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
       September 30, 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 October 30, 1996: 5,913,570


<PAGE>

                         PART I - FINANCIAL INFORMATION

                                     ITEM 1.








                                    Page - 2

<PAGE>


<TABLE>
<CAPTION>
                          

                               ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
                                 Condensed Consolidated Balance Sheets
                                 September 30, 1996 and March 31, 1996

              Assets                                      Sept 30, 1996  March 31, 1996
              ------                                      -------------  --------------
                                                           (unaudited)

<S>                                                       <C>                  <C>    
 Cash and investments                                     $    390,043         585,643
 Mortgage servicing advances and accounts receivable         2,365,634         520,620
 Property and equipment, net                                 1,576,486       1,718,355
 Mortgage bans held for sale                                 9,067,699      10,110,747
 Mortgage bans held for investment                              85,320          94,932
 Purchased mortgage servicing rights, net                      792,754       2,440,780
 Excess of cost over fair value of assets acquired, net        499,441         524,798
 Net receivable from related party                             500,000
 Prepaid expenses                                               98,393         191,442
 Deferred income taxes                                         100,000         440,000
 Other investment                                              206,991         235,800
 Receivable from related party                                 125,000         190,000
 Other                                                         300,021         260,899
                                                          ------------      ----------
 Total assets                                             $ 16,107,782      17,313,516
                                                          ============      ==========

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

 Accounts payable and accrued expenses                    $  2,865,080       2,507,103
 Notes payable                                              11,696,408      13,412,419
 Capitalized lease obligations                                 295,575         415,665
                                                          ------------      ----------
 Total liabilities                                        $ 14,857,063      16,335,187
                                                          ============      ==========

        Stockholders Equity
        -------------------

 Preferred stock, Series B, $005 par value. 
  10,000,000 shares authorized; 372,000 and
  shares issued                                                  1,860           1,860
 Common stock, $001 par value 25,000,000
  shares authorized; 5,894,670 and 3,875,476
  shares, respectively, issued and outstanding                   5,895           4,256
 Paid-in capital                                             9,682,409       8,877,493
 Deficit                                                    (7,998,100)     (7,463,935)
                                                          ------------      ----------
                                                             1,692,064       1,419,674

 Treasury stock, 99,869 and 100,119 shares of
  commonstock,at cost                                         (441,345)       (441,345)
                                                          ------------      ----------
 Total stockholders' equity                                  1,250,719         978,329
                                                          ------------      ----------
 Total liability and stockholders'equity                  $ 16,107,782      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 September 30, 1996
                             and September 30, 1995

                                                Sept 30, 1996          Sept 30, 1995
                                                --------------         -------------
Revenues:                                         (unaudited)            (unaudited)

<S>                                              <C>                      <C>    
  Servicing fee income                           $  537,563               626,039
  Other fee income                                  218,340               333,348
  Gain on sale of mortgage loans                    845,200               708,015
  Gain on sale of servicing rights                  814,727                    --   
  Interest income                                   184,482               188,507
  Other income                                          346                12,928
                                                 ----------            ----------
    Total operating revenues                      2,600,658             1,868,837
                                                 ----------            ----------
Expenses:
  Servicing expense                                 383,782               300,077
  Personnel                                         818,347             1,096,834
  General and administrative                        375,068               478,969
  Interest expense                                  294,416               202,123
  Depreciation and amortization                     346,375               447,955
  Other                                              14,704                30,455
                                                 ----------            ----------
    Total operating expenses                      2,232,692             2,556,413
                                                 ----------            ----------

    Income/(Loss) before income taxes               367,966              (687,576)

Income tax expense                                  340,000                49,350
                                                 ----------            ----------

    Net income/Loss)                             $   27,966              (736,926)
                                                 ==========            ========== 
       
Weighted average shares outstanding               4,437,973             3,777,533
                                                 =========             ==========

Loss per common share:

  Primary                                        $     0.00                 (0.21)
                                                 ==========            ========== 

  Fully diluted                                  $     0.00                 (0.21)
                                                 ==========            ========== 

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 six month periods ended September 30, 1996 and
                               September 30, 1995

                                             Sept 30, 1996             Sept 30, 1995
                                             -------------             -------------
Revenues:                                     (unaudited)               (unaudited)

<S>                                           <C>                         <C>      
  Servicing fee income                        $ 1,066,523                 1,261,490
  Other fee income                                402,030                   569,369
  Gain on sale of mortgage loans                1,539,312                 1,221,983
  Gain on sale of servicing rights                801,245                    99,759
  Interest income                                 424,762                   289,460
  Other income                                     15,789                    26,971
                                              -----------                ----------
    Total operating revenues                    4,949,661                 3,469,032
                                              -----------                ----------

Expenses:
  Servicing expense                               523,363                   613,907
  Personnel                                     1,838,330                 1,964,415
  General and administrative                      773,860                   936,527
  Interest expense                                516,605                   355,424
  Depreciation and amortization                   719,923                   898,382
  Other                                            71,745                    75,307
                                              -----------                ----------
    Total operating expenses                    4,443,826                 4,843,962
                                              ===========                ==========

    Gain/(Loss) before income taxes              (194,165)               (1,374,930)

Income tax expense                                340,000                    49,350
                                              -----------                ----------

    Net loss                                  $  (534,165)                (1,424280)
                                              ===========                ========== 

Weighted average shares outstanding             3,988,797                 3,776,868
                                              ===========                ==========

Loss per common share:

  Primary                                     $     (0.15)                    (0.40)
                                              ===========                ========== 

  Fully diluted                               $     (0.15)                    (0.40)
                                              ===========                ========== 


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 six month periods ended Sept 30, 1996 and Sept 30, 1995


                                                             Sept 30, 1996        Sept 30, 1995
                                                             -------------        -------------
                                                              (unaudited)          (unaudited)

<S>                                                          <C>                   <C>        
Net cash provided by (used in) operating activities          $ (1,220,286)         (8,061,117)

Cash flows from  investing  activities:
  Acquisition  of property and  equipment                         (10,229)             70,322
  Purchase of real estate owned                                        --                  --
  Proceeds from sale of mortgage servicing rights               2,054,848                  --
  Acquisition/Principal payments on mortgage loans
   held for investment,net                                          9,612               6,759 
                                                              -----------          ----------
      Net cash used in investing activities                     2,054,231             119,341

Cash flows from financing activities:
  Proceeds from issuance of common stock, net                     806,556                  --      
  Notes payable, net                                           (1,716,011)          7,624,082
  Payments on capitalized lease obligations                      (120,090)           (113,299)
  Payment of preferred dividends                                       --             (78,120)
                                                              -----------          ----------
      Net cash provided by (used in) financing activities      (1,029,545)          7,432,663

      Net increase (decrease) in cash                            (195,600)           (509,113)

Cash at beginning of period                                       585,643             512,156
                                                              -----------          ----------
Cash at end of period                                         $   390,043               3,043
                                                              ===========          ==========

Supplemental disclosures for cash flow:
   Cash paid for interest                                     $   358,387             306,122
   Cash paid for taxes                                                 --                  --

Supplemental disclosures of noncash
  financing and investing activities:                 
    Property acquired under capital leases                    $        --              24,592
    Receivable recognized for exercise of stock options       $   124,000                  --
    Receivable recognized for issue of stock                  $   500,000                  --

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

<PAGE>




                    ADVANCED FINANCIAL, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           September 30, 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
          $183,307,000 as of September 30, 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>
                                     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  $183,000,000  mortgages as of September  30, 1996 and  originated
approximately  $78 million in single family housing mortgages for the six months
ended September 30, 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 a gain of $814,727,  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.

                                    Page - 8

<PAGE>

RESULTS OF OPERATIONS
----------------------
Quarter Ended  September 30, 1996 Compared To The Quarter Ended
September 30, 1995

     The Company had  operating  revenues of  $2,600,658  for the quarter  ended
September 30, 1996 compared to  $1,868,837  for the quarter ended  September 30,
1995.  Income before taxes for the quarter ended September 30, 1996 was $367,966
compared to loss before taxes of $687,576 for the quarter  ended  September  30,
1995.  Net income for the quarter  ended  September  30, 1996 was $27,966 or .00
cents per share primary and fully diluted  compared to a net loss of $736,926 or
 .21 cents per share primary and fully  diluted for the quarter  ended  September
30, 1995.  Primary  earnings per share for the quarter ended  September 30, 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 September 30, 1996.

Six Months Ended September 30, 1996 Compared To The Six Months Ended
September 30, 1995

     The Company had operating  revenues of $4,249,661  for the six months ended
September 30, 1996 compared to $3,469,032 for the six months ended September 30,
1995. Loss before taxes for the six months ended September 30, 1996 was $194,165
compared to $1,374,930 for the six months ended September 30, 1995. Net loss for
the six months  ended  September  30,  1996 was  $534,165 or .15 cents per share
primary and fully diluted  compared to a net loss of $1,424,280 or .40 cents per
share  primary and fully  diluted for the six months ended  September  30, 1995.
Primary earnings per share for the quarter ended September 30, 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 six months
ended September 30, 1996.
 
     The decrease in service fee income to  $1,066,523  for the six months ended
September 30, 1996 from  $1,261,490 for the six months ended  September 30, 1995
reflected the decrease in the servicing portfolio to $417,000,000,  prior to the
sale of  $234,000,000  of servicing on September 30, 1996, at September 30, 1996
from  $493,000,000  at September  30, 1995. In the first quarter of fiscal 1997,
the Company  completed  the sale and  transfer of  approximately  $20 million of

                                    Page - 9

<PAGE>

servicing for a slight loss of $13,482.  At September 30, 1996, the Company sold
$234,000,000 of servicing for a gain of $814,727. 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  $474,727.  Approximately  $100,000  of  estimated
transfer cost are  reflected in the  servicing  expense for the six months ended
September  30, 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  $402,030  for the six  months  ended
September  30,  1996 from  $569,369  is also the result of the  decrease  in the
servicing  portfolio to $417,000,000,  prior to the servicing sale, at September
30, 1996 from $493,000,000 at September 30, 1995.

     Gain on sale of mortgage loans for the six months ended  September 30, 1996
was  $1,539,312  compared to a gain on sale of mortgage  loans of $1,221,983 for
the six months  ended  September  30,  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.  For the six months ended September 30, 1996, the Company
closed and funded  approximately $78 million of retail loan production  compared
to $51 million for the six months ended  September  30, 1995. 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 Company expects to see continued
increased  gains on sale of  mortgage  loans for fiscal  1997 due to the factors
described  above.  The Company  currently has a $17 million credit facility with
BankOne, Texas which allows the Company to fund originations of mortgage loans.

     The  increase  in  interest  income to  $424,762  for the six months  ended
September 30, 1996 from $289,460 for the six months ended  September 30, 1995 is
due to increased loan production to $78 million from $51 million, respectively.

     The Company's total  operating  expenses for the six months ended September
30,  1996 were  $4,443,826  compared  to  $4,843,962  for the six  months  ended
September  30,  1995.  Included in the  operating  expenses for six months ended
September 30, 1995 is expense relating to the Washington operations of $536,000.
Effective  October 1995, the Company sold its two  Washington  operations to two
independent companies.

     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 September
30,  1996.  The  $694,000  has been set up in the  accounts  payable and accrued
expenses on the Company's  consolidated  balance sheet at September 30, 1996 and
the  shortage in the account will be funded with  proceeds  from the sale of the
related servicing at September 30, 1996.

                                   Page - 10

<PAGE>

     The  decrease in  servicing  expense to $523,363  for the six months  ended
September 30, 1996  compared to $613,907 for the six months ended  September 30,
1995 is due to reimbursement of approximately  $70,000 from claims filed against
errors and omissions  insurance for penalties paid by AFIM for delinquent  taxes
on servicing portfolios  transferred to the Company through purchases as well as
the  decrease in the  outstanding  servicing  portfolio.  The decrease is not as
large as would be  expected  due to the  decrease in the  outstanding  servicing
portfolio  because of 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  $1,838,330  for six months  ended
September  30, 1996 compared to  $1,964,415  for six months ended  September 30,
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  $294,416  for the six months  ended
September 30, 1996 from $202,123 for the six months ended  September 30, 1995 is
the  result of  increased  loan  production  to $78  million  from $51  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 six months ended September
30, 1996 was $393,915  compared to $527,402  for the six months ended  Septmeber
30, 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 September  30, 1996 was 9.01%.  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.

                                   Page - 11

<PAGE>

     The Company  has a net  operating  loss  carryforward  for tax  purposes of
approximately  $6.2 million at September  30, 1996.  No income tax benefits were
recognized for the six months ended September 30, 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  represents  tax  related  to  the  unrealized  gain  on the
remaining servicing portfolio and will be evaluated quarterly for valuation.

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

     The Company has seen a decrease in its total  assets and an increase in its
stockholders'  equity.  The Company's total assets were $16,107,782 at September
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 September 30, 1996
as well as the $1,038,000  reduction of the PMSR related to the servicing  sale.
Stockholders'  equity has  increased to  $1,250,719  at September  30, 1996 from
$978,329  at  March  31,  1996.  The  increase  is due to  capital  infusion  of
approximately  $810,000 during the six months ended  September 30, 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 possible  acquisitions of other mortgage
companies.  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  and  discharge  its
liabilities in the normal course of business.

     The mortgage servicing advances and accounts  receivable were $2,365,634 at
September 30, 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 September 30, 1996,  the Company had a $125,000  outstanding  receivable
from related party compared to $190,000 at March 31, 1996.  Both the outstanding
receivables,  which were  subsequently  collected,  resulted  from a  consulting
agreement 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 the  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 September  30, 1996,  there was a note
receivable  from related party of $ 500,000.  The $500,000 note  receivable from
related party represents the completion of a private placemenet of the Company's
common stoock.  The  receivable  consists of three  promissory  notes from three
seperate  companies  to purchase  1,000,000  shares of common  stock at $.50 per

                                   Page - 12
<PAGE>

share.  The notes expire during the third fiscal quarter of 1997 and carry an 8%
interest charge.  The shares of stock purchased are held in escrow until receipt
of the funds to satisfy the  promissory  notes.  The above  transactions  do not
involve any officers or directors of the Company, however, are being referred to
as related  parties due to the number of shares issued in  conjunction  with the
two transactions.

     The Company had $9,067,699 in mortgage loans held for sale at September 30,
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.

     The Company  expects its assets to continue to grow as the Company  expands
its  origination  business.  The  Company  currently  has a $17  million  credit
facility with BankOne,  Texas which is sufficient to accommodate  increased loan
originations. The BankOne, Texas agreement is up for renewal in December 1996 at
which time the Company  anticipates a review and  adjustment  of covenants.  The
Company's  building note is also up for renewal in fiscal 1997 which  Management
plans to  refinance.  The  Company  had a  $450,000  working  capital  line with
BankOne,  Texas which was paid down to $100,000  from  proceeds from the capital
infusions discussed above. The remaining $100,000 will be paid from the proceeds
of the servicing sale.
 
     The net  decrease in cash of the Company  was  $195,600  for the six months
ended  September  30,  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  escrows 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 six months ended  September  30, 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 the  additional  loan  originations  ,
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 a related gain of $814,727  before expense
for the related  deferred tax asset of $340,000.  A portion of the proceeds from
the  sale  are to be  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  will repay $330,000 on the note with proceeds from
the sale and  refinance the remaining  $217,000.  Approximately  $300,000 of the
proceeds  will be used to pay down  additional  outstanding  debt related to the
servicing sold reducing that debt to  approximately  $370,000.  The Company will
also pay off  $400,000 of the  $750,000  loan  financed at March 31,  1996.  The
remaining  $100,000 of the BankOne  working  capital  line will also be 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.

                                   Page - 13

<PAGE>


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

     Effective  October 2, 1996,  the  Company  signed a  non-binding  letter of
intent to  purchase  the  assets  of an  independent  California-based  mortgage
banking  company.  The  transaction  will  involve an exchange of the  Company's
common stock for assets. The acquired company currently orginates  approximately
$15,000,000  to  $20,000,000  in  mortgages  per month  through  15 offices in 3
states. The Company feels that the acquisition will provide a strong base in the
lucrative   California  market  where  no  offices  currently  exist.  With  the
consolidation of its current  production and that of the acquired  company,  the
Company believes it will continue to show profits through fiscal 1997.

     The  Company   will   continue  to  develop   and   implement   the  latest
state-of-the-art technologies that will enhance the Company's operations as well
as  increase   productivity.   The  Company's   Management   believes  that  new
technologies  will  be  one  of  the  most  significant  factors  in  increasing
production  volume and reducing  costs of  originating  and  servicing  mortgage
loans.  Another  important factor will be the strategies used to implement these
new   technologies.   The  Company  believes  its  strategy  of  implementing  a
convenient,  low cost  national  network of Desktop  Mortgage  Loan  Origination
Systems  will  substantially   increase  the  Company's  loan  originations  and
ultimately its servicing portfolio.

     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 - 14
<PAGE>

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," 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 - 15




                                       
<PAGE>

                                     PART II



ITEM 1   Legal Proceedings                  none.

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 $117,180.

ITEM 4.  Submission Matters to a Vote
         of Securities Holders.             none.
 
ITEM 5.  Other Information                  none.

ITEM 6.  Exhibits and Reports on Form 8-K






                                   Page - 16


                                       
<PAGE>

SIGNATURES
---------- 

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

ADVANCED FINANCIAL, INC.
(Registrant)


Dated:   November 8, 1996                   By: /S/   Debbie K. Towery
                                                -------------------------------
                                                Debbie K. Towery
                                                Chief Financial Officer


Dated:   November 8, 1996                   By: /S/   William E. Moffatt
                                                -------------------------------
                                                William E. Moffatt
                                                President/Director






                                   Page - 17