Conformed
    _________________________________________________________ 
                       ---------------------
                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, 1998                               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(g) of the Act:

                               Title of Each Class
                          ----------------------------
                          Common Stock $.001 par value
                              ---------------------

      Check  whether  the issuer (1) filed all  reports  required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act during the past 12 months
(or for such  shorter  period  that the  registrant  was  required  to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days.  Yes ___   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, 1998 were $ 257,629.

      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>

                                                        Advanced Financial, Inc.
                         TABLE OF CONTENTS

ITEM                                                       PAGE

Part I

      Item  1 -      Description of Business................. 3

      Item  2 -      Description of Property................. 7

      Item  3 -      Legal Proceedings....................... 8

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

Part II

      Item  5 -      Market for Common Equity and Related
                     Stockholder Matters..................... 8

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

      Item  7 -      Financial Statements.................... 10

      Item  8 -      Changes In and Disagreements With 
                     Accountants on Accounting and 
                     Financial Disclosure.................... 12

Part III

      Item  9 -      Directors, Executive Officers, 
                     Promoters and Control Persons;
                     Compliance With Section 16(a) Of The 
                     Exchange Act............................ 11

      Item 10 -     Executive Compensation................... 12

      Item 11 -     Security Ownership of Certain Beneficial
                    Owners and Management.................... 14

      Item 12 -     Certain Relationships and Related 
                    Transactions............................. 15

Part IV

      Item 13 -     Exhibits and Reports on Form 8-K......... 15

Signatures................................................... 17


                                    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, 1998, 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
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

                                    Page - 3
<PAGE>

                                                        Advanced Financial, Inc.

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 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 to 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,  1998, 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.

      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.


                                    Page - 4
<PAGE>

     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 1998, the Company had no loan  originations and received
revenue from its  remaining  servicing  portfolio  for only 15 days during April
1997.  In  addition,  due to the  Company's  continued  losses in  fiscal  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.

      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 1998, the Company had no loan
originations  compared to 1,242 loans with a principal  balance of approximately
$110,500,000 in fiscal 1997.

     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 - 5
<PAGE>
                                                        Advanced Financial, Inc.

      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 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

                                    Page - 6
<PAGE>
                                                        Advanced Financial, Inc.

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 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.

     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,  1998,  the  Company  and its  subsidiary  had 1 full time
employee.

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

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

     At March 31,  1998,  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,
1998 of $717,000 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 term of the loan has  subsequently  been  extended
until March 31, 1999, with all the same terms. 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  years 1997 and 1998 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 

                                    Page - 7
<PAGE>
                                                        Advanced Financial, Inc.

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  fiscal  1998,  the  Company  did not  invest  in any  real  estate
mortgages.

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

      During  fiscal year 1998,  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, 1998, the Company had 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, 1998,  either  through the
solicitation of proxies or otherwise.

                                     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

                                    Page - 8
<PAGE>
                                                        Advanced Financial, Inc.

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 1997 and 1998.  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.


                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

                1998
                ----                                High      Low
                                                    ----      ---   
           Quarter Ended June 30, 1997              $0.38     $0.04
           Quarter Ended September 30, 1997         $0.19     $0.04
           Quarter Ended December 31, 1997          $0.07     $0.01
           Quarter Ended March 31, 1998             $0.01     $0.005


      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,  1998,  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.


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 1997 and 1998. 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,
1998 and the Company's results of operations for fiscal year 1998 should be read
in conjunction with description of events subsequent to March 31, 1998 contained
in Item 1 hereof.


RESULTS OF OPERATIONS
Year Ended  March 31,  1998  Compared  To The Year Ended March 31, 1997
-----------------------------------------------------------------------

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

     The Company's cash and short-term  investments increased from ($106,676) at
March 31, 1997 to $58,759 at March 31, 1998. The increase in cash and short-term
investments is attributable to the fact that the Company  suspended  operations,
except for  limited  operations  necessary  to operate  under  Chapter 11 of the
Bankruptcy Code, sold its remaining assets, except for the office building,  and
collected on various receivables due the Company.

                                    Page - 9
<PAGE>
                                                        Advanced Financial, Inc.

Also  see  Item 1:  "DESCRIPTION  OF  BUSINESS--SUBSEQUENT  EVENTS"  and Item 1:
"DESCRIPTION OF BUSINESS -- DESCRIPTION OF BUSINESS OF THE COMPANY AND AFIM."

      Losses
      ------

        Consolidated operating result for fiscal year 1998 reflect a net loss of
$375,589  as  compared  to a net loss of  $5,077,639  in fiscal  year 1997.  The
decrease  in  losses is  attributable  to the fact  that the  Company  suspended
operations  and reduced  expenses,  except for limited  operations  necessary to
operate under Chapter 11 of the Bankruptcy  code. Also see 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 1998, the Company saw a significant decrease in the Company's
assets and stockholders'  equity.  The Company's total assets were $1,300,490 at
March 31, 1998 compared to $2,158,102 at March 31, 1997.  Stockholders'  deficit
was  $(3,391,017)  at March 31, 1998 compared to $(3,015,428) at March 31, 1997.
These decreases were due to the fact that the Company  suspended the majority of
its  operations  and had  limited  revenues,  causing the Company to continue to
operate at a loss  during  fiscal  1998.  The Company  sold its loan  production
operations in February,  1997, causing its loans held for sale to decrease to $0
at March 31, 1998  compared to $305,193 at March 31,  1997.  Because the Company
was no longer  borrowing on its  warehouse  facility to fund loan  originations,
Notes  Payable  also  decreased  to  $1,577,194  at March 31,  1998  compared to
$1,968,427 at March 31, 1997.

      At March 31, 1998, the Company had a cash position of $58,759  compared to
a negative cash position of $106,676 at March 31, 1997. After year end March 31,
1997,  the Company  covered its negative cash position through the collection of
receivables and the funding of the remaining Mortgage Loans Held for Sale. Since
March 31,  1998,  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

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

      Financial  statements  for the years  ended  March 31,  1998 and March 31,
1997, are presented on the following pages.


                                   Page - 10
<PAGE>


                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS




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, 1998 and 1997, and the related
consolidated   statements  of  operations,   changes  in  stockholders'   equity
(deficiency),  and  cash  flows  for  the  years  then  ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Advanced Financial, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the
consolidated  results of their operations and their  consolidated cash flows for
the  years  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



Kansas City, Missouri
January 26, 1999

                                      10-1
<PAGE>
<TABLE>
<CAPTION>
                                                       Advanced Financial, Inc.
                                                           and Subsidiaries

                                                      CONSOLIDATED BALANCE SHEETS

                                                               March 31,

         ASSETS                                                                        1998                      1997
                                                                               ---------------------    -----------------------
<S>                                                                            <C>                      <C>
Cash                                                                           $          58,759        $              -
Mortgage servicing advances and accounts receivable (note A2)                            151,097                    440,367 
Mortgage loans held for sale (notes A3, D and E)                                           -                        305,193 
Mortgage loans held for investment (notes A3 and E)                                        5,997                     12,713 
Property and equipment, net (notes A4, E, F, and J)                                   1,070,5553                  1,303,802 
Prepaid expenses                                                                           -                         23,121 
Other                                                                                     14,084                     72,906 
                                                                               ---------------------    -----------------------
                                                                               $       1,300,490        $         2,158,102 
                                                                               =====================    =======================

         LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
LIABILITIES
     Bank overdraft                                                            $           -            $           106,676 
     Accounts payable and accrued expenses                                                24,292                  2,919,541 
     Note payable (note E)                                                               717,357                 1, 768,427 
     Notes payable to related parties (note G)                                             -                        200,000 
     Capitalized lease obligations (note F)                                                -                        178,886 
                                                                               ---------------------    -----------------------
                                                                                         741,649                  5,173,530 

LIABILITIES SUBJECT TO COMPROMISE (note B)
     Accounts payable and accrued expenses                                             3,024,595                       -
     Notes payable (note E)                                                              659,837                       -
     Notes payable on stock recission (note G)                                           200,000                       -
     Capitalized lease obligations (note F)                                               65,426                       -
                                                                               ---------------------    -----------------------
                                                                                       3,949,858                       -

COMMITMENTS AN 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 shares issued and outstanding                                   1,815                      1,815 
     Common stock, $.001 par value; 25,000,000 shares authorized; 5,836,476                                                    
       shares issued                                                                       5,836                      5,836 
     Paid-in capital                                                                   9,959,840                  9,959,840 
     Accumulated deficit                                                             (12,917,163)               (12,541,574)
                                                                               ---------------------    -----------------------
                                                                                      (2,949,672)                (2,574,083)

     Treasury stock, 99,869 shares of common stock, at cost                             (441,345)                  (441,345)
                                                                               ---------------------    -----------------------
                                                                                      (3,391,017)                (3,015,428)
                                                                               ---------------------    -----------------------
                                                                               $       1,300,490        $         2,158,102
                                                                               =====================    =======================

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

                                                                 10-2


<PAGE>

<TABLE>
<CAPTION>

                                                       Advanced Financial, Inc.
                                                           and Subsidiaries

                                                 CONSOLIDATED STATEMENTS OF OPERATIONS

                                                         Year ended March 31,

                                                                                       1998                      1997
                                                                               ---------------------    -----------------------
<S>                                                                            <C>                      <C> 
Revenues
     Servicing fees                                                            $          58,492                  1,558,933 
     Gains (losses) on sales of mortgage loans, net (including origination                                                     
       fee income (expense) of ($40,681) and $788,868, respectively)                     (45,261)                 2,232,547 
     Other fees                                                                           23,373                    674,388 
     Gains on sales of mortgage servicing rights                                           -                        827,482 
     Interest                                                                             11,036                    691,559 
     Rental Income (note F)                                                              165,027                     46,667 
     Other                                                                                44,962                    105,197 
                                                                               ---------------------    -----------------------
         Total revenues                                                                  257,629                  6,136,773 

Expenses
     Servicing expense                                                                    90,926                  1,630,457 
     Personnel                                                                           168,471                  2,903,116 
     General and administrative                                                          156,669                  2,275,168 
     Interest                                                                            156,786                    851,952 
     Depreciation and amortization                                                        49,374                  2,201,103 
     Other                                                                                10,992                    910,456 
                                                                               ---------------------    -----------------------
         Total expenses                                                                  633,218                 10,772,252 
                                                                               ---------------------    -----------------------

         Loss before income taxes                                                       (375,589)                (4,635,479)

Income tax expense (notes A8 and I)                                                        -                       (442,160)
                                                                               ---------------------    -----------------------
         Net loss                                                              $        (375,589)       $        (5,077,639)
                                                                               =====================    =======================

Weighted average shares outstanding                                                   $5,736,607                  4,651,327
                                                                               =====================    =======================

Loss per common share (note A9)                                                $           (0.09)       $             (1.12)
                                                                               =====================    =======================

                                    The accompanying notes are an integral part of these statements

</TABLE>
                                                                 10-3

<PAGE>

<TABLE>
<CAPTION>
                                                       Advanced Financial, Inc.
                                                           and Subsidiaries

                                         CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
                                                        EQUITY (DEFICIENCY)
                                               Years ended March 31, 1998 and 1997

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

Balance at April 1, 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
  and H)                                          -            771         414,361                -             -          415,132

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

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)

Net loss                                          -              -               -         (375,589)            -         (375,589)
                                       -------------  ------------- --------------- ---------------- -------------  ---------------

Balance at March 31, 1998                   $ 1,815        $ 5,836      $9,959,840     $(12,917,163)   $ (441,345)     $(3,391,017)
                                       =============  ============= =============== ================ =============  ===============

                                    The accompanying notes are an integral part of these statements

</TABLE>

                                                          10-4
<PAGE>

<TABLE>
<CAPTION>


                                                       Advanced Financial, Inc.
                                                           and Subsidiaries

                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                         Year ended March 31,


                                                                                       1998                  1997
                                                                                -----------------    ----------------
<S>                                                                             <C>                  <C> 
Cash flows from operating activities
     Net loss                                                                      $   (375,589)        $ (5,077,639)
     Adjustments to reconcile net loss to net
       cash provided by) operating activities:
        Depreciation and amortization                                                    49,374            2,201,103
        (Gains) losses on sales of mortgage loans held for sale                          45,261           (2,232,547)
        Gains on sales of mortgage servicing rights                                           -             (827,482)
        Gain on sale of investment                                                            -              (18,205)
        Deferred income taxes                                                                 -              440,000
        Loss on diposal of property and equipment                                        40,415                    -
        Services rendered in exchange for stock                                               -              593,750
        Stock issued in legal settlement                                                      -               75,000
        Mortgage loans held for sale originated                                               -         (117,647,385)
        Mortgage loans held for sale sold                                               259,932          129,685,486
        Changes in assets and liabilities:
           Mortgage servicing advances and accounts receivable                          289,270               80,253
           Prepaid expenses and other assets                                             81,943              285,916
           Accounts payable and accrued expenses                                        129,346              412,438
                                                                            --------------------   ------------------
              Net cash provided by operating activities                                 519,952           (7,970,688)
Cash flows from investing activities
     Acquisition of property and equipment                                                    -              (26,978)
     Proceeds from sales of mortgage servicing rights                                         -            2,103,386
     Proceeds from disposal of property and equipment                                    30,000                    -
     Principal payments received on other receivables                                         -              302,336
     Principal payments received on mortgage loans held for investment                    6,716               82,219
     Proceeds from sale of investment                                                         -              141,669
                                                                            --------------------   ------------------
               Net cash provided by investing activities                                 36,716            2,602,632
Cash flows from financing activities
     Bank overdraft                                                                    (106,676)             106,676
     Change in revolving borrowings, net                                               (289,749)          (9,449,895)
     Proceeds from notes payable                                                         15,000              739,031
     Notes payable on stock rescission                                                        -              200,000
     Principal payments on notes payable                                               (116,484)          (2,933,128)
     Payments on capitalized lease obligations                                                -             (236,779)
     Exercise of stock options                                                                -              415,132
                                                                            --------------------   ------------------
              Net cash used in financing activities                                    (497,909)         (11,158,963)
                                                                            --------------------   ------------------
              Net increase (decrease) in cash                                            58,759             (585,643)
Cash at beginning of year                                                                     -              585,643
                                                                            --------------------   ------------------
Cash at end of year                                                                $     58,759         $          -
                                                                            ====================   ==================
Supplemental disclosures of cash flow information
     Cash paid for interest                                                        $    126,658         $    845,346
     Cash paid for taxes                                                                      -                2,160
Supplemental disclosures of noncash financing and investing activities
     Capitalized lease obligations forgiven upon return of
       property and equipment                                                      $    113,460         $          -
     Conversion of preferred stock to common stock                                            -                   45

                                    The accompanying notes are an integral part of these statements

</TABLE>

                                                            10-5

<PAGE>
                            Advanced Financial, Inc.
                                and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

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).  Both  of  those  subsidiaries  are
     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.

                                      10-6
<PAGE>

                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     3. Mortgage Loans Held for Sale and Investment

     Mortgage  loans  held for sale  were  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  were  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  evaluated  this excess to be of no future  value and wrote off the
     entire  amount  of  $524,798,   which  was  included  in  depreciation  and
     amortization expense 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.

                                      10-7
<PAGE>

                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997

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 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 1998 and 1997,
     diluted per share  information is not presented  herein. It is probable the
     events  discussed  in Note B will  require the  issuance  of common  stock,
     thereby diluting current equity interests.

     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.

     11.  Reclassifications

     Certain items in the 1997 financial  statements  have been  reclassified to
     conform to the 1998 presentation.

                                      10-8
<PAGE>

                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997

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. However, the Company experienced net losses
     of  $375,589  and  $5,077,639  for the years ended March 31, 1998 and 1997,
     respectively.  In an effort to generate  the capital  necessary  to support
     loan production operations, during fiscal 1997 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 Filing  Date),  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.


                                      10-9
<PAGE>
                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997


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 sheets 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.

                                     10-10
<PAGE>
                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997


NOTE B - BANKRUPTCY AND REORGANIZATION - Continued

     Since  the  Filing  Date,  the  Company  has  operated  its  business  as a
     debtor-in-possession  subject to the jurisdiction of the Bankruptcy  Court.
     During such time, all claims against the Company in existence  prior to the
     Filing  Date have been  stayed  and have been  classified  as  "liabilities
     subject to compromise" in the 1998 consolidated  balance sheet,  except for
     fully secured liabilities that are expected not to be compromised.


NOTE C - MORTGAGE SERVICING RIGHTS

     A summary of the activity related to purchased mortgage servicing rights is
     as follows at March 31,

                                                1998         1997
                                            ---------    ----------
          Balance at beginning of year      $     -      $2,440,280
          Purchases                               -            - 
          Scheduled amortization                  -        (542,497)
          Amortization resulting from             -        (621,879)
          impairment
          Sales                                   -      (1,275,904)
                                            ---------    ----------
          Balance at end of year            $     -      $     -
                                            =========    ==========


NOTE D - MORTGAGE BANKING ACTIVITIES

     The Company's portfolio of mortgage loans serviced for investors, including
     loans   originated  by  the  Company,   aggregated   approximately  $0  and
     $150,000,000  at March 31,  1998 and 1997,  respectively.  Included  in the
     portfolio at March 31, 1998 and 1997 are approximately $0 and $150,000,000,
     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, 1998 and 1997,  escrow  funds  related to the  serviced  loans
     approximated $0 and $4 million,  respectively,  and are not included in the
     accompanying consolidated balance sheets. Included in servicing expense are
     foreclosure  losses of $77,665 and  $1,023,444  at March 31, 1998 and 1997,
     respectively.


                                     10-11
<PAGE>

                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997

NOTE E - NOTES PAYABLE

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

                                                 1998        1997
                                              ---------  -----------
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, 1998),  due January 31, 1997.          $       -      $289,749  
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.               364,393      328,897
Note payable, collateralized by mortgage
   servicing rights, interest at 10.25%,
   with monthly payments of $4,758 and
   final payment due August  1, 1998.             75,148       72,244 
Note payable, collateralized by real
   estate, interest at 11.75%, with
   monthly payments of $8,812 and final  
   payment due March 28, 1998.                   717,357      734,177
Note payable, collateralized by stock,
   interest at 9.5%, with payment due
   December 1, 1996.                              35,000       35,000
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
Note payable,  collateralized by furniture
   and fixtures,  interest at prime plus
   2% (10.5% at March 31,
   1998), with monthly installments of
   $1,389, with final payment due
   February 27, 2001.                             25,145       55,145
Note payable, collateralized by real
   estate and mortgage servicing rights,
   interest only at prime plus 6% (14.25%
   at March 31, 1998), with
   payment of $150,000 due September 30,
   1996 and final payment due March 29,
   1998.                                         145,151      200,019
Note payable to FMIC, no interest due
   upon approval by the Bankruptcy Court
   of the offset of the principal amount
   with amounts receivable from FMIC.             15,000            -
                                              ----------  -----------
                                              $1,377,194   $1,768,427
                                              ==========  ===========


                                     10-12
<PAGE>
                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997


NOTE E - NOTES PAYABLE - Continued

     Substantially  all of the Company's  assets are pledged to secure the notes
     payable.


NOTE F - LEASES

     The Company is leasing its land and  building to FMIC  through  December 1,
     1999 for $12,375 per month.

     The  Company  has a  capitalized  lease  obligation  of  $65,426,  which is
     considered subject to compromise under the Plan.

     The Company had various  operating lease  agreements for branch  locations.
     Operating lease expense for fiscal 1998 and 1997 was approximately  $11,000
     and $235,000, respectively. All operating leases have expired.


NOTE G - CAPITAL STOCK

     The Company's preferred stock bears a 10.5% cumulative dividend rate. Total
     unpaid  cumulative  dividends at March 31, 1998 is $383,040.  The preferred
     stock is  redeemable at the option of the Company upon payment of one share
     of common stock plus all unpaid dividends.

     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 were  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 and is considered
     subject to compromise under the Plan.


                                     10-13
<PAGE>
                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997

NOTE G - CAPITAL STOCK - Continued

     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:

                                          Number       Option price
                                        -----------    ------------
Outstanding at April 1, 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
Canceled                                  (534,250)     .81 - 4.25
                                        -----------
Outstanding at March 31, 1998              236,315      .81 - 4.25
                                        ===========

     As of March  31,  1998,  all of the above  options  were  exercisable.  All
     options will be canceled under the Plan.

     On February 15, 1996, the Company entered into  consulting  agreements with
     four companies.  Under the terms of each  agreement,  the Company was 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 was six months,  commencing on February 15, 1996. As compensation
     for each  consultant's  services,  the Company  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 were reflected in the 1996 financial statements.

                                     10-14
<PAGE>

                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997


NOTE H - STOCK OPTION PLANS - Continued

     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.


NOTE I - INCOME TAXES

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

                                                1998         1997
                                            ----------   ---------- 
          Current                           $     -       $  2,160
          Deferred                                -        440,000
                                            ----------   ----------
                                            $     -       $442,160
                                            ==========   ==========

          Federal                           $     -       $440,000
          State                                   -          2,160
                                            ----------   ----------
                                            $     -       $442,160
                                            ==========   ==========

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

                                               1998         1997
                                            ---------    -----------
          Expected  income tax benefit at
            statutory rate                  $(127,700)   $(1,576,063)
          State income taxes, net             (17,972)      (221,951)
          Amortization of excess cost
             over fair  value of                  -          178,431
             assets acquired
          Change in valuation allowance       145,650      2,276,190
          Other, net                               22       (214,447)
              Actual income tax expense     $     -         $442,160
                                            ==========   ===========

                                     10-15
<PAGE>

                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997

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,

                                              1998         1997
          Deferred tax assets:
            Net operating loss            $3,786,224   $3,600,104
               carryforward
            Valuation reserves               134,822      195,002
          Deferred state taxes               552,040      534,071
            Other                              1,495        1,965
                                           ---------    ---------
              Total deferred tax assets    4,474,581    4,331,142

          Deferred tax liabilities:
            Other                                 -        (2,211)
                                           ---------    ---------
              Total deferred tax                  -        (2,211)
               liabilities
                                           ---------    ---------
                                           4,474,581    4,328,931
          Valuation allowance             (4,474,581)  (4,328,931)
                                          ----------   ----------

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

     The Company has net operating loss  carryforwards  of  approximately  $11.1
     million as of March 31, 1998. These net operating losses will expire in the
     years ended March 31, 2009 through March 31, 2013.

     Total deferred taxes consist  primarily of the benefit of the net operating
     loss  carryforward.  Management  has  established a valuation  allowance of
     $4,474,581  to reduce the total  deferred  tax asset to $0. As of March 31,
     1998, the Company has no recoverable income taxes previously paid.



                                     10-16
<PAGE>

                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997


NOTE J - PROPERTY AND EQUIPMENT

  Property and equipment consisted of the following at March 31,

                                           1998         1997
Land                                   $  300,000   $  300,000
Building                                  905,344      905,344
Furniture and fixtures                       -         386,034
Office and computer equipment                -         957,646
Automobile                                   -           5,331
                                        ---------    ---------
                                        1,205,344    2,554,355

Accumulated depreciation                  134,791    1,250,553
                                       ----------   ----------
                                       $1,070,553   $1,303,802
                                       ==========   ==========


NOTE K - OTHER INVESTMENT

  The Company's other investment  consisted of a 10% common  ownership  interest
  and a noninterest-bearing note receivable,  which had 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  was  accounted  for at cost of
  approximately  $125,000.  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.

                                     10-17

<PAGE>

                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997


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,  1998  based  on  the  current  economic  conditions,  risk
  characteristics  of the various  financial  instruments,  and other subjective
  factors.

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

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

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

                                     10-18
<PAGE>


                            Advanced Financial, Inc.
                                and Subsidiaries
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                             March 31, 1998 and 1997

NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

  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, 1998:

                                      Carrying value   Fair value
Financial assets:
  Cash                                 $   58,759     $   59,000
  Mortgage loans held for investment        5,997          6,000
Financial liabilities:
  Notes payable                         1,577,194      1,577,000

                                     10-19

<PAGE>
                                                        Advanced Financial, Inc.

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

      Not Applicable.

                             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,  1998,  the  following  persons  served as  directors  and
executive officers of the Company.

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

William B. Morris                   40         Chairman/Secretary/
                                               Sr. Vice President
Daniel Starczewski                  50         Director
Richard Schoenfeld                  49         Director

     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 in 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.

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

     Richard  Schoenfeld.  Mr. Schoenfeld was a Director of the Company from May
27,  1997  until  the   confirmation   of  the  Company's   bankruptcy  plan  of
reorganization  in  November,  1998.  Mr.  Schoenfeld  was  a  certified  public
accountant from Los Angeles, California.

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, 1998,  all Section
16(a) filing  requirements  applicable to its directors,  executive officers and
ten percent beneficial owners were complied with.


                                    Page - 11

<PAGE>
                                                        Advanced Financial, Inc.

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.

<TABLE>
<CAPTION>

                    SUMMARY COMPENSATION TABLE

<S>          <C>         <C>           <C>             <C>            <C>            <C>             <C>        <C>
                                                       
                                                                      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(#)       ($)        ($)
------------------------------------------------------------------------------------------------------------------------

William B.
Morris     Year Ended
Chairman   March 31,
of the      1998         $ 65,000         -0-              -0-            -0-              -0-           -0-        -0-
Board

           Year Ended
Norman L.  March31,
Peterson    1997         $ 65,272(4)     -0-               500           -0-              -0-           -0-        -0-
Chairman
of the     Year Ended
Board      March31,
President   1996         $120,000        -0-             2,500           -0-           25,000(3)        -0-        -0-
and Chief
Executive
Officer

William E.
Moffatt    Year Ended
Chairman   March31,
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 - 12


<PAGE>
                                                        Advanced Financial, Inc.



<TABLE>
<CAPTION>

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

<S> <C>             <C>          <C>           <C>                       <C>
    (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
      ---------------------------------------  ---------------------------------------

William B. Morris      -0-          -0-          125,000/0                 $-0-

</TABLE>

Compensation of Directors

      The Company  made no payments for board  meetings  which  occurred  during
fiscal year 1998.

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.

      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 

                                    Page - 13
<PAGE>
                                                        Advanced Financial, Inc.


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%

  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%

  All Executive officers
  and directors as a group
  (4 persons)                  1,238,625(8)               32%


(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.

                                    Page - 14
<PAGE>
                                                        Advanced Financial, Inc.


(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,  all of
        which subsequently expired.

(8)    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
          (Exhibit  4.2 to  Advanced  Financial,  Inc.'s  Annual  Report on Form
          10-KSB  for the  fiscal  year  ended  March 31,  1997  filed  with the
          Securities and Exchange Commission on February 16, 1999).

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


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

                                    Page - 15
<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. (Exhibit 10.3
          to Advanced  Financial,  Inc.'s  Annual  Report on Form 10-KSB for the
          fiscal  year  ended  March 31,  1997  filed  with the  Securities  and
          Exchange Commission on February 16, 1999)

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


*21.1     List of  Subsidiaries.  (Exhibit  21.1 to Advanced  Financial,  Inc.'s
          Annual  Report on Form  10-KSB for fiscal  year ended  March 31,  1997
          filed with the  Securities  and  Exchange  Commission  on February 16,
          1999)

27.1      Financial Data Schedule.

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

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

          None.

                                    Page - 16
<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
                               

                                    Page - 17