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, 1997                                  0-19485

                            ADVANCED FINANCIAL, 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)

      5425 Martindale, Shawnee, KS                           66218
(Address of principal executive offices)                   (Zip Code)

                    Issuer's telephone number (913) 441-2466
                               -------------------

   Securities registered under Section 12(b) of the Act as of March 31, 1997:

                                                         Name of each 
     Title of Each Class                         exchange on which registered
     -------------------                         ----------------------------

Common Stock $.001 par value                        American Stock Exchange
                              ---------------------

     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 ___  No X

     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,  1997  were $
6,136,773.

     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 the
consolidated  reporting  system on the NASDAQ Bulletin Board on January 25, 1999
was $ 54,016.

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of January 25, 1999: 5,836,476

     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___ 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 .............................  9

      Item  3 -    Legal Proceedings ................................... 10

      Item  4 -    Submission of Matters to a Vote of Security Holders . 10

Part II

      Item  5 -    Market for Common Equity and Related Stockholder
                   Matters ............................................. 11

      Item  6 -    Management's Discussion and Analysis or Plan of
                   Operation ........................................... 11

      Item  7 -    Financial Statements ................................ 13

      Item  8 -    Changes In and Disagreements With Accountants on
                   Accounting and Financial Disclosure ................. 14

Part III

      Item  9 -    Directors, Executive Officers, Promoters and
                   Control Persons; Compliance With Section 16(a)
                   of the Exchange Act ................................. 14

      Item 10 -    Executive Compensation .............................. 15

      Item 11 -    Security Ownership of Certain Beneficial Owners
                   and Management ...................................... 18

      Item 12 -    Certain Relationships and Related Transactions ...... 20

Part IV

      Item 13 -    Exhibits and Reports on Form 8-K .................... 20

Signatures ............................................................. 22

                                    Page - 2
<PAGE>

                                                        Advanced Financial, Inc.


                                     PART I
                                     ------

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

      Advanced   Financial,   Inc.  (the  "Company"  or  "AFI")  is  a  Delaware
corporation formed in September 1986.

                                SUBSEQUENT EVENTS

        In  April  1997,  the  Company  and  its  wholly-owned  subsidiary,  AFI
Mortgage,  Corp. ("AFIM"),  decided that it would be in the best interest of the
continuity  of the Company's  business  enterprise  to  temporarily  suspend its
active  mortgage  operations.  On November 7, 1997,  AFIM filed for relief under
Chapter 11 of the  United  States  Bankruptcy  Code  ("Bankruptcy  Code") in the
United States Bankruptcy Court,  District of Kansas,  Topeka Division,  Case No.
97-43122.  On May 8, 1998, the Company also filed for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy  Court,  District of Kansas,
Topeka Division,  Case No. 98-41228.  The two cases were consolidated on July 2,
1998. On November 13, 1998, the United States  Bankruptcy Court for the District
of Kansas  entered  an order (the  "Confirmation  Order")  confirming  the First
Amended Joint Plan of Reorganization dated July 29, 1998 of the Company and AFIM
("Plan of  Reorganization").  The confirmation of the Plan of Reorganization was
reported in a Current  Report on Form 8-K filed with the Securities and Exchange
Commission  on November 25, 1998. A copy of the Plan was filed as Exhibit 2.1 to
the Form 8-K and a copy of the  Confirmation  Order was filed as Exhibit 99.1 to
the Form 8-K. See also Note B to the  Consolidated  Financial  Statements of the
Company in Item 7 hereof.

                             DESCRIPTION OF BUSINESS
                               OF COMPANY AND AFIM

      The following  information  concerning the Company and AFIM is provided as
of March 31, 1997, unless otherwise indicated.

History of the Company and AFIM
-------------------------------

      The  Company  was formed in  September  1986.  In July 1990,  the  Company
determined that an opportunity existed in the mortgage servicing industry due to
the  collapse  of the  savings  and loan  industry  and  decided  to pursue  the
opportunity.  The  Company  acquired  Creative  Financing,  Inc.  in March 1991,
changed the subsidiary's name to Continental Mortgage,  Inc. in 1992 and changed
the name again in 1994 to AFI Mortgage,  Corp.  From the time it was acquired by
the Company, AFIM focused on the origination,  refinancing and servicing of 1 to
4 family  residential  mortgages.  Between  fiscal  1992 and fiscal  1995,  AFIM
invested  its capital  mainly in the purchase of mortgage  servicing  portfolios
from the  Resolution  Trust  Corporation  and during that  period its  servicing
portfolio reached a principal balance of approximately $750 million.

      The  servicing  portfolio  was AFIM's  primary  source of revenue and cash
flows.  In March  1994,  AFIM  determined  that it needed  to enter  the  retail
origination  market to increase its servicing  portfolio through the origination
of new loans rather than bulk purchases,  which would require raising additional
capital.  AFIM also determined that it needed to find an origination concept and
strategy that would not require the capital necessary to implement a traditional
branch  office  operation.  AFIM  wanted  to  take  advantage  of the  many  new
technologies  which had recently became available to the mortgage  industry.  It


                                    Page - 3
<PAGE>

                                                        Advanced Financial, Inc.

was at this time that AFIM  initiated  its  concept  of  putting a loan  officer
directly in an established real estate office.

      During  March and April,  1994,  AFIM  proceeded  to invest a  significant
amount of its capital into both systems and  personnel in an effort to implement
this new origination  strategy.  AFIM had anticipated marketing this new concept
in May,  1994.  Unfortunately,  technical  problems  encountered  in meshing the
technologies for its Desk Top Origination units delayed marketing until January,
1995.  During 1995,  AFIM was very  successful in  establishing  its strategy in
several real estate offices around the country.

      Although AFIM was  successful in locating real estate  offices in which to
implement its Desk Top  Origination  System,  it was not nearly as successful in
hiring  experienced  and qualified loan officers to operate the  locations.  The
inability to hire experienced loan originators caused AFIM to fall significantly
short of its loan production goals and projections.  Therefore,  AFIM was unable
to  generate  from its loan  production  operations  the  revenue  and cash flow
necessary  to  support  the  infrastructure  which was in place to  handle  much
higher  anticipated volumes.  This led to significant losses during fiscal 1996
and fiscal 1997.

      In an effort  to  generate  the  capital  necessary  to  support  the loan
production  operations,  AFIM sold  approximately  $234,000,000 of its remaining
servicing portfolio in September 1996 and an additional $9,000,000 in the fourth
quarter of fiscal year 1997,  anticipating  that loan production  would increase
sufficiently to offset the lost revenue and cash flow  previously  realized from
the servicing  operations.  Unfortunately,  loan  production did not increase as
anticipated and AFIM had to close several of its nonproductive locations. AFIM's
revenues  and cash  flow  were  insufficient  to  continue  to  support  current
operations  and in  January,  1997,  AFIM  decided  that it would be in the best
interest of the continuity of the Company's  business  enterprise to temporarily
suspend its active  mortgage  operations  and liquidate its remaining  assets to
satisfy creditors.

      On February 3, 1997,  AFIM entered into an agreement to sell its remaining
loan  production  operations to First  Mortgage  Investment Co.  ("FMIC").  This
allowed AFIM to eliminate the costs related to those  operations.  At that time,
AFIM still had  approximately  $150,000,000 of mortgage  servicing rights of The
Government National Mortgage  Association  ("GNMA"),  from which it derived some
revenue.

      However,  due to the nature of the servicing  portfolio and AFIM's lack of
capital,  AFIM was  unable to  service  the  portfolio  properly  within  GNMA's
guidelines.  Thus,  in  April,  1997,  AFIM  advised  GNMA of its  deteriorating
financial  condition and requested  approval for the sale of the remaining  GNMA
servicing  rights  to a  third  party.  AFIM  also  advised  GNMA  that  if  the
transaction was consummated under the proposed terms, AFIM anticipated  having a
shortage of  approximately  $350,000 to  $400,000 in AFIM'S  mortgage  custodial
accounts,  however,  GNMA  chose to seize the  servicing  portfolio  instead  of
approving  the sale.  At such time,  AFIM  decided  that it would be in the best
interest of the continuity of the Company's  business  enterprise to temporarily
suspend its active mortgage  operations.  The Company sold most of its remaining
fixed assets to FMIC in May 1997.  For  additional  information  concerning  the
history of the Company and AFIM, see "SUBSEQUENT EVENTS" set forth above.

Description of Real Estate and Operating Data
---------------------------------------------

     At March 31,  1997,  the only real estate  owned by or in which the Company
had an investment  interest was the Company's  headquarters  building  which was
developed  for the Company and which the Company  occupied in June of 1993.  The
building  housed  all  administrative  functions  of the  Company.  The  Company
currently  leases  the  building  to the  mortgage  company  who  purchased  the
production platform until such time as the sale of the building is completed.


                                    Page - 4
<PAGE>
                                                        Advanced Financial, Inc.

      Loan Servicing
      --------------

        Prior to fiscal year 1997, the Company  serviced  substantially  all the
mortgage  loans  that it  originated  or  purchased  from  failed  institutions.
Servicing includes collecting and remitting loan payments,  making advances when
required,  accounting for principal and interest, holding escrow (impound) funds
for payment of taxes and insurance, making inspections of the mortgage premises,
contacting  delinquent   mortgagors,   supervising   foreclosures  and  property
dispositions in the event of unremedied defaults and generally administering the
loans.  The  Company  received  fees for  servicing  the  mortgage  loans in its
servicing portfolio,  which mortgage loans were owned by investors.  The fees on
the Company's servicing  portfolio were calculated on the outstanding  principal
balances of the loans  serviced and were  recorded as income when earned.  Other
fee income  consisted of ancillary  income (late  charges,  fax fees,  insurance
commissions,  etc.)  associated  with loan  servicing and was recorded as income
when collected.

      The  Company's  servicing  portfolio  was subject to  reduction  by normal
amortization and by prepayment or foreclosure of loans. In addition, the Company
had in the past sold  portions of its  portfolio of loan  servicing  rights.  In
general,   the  decision  to  buy  or  sell  servicing  rights  was  based  upon
management's  assessment of the Company's cash requirements,  the Company's debt
to equity  ratio and other  significant  financial  ratios,  the market value of
servicing rights, and the Company's current and future earnings objectives.

        During  fiscal year 1997,  the majority of all loans  originated  by the
Company were sold  servicing  released to private  investors  on a  non-recourse
basis. In addition,  due to the Company's  continued losses in fiscal years 1996
and 1997,  management  made the  decision in  September  1996 to sell the entire
servicing portfolio to pay off as much related indebtedness as possible. At that
time, the sale of the servicing allowed the Company to significantly  reduce its
cash flow needs.

      Servicing Capability
      --------------------

      In  the  past  a  non-affiliated  third  party  provided  electronic  data
processing  through the Company's IBM AS/400.  This relationship and service was
terminated, in April, 1997.

      Servicing Portfolio Characteristics
      -----------------------------------

      The following table sets forth certain information regarding the Company's
servicing  portfolio of mortgage  loans,  including loans held for sale, for the
periods indicated:

                                                March 31, 1996   March 31, 1997 
                                                --------------   -------------- 
                                                (000's Omitted)  (000's Omitted)
Composition of Servicing Portfolio at 
  Period End:
      FHA Insured/VA Guaranteed Mortgage Loans      $281,500        $144,000
      Conventional Mortgage Loans.............       198,224           1,700
      Second Mortgages........................           857             250

                Total Servicing Portfolio           $480,581        $145,950


                                    Page - 5
<PAGE>
                                                        Advanced Financial, Inc.

Delinquent Mortgage Loans and Pending Foreclosures at Period End:
      30 Days..........................................4.47%           7.20%
      60 Days..........................................0.92%           1.50%
      90 Days..........................................0.79%           0.70%
                Total Delinquencies                    6.18%           9.40%

Foreclosures Pending...................................0.59%           1.70%

      By June 1, 1997, the Company had liquidated the remainder of its servicing
portfolio.

      Loan Originations
      -----------------

      In January 1992, the Company expanded its mortgage  banking  operations to
include the ability to refinance  mortgage  loans.  This was designed to enhance
the  Company's  servicing  portfolio in several  ways. It allowed the Company to
retain a portion of its payoffs as new loans.  Previously,  the refinanced loans
enhanced the value of the Company's  portfolio  because the new loan had a lower
note rate and a longer  servicing  life.  During  fiscal  1997,  originated  and
refinanced  mortgage loans were sold servicing  released which increased current
cash flow and  revenues.  Also the revenues  and  earnings  provided by the loan
originations  allowed the Company to diversify its potential  revenue  producing
business away from loan  servicing.  During fiscal 1997, the Company  originated
1,242 loans with a principal balance of approximately  $110,500,000  compared to
1,284 loans with a principal  balance of  approximately  $111,090,000  in fiscal
1996.

      AFIM had  developed an important  expertise  which  allowed the Company to
close new loans in several  states through  closing  agents and title  companies
without the necessity to invest in branch office  overhead.  This  expertise was
critical in the ability to place Desktop  installations  in real estate  offices
nationwide.   All  processing   and   underwriting   was   centralized  at  AFIM
headquarters.  Eighteen  Desktop  terminals were in operation  during the fourth
quarter of fiscal 1997. The system included core software capabilities which ran
on a desktop or personal  computer.  The Company had in-house  computer oriented
employees trained on the software to perform necessary modifications to software
as well as installation of the software.

      The Company anticipated completed  installations  (terminals installed and
operational,  including the staffing of a loan officer on the Company's payroll)
of 70  locations by the end of fiscal  1997.  Unfortunately  the Company did not
reach its goal, but did have as many as 45 locations at its peak. Due to various
reasons  several of these  locations  did not meet the  Company's  profitability
projections and were subsequently closed.  Eighteen locations were in place when
the Company sold its  production  platform.  The Company  estimated  the initial
set-up  cost of an  office  for the  first 90 days,  including  monthly  cost of
license and equipment,  office supplies,  etc., to be  approximately  $7,000 per
location.

      The system was  initially  being  targeted  for  placement  in real estate
brokerage  companies with high residential growth. The system was designed to be
operated on-site by an AFIM loan  representative  with "expert systems" feedback
to the  borrower,  an  evaluation  of loan balance and  repayment  options.  The
information  was  electronically  transmitted  by modem to AFIM where the actual
processing and underwriting  were performed.  The system offered the convenience
of one stop shopping for the home buyer in addition to  productivity  advantages
for the agents.  The "Step 1 Pre-Approval  Process"  provided the potential home
buyer with a formal written pre-approval for a monthly mortgage payment based on
the application in approximately 48 hours.  This allowed the home buyer and real
estate  agent the  advantage  of knowing  financing  opportunities  prior to the
negotiation of a potential contract.


                                    Page - 6
<PAGE>
                                                        Advanced Financial, Inc.

      As another method of increasing mortgage loan originations,  in July 1994,
the Company began mortgage production operations in the State of Washington. The
Company opened operations by hiring some of the staff of a Seattle area mortgage
broker. The Company's Desktop terminals were installed in two offices as a means
of enhancing operating efficiencies.  The predecessor  organization developed an
active business in non-conforming  loan originations which did not meet industry
standard credit, loan to value or other criteria.  However, due to the high cost
of the  operation,  $576,000 for the first eight months in fiscal year 1996, the
Company made the decision to sell the operation in October 1995.

      Loan Processing
      ---------------

      In connection with the origination of each loan, the Company processed the
loan application, prepared mortgage documentation,  conducted credit checks, had
the property  valued by appraisers and funded the loan. Loan  applications  were
approved  by  the  Company's   underwriting   department  for  compliance   with
underwriting  criteria,  including the  loan-to-value  ratio,  borrower's income
qualification and necessary insurance.  After approval, the Company's policy was
to obtain pre-closing commitments from investors to purchase substantially every
loan to be  originated  or purchased by the Company.  In the case of loans to be
sold to private investors,  the Company submitted the loan file to a prospective
investor for its approval.

      FNMA and FHLMC did not review  individual  loan files prior to issuance of
commitments to purchase loans.  Upon receipt of a commitment from an investor to
purchase a loan or loans from the Company  once  closed,  the  Company  issued a
commitment to the  prospective  borrower  specifying the amount of the loan, the
prevailing  interest  rate,  the fees to be paid to the  Company and the date on
which the Company's commitment expired. The actual interest rate of the loan was
established prior to loan closing based upon the then prevailing  interest rate,
unless the  borrower has  purchased a "rate lock," which  guarantees a specified
rate for a designated  period. The normal interval of time between the Company's
issuing its commitment and the closing of a loan was one to three weeks.

      Types of Loans
      --------------

      Approximately  half of the loans serviced by the Company were conventional
loans. The Company  emphasized the origination of "conforming"  loans, which are
conventional  loans having principal amounts within the maximum amounts eligible
for sale to FNMA and FHLMC  (currently  $203,150 for a one-family  property) and
which  otherwise  comply  with FNMA and FHLMC  requirements.  The  Company  also
originated  "jumbo" loans  (conventional  loans that exceed the maximum  amounts
qualifying  for sale to FNMA or FHLMC but that otherwise  generally  comply with
FNMA or FHLMC requirements and other loans that do not comply with FNMA or FHLMC
requirements)  but  that  do  comply  with  requirements  for  sale  to  private
investors.  It was the Company's  policy to obtain a title  insurance  policy on
every mortgage loan. In addition,  substantially all of the Company's originated
loans were first mortgage  loans.  During the fourth quarter of fiscal 1995, the
Company did introduce a second  mortgage  loan program for which the  originated
loans were sold to private investors.

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

      The loan origination market share is somewhat diversified with a few large
players  and many small  players.  As a whole,  the  industry  is  incorporating
technology  and pursuing  point of sale  strategies  to generate  mortgage  loan
originations.  The company also believes that its strategy for  implementing its
technology  and  strategy for point of sale  originations  was unique and should
have allowed it to compete even with its largest competitors.  Unfortunately due
to the shortage and  availability  of experienced  loan officers,  caused by the
industry's  increased  production volumes, the Company was unable to attract and
hire experienced loan originators to operate its desktop  locations.  This meant
that the company had to hire and

                                    Page - 7
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                                                        Advanced Financial, Inc.

train less  experienced  personnel.  This caused a much longer than  anticipated
time frame for loan origination  volumes to meet projected goals. In many cases,
due to the Company's shortage of capital, the Company could not continue to keep
the locations open in anticipation of future loan production.

      Regulation
      ----------

      The  Company's  mortgage  banking  business  was  subject to the rules and
regulations  of FHA,  VA,  FNMA,  FHLMC and GNMA with  respect  to  originating,
processing,  selling and servicing  mortgage loans. Those rules and regulations,
among  other  things,  prohibit  discrimination,  provide  for  inspections  and
appraisals, require credit reports on prospective borrowers and fix maximum loan
amounts, and with respect to VA loans, fix maximum interest rates. Moreover, FHA
lenders  such as the  Company  were  required  annually to submit to the Federal
Housing Commissioner audited financial statements. FNMA, FHLMC and GNMA required
the  maintenance of specified  minimum net worth levels (which vary depending on
the amount of the portfolio serviced). The Company was subject to examination by
the Federal  Housing  Commissioner  at all times to assure  compliance  with FHA
regulations,   policies  and  procedures.  The  Company's  mortgage  origination
activities  were  subject  to the Equal  Credit  Opportunity  Act,  the  Federal
Truth-in  Lending  Act and the Real  Estate  Settlement  Procedures  Act and the
regulations promulgated thereunder which prohibit discrimination and require the
disclosure of certain basic  information  to  mortgagors  concerning  credit and
settlement costs.

      Additionally,  there were various state laws and regulations affecting the
Company's  mortgage  servicing  and  banking  operations.  The  Company was also
licensed as a mortgage  banker or retail  installment  lender in those states in
which it did business that required such a license.

      The Company's  conventional mortgage operations may also have been subject
to state usury  statutes.  The  Company's FHA and VA loans and  activities  were
exempt from the effect of such statutes.

      Other Operations
      ----------------

      On June 29, 1993, the Company acquired Continental Mortgage Services, Inc.
(CMSI),  a consulting  company to the mortgage banking  industry.  CMSI provided
support  services to mortgage  banking  institutions,  savings and loans and the
Resolution  Trust  Corp.  (RTC).  CMSI  was  comprised  of  highly  trained  and
experienced  professionals who excelled in the placement of temporary  personnel
in  mortgage  related  fields,   due  diligence,   servicing  audits,  and  loan
securitization.  Approximately  95% of CMSI's  time was spent on  providing  its
services  to AFIM.  At the time of  acquisition,  CMSI and AFIM  were  unrelated
companies.  Due to the Company's  increased focus on Desktop,  CMSI ceased as an
operating company prior to fiscal year end 1997, and is currently inactive.

      On July 1, 1994, the Company purchased for $10,000 the outstanding  shares
of Network  Appraisal  Associates,  Inc.  (Network).  Network was  previously an
unrelated  appraisal company providing services to AFIM branch offices and other
mortgage  banking  companies  in the  Northwest  region.  However,  in the first
quarter of fiscal 1996,  the Company made the economic  decision to  discontinue
operations of Network.

      On August 1, 1994, the Company purchased 100% of the stock of Century Real
Estate of  Lincoln,  Nebraska.  The  acquisition  was  planned  as a short  term
investment  which allowed for deployment of some of the first Desktop  terminals
in a closely monitored real estate brokerage environment. Effective December 20,
1994, the Company sold this temporary  investment in Century to Home Real Estate
Services of Lincoln,  Inc.  ("Home") and  concurrently  through a stock exchange
purchased 10% of Home.  The  combination of Century and Home created the largest
real estate brokerage firm in the Lincoln, Nebraska market. Also, as part of the
sale, AFIM had the right to install its Desktop Mortgage Loan Origination System
in all four of Home's real estate offices in the Lincoln area.

                                    Page - 8
<PAGE>
                                                        Advanced Financial, Inc.


      On March 1, 1997 Home elected to exercise its right to  repurchase  10% of
Home from the  Company  pursuant  to a Stock  Redemption  Agreement  between the
Company and Home. The Company received  $141,669 from Home for the repurchase of
its 10% ownership, the proceeds of which were used to pay down Company debt.

Employees
---------

      As of March 31, 1997, the Company and its subsidiary had 20 employees, all
of which were full-time employees.


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


Real Estate Owned
-----------------

      At  March 31,  1997, AFIM owned fee simple  title to a 20,000  square foot
office  building  and  the  land on  which  the  building  sat  located  at 5425
Martindale, Shawnee, Kansas (the "Property"). The Property is subject to a first
and second  mortgage.  The first  mortgage had a principal  balance at March 31,
1997 of $734,000 with a fixed interest rate of eleven and three quarters percent
(11.75%)  per annum and was  payable  monthly  with the entire  balance  due and
payable March 31, 1998. The balance may be prepaid at any time without  penalty.
In the fourth  quarter of the 1996 fiscal  year,  the Company  took out a second
mortgage on the  Property of $350,000  that was due March 1998.  $200,000 of the
second  mortgage  was  repaid  in fiscal  year  1997 from the sale of  servicing
rights.  In the opinion of  management,  the Property is  adequately  covered by
insurance.

     Subsequent  Events.  Under the Plan of  Reorganization,  and subject to the
terms  and  conditions  set  forth  in the  Plan of  Reorganization,  FMIC is to
purchase the Property for  $1,030,000,  the net proceeds of which would  satisfy
the first mortgage,  and would also release the second mortgage it holds against
the building.  The net proceeds to AFIM from this  transaction  would be used to
satisfy the claims of creditors in accordance  with the Plan of  Reorganization.
This building is currently leased to FMIC. See Item 1:  "DESCRIPTION OF BUSINESS
-- SUBSEQUENT EVENTS."

Investment Policies
-------------------

      The only type of real  estate in which the  Company  has  invested  is the
office building and land described  above.  The Company manages its own property
and the  financing of said property is as described  above.  The Company has not
adopted any policies  which would limit the number or amount of mortgages  which
may be  placed  on any  piece of  property  owned by the  Company.  The  Company
presently  has no plans to  purchase  or invest in real  estate  except  for its
headquarters  building  as  described  above.  No  limitations   concerning  the
percentage of assets of the Company which may be invested in any one investment,
or type of  investment.  Any  investment  policy of the  Company  may be changed
without a vote of security holders.

Investments in Real Estate Mortgages
------------------------------------

      During the first three  quarters of fiscal 1997,  the Company  invested in
real estate mortgages by acting as a loan originator as an essential part of its
core  business.  Primarily all mortgage  originations   were first  mortgages on
single  family  dwellings.  For a general  description  of each type of mortgage
activity in

                                    Page - 9
<PAGE>
                                                        Advanced Financial, Inc.

which the Company engaged, such as origination,  servicing and warehousing,  and
the portfolio turnover rate, see Part I, Loan Servicing; Loan Originations.

Securities  of  or  Interests  in  Persons  Primarily  Engaged  in  Real  Estate
Activities
--------------------------------------------------------------------------------

      During  fiscal year 1997,  the Company did not invest in  securities of or
interests in persons primarily engaged in real estate activities.


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


      In March 1994, the Company was named as co-defendant in a lawsuit filed by
two former  officers of the  Company.  The lawsuit,  filed in the United  States
District Court for the District of Nebraska,  alleges that the Company  violated
securities  laws,  delaying  the ability of these former  officers  from selling
common  stock of the  Company  owned by them,  resulting  in  alleged  losses of
$300,000. The validity of the stock owned by these plaintiffs was the subject of
concurrent litigation pending in the state court in Omaha, Nebraska. In January,
1997,  the Company  settled the litigation by agreeing to issue the plaintiffs a
total of 300,000 shares of the Company's  restricted  common stock. In turn, one
of the parties  pledged  100,000 shares as collateral  for a note  receivable of
$214,000 due AFIM. At March 31, 1997, the Company has already  reserved  $74,815
against the note and $140,000  towards the  settlement of this  litigation.  The
parties settled this litigation to avoid any further  uncertainty and expense of
litigation.

      The Company had various other lawsuits initiated from various lenders as a
result of the Company's inability to make required payments on its various debt.
On November 7, 1997,  AFIM filed for relief under  Chapter 11 of the  Bankruptcy
Code in the United States Bankruptcy Court, District of Kansas, Topeka Division,
Case  No. 97-43122.  On May 8, 1998, the  Company  also  filed for relief  under
Chapter  11 of the  Bankruptcy  Code  in the  United  States  Bankruptcy  Court,
District  of Kansas,  Topeka  Division,  Case No.  98-41228.  The two cases were
consolidated on July 2, 1998. On November 13, 1998, the United States Bankruptcy
Court  for  the  District  of  Kansas  entered  the   Confirmation   Order.  The
confirmation of the Plan of  Reorganization  was reported in a Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 25, 1998.
A copy of the Plan was  filed as  Exhibit  2.1 to the Form 8-K and a copy of the
Confirmation  Order  was filed as  Exhibit  99.1 to the Form  8-K.  All  pending
litigation was suspended  pending the final outcome of the Company's  Chapter 11
Plan of  Reorganization.  Upon the  Company's  discharge  from  bankruptcy,  all
litigation will have been dismissed.


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


      No matters were submitted to a vote of security  holders during the fourth
quarter of the Company's  fiscal year ended March 31, 1997,  either  through the
solicitation of proxies or otherwise.


                                   Page - 10

<PAGE>

                                                        Advanced Financial, Inc.
                                     PART II
                                     -------

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


      The Company's  Common Stock was traded on the American Stock Exchange from
March 29, 1993 to April 3, 1997 under the symbol  AVF. On December 6, 1996,  the
Exchange  halted trading of the Company's  Common Stock due to the fact that the
Company was not in compliance  with the Exchange's  listing  requirements.  As a
result the Company's  Common Stock was delisted on April 3, 1997.  The Company's
Common Stock is currently  traded on the NASDAQ  Bulletin Board under the symbol
AVFI. The following table sets forth the high and low prices for Common Stock as
reported on the American  Stock  Exchange and the NASDAQ  Bulletin Board for the
four  quarters of fiscal years 1996 and 1997.  The prices were obtained from the
American Stock Exchange and the NASDAQ Bulletin Board. The prices do not include
retail mark-ups, mark-downs, or other fees or commissions, and may not represent
actual transactions.


                1996
                ----
                                                    High      Low
                                                    ----      ---
           Quarter Ended June 30, 1995              $1.75     $0.88
           Quarter Ended September 30, 1995         $1.56     $1.00
           Quarter Ended December 31, 1995          $1.38     $0.56
           Quarter Ended March 31, 1996             $1.38     $0.69

                1997
                ----
                                                    High      Low
                                                    ----      ---
           Quarter Ended June 30, 1996              $1.62     $1.00
           Quarter Ended September 30, 1996         $1.75     $1.00
           Quarter Ended December 31, 1996          $2.00     $1.00
           Quarter Ended March 31, 1997             $1.38     $1.38



      At January 25,  1999,  the closing  market price of the  Company's  common
stock was  $.012  per  share.  On such  date,  178  holders  of record  held the
Company's common stock and the Company estimates that it has approximately 1,200
beneficial shareholders.

        At March 31,  1997,  the Company had not paid any cash  dividends on its
Common  Stock and had not paid any  dividends  on its 10.5%  Series B  Preferred
Stock since the second  quarter of fiscal  1996.  The Company was not subject to
any  restrictive  covenants  or  agreements  which  limit  its  ability  to  pay
dividends.  At March 31, 1997,  AFI Mortgage,  Corp.  was subject to restrictive
covenants in connection with certain of its borrowing arrangements.


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

GENERAL
-------

        As described in Item 1 hereof, the Company and AFIM suffered substantial
losses in fiscal years 1996 and 1997, management decided that it would be in the
best  interest  of  the  continuity  of the  Company's  business  enterprise  to
temporarily suspend its active mortgage operations in April 1997 and the Company
and AFIM subsequently  filed for relief under Chapter 11 of the Bankruptcy Code.
The following  discussion of the Company's  financial  condition as of March 31,
1997 and the Company's results of operations for 

                                   Page - 11
<PAGE>
                                                        Advanced Financial, Inc.

fiscal  year  1997  should be read in  conjunction  with  description  of events
subsequent to March 31, 1997 contained in Item 1 hereof.


RESULTS OF OPERATIONS
---------------------
Year Ended March 31, 1997 Compared To The Year Ended March 31, 1996
-------------------------------------------------------------------

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

      The Company's cash and short-term  investments  decreased from $585,643 at
March  31,  1996 to  ($106,676)  at March 31,  1997.  The  decrease  in cash and
short-term  investments  is  attributable  to  reasons  set forth  under Item 1:
"DESCRIPTION OF BUSINESS-SUBSEQUENT EVENTS" and Item 1: "DESCRIPTION OF BUSINESS
- DESCRIPTION OF BUSINESS OF THE COMPANY AND AFIM."

      Income/losses
      -------------

      Consolidated  operating  result for fiscal year 1997 reflect a net loss of
$5,077,639  as compared  to a net loss of  $3,184,577  in fiscal year 1996.  The
increase  in  losses  is  attributable  to  reasons  set  forth  under  Item  1:
"DESCRIPTION OF BUSINESS-SUBSEQUENT EVENTS" and Item 1: "DESCRIPTION OF BUSINESS
- DESCRIPTION OF BUSINESS OF THE COMPANY AND AFIM."

FINANCIAL POSITION
------------------

     During fiscal 1997, the Company saw a significant decrease in the Company's
assets and stockholders'  equity.  The Company's total assets were $2,158,102 at
March 31, 1997 compared to $17,313,516 at March 31, 1996.  Stockholders' deficit
was  $(3,015,428)  at March 31, 1997 compared to equity of $978,329 at March 31,
1996.  These  decreases were due to the Company  continuing to operate at a loss
during fiscal 1997, the sale of the Company's loan production operations and the
sale and transfer of its mortgage  servicing  rights.  The Company sold its loan
production  operations  in  February,  1997  causing  its loans held for sale to
decrease  to $305,193 at March 31,  1997  compared to  $10,110,747  at March 31,
1996.  Notes Payable also  decreased to $1,768,427 at March 31, 1997 compared to
$13,412,419  at March 31,  1996 due to the fact that the  Company  was no longer
borrowing  on its  warehouse  facility to fund loan  originations.  At March 31,
1997, the Company had written of all of its mortgage  servicing  rights compared
to the  balance  at March 31,  1996 of  $2,440,280.  Since the  majority  of the
Company's  operations  had been  suspended at March 31,  1997,  the Company also
wrote off all its  Excess of Cost Over Fair  Value  compared  to the  balance at
March 31, 1996 of $524,798.

      At March 31, 1997,  the Company had a negative  cash  position of $106,676
compared to a positive cash  position of $585,643 at March 31, 1996.  After year
end, the Company  covered its negative  cash  position  from the  collection  of
receivables and the funding of the remaining Mortgage Loans Held for Sale. Since
March 31,  1997,  and while  operating  under the  protection  Chapter 11 of the
Bankruptcy  code, the Company has been able to fund its limited  operations from
the sale of various assets and the collection of various receivables.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
----------------------------------------------

      None


                                   Page - 12
<PAGE>
                                                        Advanced Financial, Inc.

ITEM 7.  FINANCIAL STATEMENTS


      Financial  statements  for the years  ended  March 31,  1997 and March 31,
1996, are presented on the following pages.


                                   Page - 13
<PAGE>




                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
Advanced Financial, Inc.
  and Subsidiaries

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Advanced
Financial,  Inc.  and  Subsidiaries  as of  March  31,  1997,  and  the  related
consolidated   statements  of  operations,   changes  in  stockholders'   equity
(deficiency), and cash flows for the year then ended. These financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Advanced  Financial,  Inc.  and  Subsidiaries  as of  March  31,  1997,  and the
consolidated  results of their operations and their  consolidated cash flows for
the  year  then  ended,  in  conformity  with  generally   accepted   accounting
principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note B to the
consolidated  financial  statements,  on November 7, 1997,  the Company  filed a
voluntary  petition for reorganization in the United States Bankruptcy Court for
the District of Kansas  (Bankruptcy Court) under Chapter 11 of the United States
Bankruptcy Code (Bankruptcy Code).  Pursuant to the Bankruptcy Code, the Company
has  continued  to  manage  its  business  as a  debtor-in-possession  under the
jurisdiction of the Bankruptcy Court, but has no ongoing operations. On November
13, 1998, the Bankruptcy  Court confirmed the Company's First Amended Joint Plan
of Reorganization dated July 29, 1998. These factors, among others, as discussed
in Note B to the consolidated  financial  statements,  raise  substantial  doubt
about the Company's ability to continue as a going concern.  Management's  plans
in  regard  to  these  matters  are  also  described  in Note B.  The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

GRANT THORNTON LLP

/s/ Grant Thornton LLP
___________________________


Kansas City, Missouri
December 17, 1998

                                      13-1
<PAGE>


                          INDEPENDENT AUDITOR'S REPORT
                          ----------------------------

The Board of Directors
Advanced Financial, Inc.
   and Subsidiaries:

We have  audited  the  accompanying  consolidated  balance  sheets  of  Advanced
Financial,  Inc.  and  subsidiaries  as  of  March  31,  1996  and  the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the   financial   statement  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 audit provides a reasonable basis for your opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of the Company and
subsidiaries as of March 31, 1996 and the results of their  operations and their
cash flows for the year then ended.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  note B to the
consolidaed  financial  statement,  the  Company  has  incurred  net  losses  of
$3,184,577  and  $3,963,497  during the years ended March 31,  1996.  This loss,
along with other matters as set forth in note B, raise  substantial  doubt about
its  ability to  continue as a going  concern.  Management's  plans in regard to
these  matters  are  also  described  in  note  B.  The  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


KPMG LLP

/s/ KPMG LLP
________________________


Kansas City, Missouri
June 30, 1996

                                      13-2

<PAGE>


          
                                                     Advanced Financial, Inc.
                                                         and Subsidiaries
                                                   CONSOLIDATED BALANCE SHEETS
                                                             March 31,

<TABLE>
<CAPTION>

           ASSETS                                                                  1997                 1996
                                                                            -------------------   ------------------
<S>                                                                                <C>                 <C>
Cash                                                                               $         -            $ 585,643
Mortgage servicing advances and accounts receivable (note A2)                          440,367              520,620
Mortgage loans held for sale (notes A3, D, and E)                                      305,193           10,110,747
Mortgage loans held for investment (notes A3 and E)                                     12,713               94,932
Purchased mortgage servicing rights, net (notes A2, C, and E)                                -            2,440,280
Property and equipment, net (notes A4, E, F, and J)                                  1,303,802            1,718,355
Excess of cost over fair value of assets acquired, net of accumulated
  amortization of $235,899 in 1996 (note A5)                                                 -              524,798
Prepaid expenses                                                                        23,121              191,442
Deferred income taxes (notes A8 and I)                                                       -              440,000
Other investment (note K)                                                                    -              235,800
Receivable from related party (note H)                                                       -              190,000
Other (note L)                                                                          72,906              260,899
                                                                            -------------------   ------------------
                                                                                   $ 2,158,102         $ 17,313,516
                                                                            ===================   ==================


           LIABILITIES AND STOCKHOLDERS' EQUITY
             (DEFICIENCY)
LIABILITIES (note B)
     Bank overdraft                                                                  $ 106,676         $      -
     Accounts payable and accrued expenses                                           2,919,541            2,507,103
     Notes payable (note E)                                                          1,768,427           13,412,419
     Notes payable on stock rescission (note G)                                        200,000                -
     Capitalized lease obligations (note F)                                            178,886              415,665
                                                                            -------------------   ------------------
                                                                                     5,173,530           16,335,187

COMMITMENTS AND CONTINGENCIES (notes F, G, and L)                                            -                    -

STOCKHOLDERS' EQUITY (DEFICIENCY) (notes B, G, and H)
     Preferred stock, Series B, $.005 par value 10,000,000 shares
       authorized; 363,000 and 372,000 shares issued
       and outstanding, respectively                                                     1,815                1,860
     Common stock, $.001 par value; 25,000,000 shares authorized;
       5,836,476 and 3,875,476 shares issued, respectively                               5,836                4,256
     Paid-in capital                                                                 9,959,840            8,877,493
     Accumulated deficit                                                           (12,541,574)          (7,463,935)
                                                                            -------------------   ------------------
                                                                                    (2,574,083)           1,419,674

     Treasury stock, 99,869 shares of common stock, at cost                           (441,345)            (441,345)
                                                                            -------------------   ------------------
                                                                                    (3,015,428)             978,329
                                                                            -------------------   ------------------
                                                                                   $ 2,158,102         $ 17,313,516
                                                                            ===================   ==================


                                      The accompanying notes are an integral part of these statements.
</TABLE>

                                                               13-3
<PAGE>

<TABLE>
<CAPTION>


                                                     Advanced Financial, Inc.
                                                         and Subsidiaries
                                              CONSOLIDATED STATEMENTS OF OPERATIONS
                                                       Year ended March 31,




                                                                                      1997                 1996
                                                                            -------------------   ------------------
<S>                                                                               <C>                   <C> 

Revenues
     Servicing fees                                                                $ 1,558,933          $ 2,466,646
     Gains on sales of mortgage loans, net (including
       origination fee income of $788,868 and $891,932,
       respectively)                                                                 2,232,547            2,531,580
     Other fees                                                                        674,388            1,009,685
     Gains on sales of mortgage servicing rights                                       827,482               99,759
     Interest                                                                          691,559              639,458
     Other                                                                             151,864              144,200
                                                                            -------------------   ------------------
           Total revenues                                                            6,136,773            6,891,328

Expenses
     Servicing expense                                                               1,630,457            1,420,763
     Personnel                                                                       2,903,116            3,789,712
     General and administrative                                                      2,275,168            2,239,103
     Interest                                                                          851,952              721,281
     Depreciation and amortization                                                   2,201,103            1,485,192
     Other                                                                             910,456              370,504
                                                                            -------------------   ------------------
           Total expenses                                                           10,772,252           10,026,555
                                                                            -------------------   ------------------

           Loss before income taxes                                                 (4,635,479)          (3,135,227)

Income tax expense (notes A8 and I)                                                   (442,160)             (49,350)
                                                                            -------------------   ------------------
           Net loss                                                               $ (5,077,639)        $ (3,184,577)
                                                                            ===================   ==================

Weighted average shares outstanding                                                  4,651,327            3,776,000
                                                                            ===================   ==================

Loss per common share (note A9)                                                        $ (1.12)             $ (0.88)
                                                                            ===================   ==================



                                 The accompanying notes are an integral part of these statements.
</TABLE>

                                                               13-4
<PAGE>





<TABLE>
<CAPTION>

                                                     Advanced Financial, Inc.
                                                         and Subsidiaries
                                       CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
                                                        EQUITY (DEFICIENCY)
                                               Years ended March 31, 1997 and 1996

                                        Preferred        Common        Paid-in        Accumulated      Treasury
                                          stock          stock         capital          deficit         stock           Total
                                       -------------  ------------- --------------- ---------------- -------------  ---------------
<S>                                        <C>             <C>          <C>            <C>             <C>             <C>

Balance at April 1, 1995                    $ 1,860        $ 3,876      $8,642,442     $ (4,162,178)   $ (441,345)     $ 4,044,655

Net loss                                          -              -               -       (3,184,577)            -       (3,184,577)

Services rendered in exchange
  for stock options                               -              -          45,431                -             -           45,431

Exercise of stock options (notes G
  and H)                                          -            380         189,620                -             -          190,000

Dividends on preferred stock,
  $.32 per share (note G)                         -              -               -         (117,180)            -         (117,180)
                                       -------------  ------------- --------------- ---------------- -------------  ---------------

Balance at March 31, 1996                     1,860          4,256       8,877,493       (7,463,935)     (441,345)         978,329

Net loss                                          -              -               -       (5,077,639)            -       (5,077,639)

Exercise of stock options (notes G                -            771         414,361                -             -          415,132
  and H)

Services rendered in                              -            500         593,250                -             -          593,750
  exchange for stock (note G)

Stock issued in legal
  settlement (note L)                             -            300          74,700                -             -           75,000

Conversion of 9,000 shares of
  preferred stock to common stock               (45)             9              36                -             -                -
                                       -------------  ------------- --------------- ---------------- -------------  ---------------

Balance at March 31, 1997                   $ 1,815        $ 5,836      $9,959,840     $(12,541,574)   $ (441,345)     $(3,015,428)
                                       =============  ============= =============== ================ =============  ===============



                                       The accompanying notes are an integral part of this statement.
</TABLE>

                                                               13-5
<PAGE>


<TABLE>
<CAPTION>
          
                                                     Advanced Financial, Inc.
                                                         and Subsidiaries
                                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       Year ended March 31,


                                                                                       1997                  1996
                                                                                -----------------    ----------------
<S>                                                                             <C>                  <C>
Cash flows from operating activities
     Net loss                                                                      $ (5,077,639)        $ (3,184,577)
     Adjustments to reconcile net loss to net
       cash provided by (used in) operating activities:
        Depreciation and amortization                                                 2,201,103            1,485,192
        Gains on sales of mortgage loans held for sale                               (2,232,547)          (2,531,580)
        Gains on sales of mortgage servicing rights                                    (827,482)             (99,759)
        Gain on sale of investment                                                      (18,205)                   -
        Deferred income taxes                                                           440,000               50,000
        Services rendered in exchange for stock options                                       -               45,431
        Services rendered in exchange for stock                                         593,750                    -
        Stock issued in legal settlement                                                 75,000                    -
        Mortgage loans held for sale originated                                    (117,647,385)        (111,090,000)
        Mortgage loans held for sale sold                                           129,685,486          105,862,745
        Changes in assets and liabilities:
           Mortgage servicing advances and accounts receivable                           80,253              763,287
           Prepaid expenses and other assets                                            285,916              121,384
           Accounts payable and accrued expenses                                        412,438              686,254
                                                                            --------------------   ------------------
              Net cash provided by (used in) operating activities                     7,970,688           (7,891,623)
Cash flows from investing activities
     Acquisition of property and equipment                                              (26,978)             (32,060)
     Purchase of mortgage servicing rights                                                    -              (11,172)
     Proceeds from sale of foreclosed assets                                                  -               57,931
     Proceeds from sales of mortgage servicing rights                                 2,103,386                    -
     Principal payments received on other receivables                                   302,336               61,578
     Principal payments received on mortgage loans held for investment                   82,219               41,593
     Proceeds from sale of investment                                                   141,669                    -
                                                                            --------------------   ------------------
               Net cash provided by investing activities                              2,602,632              117,870
Cash flows from financing activities
     Bank overdraft                                                                     106,676                    -
     Change in revolving borrowings, net                                             (9,449,895)           7,726,195
     Proceeds from notes payable                                                        739,031              984,399
     Notes payable on stock rescission                                                  200,000                    -
     Principal payments on notes payable                                             (2,933,128)            (453,811)
     Payments on capitalized lease obligations                                         (236,779)            (292,363)
     Payment of preferred dividends                                                           -             (117,180)
     Exercise of stock options                                                          415,132                    -
                                                                            --------------------   ------------------
              Net cash provided by (used in) financing activities                   (11,158,963)           7,847,240
                                                                            --------------------   ------------------
              Net increase (decrease) in cash                                          (585,643)              73,487
Cash at beginning of year                                                               585,643              512,156
                                                                            --------------------   ------------------
Cash at end of year                                                                $          -         $    585,643
                                                                            ====================   ==================
Supplemental disclosures of cash flow information
     Cash paid for interest                                                        $    845,346         $    608,293
     Cash paid for taxes                                                                  2,160                    -
Supplemental disclosures of noncash financing and investing activities
     Acquisition of fixed assets financed by capital leases                        $          -         $     66,686
     Receivable recognized for exercise of stock options                                      -              190,000
     Conversion of preferred stock to common stock                                           45                    -

                                      The accompanying notes are an integral part of these statements.
</TABLE>

                                                                    13-6
<PAGE>



                            Advanced Financial, Inc.
                                and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             March 31, 1997 and 1996

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Asummary of the significant accounting policies consistently applied in the
     preparation of the accompanying financial statements follows.

     1. Organization and Principles of Consolidation

     Advanced  Financial,  Inc. (the  Company) owns 100% of AFI Mortgage,  Corp.
     (AFI).  Prior to  ceasing  operations  in  1997,  AFI  originated,  sold to
     investors,  and serviced residential first mortgage loans (see Note B). The
     Company also owns 100% of Continental  Mortgage  Services,  Inc. (CMSI) and
     Network Appraisals,  Inc.  (Network).  CMSI and Network provided consulting
     and appraisal services to AFI and other mortgage banking companies.  During
     the fiscal year ended March 31,  1996,  both of those  subsidiaries  became
     inactive.

     The consolidated  financial statements include the accounts of the Company,
     AFI,  CMSI,  and  Network.  All  significant   intercompany   accounts  and
     transactions have been eliminated.

     2. Mortgage Servicing Rights and Mortgage Servicing Advances Receivable

     Purchased  mortgage  servicing  rights  were  recorded  at  cost  and  were
     amortized in  proportion  to and over the  estimated  positive  future cash
     flows  derived from  servicing  the  portfolio.  The Company  evaluated the
     recoverability of the cost of each bulk purchase of servicing  rights,  or,
     in the case of correspondent  purchases,  by grouping such servicing rights
     by interest rates and purchase dates of similar  loans.  If necessary,  the
     Company  further  disaggregated  bulk  purchases for purposes of evaluating
     recoverability  if the  underlying  loans did not have  similar  underlying
     economic characteristics. The Company estimated remaining net cash flows to
     be received from servicing the portfolio;  if such amounts, on a discounted
     basis, were less than amortized cost, appropriate  amortization adjustments
     were  made.  This  additional  amortization,  when  required,  resulted  in
     servicing  rights  being  carried at the lower of cost or market.  Gains on
     sales of mortgage  servicing  rights were  determined by deducting from the
     selling price the remaining unamortized cost of such servicing rights.

     In  connection  with  servicing  mortgage-backed  securities  guaranteed by
     federal  agencies,  the Company  advanced  certain  principal  and interest
     payments  to  security  holders  prior to their  collection  from  specific
     mortgagors.  In addition,  the Company  made  certain  payments of property
     taxes and  insurance  premiums  in  advance  of  collection  from  specific
     mortgagors,  as well as certain payments of attorneys' fees and other costs
     related to loans in  foreclosure.  Such  advances were included in mortgage
     servicing advances receivable.

                                      13-7
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     3. Mortgage Loans Held for Sale and Investment

     Mortgage  loans  held  for sale are  carried  at the  lower of cost or fair
     market value as determined by  outstanding  commitments  from  investors or
     current investor yield requirements calculated on an aggregate basis. Gains
     or  losses  on  sales of  mortgage  loans  are  recognized  based  upon the
     difference  between the selling price and the carrying value of the related
     mortgage  loans  at the  date of sale  using  the  specific  identification
     method. Mortgage loans held for investment are carried at the lower of cost
     or market on the date of  acquisition  or  transfer  from the held for sale
     account.

     4. Property and Equipment

     Property and  equipment are stated at cost.  Depreciation  is calculated on
     the  straight-line  method over the  estimated  useful lives of the assets,
     ranging from three years to thirty years.

     5. Excess of Cost Over Fair Value of Assets Acquired

     The excess of cost over fair value of assets  acquired,  resulting from the
     Company's  acquisition of AFI, was being amortized over fifteen years.  The
     Company has evaluated  this excess to be of no future value and has written
     off the entire amount during the year ended March 31, 1997.

     6. Foreclosed Assets

     Foreclosed   assets,   included  as  other   assets  in  the   accompanying
     consolidated  balance sheets, are recorded at the lower of the loan balance
     or the fair value of the property less estimated selling costs.

     7. Servicing and Other Fees

     Servicing fees represent fees earned for servicing  mortgage loans owned by
     investors.  These fees are calculated on the outstanding principal balances
     of the loans serviced and are recorded as income when collected.

     Other fees consist of ancillary  income  associated with loan servicing and
     are recorded as income when collected.

                                      13-8
<PAGE>

                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     8. 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.

     9.  Loss Per Common Share

     Loss per common  share is based on the  weighted  average  number of common
     shares outstanding  during the periods plus common stock equivalents,  when
     dilutive,  consisting of stock  options and warrants.  For purposes of this
     computation,  net  losses  have  been  adjusted  for the  dividends  on the
     preferred  stock.  The computation of fully diluted loss per share includes
     the  common  stock  issuable  upon  conversion  of  preferred  stock,  when
     dilutive. Because the effect of such inclusion is anti-dilutive in 1997 and
     1996, fully diluted per share information is not presented herein.

     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.


                                      13-9
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE B - BANKRUPTCY AND REORGANIZATION

     The accompanying financial statements have been prepared in conformity with
     generally accepted accounting principles, which contemplate continuation of
     the Company as a going concern.

     The Company  experienced  net losses of $5,077,639  and  $3,184,577 for the
     years ended March 31, 1997 and 1996, respectively. In an effort to generate
     the capital  necessary to support loan production  operations,  the Company
     sold most of its servicing  portfolio,  anticipating  that loan  production
     would  increase  sufficiently  to  offset  the lost  revenue  and cash flow
     previously  realized from the  servicing  operations.  Unfortunately,  loan
     production  did not increase as  anticipated,  and the Company had to close
     several of its nonproductive locations.  Ultimately, revenues and cash flow
     were insufficient to continue to support current  operations and in January
     1997, the Company  decided to discontinue  its operations and liquidate its
     remaining assets to satisfy creditors.

     In  February  1997,  the  Company  entered  into an  agreement  to sell its
     remaining  loan  production  operations to First  Mortgage  Investment  Co.
     (FMIC).  This allowed the Company to eliminate  the costs  related to those
     operations. At that time, the Company still had approximately  $150,000,000
     of GNMA mortgage servicing rights, from which it derived some revenue.

     However,  due to the  nature  of the  servicing  portfolio  and the lack of
     capital,  the Company was unable to service the portfolio  properly  within
     GNMA's  guidelines.  Thus, in April 1997,  the Company  advised GNMA of its
     deteriorating  financial  condition and requested  approval for the sale of
     the  remaining  GNMA  servicing  rights to a third party.  The Company also
     advised GNMA that if the  transaction  was  consummated  under the proposed
     terms, the Company anticipated having a shortage of approximately  $350,000
     to $400,000 in the Company's  mortgage  custodial  accounts.  GNMA chose to
     seize the servicing  portfolio  instead of approving the sale. As a result,
     the Company was left with no ongoing operations.

     As a result of these  events,  on  November 7, 1997,  the  Company  filed a
     voluntary petition for reorganization in the United States Bankruptcy Court
     for the  District  of Kansas  (Bankruptcy  Court)  under  Chapter 11 of the
     United States Bankruptcy Code (Bankruptcy Code).

     On November 13, 1998, the Bankruptcy  Court  confirmed the Company's  First
     Amended Joint Plan of Reorganization (the Plan) dated July 29, 1998.


                                      13-10
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE B - BANKRUPTCY AND REORGANIZATION - Continued

     Pursuant to the Plan, among other things:

          (a) FMIC, a creditor of the Company,  will release its secured  claims
          against,  and acquire  certain  assets of the Company in exchange  for
          1,800,000   shares  of  common   stock  of  the   Company,   initially
          constituting  60% of the  3,000,000 new shares to be issued as part of
          the Company's  recapitalization and reorganization.  In addition, FMIC
          has an option to acquire an  additional  3,000,000  shares at $.50 per
          share  or  $1.5  million  increasing  its  ownership  to  80%  of  the
          outstanding shares of the Company.

          (b) The Company will issue shares of common  stock,  warrants and make
          partial  payments to certain other creditors in exchange for a release
          of their claims.  The creditors will receive  900,000 shares of common
          stock of the Company,  constituting 30% of the 3,000,000 new shares to
          be  issued   as  a  part  of  the   Company's   recapitalization   and
          reorganization.  The  creditors  will also  receive  900,000  warrants
          allowing  the holder to purchase one share of common stock per warrant
          at a price of $1.25.  The warrants are callable by the Company at 130%
          of the strike price paid and expire on March 31, 2002.

          (c) Shares currently held by preferred and common  shareholders of the
          Company will be canceled and they will receive  300,000  shares of new
          common stock of the Company,  constituting  10% of the  3,000,000  new
          shares  to be  issued as part of the  Company's  recapitalization  and
          reorganization.  Each  preferred and common  shareholder  will receive
          approximately .05269 new shares for each old share.

     The completion of these transactions is subject to numerous conditions.

     In view of the matters  described above,  recoverability of a major portion
     of the  recorded  asset  amounts  shown  in the  accompanying  consolidated
     balance sheet is dependent upon  completion of the Plan.  The  consolidated
     financial  statements  do  not  include  any  adjustments  relating  to the
     recoverability  and classification of recorded asset amounts or amounts and
     classification of liabilities that might be necessary should the Company be
     unable to continue in existence.

     Management  believes  the steps in the Plan are  sufficient  to provide the
     Company with the ability to continue in existence.

                                     13-11
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE C - MORTGAGE SERVICING RIGHTS

     Purchased  mortgage  servicing  rights  are  presented  net of  accumulated
     amortization of $0 and $3,326,547 at March 31, 1997 and 1996, respectively.
     A summary of the activity related to purchased mortgage servicing rights is
     as follows at March 31,

                                        1997             1996
                                        ----             ----
Balance at beginning of year          $2,440,280       $3,534,450
Purchases                                    -             11,172
Scheduled amortization                  (542,497)      (1,010,047)
Amortization resulting from impairment  (621,879)         (95,295)
Sales                                 (1,275,904)             -
                                      -----------      -----------
Balance at end of year                $     -          $2,440,280
                                      ===========      ===========


NOTE D - MORTGAGE BANKING ACTIVITIES

     The Company's portfolio of mortgage loans serviced for investors, including
     loans originated by the Company,  aggregated approximately $150,000,000 and
     $481,000,000  at March 31,  1997 and 1996,  respectively.  Included  in the
     portfolio  at March 31, 1997 and 1996 are  approximately  $150,000,000  and
     $188,000,000,  respectively,  of GNMA mortgage-backed  securities (see Note
     B).  Under  terms of the  guarantee  agreement  with GNMA,  the Company was
     required to advance principal and interest not collected from the mortgagor
     and is liable  for  amounts  lost in  foreclosure  of  defaulted  loans not
     recovered from the loans' insurers.

     At March 31, 1997 and 1996,  escrow  funds  related to the  serviced  loans
     approximated  $4  million  and  $12.5  million,  respectively,  and are not
     included  in the  accompanying  consolidated  balance  sheets.  Included in
     servicing  expense are  foreclosure  losses of  $1,023,444  and $728,703 at
     March 31, 1997 and 1996, respectively.

     AFI carries  blanket bond coverage of  $1,000,000  and errors and omissions
     coverage of $1,200,000 at March 31, 1997.


                                     13-12

<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE E - NOTES PAYABLE

  The following summarizes the Company's notes payable at March 31,

                                              1997        1996
                                              ----        ----
Borrowings under a $17,000,000 line of 
   credit,  collateralized by mortgage
   loans and mortgage servicing rights,
   interest at the agreement's default
   rate of prime plus 4% (12.5% at March
   31, 1997),  due January 31, 1997.        $289,749  $10,591,644
Borrowings under a $1,000,000 line of
   credit, collateralized by mortgage
   servicing rights, interest at 9.75%,
   monthly payments of $20,517 with
   final payment due July 1, 1999.           328,897      727,559
Note payable, collateralized by mortgage
   servicing rights, interest at 10.25%,
   with monthly payments of $4,758 and
   final payment due August  1, 1998.         72,244      534,069
Note payable, collateralized by real
   estate, interest at 11.75%, with
   monthly payments of $8,812 and final
   payment due March 28, 1998.               734,177      589,848 
Note payable, collateralized by stock,
   interest at 9.5%, with payment due
   December 1, 1996.                          35,000       43,399
Note payable, collateralized by note
   receivable, interest at 9.5%, with
   monthly installments of $5,556, with
   final payment due January 1, 1998.         53,196      111,752
Note payable,  collateralized by furniture
   and fixtures,  interest at prime plus
   2% (10.5% at March 31,
   1997), with monthly installments of
   $1,389, with final payment due
   February 27, 2001.                         55,145       64,148
Note payable, collateralized by real
   estate and mortgage servicing rights,
   interest only at prime plus 6% (14.25%
   at March 31, 1997), with
   payment of $150,000 due September 30,
   1996 and final payment due March 29,
   1998.                                     200,019      350,000
Note payable, collateralized by
   servicing rights, interest only at
   prime plus 4%, with final payment due
   September 30, 1996.                            -       400,000
                                          ----------  -----------

                                          $1,768,427  $13,412,419
                                          ==========  ===========


                                     13-13
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE E - NOTES PAYABLE - Continued

  Substantially  all of the  Company's  mortgage  loans held for sale,  mortgage
  loans  held  for   investment  and  servicing   rights  (both   purchased  and
  originated),  and  property  and  equipment  are  pledged  to secure the notes
  payable.


NOTE F - CAPITALIZED LEASE OBLIGATIONS

  The  Company  has entered  into  various  capital  lease  agreements  relating
  primarily to computer equipment and furniture. The future lease payments as of
  March 31, 1997 are as follows:

           Year               Amount
           ----               ------
           1998              $173,375
           1999                13,815
                             -------- 
    Total future lease        187,190
         payments

Less amounts representing
interest at rates ranging
      from 7% to 10%            8,304
                             --------
                             $178,886

  The Company has entered into various  operating  lease  agreements  for branch
  locations.  The  operating  lease  expense  for  fiscal  1997  and  1996  were
  approximately  $235,000  and  $283,000,  respectively.  Most of the  operating
  leases are short-term in nature.


NOTE G - CAPITAL STOCK

  On June 4, 1992,  the Company  completed  an  offering of 400,000  units at an
  offering  price of $4 per unit. In connection  with the offering,  the Company
  issued warrants to the underwriter to acquire 40,000 units. The  underwriter's
  warrants  are  exercisable  until June 1, 1997 at an exercise  price of $6.60.
  Each unit  consisted  of one share of Series B  preferred  stock,  one Class A
  warrant and one Class B warrant.  The preferred stock bears a 10.5% cumulative
  dividend  rate.  Total  unpaid  cumulative  dividends  at  March  31,  1997 is
  $230,580.  The preferred stock is redeemable at the option of the Company upon
  payment of one share of common  stock plus all unpaid  dividends.  The Class A
  warrants  entitled  the holder to purchase one share of the  Company's  common
  stock for $3.50 until  December 4, 1993,  at which time the warrants  expired.
  The  Class B  warrants  entitled  the  holder  to  purchase  one  share of the
  Company's  common  stock for $10 until  December  4, 1996,  at which time they
  expired.

                                     13-14
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE G - CAPITAL STOCK - Continued

  On March 29,  1993,  the Company  completed  an offering of 900,000  shares of
  common stock at an offering price of $4.25 per share. In addition, the Company
  issued  warrants to the underwriter to acquire 100,000 shares of common stock.
  The warrants are  exercisable  until March 29, 1998,  at an exercise  price of
  $5.95. None were exercised before the expiration date.

  On  September  30,  1996,  the  Company  issued to three  companies a total of
  1,000,000  shares of common  stock  valued at $0.50 per share in exchange  for
  $500,000 of promissory notes, of which the Company had collected $200,000.  In
  December  1996, the Company was notified this private  placement  violated the
  listing  agreement with the American  Stock Exchange (See Note L).  Therefore,
  all parties agreed to rescind the issue and,  accordingly,  the transaction is
  not  reflected in the 1997  financial  statements.  The  $200,000  received is
  recorded as notes payable on stock rescission.

  On October 1, 1996, the Company  entered into two consulting  agreements  with
  two independent  consulting firms to perform public relation  services for the
  Company.  Each  agreement  provided the  issuance of 250,000  shares of common
  stock in exchange for the service.  Although the  consulting  agreements  were
  finalized on October 1, 1996,  the Company  entered into a letter of agreement
  on August  27,  1996 at which time the market  value of the  Company's  common
  stock was $1.1875. The resulting value of the service of $593,750 is reflected
  as expense in the 1997 consolidated  statement of operations as well as equity
  on the consolidated balance sheet at March 31, 1997.


NOTE H - STOCK OPTION PLANS

  The Company has key employee option and incentive stock option plans.  Options
  to acquire  common stock are  granted,  at fair market  value,  on the date of
  grant and expire in 2001 through 2006;  2,000,000  shares of common stock have
  been reserved for issuance under the plans. The following  schedule sets forth
  information regarding option activity under these plans:

                                     13-15
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE H - STOCK OPTION PLANS - Continued

                                             Number     Option price
                                             ------     ------------
Outstanding at April 1, 1995                 601,900    $1.31-4.25
Granted                                      663,991      .81-1.25
Canceled                                     (12,000)    1.31-4.25
                                          -----------
Outstanding at March 31, 1996              1,253,891      .81-4.25
Granted                                    1,708,824      .50-2.00
Canceled                                  (1,040,150)     .81-4.25
Exercised                                 (1,152,000)     .50-1.50
                                          -----------
Outstanding at March 31, 1997                770,565      .81-4.25
                                          ===========

  As of March 31, 1997, 273,865 of the above options were exercisable.

  On February 15, 1996, the Company entered into consulting agreements with four
  companies.  Under the terms of each  agreement,  the Company is to be provided
  with financial and public  relations  services,  including  advice  concerning
  marketing  surveys,  investors  profile  information,  investors'  methods  of
  expanding  investor support and increasing  investor  awareness of the Company
  and its products and services.  The term of each  consulting  agreement is six
  months, commencing on February 15, 1996. As compensation for each consultant's
  services,  the  Company has granted  options to purchase  1,000,000  shares of
  common  stock to the  consultants  at an  exercise  price  of $.50 per  share.
  Options to acquire 380,000 shares were exercised subsequent to March 31, 1996,
  and have been reflected as a receivable  from related party and an increase in
  stockholders'   equity  of  $190,000  in  the   accompanying   1996  financial
  statements.  The $190,000 was collected and the remaining 620,000 options were
  exercised during the fiscal year ended March 31, 1997.

  The disclosures  required under Financial Accounting Standards Board Statement
  No. 123, Accounting for Stock-Based  Compensation,  are not material,  and, in
  light of the bankruptcy of the Company, are meaningless and may be misleading.



                                     13-16
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE I - INCOME TAXES

  The  following  are the  components  of income tax  expense for the
  years ended March 31,

                          1997        1996
                          ----        ----
Current                 $  2,160    $     - 
Deferred                 440,000      49,350
                         -------     -------
                        $442,160    $ 49,350
                         =======     =======

Federal                 $440,000    $ 40,517
State                      2,160       8,833
                         -------     -------
                        $442,160    $ 49,350
                         =======     =======

  The  difference  between  actual  income tax expense and  expected  income tax
  benefit at the statutory federal income tax rate (34%) computes as follows:

                                                    1997          1996
                                                    ----          ----
Expected  income tax benefit at statutory rate  $(1,576,063)  $(1,065,977)
State income taxes, net                            (221,951)     (140,094)
Amortization  of  excess  cost  over fair
   value of assets acquired                         178,431        17,242
Change in valuation allowance                     2,276,190     1,183,660
Other, net                                         (214,447)       54,519
                                                ------------  ------------
    Actual income tax expense                   $   442,160   $    49,350
                                                ===========   ===========

                                     13-17
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE I - INCOME TAXES - Continued

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

                                         1997         1996
                                         ----         ----
Deferred tax assets:
  Net operating loss carryforward      $3,600,104   $1,893,261
  Valuation reserves                      195,002      165,579
  Basis difference in purchased
    mortgage servicing rights                  -       343,481
  Deferred state taxes                    534,071      307,535
  Other                                     1,965        2,383
                                         --------     --------
    Total deferred tax assets           4,331,142    2,712,239

Deferred tax liabilities:
  Basis difference in excess cost
    over fair value of assets                  -      (178,432)
    acquired
  Basis difference in fixed assets             -       (37,330)
  Deductible prepaid expenses                  -        (3,664)
  Other                                    (2,211)         (72)
                                         --------     --------
    Total deferred tax liabilities         (2,211)    (219,498)
                                        4,328,931    2,492,741
Valuation allowance                    (4,328,931)  (2,052,741)
                                       ----------   ----------

    Net deferred tax asset             $       -    $  440,000
                                       ==========    =========

  The  Company has net  operating  loss  carryforwards  of  approximately  $10.6
  million as of March 31, 1997.  These net  operating  losses will expire in the
  years ended March 31, 2009 through March 31, 2012.

  Total  deferred  taxes  consist  primarily of the benefit of the net operating
  loss  carryforward.  Management  has  established  a  valuation  allowance  of
  $4,328,931 to reduce the total deferred tax asset to $0. As of March 31, 1997,
  the Company has no recoverable income taxes previously paid.



                                     13-18
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE J - PROPERTY AND EQUIPMENT

  Property and equipment consisted of the following at March 31,

                                         1997         1996
                                         ----         ----
Land                                 $  300,000   $  300,000
Building                                905,344      905,344
Furniture and fixtures                  386,034      387,965
Office and computer equipment           957,646      930,667
Automobile                                5,331        5,331
                                      ---------    ---------
                                      2,554,355    2,529,307

Accumulated depreciation              1,250,553      810,952
                                      ---------    ---------
                                     $1,303,802   $1,718,355
                                      =========    =========


NOTE K - OTHER INVESTMENT

  The Company's other investment consists of a 10% common ownership interest and
  a noninterest-bearing  note receivable,  which has been discounted to yield 9%
  to the Company from Home Real Estate Services of Lincoln,  Inc.  (Home).  This
  investment  results from the issuance of 62,500 shares of the Company's  stock
  and the sale of substantially  all of the assets of Century Realty in December
  1994.

  Home is a  residential  real  estate  brokerage  company  located in  Lincoln,
  Nebraska.  The  Company's  investment  in  Home  is  accounted  for at cost of
  approximately  $125,000.  The balance of the note receivable at March 31, 1996
  was $112,336. During the fiscal year ended March 31, 1997, this investment was
  sold and the note was collected.


NOTE L - CONTINGENCIES

  In March  1994,  the  Company  was  named  in a  lawsuit  filed by two  former
  stockholders and officers of the Company. The lawsuit alleges that the Company
  breached an employment  contract and violated  securities  laws,  delaying the
  ability of these former  officers to sell common stock of the Company owned by
  them,  resulting  in alleged  losses of $200,000 and  $300,000,  respectively.
  During 1997, the Company  reached a settlement  with the two former  officers.
  The Company settled the litigation by agreeing to issue the plaintiffs a total
  of 300,000 shares of common stock. In turn, one of the parties pledged 100,000
  shares as collateral for a note receivable of $214,000 due to the Company.


                                     13-19
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE L - CONTINGENCIES - Continued

  In connection  with a review of the Company's  servicing  operation by Federal
  Home Loan Mortgage  Company  (FHLMC),  the Company was advised in January 1996
  that  unreconciled   shortages  existed  in  certain  bank  accounts  used  to
  accumulate  funds  related to loans  serviced by the  Company  for FHLMC.  The
  Company was advised  that the  shortage  approximated  $600,000  and that such
  amounts  should  either be  researched  and resolved or otherwise  paid by the
  Company.  The Company completed its research and determined the shortage to be
  $694,000, which was paid during the year ended March 31, 1997.

  On December 6, 1996,  the Company was notified by the American  Stock Exchange
  (the  Exchange)  that trading in its common stock would be halted  because the
  Company  had  fallen  below  certain  of  the  Exchange's   continued  listing
  guidelines.  On December 9, 1996,  the Exchange also notified the Company that
  it had  issued  1,000,000  shares  of its  common  stock,  through  a  private
  placement,  prior  to  receiving  notification  from  the  Exchange  that  the
  securities  had  been  approved  for  listing.  This  is a  violation  of  the
  Exchange's  listing  agreement and is a factor considered by the Exchange when
  reviewing a Company's  continued listing eligibility (see Note G). On December
  11,  1996,  the Exchange  informed  the Company  that it would  proceed with a
  filing of an application with the Securities and Exchange Commission to strike
  the Company's common stock from listing and registration on the Exchange.  The
  Exchange subsequently chose to delist the stock.


NOTE M - 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,  1997  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:

     Bank overdraft - The carrying  amounts  approximated  fair value because of
     the short maturity of these instruments.

     Mortgage  loans held for sale - The fair values of loans are  determined by
     outstanding   commitments   from   investors  or  current   investor  yield
     requirements calculated aggregately.


                                     13-20
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1997 and 1996

NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

     Mortgage loans held for investment - The carrying amounts approximated fair
     value since carried at lower of cost or market.

     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.

  The  estimated  fair  value  and  carrying  value of the  Company's  financial
  instruments are as follows at March 31, 1997:

                                          Carrying value    Fair value
                                          --------------    ----------
Financial assets:
  Mortgage loans held for sale               $305,193        $305,000
  Mortgage loans held for investment           12,713          13,000
Financial liabilities:
  Bank overdraft                              106,676         107,000
  Notes payable                             1,968,427       1,968,000



                                     13-21
<PAGE>


                                                        Advanced Financial, Inc.

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

      On July 15,  1996,  the Company  filed a Form 8-K report  stating that the
Company's  and the  Company's  certifying  accountant,  KPMG Peat  Marwick  LLP,
mutually agreed to terminate their accountant-client  relationship.  On March 5,
1997, the Company filed a Form 8-K report stating that the Company had agreed to
engage Grant Thornton LLP as its independent auditors.

                                    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,  1997,  the  following  persons  served as  directors  and
executive officers of the Company.

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

William E. Moffatt                     44           CEO/President
Thomas C. Schleich                     35           Director
Daniel Starczewski                     49           Director
William B. Morris                      40           Secretary/Sr.
Vice President


      William E. Moffatt. Mr. Moffatt was appointed President of the Company and
its  subsidiary  on July 25, 1996 and served as a Director  of the Company  from
September 6, 1996 until he resigned  from both  positions  on May 20,  1997.  He
received a BBA degree in  accounting/marketing  from the  University of Texas at
Austin in 1975.  From 1989 to 1995, he was Executive  Vice-President  of Capital
Markets of Plaza Home Mortgage Corporation in Santa Ana, California where he was
responsible  for all  functions  of  secondary  marketing,  shipping and product
development.  He has also been employed with numerous other mortgage  companies,
including First Northern Bank in Garden City, New York from 1988 to 1989 (Senior
Vice President/Secondary  Marketing), Liberty Mortgage Company in Oklahoma City,
Oklahoma from 1987 to 1988 (Senior Vice President/Loan Production), Commonwealth
Mortgage   Corp.  of  America  in  Houston,   Texas  from  1986  to  1987  (Vice
President/Secondary  Marketing and National  Refinance),  and Colwell  Financial
Corp.   in  Los   Angeles,   California   from   1984  to  1986   (Senior   Vice
President/Administration).

      Thomas G.  Schleich.  Mr.  Schleich  was a Director  of the  Company  from
January,  1995 until his resignation in May, 1997. Mr.  Schleich  graduated from
Nebraska   Wesleyan   University  in  1985  with  a  B.S.   degree  in  Business
Administration.  He graduated from the University of Nebraska law school in 1988
with a J.D. degree. From 1989 to 1993, he was president of Commercial Investment
Properties in Lincoln, Nebraska. From 1993 to the present, he has been the Chief
Operating Officer of Home Real Estate in Lincoln, Nebraska. In addition to being
a member of the Nebraska State Bar Association, he is also licensed by the State
of Nebraska as a Real Estate Broker.

      Daniel  Starczewski.  Mr.  Starczewski  was a Director of the Company from
September 6, 1996 until the  confirmation  of the Company's  bankruptcy  plan of
reorganization on November, 1998. Mr. Starczewski has been president of Investor
Resource  Services,  a public and investor  relations  firm,  since 1993.  After
working for  several  years as an office  manager,  Mr.  Starczewski  started an
accounting partnership in

                                    Page - 14
<PAGE>


                                                        Advanced Financial, Inc.

Winston-Salem,  North  Carolina  in 1975.  Currently  he  serves on the Board of
Directors of both Atlantis Group, Inc. and Tollgate, Inc.

     William B. Morris. Since 1991, Mr. Morris has been Secretary and a Director
of the Company and Mr.  Morris is the only officer to continue  with the Company
after the Company filed for relief under Chapter 11 of the  Bankruptcy  Code. On
October 14,  1997,  although  Mr.  Morris did not stand for  re-election  at the
meeting of shareholders on September 6, 1996, the Board of Directors elected Mr.
Morris to fill a Director  vacancy for the fiscal year 1998.  At that time,  the
Board of Directors  elected Mr.  Morris to the office of Chairman.  From 1991 to
1996, Mr. Morris participated with a former officer and director,  Mr. Norman L.
Peterson,  in a partnership called Lancaster Partners,  Shawnee,  Kansas,  which
provided  consulting services to small to mid-sized companies on raising capital
and  becoming  publicly  traded.  From 1984 to 1989,  Mr.  Morris was an account
executive at the  investment  banking  firm of Stuart  James & Company,  Denver,
Colorado,  and from 1983 to 1984,  Mr.  Morris was an account  executive  at the
venture capital brokerage firm R.B. Marich, Inc. in Denver, Colorado.

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, 1997,  all Section
16(a) filing  requirements  applicable to its directors,  executive officers and
ten percent beneficial owners were complied with.


ITEM 10.  EXECUTIVE COMPENSATION
          ----------------------

     The following table sets forth information  regarding  compensation paid by
the  Company in each of the last three years to the Chief  Executive  Officer in
the 1995, 1996 and 1997 fiscal years.  The Chief Executive  Officer was the only
executive officer to receive  compensation in excess of $100,000 in any of those
fiscal years.



                                    Page - 15
<PAGE>

                                                        Advanced Financial, Inc.


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                                       Long Term Compensation
                                                                       ----------------------
                                    Annual Compensation (1)(2)         Awards                Payouts
                                    --------------------------         ------                -------
(a)                  (b)                (c)         (d)           (e)          (f)            (g)           (h)           (i)
                                                                 Other      Restricted
Name and                                                         Annual        Stock                        LTIP       All Other
Principal                                                     Compensation   Award(s)       Options/       Payouts    Compensation
Position                            Salary ($)    Bonus ($)        ($)         ($)          SARs(#)          ($)          ($)
-----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>             <C>              <C>          <C>            <C>         <C>               <C>          <C>      

                  Year Ended
Norman L.          March 31,
Peterson             1997         $ 65,272(4)      -0-             500         -0-             0             -0-          -0-
Chairman
of the            Year Ended
Board              March 31,
President            1996         $120,000         -0-           2,500         -0-         25,000(3)         -0-          -0-
and Chief
Executive         Year Ended
Officer            March 31.
                     1995         $120,000         -0-             -0-         -0-            -0             -0-          -0-

William E.
Moffatt           Year Ended
Chairman           March 31,
of the               1997         $157,565         -0-             500         -0-        450,000(3)         -0-          -0-
Board
President
and Chief
Executive
Officer

</TABLE>

(1)     Amounts  shown  set forth  all cash  compensation  earned by each of the
        named individuals in the years shown.

(2)     While the  named  individuals  received  perquisites  or other  personal
        benefits in the years shown, in accordance with applicable  regulations,
        the value of these benefits are not indicated since he did not exceed in
        the  aggregate the lesser of $25,000 or 25% of the  individual's  salary
        and bonus in any year.

(3)     These  options  have  expired  prior to the  filing of this  report as a
        result of the termination of the executive officers.

(4)     Pursuant to an agreement between Mr. Peterson and the Company and in
        connection  with  the  termination  of Mr.  Peterson's  employment,  the
        Company  agreed  to pay  Mr.  Peterson  $2,000  a month  for six  months
        beginning on December 1, 1996 and health benefits for one year beginning
        on December 1, 1996.




                                   Page - 16
<PAGE>

                                                        Advanced Financial, Inc.


           OPTIONS/SAR GRANTS IN YEAR ENDED MARCH 31, 1997
    (a)              (b)                 (c)             (d)          (e)
                                     % of Total
                                Options/SARs Granted
                   Options/SARs     to Employees     Exercise or Base Expiration
  Name              Granted (#)    in Fiscal Year       Price ($/Sh)     Date
  ----              -----------    --------------       ------------     ----

William E. Moffatt    450,000         66.18%                1.00     04/08/07(1)
Norman L. Peterson          0             0%                0.00         N/A


(1)       While the expiration  date for these options was scheduled to occur in
          2007,  these options  expired early as a result of  termination of Mr.
          Moffatt's  employment.  

<TABLE>
<CAPTION>
                       AGGREGATED OPTION/SAR EXERCISED IN YEAR ENDED
                  MARCH 31, 1997 AND OPTION/SAR VALUES AS OF MARCH 31, 1997

(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> 
Norman L. Peterson       -0-          -0-                0/0                  $-0-
William E. Moffatt       -0-          -0-             450,000/0               $-0-

</TABLE>

Compensation of Directors

      Directors  received a fee of $250 for each of two board meetings  attended
during the first half of fiscal 1997. The Company  suspended  payments for board
meetings which occurred in the second half of fiscal 1997.

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

        The Company entered into an employment agreement with William E. Moffatt
on April 8, 1996.  The  agreement  required the Company to pay to Mr.  Moffatt a
base salary of $165,000 for an initial 12 month period and at a rate of $180,000
per year  for each  fiscal  quarter  thereafter  if the  preceding  quarter  was
profitable.  If a  merger  transaction  was  completed  which  created  a larger
organization,  then the base salary  would  increase to $200,000  per year.  Mr.
Moffatt  was to  receive  5  weeks  of  paid  vacation  per  year  and was to be
reimbursed for all travel  expenses  associated  with commuting from his home in
California to the  Company's  offices in Shawnee,  Kansas.  If  terminated,  Mr.
Moffatt was to receive 4 months  severance  to be paid based on a pro rata share
of his existing salary plus benefits.  Mr. Moffatt was also granted an option to
purchase up to 450,000 shares of the Company's Common Stock at an exercise $1.00
per share which vested at a rate of 37,500  shares each month for a period of 12
months.  Mr.  Moffatt  resigned  on May 20,  1997  and was paid  eight  weeks of
severance pay and the Company agreed to pay medical and dental  benefits for six
months  in  exchange  for his  agreement  not to  pursue  his  rights  under his
employment contract.  Pursuant to his employment contract,  Mr. Moffatt's option
expired unexercised 90 days from the date of his resignation.


                                   Page - 17
<PAGE>


                                                        Advanced Financial, Inc.

     Mr. Peterson resigned from the Company on November 21, 1996. As a condition
of his  resignation  the Company  entered into an agreement with Mr. Peterson to
pay Mr. Peterson a severance of $12,000 to be paid in payments of $2,000 a month
for six months starting  December 1, 1996. The Company agreed to continue paying
health  benefits for a one year period  beginning  December 1, 1996. The Company
agreed to  indemnify  Mr.  Peterson  from  adverse  claims made by two  previous
officers  which were  pending in the Nebraska  State Court and Nebraska  Federal
District Court. This litigation was subsequently  settled between the parties on
January 31,  1997.  Mr.  Peterson  and the Company  agreed to waive and mutually
release  each  other from any and all claims  which they may have  against  each
other, if any which existed at that time.

     The Company has not entered  into any other  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 other than those specified above.

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 July  26,  1996,  the  record  date  for
determining the shareholders of the Company entitled to vote at the shareholders
meeting  held  September 6, 1996,  by: (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 3,875,476 shares outstanding on the July 26,
1996 record  date.  Pursuant to the  Company's  Plan of  Reorganization,  on the
effective  date of the  Plan of  Reorganization,  all  existing  shares  will be
canceled and each shareholder of record on the effective date shall receive such
shareholder's  pro rata share of three hundred thousand  (300,000) new shares of
Common Stock of the Company. All currently outstanding options and warrants will
be canceled. See Item 1: "DESCRIPTION OF BUSINESS - SUBSEQUENT EVENTS."

Beneficial Ownership (1)
Beneficial Owner                        Number of Shares        Percent of Total
--------------------------------------------------------------------------------

      Peterson & Sons
      5425 Martindale
      Shawnee, KS 66218                   887,462(2)                 22.9%

      William B. Morris
      5425 Martindale
      Shawnee, KS 66218                   756,263(3)                 18.8%

      Mark J. Peterson
      770 N. Cotner, #402
      Lincoln, NE 68505                   887,462(4)                 22.9%

      Norman L. Peterson
      5425 Martindale
      Shawnee, KS 66218                 1,073,010(5)                 26.7%


                                   Page - 18
<PAGE>


                                                        Advanced Financial, Inc.

      Lancaster Partners
      5425 Martindale
      Shawnee KS, 66218                   267,600(6)                  6.9%

      Steven J. Peterson
      5425 Martindale
      Shawnee, KS 66218                 1,026,016(7)                 25.6%

      Thomas G. Schleich
      225 N. Cotner #107
      Lincoln, NE 68505                    75,000(8)                  3.0%

All Executive officers
and directors as a group (7 persons)    1,301,125(9)                 23.1%


(1)       This  table  is  based  upon  information  obtained  by the  Company's
          transfer  agent listing the  shareholders  of record on July 26, 1996,
          and  Schedules  13D and 13G filed  with the  Securities  and  Exchange
          Commission  (the  "Commission").  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 267,600 shares  controlled by Peterson & Sons Holding Company
          as 50% partners in  Lancaster  Partners,  which owns  267,600  shares.
          Subsequent to the record date of July 26, 1996, Lancaster Partners was
          dissolved  and 50% of the  shares,  or  133,800  shares,  were  issued
          directly to Peterson & Sons Holding  Company.  Peterson & Sons Holding
          Company is 76% controlled by Mark J. Peterson, his brother,  Steven J.
          Peterson,  and their father Norman L Peterson,  all of whom are former
          officers and directors of the Company.

(3)       Consists  of  351,163  shares  owned  personally  and  276,600  shares
          controlled  by William B. Morris as 50% partner of Lancaster  Partners
          which owns 267,600  shares.  Subsequent to the record date of July 26,
          1996,  Lancaster  Partners  was  dissolved  and 50% of the shares,  or
          133,800  shares,  were  issued  directly  to William B.  Morris.  Also
          included is an option to purchase 137,500 shares of common stock which
          will be canceled on the effective date of the Plan of Reorganization..

(4)       Consists of 887,462  controlled  by Peterson & Sons  Holding  Company.
          Peterson & Sons Holding company is 24% owned by Mark J. Peterson.

(5)       Consists  of 887,462  shares  controlled  by  Peterson & Sons  Holding
          Company  of  which  Norman  L.  Peterson   disclaims  all   beneficial
          ownership.  Also  includes  options to acquire  137,500  shares all of
          which subsequently expired.

(6)       Lancaster Partners was 50% owned by William B. Morris and 50% owned by
          Peterson & Sons Holding Company. Subsequent to the record date of July
          26, 1996,  Lancaster  Partners was dissolved and William B. Morris and
          Peterson & Sons Holding Company each received 133,800 shares directly.

(7)       Consists  of 887,462  shares  controlled  by  Peterson & Sons  Holding
          Company.  Peterson  & Sons  Holding  company is 24% owned by Steven J.
          Peterson. Also includes an option to purchase 137,500 shares of common
          stock, all of which subsequently expired.


                                   Page - 19
<PAGE>


                                                        Advanced Financial, Inc.

(8)     Includes  62,500 shares of common stock held by Home Real Estate Service
        of Lincoln,  Inc., a private corporation controlled by the family of Mr.
        Schleich.  Also,  includes  options to purchase  12,500 shares of common
        stock,  which  will be  canceled  on the  effective  date of the Plan of
        Reorganization.

[(9)    Includes only shares actually issued and outstanding.]


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

        On December 20, 1994, the Company sold its Century Realty Central,  Inc.
Lincoln,  Nebraska  subsidiary  to Home Real  Estate  Service of  Lincoln,  Inc.
("Home") for  $250,000,  consisting of $50,000 cash and a  non-interest  bearing
promissory  note for  $200,000.  The  promissory  note was payable in 36 monthly
installments with the entire balance due January 1, 1998. The note was unsecured
but was guaranteed by Austin Realty, Inc., whose vice president is Mr. Thomas G.
Schleich,  a former director of the Company.  The Company owns 10% of the issued
and outstanding  common stock of Home. The family of Thomas G. Schleich controls
Home.  The note was paid in full as described below.

      On November  11, 1996,  the Company  entered into an agreement to sell its
10%  ownership  interest  in Home back to Home  pursuant  to a Stock  Redemption
Agreement  entered  into by the parties on December  20,  1994.  Pursuant to the
terms of the Stock Redemption Agreement, the purchase price was determined to be
$141,669 which was paid to the Company in exchange for its 10% ownership of Home
on  March  1,  1997.  In  addition,  Home  paid  the  remaining  balance  of the
non-interest  bearing promissory note due the Company.  On February 1, 1997, the
Company sold its loan production  operations and therefore no longer pays Home a
monthly rental for the use of the three offices in the Lincoln Nebraska area.


                                     PART IV
                                     -------

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K
          --------------------------------

(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 to 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 the order of Commercial Federal Bank, successor to Railroad Savings
Bank,  FSB  ("Lender")  and Agreement  dated  October 11, 1996 between  Advanced
Financial, Inc. and AFIM, as Borrower, and Lender and Matrix Financial Servicers
Corporation  

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.

*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)).


                                   Page - 20
<PAGE>


                                                        Advanced Financial, Inc.

*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.

10.4   Second Mortgage dated March 29, 1996 made by Advance  Financial, Inc. and
AFI  Mortgage  Corp.,  as  Mortgagor,  to  First  Mortgage  Investment  Co.,  as
Mortgagee.

21.1  List of Subsidiaries

27.1  Financial Data Schedule

* Asterisk indicates exhibits incorporated by reference as indicated,  all other
exhibits are filed herewith.

(b) Reports on Form 8-K
    -------------------

Current Report dated March 5, 1997 on Form 8-K was filed with the Securities and
Exchange  Commission  on March 6, 1997,  pursuant to Item 4 of that form stating
that the  Company  had  agreed to engage  Grant  Thornton  LLP as the  Company's
independent auditors.



                                   Page - 21
<PAGE>


                                                        Advanced Financial, Inc.

                                   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 FINANCIAL, INC.
                                     (Registrant)


Dated:  February 16, 1999           By:/s/William B. Morris
                                       ---------------------
                                       William B. Morris
                                       Chairman


      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.

      Signature                        Title                       Date
      ---------                        -----                       ----


/s/William B. Morris            Chairman, Secretary,           February 16, 1999
--------------------            Principal Accounting
William B. Morris               Officer