U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2004

( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the Transition Period from To
---------- ----------

Commission File No. 0-19485

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

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

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

Issuer's telephone number (913) 535-1072

APPLICABLE ONLY TO CORPORATE ISSUERS

As of June 30, 2004, the Issuer had 1,955,379 shares of its common stock
outstanding.

Transitional Small Business Disclosure Format: Yes No X
----- -----

FORM 10-QSB

Part 1
------

Item 1. Financial Statements
--------------------
Page

Unaudited Condensed Consolidated Balance Sheet -June 30, 2004 3

Unaudited Condensed Consolidated Statement of Operations for
the three months ended June 30, 2004 and 2003 4
Unaudited Condensed Consolidated Statement of Cash Flows for
the three months ended June 30, 2004 and 2003 5

Notes to Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis 20
-------------------------------------

Part 1I

Items 1-5. 25

Signatures 25

Certifications

ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES
FORMERLY ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)

June 30,
2004
-----------
ASSETS

Cash $ 306
Other receivables 27,875
Accrued guaranteed interest return receivable 103,548
Escrow deposit, net of $75,000 reserve --

-----------
Total Assets $ 131,729
===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

LIABILITIES
Accounts payable $ 499
Accrued interest payable 47,122
Accounts payable - related parties 52,815
Notes payable 284,450
Dividends accrued- preferred stock of subsidiary 83,345
-----------
Total Liabilities 468,231
-----------

STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock of subsidiary, Series A, $10.00 par value;
900 shares authoriized, 900 shares issued 9,000
Paid-in capital, Series A 891,000
Subscriptions receivable, Series A Preferred Stock (900,000)
-----------
--
-----------
Preferred stock, Series B, $.005 par value; 1,000,000
shares authorized, none issued and outstanding --
-----------

Common stock, $.003 par value; 10,000,000 shares
authorized, 1,955,379 issued and
and outstanding 5,867
Paid-in capital 1,253,259
Accumulated deficit (1,595,628)
-----------
Total stockholders' equity (deficiency) (336,502)
-----------

$ 131,729
===========

The accompanying notes are an integral part of these statements.

ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES
FORMERLY ADVANCED FINANCIAL, INC. & SUBSIDIARES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

Three Months Three Months
June 30, June 30,
2004 2003
----------- -----------

REVENUES
Collection, servicing, and other fees $ -- 242,956
Other 948 5,165
Interest and guaranteed return 33,750 33,769

----------- -----------
Total revenues 34,698 281,890
----------- -----------

EXPENSES
Operating expenses, including general and
administrative costs 13,015 270,697
Interest 3,740 10,871
Depreciation -- 12,510
----------- -----------
Total expenses 16,755 294,078
----------- -----------

OPERATING INCOME (LOSS) 17,943 (12,188)

Gain on Exchange Transaction (Note C) 1,569,476 --
----------- -----------

INCOME (LOSS) BEFORE INCOME TAXES $ 1,587,419 $ (12,188)

INCOME TAXES -- --
----------- -----------

NET INCOME (LOSS) 1,587,419 (12,188)

Subsidiary preferred stock dividends accrued (22,511) (22,500)
----------- -----------

EARNINGS (LOSS) FOR COMMON STOCK $ 1,564,908 $ (34,688)
=========== ===========

Weighted-average shares outstanding 1,955,379 1,955,379
=========== ===========

Earnings (Loss) Per Common Share
Basic and diluted $ 0.80 $ (0.02)

The accompanying notes are an integral part of these statements.

ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES
FORMERY ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

Three Months Three Months
June 30, June 30,
2004 2003
----------- -----------

Cash flows from operating activities
Net income (loss) $ 1,587,419 $ (12,188)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation -- 12,510
Gain on Exchange Transaction (1,569,476) --
Net change in current assets and current liabilities 1,001 (118,615)

----------- -----------
Net cash provided (used) in operating activities 18,944 (118,293)
----------- -----------

Cash flows from investing activities
Collections applied to finance receivables -- 4,578
Interest receivable-Gateway Energy Corporation (33,906) (33,750)
Project price upside payments received 26,453 --
Acquisitions of property, furniture, and equipment 0 --

----------- -----------
Net cash provided by (used in) investing activities (7,453) (29,172)
----------- -----------

Cash flows from financing activities
Change in checks issued in excess of cash balances -- 54,961
Payments on notes payable (1,350) (21,606)
Issuance of subsidary preferred stock -- 900,000
Subscriptions receivable-subsidiary preferred stock -- (900,000)
Advances from related parties -- 71,914
Subsidiary preferred stock dividends paid (16,569) --
----------- -----------
Net cash provided by financing activities (17,919) 105,269
----------- -----------

Net increase (decrease) in cash (6,428) (42,196)
Cash, beginning of period 6,734 42,196
----------- -----------
Cash, end of period $ 306 $ --
=========== ===========

Cash paid for interest $ -- $ 5,063

The accompanying notes are an integral part of these statements.

Advanced Energy Recovery, Inc.
and Subsidiaries
Formerly Advanced Financial, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

1. Organization and Principles of Consolidation

Advanced Energy Recovery, Inc., formerly Advanced Financial, Inc., (the Company)
owns 100% of Allen Drilling Acquisition Company ("ADAC"). ADAC is engaged in
operations in the energy industry (See Note 3 below).

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

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

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

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

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

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

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

The consolidated financial statements as of June 30, 2004, include the accounts
of the Company and ADAC. The consolidated financial statements (Statement of
Operations and Statement of Cash Flows) as of June 30, 2003, include the
accounts of the Company, ADAC, and AIH. All significant intercompany accounts
and transactions have been eliminated.

2. Finance Receivables And Revenue Recognition

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

3. Property and Equipment

All property, furniture, and equipment was owned by AIH and accordingly included
in the Exchange Transaction and the determination of the gain thereon.

4. Income Taxes

The Company accounts for income taxes under the asset and liability method where
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement

carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are recognized to the extent
management believes that it is more likely than not that they will be realized.
The Company had estimated net operating loss carryforwards ("NOLs") of
approximately $10.8 million as of March 31, 2004. Such NOLs will be reduced by
the taxable gain, yet to be determined, for the gain on the April 1, 2004,
Exchange Transaction, The net operating losses will expire in the years ended
March 31, 2009 through March 31, 2025.

5. Income (Loss) Per Common Share

Income (Loss) per common share is based on the weighted average number of common
shares outstanding during the periods presented. The inclusion of stock options
and warrants had no effect on basic earnings per share.

6. Stock-Based Compensation

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

7. Accounting Pronouncements and Recent Regulatory Developments

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

provisions of SFAS 142 on April 1, 2002. There was no impairment charge upon
completion of the impairment review as of March 31, 2003. However, at March 31,
2004, the Company provided an impairment charge of $90,000 in connection with
the goodwill arising from a prior year's acquisition. The operations with
respect to such acquisition were included in the Exchange Transaction.

Also in June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations, which requires that the fair value of the liability for asset
retirement costs be recognized in an entity's balance sheet, as both a liability
and an increase in the carrying value of such assets, in the periods in which
such liabilities can be reasonably estimated. It also requires allocation of
such asset retirement cost to expense over its useful life. This Statement is
effective for fiscal years beginning after June 15, 2002. The adoption did not
have a material effect on the Company's consolidated financial position or
consolidated results of operations

In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144
supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and related literature and establishes a
single accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale. The Company implemented the
provisions of SFAS 144 as required on January 1, 2002. The adoption did not have
a material effect on the Company's consolidated financial position or
consolidated results of operations.

In April 2002, the FASB issued SFAS No. 145, "Recession of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections",
to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
are similar to sale-leaseback transactions. The statement also amends other
existing pronouncements. This statement is effective for fiscal years beginning
after May 15, 2002. The adoption did not have a material effect on the Company's
consolidated financial position or consolidated results of operations

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses accounting and reporting for
costs associated with exit and disposal activities and replaces Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". This Statement is effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption did
not have a material effect on the Company's consolidated financial position or
consolidated results of operations.

Effective July 30, 2002, the Sarbanes-Oxley Act of 2002 (the "Act") was signed
into law. The Act encompasses a broad range of new legislation designed to
increase accountability of public companies and investor confidence. The Act
establishes a new regulatory body, the "Public Company Accounting Oversight

Board", under the auspices of the Securities and Exchange Commission (the "SEC")
to oversee audits of companies offering equity or debt securities to the public,
and further regulates and redefines the relationship between a registered public
accounting firm and its audit clients. The Act establishes new disclosure
requirement for public companies, financial certification standards for public
company CEOs and CFOs, restrictions on the ability of officers and directors to
engage in certain types of transactions, accelerated reporting of certain types
of transactions and new rules of analysts. In addition, the Act enhances a
number of criminal penalties and enforcement measures available for securities
related offenses. The SEC was directed to study and issue final rules to
implement a number of directives contained in the Act, and some of the ensuing
rules are discussed below.

In August 2002, among other matters, the SEC adopted amendments to accelerate
filing deadlines for certain public reports, and adopted new rules to implement
Section 302 of the Act pertaining to financial statement certification and
clarify disclosure controls and procedures. The Company is not subject to the
accelerated filing deadlines at this time due to its size, however, it is
subject to the financial statement certification and disclosure control rules.
The Company has complied with all applicable new rules as they became effective.

In December 2002, the FASB issued SFAS No. 148. "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 of the same name to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
This statement is effective for fiscal years and interim periods ending after
December 15, 2002, and the Company has implemented this statement. The Company
intends to continue using the intrinsic method of accounting for stock-based
compensation first allowed under APB Option No. 25, "Accounting for Stock Issued
to Employees". Therefore, the impact of adopting SFAS No. 148 on the
consolidated financial statements of the Company is limited to the expanded
disclosure requirements of the statement.

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

Board, the Company did not have on its Board of Directors a member who could
meet the qualifications as defined in the rules for serving on an audit
committee, or a member who could meet the qualifications of an audit committee
financial expert.

Also in January 2003, the SEC adopted rules implementing section 401(a) of the
Act, which required public companies to disclose "all material off-balance sheet
financing transactions, arrangements, obligations (including contingent
obligations), and other relationships of the issuer with consolidated entities
or other persons, that may have a material current or future effect on financial
condition, changes in financial condition, results of operations, liquidity,
capital expenditures, capital resources, or significant components of revenues
or expenses." The rules require an additional section in Management's Discussion
and Analysis for the presentation of this new disclosure, and there are
additional rules for companies that are not small business issuers. The rules
are effective for interim and annual filings for periods ending on or after June
15, 2003. The impact of adopting this statement on the consolidated financial
position or results of operations is not material.

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

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

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

8. Use of Estimates

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

NOTE B - GOING CONCERN

The accompanying consolidated financial statements have been prepared on going
concern basis, which contemplates the Company's continuity of operations,
realization of assets, and liquidation of liabilities in the ordinary course of
business. To address these issues, early in fiscal year 2004, management of the
Company developed a plan to restructure the Company and to change its focus and
business strategy to the energy industry. The plan was implemented throughout
the year, and culminated in the Exchange Transaction, which transaction was
effective on April 1, 2004. In addition, on November 15, 2004, the Company
closed two transactions which should further address the going concern issues.
These statements, however, do not reflect adjustments that might result if the
Company is unable to continue as a going concern.

NOTE C- THE EXCHANGE TRANSACTION

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

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

Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Financial Position 03/31/00 03/31/01 03/31/02 03/31/03 03/31/04
----------- ----------- ----------- ----------- -----------

Total assets $ 1,139,576 $ 742,348 $ 562,750 $ 435,032 $ 332,697
Total liabilities 1,027,060 1,272,620 1,589,521 1,873,184 2,234,107
Stockholders' equity $ 112,516 $ (530,272) $(1,026,771) $(1,438,152) $(1,901,410)

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

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

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

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

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

Condensed Consolidated Balance Sheet

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

Notes to Condensed Consolidated Balance Sheet:

(A) At March 31, 2004, the amounts due to related parties consisted of
$52,815 due to AFI Capital Corporation.

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

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

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

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

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

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

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

The gain to the Company on the Exchange Transaction. Such gain was the
difference between the ARGUS obligations cancelled and the AIH operation's net
assets (assets less liabilities assumed by ARGUS).

NOTE D -AGREEMENTS

1. AFI Capital Corporation Agreement

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

2. Allen Drilling Acquisition Company Agreement

On April 22, 2002, the Company, through a wholly owned subsidiary, Allen
Drilling Acquisition Company ("ADAC") executed a definitive Stock Purchase
Agreement to acquire a service company in the energy industry. The closing,
which was not subject to a specific date, was subject to several conditions, one
of which included certain matters with respect to the financing of the
acquisition transaction. As a result of a material adverse change in the
operating results for the company to be acquired, the transaction could not
close primarily due to the financing requirement matters. Ernest money deposits
in the amount of $75,000 were provided to ADAC by Capital under an 8% demand
promissory note. Rather then pursuing the closing of the Agreement and incurring
additional expense at the time, ADAC notified the seller that the earnest
deposit could be used to offset certain obligations incurred by Capital to the
company of the seller. ADAC then focused its attention on the March 6, 2003,
Gateway Energy Corporation transaction as described herein. Given the above, as

well as the present stance of the parties, it is more likely than not, that the
transaction will never be closed. Due to the uncertainty of the above matters, a
reserve of $75,000 was established by ADAC as of March 31, 2003, for the escrow
deposit.

3. The Gateway Energy/Madisonville Project Agreement

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

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

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

During the quarter ended June 30, 2004, the Company's wholly owned subsidiary
(ADAC) accrued $33,750, the minimum guaranteed return and received $26,453 in
price upside payments. These payments were offset to the accrued minimum

guaranteed return. During the quarter ended June 30, 2004, ADAC also accrued
Series Preferred Stock dividends payable of $22,511, representing 66-2/3% of
such minimum guaranteed return and paid cash dividends of $16,569. The dividends
are not payable until such time as ADAC receives project cash distributions from
Gateway. The plant was deemed to be in service on October 1, 2003, which is the
date that the price up side provisions of the agreement became effective.

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

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

NOTE E - NOTES PAYABLE

At June 30, 2004, Notes Payable consisted of the following:

Due ARGUS, $185,900, interest at prime, due on demand, unsecured.

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

NOTE F - ACCOUNTS PAYABLE - RELATED PARTY

Accounts payable - related parties consisted of amounts advanced to the Company
by AFI Capital, ($52,815). No interest or repayment terms exist.

NOTE G - SUBSEQUENT EVENTS

GulfWest Energy Inc. Joint Venture

On July 21, 2004, the Company entered into a Letter of Intent, subject to the
execution of definitive agreements, with GulfWest Energy Inc. ("GWEI") located
in Houston, Texas, under which the Company and GWEI, through one or more Joint
Venture LLCs, would develop certain oil and gas assets owned by GWEI in Grimes
and Madison County, Texas. Certain of the Madison County reserves, if developed
and produced, are expected to require treatment similar to that described in the
Madisonville Project as discussed later under the Gateway Energy Corporation
Agreement. On October 14, 2004, the Company, through its wholly owned
subsidiary, Allen Drilling Acquisition Company ("ADAC"), became a member of a
Texas LLC (Elgin Holdings, L.L.C.) (the "LLC") ("Elgin") with GWEI for the
purpose of initially developing certain portions of the GWEI oil and gas asset
bases in Madison County and Hardin County, Texas. Participation in the
development of the Grimes County asset base by ADAC was deferred and will not be
a part of this LLC. GWEI contributed certain assets valued at approximately
$540,000, and the Company committed to provide up to $595,000 in initial capital
funding to the LLC. The Company owns 52.5% of the LLC, and hold two of the three
manager positions, such positions filled by Charles A. Holtgraves and Larry J.
Horbach. The various agreement transaction requirements were completed on
November 15, 2004, including the required cash initial capital funding
requirements.

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

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

AER/Elgin and Gateway Energy Corporation Agreement

On November 15, 2004, AER and Elgin entered into a LICENSE AGREEMENT (the
"Agreement") with Gateway Energy Corporation and certain of its subsidiaries.
The Agreement, provides, among other things, for the granting of a sublicense to
AER and Elgin to enable Elgin to treat the gas produced from the leasehold
interests owned by Elgin in Madison County, Texas, which interests fall within a
defined Area of Mutual Interest, ("AMI"). The AMI is described in certain
agreements with respect to the "The Gateway Energy/Madisonville Project
Agreement" discussed briefly in Note D, 3 above. In addition, the Agreement
provides that AER and Elgin will dedicate the gas produced from its interests in
the AMI to the Madisonville Project plant and will advance up to $91,250 to

Gateway, in the form of a prepayment, the license and other fees due Advanced
Extraction Technologies ("AET") for the processing of a minimum of 5,000 Mcf per
day. The Agreement further grants to AER or its designees, an option to
participate pari passu with Gateway, subject to certain limitations, in future
projects which require the treatment of natural gas containing high nitrogen,
which projects utilize the AET license held by Gateway.

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

Settlement With AFI Capital Corporation

The $52,815 due to AFI Capital Corporation at June 30, 2004, was converted to
337,500 shares of AER Common Stock (post reverse split basis) in August, 2004,
in accordance with the provisions of the July, 2001 Agreement between AFI
Capital and the Company. Upon issuance of the shares, the Agreement was
terminated and all parties released from any obligations arising there from.

Office Lease

On August 31, 2004, the Company entered into a month to month lease for space
located at 5799 Broadmoor, Suite 750, Mission, KS, 66203, at a cost of $1,000
per month with a former subsidiary of the Company.

NOTE O - RELATED PARTIES

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

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

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

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

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

GENERAL
- -------

Effective April 1, 2004, the Company completed a restructuring and changed its
business focus to the energy industry, having disposed of all of its financial
service related operations. Thus, any comparisons of results of operations and
financial condition would be somewhat meaningless. However the prior year's
Management's Discussions are included for a historical perspective.

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

This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in any forward-looking statements included herein. In addition,
because of the change to a new business strategy, the Company will be subject to
all of the energy industry common and traditional risks associated with the
economic production of hydrocarbons including, but not limited to, acquisition
of reserves that can produce adequate returns to attract the necessary
investment capital to develop such reserves, the petroleum engineering of
underground oil and gas reserves, drilling of the wells, and the fluctuation of
hydrocarbon prices. The Company has limited capital resources and management has
limited experience with respect to this segment of the energy industry.
Accordingly, the Company is utilizing the joint venture approach to mitigate
these risks.

RESULTS OF OPERATIONS
- ---------------------
Three Month's Ended June 30, 2003
- ----------------------------------

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

The Company had a deficit cash balance at June 30, 2003 of $54,961. The
Company's deficit cash balance and working capital requirements continue to be
funded by Argus Investment Group, Inc. ("ARGUS ") the Company's majority
shareholder, On February 5, 1999, ARGUS agreed to make available to the Company
a line of credit in the amount of $875,000 for five years with an interest rate
of 7% annually. This line of credit was used to acquire charged off credit card
debt. During the year ended March 31, 2001, the maximum was reached under the
line of credit and Argus converted such amount to common stock and entered into
a series of 7% demand secured notes with the Company and advances. The balance
due under the secured notes at June 30, 2003 was $822,932 and $514,786 under the
advances.

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

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

During the quarter ended June 30, 2003, the Company's wholly owned subsidiary
(ADAC) accrued $33,750, the minimum guaranteed return. It also accrued a Series
Preferred Stock dividend payable of $22,500, representing 66-2/3% of such
minimum guaranteed return. These dividends are not payable until such time as
ADAC receives project cash distributions from Gateway. The plant was deemed to
be in service on October 1, 2003, which is the date that the price up side
provisions of the agreement become effective.

As of June 30, 2003, the Company's total assets were $392,016 and the common
stockholders' equity was a deficit of $1,472,840. Argus has agreed to continue
provide funding as and when required by the Company to meet its cash flow
requirements.

Operations

Consolidated operations for the quarter ended June 30, 2003 resulted in net loss
of $12,188 on collection, servicing and fee gross income of $242,956 and the
guaranteed minimum return accrual of $33,750 with respect to the Madisonville
Project. Revenues from the collection of the Company's portfolio receivables are
recognized only after the cost of such portfolios has been recovered. During the
period, the Company recovered $36,203 from its portfolio receivables of which
$4,578 was applied to reduce the carrying value of its finance receivables asset
leaving a portfolio carrying value of $26,418. As of June 30, 2003, the
remaining outstanding balance of the receivables portfolio was approximately
$14,000,000.

Operating expenses, including general and administrative costs, for the quarter
ended June 30, 2003, were $270,697 compared to $372,252 for the 2002 period. The
reduction was primarily a reflection of a reduction in payroll resulting from
the company's continuing re-organization of various employee departments.

RESULTS OF OPERATIONS
- ---------------------
Three Month's Ended June 30, 2004
- ----------------------------------

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

As of December 31, 2003, the accumulation of debt to ARGUS had grown to a point
where the Company could no longer service this outstanding debt given the
downsizing of the Company that was the result of the reorganization and
restructuring of the various AIH segment operations. Also during these years,
and to the current date, the current President and Treasurer of the Company did
not draw a salary, nor were any amounts accrued with respect thereto. With the
completion of the Madisonville Project investment, and the joint venture with
GulfWest Energy Inc. as discussed later, the Company had determined that the
ability to generate long-term value for the common shareholders could be
enhanced if the present Company operations, (AIH) were sold and the Company
concentrated its growth efforts in the energy industry, focusing primarily on
natural gas. In accordance with this business strategy, an agreement was entered
into with ARGUS, subject to common shareholder approval, wherein the common
shares of AIH would be exchanged for an assumption by ARGUS of all of the AIH
liabilities (the "Exchange Transaction"). The Board of Directors engaged an

investment banking firm (Morgan Stanley) to determine the fair market value of
the AIH operations on a going concern basis. Morgan Stanley, through its
SPARDATA affiliate, determined such value to be $345,000. On March 24, 2004, the
Company received the requisite affirmative consent votes from the common
shareholders to effect the Exchange Transaction. The Exchange Transaction was
effective at the beginning of business on April 1, 2004. In the Exchange
Transaction, ARGUS assumed $1,661,719 of liabilities, (including $1,308,858 of
notes payable, substantially all of which carried a prime interest rate),
resulting in a gain to the Company on the exchange of $1,569,476

Subsequent to June 30, 2004 the Company entered into two transactions which
significantly impacted the Company-

GulfWest Energy Inc. Joint Venture

On July 21, 2004, the Company entered into a Letter of Intent, subject to the
execution of definitive agreements, with GulfWest Energy Inc. ("GWEI") located
in Houston, Texas, under which the Company and GWEI, through one or more Joint
Venture LLCs, would develop certain oil and gas assets owned by GWEI in Grimes
and Madison County, Texas. Certain of the Madison County reserves, if developed
and produced, are expected to require treatment similar to that described in the
Madisonville Project as discussed earlier under the April 30, 2003 Gateway
Energy Corporation Agreement. On October 14, 2004, the Company, through its
wholly owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), became a
member of a Texas LLC (Elgin Holdings, L.L.C.) (the "LLC") ("Elgin") with GWEI
for the purpose of initially developing certain portions of the GWEI oil and gas
asset bases in Madison County and Hardin County, Texas. Participation in the
development of the Grimes County asset base by ADAC was deferred and will not be
a part of this LLC. GWEI contributed certain assets valued at approximately
$540,000, and the Company committed to provide up to $595,000 in initial capital
funding to the LLC. The Company owns 52.5% of the LLC, and hold two of the three
manager positions, such positions filled by Charles A. Holtgraves and Larry J.
Horbach, directors and officers of the Registrant. The various agreement
transaction requirements were completed on November 15, 2004, including the
required cash initial capital funding requirements.

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

The Company/Elgin and Gateway Energy Corporation Agreement

On November 15, 2004, the Company and Elgin entered into a LICENSE AGREEMENT
(the "Agreement") with Gateway Energy Corporation and certain of its
subsidiaries. The Agreement, provides, among other things, for the granting of a
sublicense to the Company and Elgin to enable Elgin to treat the gas produced
from the leasehold interests owned by Elgin in Madison County, Texas, which
interests fall within a defined Area of Mutual Interest, ("AMI"). In addition,
the Agreement provides that the Company and Elgin will dedicate the gas produced
from its interests in the AMI to the Madisonville Project plant and will advance
up to $91,250 to Gateway, in the form of a prepayment, the license and other
fees due Advanced Extraction Technologies ("AET") for the processing of a
minimum of 5,000 Mcf per day. The Agreement further grants to the Company or its
designees, an option to participate pari passu with Gateway, subject to certain
limitations, in future projects which require the treatment of natural gas
containing high nitrogen, which projects utilize the AET license held by
Gateway.

Operations
- ----------

The revenues for the three months ended June 30, 2004 consisted of the interest
and guaranteed return from the Madisonville Project. During the quarter ended
June 30, 2004, the Company's wholly owned subsidiary (ADAC) accrued $33,750, the
minimum guaranteed return and received $26,453 in price upside payments. These
payments were offset to the accrued minimum guaranteed return. During the
quarter ended June 30, 2004, ADAC also accrued Series A Preferred Stock
dividends payable of $22,511, representing 66-2/3% of such minimum guaranteed
return and paid cash dividends of $16,569. The dividends are not payable until
such time as ADAC receives project cash distributions from Gateway. The plant
was deemed to be in service on October 1, 2003, which is the date that the price
up side provisions of the agreement became effective.

Operating income was $17,943 after general and administrative costs of $13,015
and interest of $3,740, generating net positive cash flow of $18,944. Such
general and administrative costs are not indicative of future operations as the
sole three employees/officers of the Company (Charles Holtgraves, Philip
Holtgraves and Larry Horbach) have waived current compensation in order to
preserve cash flow for Company investment in on going projects. For such waiver
of current compensation, these individuals have been given the right to invest
on a pari-passu basis in these initial high risk capital projects along side the
Company and other outside accredited investors. To date, entities in which these
individuals either control or have an interest in, have provided a majority of
all of the capital invested in the initial energy projects described above.

During the quarter ended June 30, 2004, the Company recognized a gain on the
Exchange Transaction of $1,569,476. Such gain was the difference between the
ARGUS obligations cancelled and the AIH operation's net assets (assets less
liabilities assumed by ARGUS).

Part II

Item 1. Legal Proceedings

None

Item 2. Changes in Securities
None

Item 3. Defaults Upon Senior Securities
None

Item 4. Submission of Matters to a Vote of Security Holders
None

Item 5. Exhibits and Reports on Form 8-K

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

31 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(b) Reports
-------

On May 9, 2003, the Registrant filed a Form 8-K reporting under
Items 4, 5, and 7.

On November 19, 2004, the Registrant filed a Form 8-K reporting
under Item 8.01.

SIGNATURES

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

ADVANCED ENERGY RECOVERY, INC.
(Registrant)

Dated: 06-15-05 By: /s/ Charles A. Holtgraves
-------------------------------------
Charles A. Holtgraves
Chairman, President, and
Treasurer