets of AER           -         199,950

Due to two officers and directors of the Company,
  under an assignment by AFI Capital Corporation,
  interest at 8%, unsecured, due on demand                     -          75,000

Due AFI Capital Corporation,  interest at 8%,
  non secured                                                75,000         -

Borrowings  under bank line of credit, interest at two
  over prime,  unsecured, guaranteed by a director           77,040         -

Due to bank, interest at prime, due June 20, 2005,
  with renewable terms, guaranteed by Mr. Horbach
  and Mr. Holtgraves, officers and directors of  the
  Company                                                      -          91,450
                                                         ----------   ----------

               Notes Payable,  All Current               $1,594,658   $  366,400
                                                         ----------   ----------

                                       31

<PAGE>


NOTE F - LEASES

Operating lease expense was approximately $12,000 and $100,000 for fiscal years
2005 and 2004 respectively. On August 31, 2004, upon notice of the present
office lease termination, a subsidiary of the Company (RMS) entered into a new
three year office lease for space located at 5799 Broadmoor, Suite 750, Mission,
KS, 66203. Effective with the Exchange Transaction, the Company entered into a
month to month lease for both office space and office equipment at a cost of
$1,000 per month with RMS. Future rent obligations under the lease are; $12,000
for the fiscal years ended March 31, 2006 and 2007 respectively; and $5,000 for
the fiscal year ended March 31, 2008.


NOTE  G - EMPLOYEE STOCK OPTIONS

     On February 19, 1999, the Company issued 50,000 shares of common stock at
     $0.50 per share, to a non-employee for service provided in connection with
     an acquisition. The options were immediately exercisable and will expire
     ten years from the date of issuance.

     Options to purchase 299,999 shares of the Company's common stock were
     issued to a former officer of the Company in February 1999. One hundred
     forty-nine thousand nine hundred ninety-nine (149,999) of the options were
     exercisable at $0.25 per share on or after November 13, 2000 through the
     expiration date of November 13, 2010, if the Company's common stock has
     attained and maintained bid prices of $1, $2, $3, and $4 for twenty
     consecutive trading days, respectively. The options vested during certain
     periods.

     In January, 2001, in connection with the resignation of the officer, the
     terms of the option were changed resulting in an immediate vesting of all
     options and a fixed exercise price of $.25 ($.75 post reverse split) per
     share exercisable to February 19, 2011.

     The stock options are accounted for as a variable plan under APB 25 and
     related Interpretations. No compensation cost has been recognized for the
     options. Had compensation cost for the options been determined based on the
     fair value of the options at the grant dates consistent with the method of
     SFAS 123, and to reflect the changes in January 2001, the Company's net
     loss and loss per common share and the pro forma amounts are set forth
     below for the year ended March 31, 2005 and 2004 respectively.

                                                           2005         2004
                                                       -------------------------
          Income, loss for common stock   As reported  $ 1,451,340   $ (463,258)
                                            Pro forma    1,451,340     (463,258)

          Income, loss per common share   As reported  $      0.64   $    (0.24)
                                            Pro forma         0.64   $    (0.24)



     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes options-pricing model with the following weighted-average
     assumptions used for grants: dividend yield of 0.0%; expected volatility of
     289.1%; risk-free interest rates of 5.54%; and expected lives of 10 years.

     There have been no options granted since fiscal year 2001. At March 31,
     2005, there were options outstanding with respect to 116,677 common shares
     (post reverse split), with an exercise price range of $0.75 to $1.50 per
     share, averaging $0.87 per share. All options are currently exercisable.

                                       32

<PAGE>
<TABLE>
<CAPTION>




                                                  2004 Compensatory Stock Options
                        -----------------------------------------------------------------------
                        Options Outstanding                                              Options Exercisable
----------------------------------------------------------------------------    -----------------------------------
                                       Weighted-average
   Range of              Number           remaining         Weighted-average       Number         Weighted-average
exercise prices       outstanding      contractual life     exercise price       exercisable      exercisable price
---------------       -----------      ----------------     --------------       -----------      -----------------
<S>      <C>            <C>               <C>                   <C>               <C>                  <C>
$0.75 to $1.50          116,667           5.1 years             $ 0.86            116,667              $ 0.86



                                                  2005 Compensatory Stock Options
                        -----------------------------------------------------------------------
         Options outstanding                                                             Options Exercisable
----------------------------------------------------------------------------    -----------------------------------
                                       Weighted-average
    Range of             Number           remaining         Weighted-average       Number         Weighted-average
exercise prices       outstanding      contractual life     exercise price       exercisable      exercisable price
---------------       -----------      ----------------     --------------       -----------      -----------------
$0.75 to $1.50          116,667           4.1 years             $ 0.86            116,667              $ 0.86





NOTE H - INCOME TAXES

The difference between actual income tax expense (benefit) and expected income
tax expense (benefit) at the statutory federal income tax rate (34%) computed as
follows at March 31,

                                                       2005             2004
                                                     ---------        ---------
            Expected income tax
               at statutory rate                     $ 524,056        $(102,383)
            State income taxes, net                     49,742           (9,718)
            Change in valuation allowance             (573,798)         109,812
            Other                                         --              2,289
                                                     ---------        ---------
                 Actual income tax expense           $    --          $    --
                                                     =========        =========


The following is the tax effect of temporary differences that gave rise to the
significant portions of deferred tax assets and liabilities at March 31:

                                                      2005             2004
                                                   -----------      -----------
Deferred tax assets
     Net operating loss carryforward               $ 3,014,885      $ 4,341,011

Valuation allowance                                 (3,014,885)      (4,341,011)
                                                   -----------      -----------

        Net deferred tax asset                     $      --        $      --
                                                   ===========      ===========

                                       33
</TABLE>

<PAGE>


The Company had estimated net operating loss carryforwards ("NOLs") of
approximately $10.4 million as of March 31, 2004. Such NOLs will be reduced by
the taxable gain on the April 1, 2004, Exchange Transaction. The net operating
losses will expire in the years ended March 31, 2009 through March 31, 2025.

Total deferred taxes consist primarily of the benefit of the net operating loss
carryforward. Management has established a valuation allowance to reduce the
total deferred tax asset to $0. As of March 31, 2005, the Company has no
recoverable income taxes previously paid.



NOTE I - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:

                                                    March 31,         March 31,
                                                      2005             2004
                                                   -----------      -----------
         Non evaluated, non producing leaseholds   $   529,819      $      --
         Plant and equipment                           480,801             --
         Furniture and fixtures                           --            297,977
                                                   -----------      -----------
                                                     1,010,620          297,977
         Accumulated depreciation                       (1,733)        (261,914)
                                                   -----------      -----------
                                                   $ 1,008,887      $    36,063
                                                   ===========      ===========

         Depreciation provided                     $     1,733      $    36,455
                                                   ===========      ===========



NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS

     Financial Accounting Standards Board Statement No. 107, Disclosure About
     Fair Value of Financial Instruments, and Financial Accounting Standards
     Board Statement No. 119, Disclosure About Derivative Financial Instruments
     and Fair Value of Financial Instruments, require that the Company disclose
     estimated fair values for its financial instruments. Fair value estimates
     have been made as of March 31, 2005 and March 31, 2004 based on the current
     economic conditions, risk characteristics of the various financial
     instruments, and other subjective factors.

     The following methods and assumptions were used to estimate the fair value
     of each class of financial instrument for which it is practicable to
     estimate that value:

Cash:  The carrying amounts approximated fair value.

Finance receivables: The Company recorded finance receivables at cost, which was
discounted from the actual principal balance. This cost was reduced as
collections were made. The carrying value of finance receivables approximates
fair value at March 31, 2004. The finance receivables were included in the
Exchange Transaction.

Notes payable: The fair values of the notes payable are estimated based on
discounted values of contractual cash flows using rates currently available for
similar loan types.

                                       34

<PAGE>


The estimated fair value and carrying value of the Company's financial
instruments are as follows at March 31, 2005 and 2004:


                                         2005                      2004
                               -----------------------   -----------------------
                                Carrying      Fair        Carrying      Fair
                                 value        value        value        value
                               ----------   ----------   ----------   ----------
     Financial assets:
       Cash                    $   81,787   $   81,787   $     --     $     --
       Finance receivables           --           --         12,621       12,621
     Financial liabilities:
       Notes payable              366,400      366,400    1,594,658    1,594,658



NOTE K - ACCOUNTS PAYABLE - RELATED PARTY

Accounts payable - related parties at March 31, 2004 consisted of amounts
advanced to the Company by AFI Capital ($52,815). No interest or repayment terms
existed. In August, 2004, the $52,815 was settled by the issuance of common
stock of the Company. At March 31, 2005 accounts payable related parties,
consisted of amounts due and officer and director (Mr. Horbach) of the Company
for un-reimbursed travel expenses.

Effective October 1, 2003, $508,787 of open advances to the Company by ARGUS
were converted to demand notes payable, with interest at prime.


NOTE L- RELATED PARTIES

Larry J. Horbach who was appointed to fill a vacant director's position in May
2003, and Charles A. Holtgraves, the Chairman of the Board and President of the
Registrant are also directors of Gateway Energy Corporation. Mr. Horbach
resigned as a director from Gateway on August 27, 2004.

Mr. Horbach is the President and Chairman of the Board of AFI Capital
Corporation. Mr. Holtgraves is a director of AFI Capital Corporation. Mr.
Holtgraves resigned as a director of AFI Capital Corporation on August 27, 2004.

Argus Investment Group, Inc. ("ARGUS ") is a family owned corporation involved
in venture capital lending and financing. The stock of ARGUS is 100% owned by
the Philip J. Holtgraves Irrevocable Trust DTD 9/20/93. Philip J. Holtgraves is
the Chairman of ARGUS , a Director of the Registrant and the father of Charles
A. Holtgraves. Charles A. Holtgraves is the President of ARGUS and Chairman,
President and Director of the Registrant.

Charles Holtgraves, Philip Holtgraves, Larry Horbach and Christopher Davis are
directors of the Registrant. Charles Holtgraves, Philip Holtgraves and Mr.
Horbach are officers of the Registrant. Entities in which these individuals
either control or have an interest in, have subscribed for 577 of the 595
authorized ADAC Series B Preferred Stock shares being issued in connection with
the Elgin Holdings, LLC joint venture.

Mr. Holtgraves owns 14.65% of an entity that owns 55.56% of the ADAC Series A
Preferred Stock. Mr. Davis serves as the Trustee of the Davis Investment
Management Trust for the Davis Investments VI LP, which LP owns 44.44% of the
ADAC Series A Preferred Stock. Mr. Horbach owns no ADAC common stock or Series A
Preferred Stock.

                                       35

<PAGE>


Mr. Holtgraves is the President and the 100% owner of Balance In Full, Inc.
("BIF"). BIF places delinquent charged of credit card accounts with AIH
Receivable Management Services, Inc., a wholly owned subsidiary of the
Registrant as of March 31, 2004, ("AIH") for collection services. The fees paid
by BIF for regular collections were 36% and 50% for legal accounts, which fees
are comparable for non related party accounts. During the fiscal year ended
March 31, 2004, gross collections were approximately $158,500.

In December, 2004, 103,000 shares of the Company's common stock were issued to
Mr. Horbach for services rendered in connection with the completion of the
restructuring and recapitalization of the Company.

NOTE M- SUBSEQUENT EVENT

On July 26, 2005, ADAC executed an "Amendment To Agreement" (the "Amendment"),
which Amendment modified certain provisions of the March 6, 2003, agreement
between ADAC and Gateway Energy Corporation as related to the Madisonville
Project Pipeline Facilities. The Amendment was necessary to enable Gateway to
sell certain of the Pipeline Facilities. The Amendment provides among other
things for; (a) a waiver of the notification by ADAC of it's election to pay off
the $900,000 Term Note and exercise of the Equity Participation Option; (b)
receipt by ADAC of certain consideration pursuant to a May 7, 2004 amendment to
the 2003 agreement, and; (c) the transfer to a newly formed LLC, which LLC will
be owned by ADAC (33.33%) and by Gateway (66.67%), of the 10" Transportation
System along with certain ancillary equipment, and a Transportation Agreement
between Gateway and the purchaser of the Pipeline Facilities. The transactions
are required to be closed and funded by August 31, 2005.

                                       36

<PAGE>



                                    PART III

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

Directors and Executive Officers.
---------------------------------

As of March 31, 2005, the following persons served as directors and executive
officers of the Company.

         NAME                 AGE                        POSITION
         --------------------------------------------------------

Charles A. Holtgraves          39                Chairman/ President/Treasurer/
                                                 Director

Philip J. Holtgraves           79                Director and Secretary

Larry J. Horbach               63                Director and Assist
Secretary

Christopher D. Davis           53                Director


Charles A. Holtgraves. From November 1998 to current, Mr. Holtgraves has been
Chairman, President, Treasurer and Director of the Company and its
subsidiaries.. Mr. Holtgraves is the President of Argus Investment Group, Inc.
("Argus") a family owned corporation involved in venture capital lending and
financing. Mr. Holtgraves was the Chief Financial Officer and Vice President of
First Mortgage Investment, Co., a full service mortgage banking operation, which
he co-founded in 1988 until its sale of assets in August 1998. Mr. Holtgraves
has been an officer and director of Gateway Energy Corporation, a publicly
traded natural gas company, since 1988. Mr. Holtgraves graduated from McPherson
College in 1988 with a dual degree in Finance and Accounting. Charles Holtgraves
is the son of Philip J. Holtgraves.


Philip J. Holtgraves. From November 1998 to current, Mr. Holtgraves has been a
Director of the Company and also serves as the Secretary of the Company. Mr.
Holtgraves is the Chairman of Argus a family owned corporation involved in
venture capital lending and financing. Mr. Holtgraves was the principal owner of
First Mortgage Investment, Co., a full service mortgage banking operation, which
he co-founded in 1988. Mr. Holtgraves was president and Chief Operating Officer
of Missouri Valley Investment, Co. from 1954 through 1987, becoming the sole
shareholder in 1965. Mr. Holtgraves sold Missouri Valley Investment, Co. in 1987
to a Texas Savings Association. From 1950 to 1954, Mr. Holtgraves was employed
by the Mid Continent regional office of the Prudential Insurance Co. in Kansas
City. In addition Mr. Holtgraves was the principal owner of and President of
Construction materials Inc., a chain lumber dealer in eastern Kansas. He sold
his interest in the operation in 1976. Mr. Holtgraves was admitted to the
Missouri Bar Association in 1951 and practiced law in the Kansas City area until
1952. Mr. Holtgraves has served on the board of directors of several banks
including First National Bank of Chanute and Mark Twain Plaza Bank in Kansas
City. Mr. Holtgraves was an agent for Rail Road Savings & Loan in the Olathe,
Kansas area for over twenty-five years. Mr. Holtgraves also holds a Missouri
Real Estate Broker's License. He is the father of Charles Holtgraves.

Larry J. Horbach. Served as a director of Gateway Energy Corporation since 1990
resigning his directorship on August 27, 2004. He has also served in various
executive capacities including Chairman and CEO and President of Gateway after
founding this energy company with certain other individuals (including Mr.
Holtgraves) in 1990. Mr. Horbach is the owner of L.J. Horbach & Associates, a
firm specializing in corporate re-organizations, re-structurings and startups
since 1976. Mr. Horbach is also a director of Templeton Savings Bank.

                                       37

<PAGE>
<TABLE>
<CAPTION>


Christopher D. Davis. For the last several years Mr. Davis has managed a
substantial family portfolio of liquid assets focusing on asset allocations,
tax, insurance, financial analysis, portfolio insurance and evaluation of third
party hedge and commodity advisory funds. From early 1974 to May 1977 he was
employed by Gulf Oil Corporation working as an analyst in certain sections of
Gulf's Strategic Planning Units.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 and the related regulations
require the Company's directors, executive officers and persons who own more
than ten percent of the Company's Common Stock to file with the Securities and
Exchange Commission initial reports of their beneficial ownership of the
Company's Common Stock and other equity securities of the Company. In addition,
such persons are required to furnish the Company with copies of all such
filings.

To the Company's knowledge, based solely upon a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended March 31, 2004, all Section
16(a) filing requirements applicable to its directors, executive officers and
ten percent beneficial owners were complied with.


ITEM 10.  EXECUTIVE COMPENSATION

    No executive officer of the Company received compensation from the Company
during the 2003, 2004 and 2005 fiscal years.


                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

                                      None
                                      ----

          AGGREGATED OPTION/SAR EXERCISED IN YEAR ENDED MARCH 31, 2005

                                      None
                                      ----



                     OPTION/SAR VALUES AS OF MARCH 31, 2005

      (a)                                 (b)             (c)             (d)                        (e)
                                                                                              Values of Unexercised
                                                                       Number of                  In-the-Money
                                                                       Unexercised               Options/SARs at
                                           Shares                      Options/SARs at            FY-End ($)
                                       Acquired on          Value   FY-End (#) Exercisable/      Exercisable/
         Name                          Exercise (#)      Realized ($)  Unexercisable             Unexercisable
         ------------------------------------------------------------  ---------------------------------------
<S>                                        <C>              <C>          <C>                          <C>
William B. Morris (1)                      -0-              -0-           0/100,000                   $-0-

(1)  Mr. Morris resigned as an officer and director in January 2001, but was
     allowed, as a part of his severance package to retain his options.

                                       38
</TABLE>

<PAGE>


Compensation of Directors

The Company paid no director's fees.


Employment Contracts and Termination of Employment and Change-in-Control
Arrangements

The Company has not entered into any employment contract with any executive
officer or any other contract with respect to the resignation, retirement or any
other termination of such executive officer's employment with the Company or its
subsidiary or resulting from a change-in-control of the Company or a change in
any executive officer's responsibility following a change-in-control.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

The following table sets forth certain information regarding the ownership of
the Company's common stock as of March 31, 2005: (i) each director; (ii) each
executive officer named in the Summary Compensation Table; (iii) all executive
officers and directors of the Company as a group; and (iv) all those known by
the Company to be beneficial owners of more than five percent of its common
stock. The percentage of ownership is based on 2,395,879 (post reverse split)
shares outstanding on March 31, 2005.
                                  Beneficial Ownership (1)
Beneficial Owner                     Number of Shares           Percent of Total
--------------------------------------------------------------------------------
    Charles A. Holtgraves
    5425 Martindale
    Shawnee, KS 66218                  1,388,712 (2)                  58.0%

    Philip J. Holtgraves
    5425 Martindale
    Shawnee, KS 66218                  1,388,712 (3)                  58.0%

    Argus Investment Group, Inc.
    5425 Martindale
    Shawnee KS, 66218                  1,388,712                      58.0%

    Christopher D. Davis                  78,333                       3.3%

    Larry J. Horbach                     103,000                       4.3%

    All Executive officers
    and directors as a group           1,570,045 (4)                  65.5%
    (4 persons)


(1)  Unless otherwise indicated in the footnotes to this table and subject to
     community property laws where applicable, each of the stockholders named in
     this table has sole voting and investment power with respect to the shares
     indicated as beneficially owned.

(2)  Includes 1,388,712 shares controlled by Argus Investment Group, Inc.
     ("Argus"). Charles A. Holtgraves is the President of Argus. Argus is 100%
     owned by the Philip J. Holtgraves Irrevocable Trust DTD 9/20/93. Charles A.
     Holtgraves is the son of Philip J. Holtgraves.

                                       39

<PAGE>


(3)  Includes 1,388,712 shares controlled by Argus. Philip J. Holtgraves is the
     Chairman of Argus.

(4)  Includes only shares actually issued and outstanding.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

Argus Investment Group, Inc. ("ARGUS ") is a family owned corporation involved
in venture capital lending and financing. The stock of ARGUS is 100% owned by
the Philip J. Holtgraves Irrevocable Trust DTD 9/20/93. Philip J. Holtgraves is
the Chairman of ARGUS , a Director of the Company and the father of Charles A.
Holtgraves. Charles A. Holtgraves is the President of ARGUS and Chairman,
President and Director of the Company.

Larry J. Horbach who was appointed to fill a vacant director's position in May
2003, and Charles A. Holtgraves, the Chairman of the Board and President of the
Registrant are also directors of Gateway Energy Corporation as of March 31,
2004. Mr. Horbach resigned his Gateway directorship on August 27, 2004.

Mr. Horbach is the President and Chairman of the Board of Capital. Mr.
Holtgraves was a director, officer, and a stockholder of Capital resigning his
director and officer positions on August 27, 2004, at which time his stock in
Capital was redeemed by Capital.

Although Mr. Holtgraves and Mr. Horbach are or were directors of Gateway, Mr.
Davis has no affiliation with Gateway. Mr. Holtgraves owns 14.65% of an entity
that owns 55.56% of the ADAC Series A Preferred Stock. Mr. Davis serves as the
Trustee of the Davis Investment Management Trust for the Davis Investments VI
LP, which LP owns 44.44% of the ADAC Series A Preferred Stock. Mr. Horbach owns
no ADAC Series A Preferred Stock.

Mr. Holtgraves is the President and the 100% owner of Balance In Full, Inc.
("BIF"). BIF places delinquent charged of credit card accounts with AIH
Receivable Management Services, Inc., a wholly owned subsidiary of the
Registrant as of March 31, 2004, ("AIH") for collection services. The fees paid
by BIF for regular collections are 36% and 50% for legal accounts, which fees
are comparable for non related party accounts. During the fiscal year ended
March 31, 2004, gross collections were approximately $158,500.


Reference is made to ITEM 1. Description of Business - History of the Company
                             ------------------------------------------------
and Subsidiaries for additional information with respect to this ITEM 12.
----------------

                                       40

<PAGE>


                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS
          --------------------

(a) Exhibits
------------

*2.1 First Amended Joint Plan of Reorganization dated July 29, 1998 of Advanced
Financial, Inc. and AFI Mortgage Corp. (Exhibit 2.1 of the Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 25,
1998).

*3.1 Articles of incorporation and by-laws (Exhibit 3.2 to Registration
Statement on Form S-2 of Advanced Financial, Inc. filed with the Securities and
Exchange Commission on January 31, 1993 (No. 33-45406)).

*4.1 Instruments Defining Rights of Holders (Exhibit 4.0 to Registration
Statement on Form S-2 of Advanced Financial, Inc. filed with the Securities and
Exchange Commission on January 31, 1993 (No. 33-45406)).

*4.2 Variable Rate Commercial Note Secured With Loan Servicing Rights dated July
27, 1994 made by AFI Mortgage Corp., successor to Continental Mortgage, Inc.
("AFIM"), to order of Commercial Federal Bank, successor to Rail Road Savings
Bank, FSB ("Lender") and agreement dated October 11, 1996 between Advanced
Financial, Inc. and AFIM, as Borrower, and Lender and Matrix Financial Services
Corporation (Exhibit 4.2 to Advanced Financial, Inc.'s Annual Report on Form
10-KSB for the fiscal year ended March 31, 1997 filed with the Securities and
Exchange Commission on February 16, 1999).

*4.3 Variable Rate Commercial Balloon Note For Purchase of Loan Servicing Rights
dated December 31, 1993 made by AFI Mortgage Corp., successor to Continental
Mortgage, Inc. ("Borrower"), to the order of Argo Federal Savings Bank, FSB
("Lender") and Security Agreement For Sale of Mortgage Loan Servicing Rights
dated December 31, 1993 between Borrower and Lender (Exhibit 4.3 to Advanced
Financial, Inc.'s Annual Report on Form 10-KSB for the fiscal year ended March
31, 1997 filed with the Securities and Exchange Commission on February 16,
1999).

*10.1 Commercial Real Estate Contract with Standard Builders (Exhibit 10.1 to
Registration Statement on Form S-2 of Advanced Financial, Inc. filed with the
Securities and Exchange Commission on February 11, 1993 (No. 33-58186)).

*10.2 Contract for Services between the Company and Rollie C. Johnson (Exhibit
10.1 to Registration Statement on Form S-2 of Advanced Financial, Inc. filed
with the Securities and Exchange Commission on February 11, 1993 (No.
33-58186)).

*10.3 Real Estate Mortgage to Secure a Loan from Citizen's National Bank of Fort
Scott ("Bank") dated February 3, 1997 made by AFI Mortgage, Corp., as Mortgagee,
to Bank and accompanying notes as amended (Exhibit 10.3 to Advanced Financial,
Inc.'s Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997
filed with the Securities and Exchange Commission on February 16, 1999).

*10.4 Second Mortgage dated March 29, 1996 made by Advanced Financial, Inc. and
AFI Mortgage, Corp., as Mortgagor, to First Mortgage Investment Co., as
Mortgagee (Exhibit 10.4 to Advanced Financial, Inc.'s Annual Report on Form
10-KSB for the fiscal year ended March 31, 1997 filed with the Securities and
Exchange Commission on February 16, 1999).

                                       41

<PAGE>

*10.5 AFI Capital Agreement.

*10.6 Agreement by and between Gateway Energy Corporation and its wholly-owned
subsidiaries and Allen Drilling Acquisition Company, filed as Exhibit A in
Registrant's Form 8-K dated May 9, 2003.

*10.7 The Certificate of Designation, Preferences and Rights of the Senior
Series A Preferred Stock, Stated Value of $1,000 of Allen Drilling Acquisition
Company, filed as Exhibit B in Registrant's Form 8-K dated May 9, 2003.

*10.8 Agreement between Advanced Financial, Inc., Charles A. Holtgraves, Davis
Investments VI LP, and Allen Drilling Acquisition Company, filed as Exhibit C in
Registrant's Form 8-K dated May 9, 2003.

*10.9 Exchange Agreement between Advanced Financial, Inc. and ARGUS Investment
Group, Inc. filed as an Exhibit to the Registrants Form 10 KSB for the year
ended March 31, 2004.

*10.10 Agreement between Advanced Financial, Inc. and AFI Capital Corporation
canceling the June 20, 2001, agreement between the parties filed as an Exhibit
to the Registrants Form 10 KSB for the year ended March 31, 2004.

*11.11 The Regulations of Elgin Holdings, L.L.C., filed as Exhibit A in
Registrants Form 8-K dated November 19, 2004.

*11.12 The Certificate of Designation, Preferences and Rights of the Senior
Series B Preferred Stock, Stated Value of $1,000 of Allen Drilling Acquisition
Company, filed as Exhibit B in Registrant's Form 8-K dated November 19, 2004.

*11.13 The License Agreement between Advanced Energy Recovery, Inc., Elgin
Holdings, L.L.C. and Gateway Energy Corporation, filed as Exhibit C in
Registrant's Form 8-K dated November 19, 2004.

*16 Letter regarding change in certifying accountant, filed as Exhibit 16 to
Registrant's Form 8-K-A/1 dated May 13, 2003.

21   Subsidiaries of Registrant, filed herewith.

31.1 Section 302 Certification of Chief Executive Officer and Chief Financial
     Officer.

32   Section 906 Certification of Chief Executive Officer and Chief Financial
     Officer.

(b) Reports on Form 8-K


o        Report dated November 19, 2004---Item 5.
o        Report dated August 1, 2005---Item 1.01


Asterisk indicates exhibits and reports on Form 8-K incorporated by reference as
indicated; all other exhibits and reports are filed herewith.

                                       42

<PAGE>


                              THIS PAGE LEFT BLANK
                              --------------------

                                       43




<PAGE>


                                   SIGNATURES


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

                                            ADVANCED ENERGY RECOVERY, INC.
                                                     (Registrant)


Dated:  August 19, 2005                     By:  /s/  Charles A. Holtgraves
                                               --------------------------------
                                                      Charles A. Holtgraves
                                                      Chairman, President, and
                                                      Treasurer


     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.


         Signatures                     Title                             Date
-----------------------------         ---------                         --------



/s/  Charles A. Holtgraves            Director                          8/19/05
-----------------------------                                           -------
     Charles A. Holtgraves


/s/  Philip J. Holtgraves             Director                          8/19/05
-----------------------------                                           -------
     Philip J. Holtgraves

/s/  Larry J. Horbach                 Director                          8/19/05
-----------------------------                                           -------
     Larry J. Horbach

/s/  Christopher D. Davis             Director                          8/19/05
-----------------------------                                           -------
     Christopher D. Davis

                                       44