SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   -----------



                                   FORM 10-QSB




                   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                   OF THE SECURITIES AND EXCHANGE ACT OF 1934





     For the Quarter ended:                         Commission file number
       December 31, 1996                                    0-19485



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




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

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

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


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

State the number of shares outstanding of each of the issuer's classes of common
equity, as of January 25, 1997: 6,527,470.




<PAGE>


                                                        Advanced Financial, Inc.


                         PART I - FINANCIAL INFORMATION

                                     ITEM 1.

                                    Page - 2


<PAGE>

<TABLE>
<CAPTION>
                          

                               ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
                                 Condensed Consolidated Balance Sheets
                                  December 31, 1996 and March 31, 1996

              Assets                                      Dec 31, 1996   March 31, 1996
              ------                                      -------------  --------------
                                                          (Unaudited)

<S>                                                       <C>                  <C>    
 Cash and investments                                     $          -     $   585,643
 Mortgage servicing advances and accounts receivable           897,309         520,620
 Property and equipment, net                                 1,508,753       1,718,355
 Mortgage loans held for sale                                8,994,343      10,110,747
 Mortgage loans held for investment                             82,159          94,932
 Purchased mortgage servicing rights, net                      717,488       2,440,280
 Excess of cost over fair value of assets acquired, net        486,763         524,798
 Prepaid expenses                                               86,091         191,442
 Deferred income taxes                                               -         440,000
 Other investment                                              192,781         235,800
 Receivable from related party                                       -         190,000
 Other                                                         299,186         260,899
                                                          ------------      ----------
 Total assets                                             $ 13,264,873     $17,313,516
                                                          ============     ===========

        Liabilities
        -----------

 Accounts payable and accrued expenses                    $  2,435,600     $ 2,507,103
 Checks outstanding in excess of bank balance                   140,954              -
 Notes payable                                             10,348,097       13,412,419
 Capitalized lease obligations                                 237,898         415,665
                                                          ------------      ----------
 Total liabilities                                        $ 13,162,549     $16,335,187
                                                          ============     ===========

        Stockholders' Equity
        -------------------

 Preferred stock, Series B, $.005 par value. 
  10,000,000 shares authorized; 372,000
  shares issued                                           $      1,860     $     1,860
 Common stock, $.001 par value 25,000,000
  shares authorized; 6,514,870 and 3,875,476
  shares, respectively, issued and outstanding                   6,515           4,256
 Paid-in capital                                            10,373,910       8,877,493
 Deficit                                                    (9,538,616)     (7,463,935)
                                                          ------------      ----------
                                                               843,669       1,419,674

 Treasury stock, 99,869 shares of
  common stock,at cost                                        (441,345)       (441,345)
 Stockholders' notes receivable                               (300,000)              -
                                                          ------------      ----------
 Total stockholders' equity                                    102,324         978,329
                                                          ------------      ----------
 Total liability and stockholders'equity                  $ 13,264,873     $17,313,516
                                                          ============     ===========

See accompanying notes to condensed consolidated financial statements.
</TABLE>
                                            Page - 3

<PAGE>
<TABLE>
<CAPTION>

                   ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
                Condensed Consolidated Statements of Operations
              For the three month periods ended December 31, 1996
                             and December 31, 1995

                                                 Dec 31, 1996           Dec 31, 1995
                                                --------------         -------------
Revenues:                                        (Unaudited)            (Unaudited)

<S>                                              <C>                      <C>    
  Servicing fee income                          $   246,420            $  591,137
  Other fee income                                  137,244               213,522
  Gain on sale of mortgage loans                    408,115               811,483
  Loss on sale of servicing rights                  (36,650)                    -   
  Interest income                                   155,610               189,111
  Other income                                       (2,079)              139,624
                                                 ----------            ----------
    Total operating revenues                        908,660             1,944,877 
                                                 ----------            ----------
Expenses:
  Servicing expense                                 349,753               284,257
  Personnel                                         709,094               866,644
  General and administrative                        327,963               404,171
  Interest expense                                  158,574               187,215
  Depreciation and amortization                     200,238               442,837
  Consulting Expense                                593,750                     -
  Other                                               7,919                13,100
                                                 ----------            ----------
    Total operating expenses                      2,347,291             2,198,224
                                                 ----------            ----------

    Loss before income taxes                     (1,438,631)             (253,347)

Income tax expense                                 (101,884)                    -
                                                 ----------            ----------

    Net loss                                    $(1,540,515)           $ (253,347)     
                                                 ==========            ========== 
       
Weighted average shares outstanding               6,342,177             3,778,478
                                                 ==========            ==========

Loss per common share:

  Primary                                        $   ( 0.24)                (0.08)
                                                 ==========            ========== 

  Fully diluted                                  $    (0.24)                (0.08)
                                                 ==========            ========== 

See accompanying notes to condensed consolidated financial statements.

                                    Page - 4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                   ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
                Condensed Consolidated Statements of Operations
             For the nine month periods ended December 31, 1996 and
                               December 31, 1995

                                              Dec 31, 1996              Dec 31, 1995
                                             -------------             -------------
Revenues:                                     (Unaudited)               (Unaudited)

<S>                                           <C>                         <C>      
  Servicing fee income                        $ 1,312,943               $ 1,852,627
  Other fee income                                539,274                   782,891
  Gain on sale of mortgage loans                1,947,427                 2,033,466
  Gain on sale of servicing rights                764,595                    99,759
  Interest income                                 580,372                   478,571
  Other income                                     13,710                   166,595
                                              -----------                ----------
    Total operating revenues                    5,158,321                 5,413,909
                                              -----------                ----------

Expenses:
  Servicing expense                               873,116                   813,837
  Personnel                                     2,547,424                 2,831,059
  General and administrative                    1,101,823                 1,340,698
  Interest expense                                675,179                   542,639
  Depreciation and amortization                   920,161                 1,425,546
  Consulting Expense                              593,750                         -
  Other                                            79,664                    88,407
                                              -----------                ----------
    Total operating expenses                    6,791,117                 7,042,186
                                              ===========                ==========

    Loss before income taxes                  $(1,632,796)              $(1,628,277)

Income tax expense                               (441,884)                   49,350
                                              -----------                ----------

    Net loss                                  $(2,074,680)              $(1,677,627)
                                              ===========               =========== 

Weighted average shares outstanding             4,776,110                 3,787,147
                                              ===========                ==========

Loss per common share:

  Primary                                     $     (0.45)               $    (0.47)
                                              ===========                ========== 

  Fully diluted                               $     (0.45)               $    (0.47)
                                              ===========                ========== 


See accompanying notes to condensed consolidated financial statements.
</TABLE>
                                    Page - 5

<PAGE>
<TABLE>
<CAPTION>
                    ADVANCED FINANCIAL, INC. AND SUBSIDIARY
                Condensed Consolidated Statements of Cash Flows
             For the nine month periods ended December 31, 1996 and
                                December 31, 1995


                                                             Dec 31, 1996         Dec 31, 1995
                                                             -------------        -------------
                                                              (Unaudited)          (Unaudited)

<S>                                                          <C>                   <C>        
Net cash (used in) provided by operating activities          $ (1,042,301)       $ (2,974,346)

Cash flows from  investing  activities:
  Acquisition  of property and  equipment                          (8,505)            (27,616)
  Proceeds from sale of mortgage servicing rights               2,054,847                   -
  Sale of real estate owned                                             -              57,931
  Acquisition/Principal payments on mortgage loans
   held for investment                                             12,773             (67,999)
                                                              -----------          ----------
      Net cash provided by (used in)
        investing activities                                    2,059,115             (37,684)

Cash flows from financing activities:
  Notes payable, net                                           (3,064,322)          2,645,737
  Checks outstanding in excess of bank balance                    140,955              99,217
  Issuance of common stock                                      1,498,677                   -
  Payments on capitalized lease obligations                      (177,767)           (166,960)
  Payment of preferred dividends                                        -             (78,120)
                                                              -----------          ----------
      Net cash provided by (used in) financing activities      (1,602,457)          2,499,874

      Net decrease in cash                                       (585,643)           (512,156)

Cash at beginning of period                                       585,643             512,156
                                                              -----------          ----------
Cash at end of period                                         $         0          $        0
                                                              ===========          ==========

Supplemental disclosures for cash flow:
   Cash paid for interest                                     $   427,426          $  451,501
   Cash paid for income taxes                                 $     1,881          $        -

Supplemental disclosures of noncash
  financing and investing activities:                 
    Property acquired under capital leases                    $         -          $   35,646  
                   

See accompanying notes to condensed consolidated financial statements.
</TABLE>
                                    Page - 6






<PAGE>
                                                        Advanced Financial, Inc.




                    ADVANCED FINANCIAL, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1996 and 1995

(1) Organization and Summary of Significant Accounting Policies
    -----------------------------------------------------------

The  Company's financial  statements include the accounts of Advanced Financial,
     Inc.  (the  Company) and its  wholly-owned  subsidiary  AFI Mortgage  Corp,
     formally Continental Mortgage, Inc. (AFI Mortgage).  AFI Mortgage is a full
     service  mortgage  banking  company  currently  servicing  first and second
     mortgage loans of approximately $174,000,000 as of December 31, 1996.


The  condensed   consolidated   financial   statements  have  been  prepared  in
     accordance  with  the  instructions  to Form  10-QSB.  To the  extent  that
     information  and  footnotes  required  by  generally  accepted   accounting
     principles for complete financial statements are contained in or consistent
     with the audited  financial  statements  incorporated  by  reference in the
     company's Form 10-KSB for the year ended March 31, 1996,  such  information
     and  footnotes  have  not  been  duplicated   herein.  In  the  opinion  of
     management,  all adjustments  considered necessary for fair presentation of
     financial  statements  have been  reflected  herein.  The  March  31,  1996
     condensed  consolidated  balance  sheet has been  derived  from the audited
     balance sheet as of that date.





                                    Page - 7


<PAGE>
                                                        Advanced Financial, Inc.


                                     ITEM II



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

GENERAL 
-------

     Advanced  Financial,  Inc. (the  "Company") is a publicly  traded  Delaware
corporation  formed in June 1988.  In July 1990 the  principals  of the  Company
recognized an opportunity  existed in the mortgage servicing industry due to the
collapse of the savings and loan  industry.  On March 29, 1991,  the Company was
successful in acquiring Creative  Financing,  Inc. as a wholly owned subsidiary.
In 1992, this subsidiary changed its name to Continental Mortgage, Inc. The name
was again changed,  due to expansion into  additional  states,  to AFI Mortgage,
Corp. ("AFIM") in November 1994.

     AFIM is a  mortgage  banking  company  servicing  a  principal  balance  of
approximately  $174,000,000  mortgages  as of December  31, 1996 and  originated
approximately  $103  million in single  family  housing  mortgages  for the nine
months  ended  December 31, 1996.  AFIM is a full service  residential  mortgage
company  and has all  approvals  needed to  service  mortgages  for the  Federal
National Mortgage  Association  (FNMA),  Federal Home Loan Mortgage  Corporation
(FHLMC) and Government National Mortgage  Association (GNMA). Due to the current
size of the  servicing  portfolio,  the  Company  does not  believe it is taking
advantage  of the  economies  of scales for cost of  servicing  to maximize  the
return on its investment in mortgage  servicing rights.  Also, the current price
the Company is receiving from  investors for the servicing  rights on originated
loan  production is strong and beneficial to fund the operations of the Company.
As a  result,  the  Company  sold  approximately  $234,000,000  of  its  current
servicing  portfolio as of September  30, 1996 for an adjusted gain of $764,595,
as well as future  servicing  rights  generated  from its own  originations,  to
reduce its outstanding debt and related interest expense.

     The Company intends to continue its expansion through the implementation of
a  convenient,  low cost  and rate  competitive  national  network  known as the
Desktop  Mortgage Loan  Origination  System  (Desktop).  The  Company's  Desktop
installations  are  primarily  targeted  at  respected  residential  real estate
brokerage offices. This market is targeted due to the fact that current mortgage
loan production volume is driven by real estate  transactions versus refinancing
transactions. However, if the market provides for a decrease in interest rates ,
an active  refinancing  market  will be  established  through not only such real
estate brokers but the placement of terminals with respected mortgage brokers.

     On February 3, 1997 the Company  entered  into an  agreement  to sell First
Mortgage  Investment Co. (FMIC) the retail loan  production  operations of AFIM.
The agreement  calls for FMIC to acquire AFI's mortgage  pipeline and assume the
operating expenses related to mortgage originations as of February 3, 1997. FMIC
has hired 24 of AFIM's  salaried  employees and 23 loan officers.  FMIC has also
agreed  to  lease  10,000  square  feet  of the  Company's  20,000  square  foot
facilities along with leasing various  furniture and equipment.  The rental rate
for the office space leased by FMIC is $10 per square foot.  This will result in
monthly  leasing  revenue to the  Company of $8,333.  FMIC also  agreed to lease
various furniture and equipment from the Company for a monthly fee of $15,000.

     The February 3, 1997 sale of the Company's mortgage  production  operations
will  reduce  the  Company's  income by  approximately  $790,000  each  quarter.
Additionally, the Company anticipates that it will be able to reduce its expense
by approximately $ 900,000 each quarter, thereby reducing the Company's net loss
and cash flow requirements by approximately $110,000.

     The  companies  continue  to  pursue   negotiations  of  consolidating  and
combining both companies,  but have not reached a Definitive Agreement. The sale
of the production operations will allow AFI to significantly reduce its expenses
and cash  requirements  immediately while it continues  negotiations.  FMIC is a
privately held mortgage  company based in the suburban  Kansas City areas.  FMIC
orginates  approximately  $10  million  per  month in retail  loan  originations
through 6 branch  offices in the Kansas and Missouri  markets and has a mortgage
servicing portfolio of approximately $730 million.

     On October  2, 1996 the  Company  announced  that it had signed a Letter of
Intent to acquire a California  based  mortgage  bank.  However,  during the due
diligence process,  AFI discovered a potential liability in excess of $1million.
This liability could  potentially be incurred by AFI if the transaction  were to
close at this time.  Therefore,  AFI has informed the California  based mortgage
bank that this  issue  must be  resolved  prior to  completing  any  transaction
between  the  parties.  As a result,  the  Company  is no longer  pursuing  this
acquisition.

                                    Page - 8


<PAGE>

                                                        Advanced Financial, Inc.

RESULTS OF OPERATIONS
---------------------
Quarter ended December 31, 1996 Compared To The Quarter Ended December 31, 1995
-------------------------------------------------------------------------------

     The  Company had  operating  revenues  of  $908,660  for the quarter  ended
December 31, 1996  compared to  $1,944,877  for the quarter  ended  December 31,
1995.  Net loss for the quarter  ended  December 31, 1996 was  $1,540,515 or .24
cents per share primary and fully  diluted  compared to net loss $253,347 or .08
cents per share  primary and fully  diluted for the quarter  ended  December 31,
1995.  Primary  earnings per share for the quarter  ended  December 31, 1996 and
1995 are calculated after deducting, from net income/loss, $39,060 for preferred
stock  dividends.  No preferred  stock  dividends were paid in the quarter ended
December 31, 1996.

Nine months ended December 31, 1996 Compared To The Nine months
 ended December 31, 1995
----------------------------------------------------------------

     The Company had operating  revenues of $5,158,321 for the nine months ended
December 31, 1996 compared to $5,413,909  for the nine months ended December 31,
1995.  Loss  before  taxes  for the nine  months  ended  December  31,  1996 was
$1,632,796  compared to $1,628,277  for the nine months ended December 31, 1995.
Net loss for the nine months ended December 31, 1996 was $2,074,6810or .45 cents
per share primary and fully diluted  compared to a net loss of $1,677,627 or .47
cents per share primary and fully diluted for the nine months ended December 31,
1995.  Primary  earnings per share for the quarter  ended  December 31, 1996 and
1995 are calculated after deducting,  from net loss, $78,120 for preferred stock
dividends.  No preferred  stock  dividends were actually paid in the nine months
ended December 31, 1996.

     The decrease in service fee income to $1,312,943  for the nine months ended
December 31, 1996 from  $1,852,627  for the nine months ended  December 31, 1995
reflected the decrease in the servicing  portfolio to  $174,000,000 of servicing
at  December  31, 1996 from  $468,000,000  at December  31,  1995.  In the first
quarter  of  fiscal  1997,  the  Company  completed  the  sale and  transfer  of
approximately  $20  million  of  servicing  for a  slight  loss of  $13,482.  At
September 30, 1996, the Company sold  $234,000,000  of servicing for an adjusted
gain of $764,595.  The related deferred tax asset was expensed as tax expense in
the  amount of  $340,000  resulting  in a net gain  after  tax of  approximately
$424,595. Approximately $100,000 of estimated transfer cost are reflected in the
servicing  expense for the nine months ended  December 31,  1996.  Also,  in the
first  quarter of fiscal 1996,  the Company  completed  the sale and transfer of
approximately $4.6 million in second mortgages. A gain of $99,759 was recognized
on the sale in fiscal 1996.  The Company  continues to evaluate the need to sell
its remaining servicing portfolio.

     The  decrease  in other fee income to $539,274  for the nine  months  ended
December  31,  1996 from  $782,891  is also the  result of the  decrease  in the
servicing  portfolio to $174,000,000  at December 31, 1996 from  $468,000,000 at
December 31, 1995.

     Gain on sale of mortgage  loans for the nine months ended December 31, 1996
was  $1,947,427  compared to a gain on sale of mortgage  loans of $2,033,466 for
the nine months  ended  December  31,  1995.  The gain on sale of  mortgages  is
derived  through the sale of loans  originated  and sold to  investors,  such as
FNMA,  FHLMC or GNMA as well as private  investors.  This gain also includes all
servicing  release  premiums,  origination  fee  income and is net of all direct
origination  expenses and hedging losses. For the nine months ended December 31,
1996,  the Company closed and funded  approximately  $103 million of retail loan
production  compared to $79 million for the nine months ended December 31, 1995.
The  slight  decrease  in  gain  on sale of  mortgage  loans  despite  increased
production is due to hedging  losses  experienced in the third quarter of fiscal
1997. As a result of the capital needed to expand the Desktop product as well as
other avenues for originations, substantially all loans are being sold servicing
released  resulting  in a  premium  paid by the  purchaser  for  these  loans of
approximately 1.25 percent of unpaid principal balance.

     The  increase in  interest  income to  $580,372  for the nine months  ended
December 31, 1996 from  $478,571 for the nine months ended  December 31, 1995 is
due to increased loan production to $103 million from $79 million, respectively.

     The Company's total  operating  expenses for the nine months ended December
31, 1996 were  $6,791,117  compared  to  $7,042,186  for the nine  months  ended
December  31,  1995.  Included in the  operating  expenses for nine months ended
December 31, 1995 is expense relating to the Washington  operations of $576,000.
Effective  October 1995, the Company sold its two  Washington  operations to two
independent companies.

                                    Page - 9

<PAGE>
                                                        Advanced Financial, Inc.

     In connection with a review of the Company's servicing operation by Federal
Home Loan Mortgage  Corporation  (FHLMC),  the Company was advised in April 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 either be researched and resolved or otherwise paid by
the Company.  During the fiscal quarter  ending  September 30, 1996, the Company
did  complete  its research  and  determined  the  shortage to be  approximately
$694,000. Approximately $255,000 of the shortage had already been identified and
reflected in accounts payable and accrued expenses in the Company's consolidated
balance  sheet at March 31,  1996.  Approximately  $56,000  represents  unfunded
penalties  over the past 3 years,  approximately  $112,000  represents  unfunded
monthly  interest and  approximately  $46,000 is unidentified  due to incomplete
records at the time of original transfer of the servicing to the Company.  These
items  are  expensed  in the  current  periods  income  statement,  $102,000  in
servicing  expense and  $112,000 in interest  expense.  The  remaining  $225,000
represents  claims the Company is currently  filing with previous  servicers for
errors in cash balances transferred to the Company at the time the servicing was
originally purchased.  These claims are reflected in mortgage servicing advances
and accounts receivable in the Company's  consolidated balance sheet at December
31, 1996.  The  $694,000 was paid to FHLMC during the third fiscal  quarter from
the proceeds  received  from the sale of the related  servicing at September 30,
1996.

     The  increase  in  servicing  expense,  with a  decrease  in the  servicing
portfolio,  to $873,116 for the nine months ended  December 31, 1996 compared to
$813,837 for the nine months ended  December 31, 1995 is due to the expensing of
the items  discussed above related to the FHLMC shortage as well as the $100,000
estimated transfer costs associated with the sale of the servicing.

     The  decrease in  personnel  expense to  $2,547,424  for nine months  ended
December 31, 1996 compared to $2,831,059 for nine months ended December 31, 1995
is due  primarily  to  internal  reorganization  as well as the  selling  of the
Washington  operation in October 1995. With increased  production and the growth
of the Desktop  installations  anticipated  by management  during fiscal 1997, a
further decrease in personnel costs is not anticipated.

     The  increase in interest  expense to  $675,179  for the nine months  ended
December 31, 1996 from  $542,639 for the nine months ended  December 31, 1995 is
the result of  increased  loan  production  to $103  million  from $79  million,
respectively.  The  Company  has  a  banking  relationship  that  provides  more
favorable  warehouse interest rates because of compensating escrow balances from
the servicing portfolio.  With the sale of a portion of the servicing portfolio,
the Company will want to make sure the mortgage  loans held for sale are shipped
to investors timely for funding to ensure the benefit of the positive spread due
to the remaining compensating balances. The increase is also attributable to the
FHLMC shortage discussed above.

     In  connection  with the  acquisition  of mortgage  servicing  rights,  the
Company  capitalizes the price paid for the mortgage  servicing rights acquired.
The  resulting  asset is amortized on an  accelerated  basis and  evaluated  for
impairment on a quarterly basis. Amortization for the nine months ended December
31, 1996 was $469,180  compared to $774,184  for the nine months ended  December
31, 1995.

     The  Company's  servicing  portfolio  is  subject  to  reduction  by normal
amortization,  by sales of servicing  rights, by prepayment or by foreclosure of
outstanding  loans.  The value of the Company's loan servicing  portfolio may be
adversely  affected  if mortgage  interest  rates  decline and loan  prepayments
increase.  The  value  is also  adversely  affected  by  unanticipated  rates of
default.  Conversely, as mortgage interest rates increase or as rates of default
decrease,  the value of the Company's loan servicing portfolio may be positively
affected.  The weighted average  interest rate on the underlying  mortgage loans
being  serviced  by the Company at December  31, 1996 was 9.94%.  The  Company's
PMSRs are subject to a great degree of volatility in the event of  unanticipated
prepayments or defaults.  Prepayments or defaults in excess of those anticipated
at the time PMSRs are recorded result in decreased future net servicing  income.
Such  decreases  in future net  servicing  income  would  result in  accelerated
amortization and/or impairment of PMSRs. The Company's net earnings,  future net
earnings and liquidity are adversely  affected by  unanticipated  prepayments of
the mortgage loans underlying its PMSRs.

     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 Company's  common stock was $1.1875.  The resulting value
of the service of $593,750 is reflected as expense in the current  period income
statement  as well as equity on the balance  sheet at  December  31,  1996.  The
agreements continue for a 24 month period.

                                   Page - 10

<PAGE>
                                                         Advanced Financial,Inc.

     The Company  has a net  operating  loss  carryforward  for tax  purposes of
approximately  $7 million at December  31,  1996.  No income tax  benefits  were
recognized for the nine months ended December 31, 1996 or 1995 since a valuation
allowance  for the same  amount  would have been  required  under  FASB 109.  In
determining  the amount of the valuation  allowance,  management has relied on a
potential  tax-planning  strategy  whereby  an  unrealized  taxable  gain in the
Company's  purchased  mortgage  servicing  rights  portfolio could be recognized
through  the  sale  of  such  servicing  rights.  As a  result  of the  sale  of
$234,000,000 of the servicing portfolio,  $340,000 of the deferred tax asset has
been recognized as tax expense on the September 30, 1996 income  statement.  The
remaining  $100,000 has been  recognized as tax expense on the December 31, 1996
income  statement  since the  evaluation  of the  remaining  portfolio  does not
support a gain to be recognized through the sale of such servicing rights.

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

     The Company  has seen a decrease in its total  assets and a decrease in its
stockholders'  equity.  The Company's total assets were  $13,264,873 at December
30,  1996  compared  to  $17,313,516  at March 31,  1996.  The  decrease  is due
primarily to the  decrease in mortgage  loans held for sale at December 31, 1996
as well as the $1,038,000  reduction of the PMSR related to the servicing  sale.
Stockholders'  equity has  decreased  to  $102,324  at  December  31,  1996 from
$978,329 at March 31, 1996. The decrease in  stockholder's  equity is lower than
would be expected  due to year to date losses due to several  capital  infusions
totaling  approximately  $1,403,375  during the nine months  ended  December 31,
1996.   AFIM's  net  worth  is  currently   satisfactory   for  those  financial
institutions  purchasing  loans from the Company on a servicing  release  basis.
However, AFIM is not currently in compliance with minimum net worth requirements
for GNMA and FHA.  AFIM  plans to  increase  the net worth to meet  both  agency
requirements  through  additional  capital  infusion  as well as the sale of the
origination  platform and anticipated  acquisition of another  mortgage  company
discussed above. To help preserve the net worth,  preferred stock dividends have
been suspended until the cash flow of the Company permits payment. The preferred
stock carries a $.42 per share annual cumulative dividend.

     Management  believes  that the items noted above will enable the Company to
meet its obligations and maintain its financial ratios and balances  required by
its lenders and mortgage  investors;  however,  there are no assurances that the
Company will  ultimately be able to realize its assets' values and discharge its
liabilities in the normal course of business.

     The mortgage  servicing  advances and accounts  receivable were $897,309 at
December 31, 1996  compared to $520,620 at March 31,  1996.  The increase is due
primarily  to a portion of the proceeds to be received for the sale of servicing
being  recorded as a  receivable  at  September  30,  1996.  The balance is also
comprised of advances made related to servicing functions.  There are some pools
in the servicing  portfolio that require the servicer to pass on to the investor
all principal and interest  payments  regardless of whether the payment has been
collected.  If customers are delinquent,  an advance is required by the Company.
As payments are made by borrowers during the month, the advance is repaid to the
Company.

     At  December  31,  1996,  the  Company  had a  $300,000  outstanding  notes
receivable  from related party that is recognized as a contra equity item on the
Balance  Sheet  since  it is  the  result  of  stock  issuance  compared  to the
outstanding  receivable  of $190,000 at March 31, 1996,  which was  subsequently
collected  and  shown on as an  asset  on the  Balance  Sheet.  The  receivables
resulted  from  consulting  agreements  entered into in February  1996 with four
companies.  Under the terms of each  agreement,  the  Company is  provided  with
financial and public relations services,  including advice concerning  marketing
surveys,  investor profiles and increasing investor awareness of the Company and
its  products  and  services.  The term of each  agreement  was six  months.  As
compensation  for this  service,  the Company  has  granted  options to purchase
1,000,000  shares of common stock at $.50 per share.  As of September  30, 1996,
all options have been exercised generating $500,000 capital for the Company. The
Company used the $350,000 of the proceeds to pay down a working capital line. At
December 31, 1996,  there was a note receivable from related party of $ 300,000.
The $300,000 note receivable  from related party  represents the completion of a
private  placement of the  Company's  common stock.  The original  receivable of
$500,000 consists of three  collateralized  promissory notes from three separate
companies to purchase 1,000,000 shares of common stock at $.50 per share. During
the third fiscal quarter $200,000 of the notes was received. The remaining notes
which  originally  expired during the third fiscal quarter of 1997 were extended
to March 31, 1997 and carry an 8% interest rate.  The shares of stock  purchased
are held in escrow pending receipt of the funds to satisfy the promissory notes.
The above  transactions do not involve any officers or directors of the Company;
however,  the people  involved  in such  transactions  are being  referred to as
related  parties due to the number of shares issued in conjunction  with the two
transactions.

     The Company had  $8,994,343 in mortgage loans held for sale at December 31,
1996  (which  were  pledged to  collateralize  the  Company's  warehouse  lines)
compared to $10,110,747 at March 31, 1996, which reflects the timing of the sale
of the mortgage loans in the secondary market.

                                    Page - 11

<PAGE>
                                                        Advanced Financial, Inc.

     As noted above, 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  Company's  common  stock was
$1.1875.  The resulting value of the service of $593,750 is reflected as expense
in the current period income statement as well as equity on the balance sheet at
December 31, 1996. The agreements continue for a 24 month period.

     The net  decrease in cash of the Company was  $726,598  for the nine months
ended  December  31,  1996.  At the end of fiscal  1996,  the  Company  received
proceeds from a loan financing of $750,000. The proceeds were used to pay down a
servicing  escrow advance line and pay $50,000 down on the working  capital line
with Bank One.  The  Company  paid an  additional  $350,000  down on the working
capital  line during the nine months  ended  December 31, 1996 from the proceeds
received due to the exercise of the stock options  discussed  above. The Company
also paid $120,090 in capital lease payments for the purchase of the IBM AS/400,
office  furniture and Desktop  computers and equipment.  During fiscal 1997, the
Company expects to generate cash through a possible acquisition , liquidation of
the notes receivable from purchase of common stock and the raising of additional
capital, if necessary.

     As previously  noted,  the Company sold  approximately  $234,000,000 of its
outstanding  servicing portfolio for an adjusted gain of $764,595 before expense
for the related  deferred tax asset of $340,000.  A portion of the proceeds from
the sale were used to fund the  shortage in the FHLMC  account of  approximately
$694,000.  In  fiscal  1996,  the  Company  had  a  note  payable  come  due  of
approximately $550,000 secured by a portion of the servicing portfolio currently
sold.  Management  paid  $330,000  on the note with  proceeds  from the sale and
refinanced the remaining  $222,000.  An additional $300,000 of the proceeds were
used to pay down additional outstanding debt related to the servicing sold, thus
reducing that debt to approximately $400,000. The Company also paid off $400,000
of the $750,000 loan financed at March 31, 1996.  The remaining  $100,000 of the
BankOne  working capital line was also paid off with proceeds from the servicing
sale.  The Company  believes that the decrease in the  servicing  income will be
offset by the  decrease in  expenses  related to that  servicing  as well as the
decrease in monthly debt payments.

PROSPECTIVE TRENDS
------------------

     As noted  previously,  on  February  3,  1997 the  Company  entered  into a
non-binding  Letter of Intent to acquire FMIC.  The Company also entered into an
agreement with FMIC to sell them the retail mortgage loan production operations.
FMIC  currently  closes  approximately  $10  million  per month in  retail  loan
originations  and has a  mortgage  servicing  portfolio  of  approximately  $730
million.  The Letter of Intent calls for a definitive  agreement to be completed
by  March  1,  1997  and is  subject  to a  fairness  opinion  and a vote of the
shareholders.


     A key  technology  that the  Company  implemented  in the first  quarter of
fiscal 1997, is the use of Automated Underwriting. Automated Underwriting is the
use of artificial  intelligence through computer technology to make underwriting
and  credit  decisions  on  residential  mortgage  loans.  The use of  automated
underwriting will reduce the time needed to process and underwrite a residential
mortgage  loan from  approximately  30 to 45 days to as few as 5 to 14 days.  It
will also  significantly  lower the cost of processing  and  underwriting  those
loans since the  technology  will  increase  the number of loans  processed  and
underwritten per employee.

     To  compliment  the Desktop  sites,  the Company  will be  recruiting  loan
originators to set up "net branches".  The  originator,  who will be employed by
AFIM, will be credited all revenues  generated from the loan above the Company's
par  price  which  will be  netted  against  all  the  expenses  related  to the
origination  site.  The Company feels this is another cost  efficient  method of
originating loans in comparison to the traditional retail branch.

                                   Page - 12

<PAGE>
                                                        Advanced Financial, Inc.

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

     The Company adopted Statement of Financial Accounting Standards No. 114 and
118,  "Accounting  by Creditors for Impairment of  Loan-Income  Recognition  and
Disclosures,"  during the first quarter of fiscal 1996. This statement  requires
the  accounting by creditors  for  impairment  of certain  loans.  The impact of
adopting the statement on the Company's  consolidated  financial  statements was
not material.

     The Company adopted  Statement of Financial  Accounting  Standards No. 122,
"Accounting for Mortgage  Servicing  Rights,  an amendment to FASB Statement No.
65", during the first quarter of fiscal 1997. The statement  generally  requires
entities that sell or securitize  loans to retain the mortgage  servicing rights
to  allocate  the total cost of  mortgage  servicing  rights to the loan and the
related servicing right based on their relative fair values.  Costs allocated to
mortgage servicing rights should be recognized as a separate asset and amortized
over the period of estimated net servicing income and periodically evaluated for
impairment  based on fair value.  The impact of adopting this statement will not
be material on the Company's 1997  consolidated  financial  statements since the
Company intends on selling  primarily all originated  loans  servicing  released
during fiscal 1997.

     Statement of Financial  Accounting  Standards No. 121,  "Accounting for the
Impairment of Long-Lived  Assets and for Long-Lived Assets to be Disposed Of" is
required for fiscal year  beginning  April 1,1996.  The Statement  requires that
certain   long-lived   assets  be  reviewed  for   impairment   when  events  or
circumstances  indicates  that the  carrying  amounts  of the  assets may not be
recoverable.  If such  review  indicates  that the  carrying  amount of an asset
exceeds the sum of its expected future cash flows, the asset's carrying value is
written down to fair value.  Long-lived assets to be disposed of are reported at
the lower of  carrying  amount or fair  value  less cost to sell.  The impact of
adopting this Statement on the Company's  consolidated  financial statements has
not been determined by Management.

     Statement  of  Financial  Accounting  Standards  No.  123  "Accounting  for
Stock-Based  Compensation,"  will be adopted by the Company  during  fiscal year
ending March 31, 1997.  This  statement  establishes  financial  accounting  and
reporting  standards for stock-based  employee  compensation  plans. These plans
include all  arrangements  by which  employees  receive shares of stock or other
equity  investments  of the  employer  or where an  employer  issues  its equity
instruments to acquire goods and services from nonemployees. This statement will
require pro forma  disclosures  of net income and earnings per share as if a new
accounting  method based on the estimated  fair value of employee  stock options
had been  adopted.  The  Company  has not  decided  if the  optional  accounting
treatment proposed by SFAS No. 123 will be adopted.

                                    Page - 13


<PAGE>
                                                        Advanced Financial, Inc.


                                     PART II


ITEM 1 Legal Proceedings  
------------------------  

The Company reached a settlement with two former officers of the Company who had
named the  Company as a  codefendant  in a law suit  filed in the United  States
District Court for the District of Nebraska.  The Company settled the litigation
by agreeing to issue the plantiffs a total of 300,000  shares of restricted  AFI
common  stock.  In turn,  one of the  parties  will  pledge  100,000  shares  as
collateral  for a note  receivable of $214,000 due the Company.  The Company has
already reserved $74,815 against the note and $140,000 towards the settlement of
this  litigation.  The  parties  settled  this  litigation  to avoid any further
uncertainty and expense of litigation.

ITEM 2. Changes in Securities.     none.
------------------------------

ITEM 3. Defaults upon Senior Securities.
----------------------------------------

The  Company  postponed  the payment of its  regular  quarterly  dividend on its
Series "A" Cumulative  Convertible Preferred Stock. The dividend will accumulate
until such time as the Company has determined  that its cash flows have improved
enough  to pay the  dividend  from the cash  flow of its  operations.  The total
arrearage is currently $156,240.

ITEM 4. Submission Matters to a Vote of Securities Holders.     none.
----------------------------------------------------------

ITEM 5. Other Information
-------------------------

On December 6, 1996 the Company was notified by the American Stock Exchange that
trading in its common stock would be halted due to the fact that 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 1.0 million
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.  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. On December 13, 1996 the Company informed the Exchange that it had
decided to pursue its right to appeal this decision to the  Exchange's  Board of
Governors  and  requested  a hearing.  On  February  5, 1997 the Company had its
hearing  with  the  Exchange's  Board of  Governors.  At that  time the  Company
presented  to the Board of  Governors  its plans on how it  intended to meet the
Exchange's  continued  listing  requirements  through the acquisition of another
mortgage company.  Also the investors who had received the 1.0 million shares of
common stock through a private  placement had returned all 1.0 million shares to
the transfer  agent.  The investors  have agreed to let the transfer  agent hold
such shares until such time as the issues have been  resolved with the Exchange.
At this time the Company has not  received a final  ruling from the  Exchange in
reference to its delisting.  Should the Exchange  choose to delist the Company's
common  stock,  the  Company  will pursue  having its shares  traded on NASDAQ's
Electronic  Bulletin Board until such time as it is able to make  application to
the small cap market.

ITEM 6. Exhibits and Reports on Form 8-K
----------------------------------------

      a.  Exhibit 10.1  Asset Purchase Agreement By and Among AFI Mortgage
          Corp., as           Seller and, and First Mortgage Investment Co., 
          as Buyer

      b.  None


                                    Page - 14


<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 11, 1997                       By:  /S/  Debbie K. Towery
                                                   -----------------------------
                                                   Debbie K. Towery
                                                   Chief Financial Officer


Dated: February 11, 1997                       By: /S/   William E. Moffatt
                                                  ------------------------------
                                                  William E. Moffatt
                                                  President/Director

                                    Page - 15