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 September 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 September 30, 2004, the Issuer had 2,292,879 shares of its common
stock outstanding.

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

ADVANCED ENERGY RECOVERY, INC.

FORM 10-QSB

Part 1

Item 1. Financial Statements

Page

Unaudited Condensed Consolidated Balance Sheet -September 30, 2004 3

Unaudited Consolidated Statement of Operations for
the three and six months ended September 30, 2003 and 2004 4

Unaudited Consolidated Statement of Cash Flows for
the six months ended September 30, 2003 and 2004 5

Notes to Consolidated Financial Statements 6

Part 1I

Items 1-5. 19

Signatures 19

Certifications

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

September 30,
2004
-----------
ASSETS (Unaudited)

Other receivables $ 34,330
Accrued guaranteed interest return receivable 106,524
Prepaid expenses 5,000
-----------
Total Assets $ 145,854
===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

LIABILITIES
Checks issued in excess of cash balances $ 396
Accounts payable and other accruals 15,499
Accrued interest payable 50,329
Notes payable 281,950
Dividends accrued-preferred stock of subsidiary 97,449
-----------

Total Liabilities 445,623
-----------

STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock of subsidiary, Series A, $10:00 par value;
900 shares authorized, 900 shares issued and outstanding 9,000
Paid in capital, Series A Preferred Stock 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, 2,292,879 issued an outstanding 6,880
Paid-in capital 1,305,062
Accumulated deficit (1,611,711)
-----------
(299,769)
-----------

Total Stockholders' Equity (Deficiency) (299,769)
-----------

-----------
$ 145,854
===========

The accompanying notes are an integral part of these statements.

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

Three Months Three Months Six Months Six Months
09/30/2003 09/30/2004 09/30/2003 09/30/2004
----------- ----------- ----------- -----------

REVENUES
Collection, servicing, and other fees $ 239,827 $ 0 $ 482,783 $ 0
Other 8,788 60 13,953 1,008
Interest and guaranteed return 33,758 33,750 67,527 67,500

----------- ----------- ----------- -----------
Total revenues 282,373 33,810 564,263 68,508
----------- ----------- ----------- -----------

EXPENSES
Operating expenses, including general and
administrative costs 275,839 23,673 560,815 36,688
Interest 2,479 3,708 5,121 7,448
Depreciation and amortization 8,404 0 14,864 0

----------- ----------- ----------- -----------
Total expenses 286,722 27,381 580,800 44,136
----------- ----------- ----------- -----------

OPERATING INCOME (LOSS) $ (4,349) $ 6,429 $ (16,537) $ 24,372

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

----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (4,349) 6,429 (16,537) 1,593,848

INCOME TAXES 0 0 0 0

----------- ----------- ----------- -----------
NET INCOME (LOSS) (4,349) 6,429 (16,537) 1,593,848

Subsidiary preferred stock dividends accrued (22,500) (22,500) (45,000) (45,000)
----------- ----------- ----------- -----------

EARNINGS (LOSS) FOR COMMON STOCK $ (26,849) $ (16,071) $ (61,537) $ 1,548,848
=========== =========== =========== ===========

Weighted-average shares outstanding 1,955,707 2,292,879 1,955,707 2,124,129
=========== =========== =========== ===========

Earnings (Loss) Per Common Share $ (0.01) $ (0.01) $ (0.03) $ 0.73
=========== =========== =========== ===========

The accompanying notes are an integral part of these statements.

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

Six Months Six Months
Sept 30, Sept 30,
2003 2004
----------- -----------

Cash flows from operating activities
Net income (loss) $ (16,537) $ 1,593,848
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 8,404 --
Gain on Exchange Transaction -- (1,569,476)
Net change in current assets and current liabilities (125,481) (45,084)

----------- -----------
Net cash from operating activities (133,614) (20,712)
----------- -----------

Cash flows from investing activities
Collections applied to finance receivables 21,747 --
Interest receivable-Gateway Energy Corporation (67,500) (67,500)
Project price upside payments received -- 57,071
Acquisitions of property, furniture, and equipment 12,509 --
----------- -----------
Net cash provided by (used in) investing activities (33,244) (10,429)
----------- -----------

Cash flows from financing activities
Change in checks issued in excess of cash balances 84,322 7,130
Issuance of subsidiary preferred stock 900,000 --
Subscriptions receivable-subsidiary preferred stock (900,000) --
Common stock issued for related party accounts payable -- 52,815
Payments on notes payable (29,181) (3,850)
Advances from related party 69,521 --
Subsidiary preferred stock dividends paid -- (24,954)
----------- -----------
Net cash provided by financing activities 124,662 31,141
----------- -----------

Net increase (decrease) in cash (42,196) --
Cash, beginning of period 42,196 --
----------- -----------

Cash, end of period $ -- $ --
=========== ===========

Cash paid for interest $ 10,545 $ --
=========== ===========

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
September 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 September 30, 2004, include the
accounts of the Company and ADAC. The consolidated financial statements
(Statement of Operations and Statement of Cash Flows) as of September 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. All pools were included in the
Exchange Transaction.

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. 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. In August, 2004 the $52,815 was settled
by the issuance of common stock of the Company.

(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 ADAC stock.

4. 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 as
earlier described in the Madisonville Project. On October 14, 2004, the Company,
through ADAC, became a member of a Texas LLC (Elgin Holdings, LLC) (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 initial capital funding was
raised by ADAC through a private placement of a new series of participating
preferred stock. The various agreement transaction requirements were completed
on November 15, 2004. The Company owns 52.5% of the LLC.

5. 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 therefrom.

6. 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 E - NOTES PAYABLE

At September 30, Notes Payable consisted of the following:

Due ARGUS, $206,950 interest at prime, due on demand,.

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 - SUBSEQUENT EVENTS

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 funds were advanced in December 2004. 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.

NOTE H - 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 meaningless. However, the prior year's Management's
Discussions are available in the Company's Form 10QSB for the quarterly period
ended September 30, 2003.

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
somewhat 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 And Six Month's Ended September 30, 2004
- ----------------------------------------------

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

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

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.

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 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.

Subsequent to September 30, 2004 the Company entered into an additional
transaction which had a positive impact on the Company-

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. This advance was completed in December 2004. 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 and six months ended September 30, 2004 consisted of
the interest and guaranteed return from the Madisonville Project. During the
quarter and six months ended September 30, 2004, the Company's wholly owned
subsidiary (ADAC) accrued $33,750 and $67,500 respectively, the minimum
guaranteed return, and received $30,618 and $57,071 respectively, in price
upside payments. These payments were offset to the accrued minimum guaranteed
return. During the quarter and six months ended September 30, 2004, ADAC also
accrued Series A Preferred Stock dividends payable of $22,500 and $45,000
respectively, representing 66-2/3% of such minimum guaranteed return and paid
cash dividends of $9,385 and $24,954 respectively. 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 for the periods was $6,429 and $24,372 after general and
administrative costs of $23,673 and $36,688 and interest of $3,708 and $7,448,
generating net positive cash flow of $24,288 for the six months. 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 six months ended September 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 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)

/s/ Charles A. Holtgraves
-----------------------------------
Dated: June 15, 2005 Charles A. Holtgraves
Chairman, President, and
Treasurer