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 December 31, 2004

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

For the Transition Period from To
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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
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(Address of principal executive offices) (Zip Code)

Issuer's telephone number (913) 535-1072

APPLICABLE ONLY TO CORPORATE ISSUERS

As of December 31, 2004, the Issuer had 2,395,879 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 - December 31, 2004 3

Unaudited Consolidated Statement of Operations for
the three and nine months ended December 31, 2003 and 2004 4

Unaudited Consolidated Statement of Cash Flows for
the nine months ended December 31, 2003 and 2004 5

Notes to Consolidated Financial Statements 6

Part 1I

Items 1-5. 20

Signatures 20

Certifications

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

December 31,
2004
-----------
ASSETS (Unaudited)

Other receivables $ 61,991
Accrued guaranteed interest return receivable 116,692
Series B Preferred Stock, subscription receivable 280,000
Prepaid license fee 30,413
Prepaid gas purchases 40,000
Other prepaid expenses 2,001
Property, plant and equipment, at cost 813,335
-----------
$ 1,344,432
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
LIABILITIES
Checks issued in excess of cash balances $ 6,721
Accounts payable and other accruals 16,249
Accrued interest payable 54,109
Notes payable 366,700
Dividends accrued-preferred stock of subsidiary 112,972
Minority interest 538,335
-----------
Total Liabilities 1,095,086
-----------

STOCKHOLDERS' EQUITY
Preferred Stocks 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)
-----------
--
-----------
Series B, $10.00 Par Value;
595 shares authorized, 315 shares issued and outstanding 3,150
Paid in capital, Series A Preferred Stock 311,850
Series B Preferred Stock subscribed 280,000
-----------
595,000
-----------
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, 2,395,879 issued an outstanding 7,189
Paid-in capital 1,330,503
Accumulated deficit (1,683,346)
-----------
(345,654)
-----------

Total Stockholders' Equity 249,346
-----------
$ 1,344,432
===========

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 Nine Months Nine Months
12/31/2003 12/31/2004 12/31/2003 12/31/2004
----------- ----------- ----------- -----------

REVENUES
Collection, servicing, and other fees $ 228,918 $ -- $ 711,701 $ --
Other 13,151 -- 27,104 1,008
Interest and guaranteed return 33,750 33,750 101,277 101,250

----------- ----------- ----------- -----------
Total revenues 275,819 33,750 840,082 102,258
----------- ----------- ----------- -----------

EXPENSES
Operating expenses, including general and
administrative costs 295,053 19,169 841,589 55,857
Interest 15,076 3,780 28,426 11,228
Depreciation and amortization 8,404 0 29,317 0

----------- ----------- ----------- -----------
Total expenses 318,533 22,949 899,332 67,085
----------- ----------- ----------- -----------

OPERATING INCOME (LOSS) $ (42,714) $ 10,801 $ (59,250) $ 35,173

Gain on Exchange Transaction (Note C) (59,925) 1,509,551

----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (42,714) (49,124) (59,250) 1,544,724

INCOME TAXES 0 0 0 0

----------- ----------- ----------- -----------
NET INCOME (LOSS) (42,714) (49,124) (59,250) 1,544,724

Subsidiary preferred stock dividends accrued (22,500) (22,534) (67,500) (67,534)
----------- ----------- ----------- -----------

EARNINGS (LOSS) FOR COMMON STOCK $ (65,214) $ (71,658) $ (126,750) $ 1,477,190
=========== =========== =========== ===========

Weighted-average shares outstanding 1,955,741 2,395,879 1,955,741 2,214,712
=========== =========== =========== ===========

Earnings (Loss) Per Common Share $ (0.03) $ (0.03) $ (0.06) $ 0.67
=========== =========== =========== ===========

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)

Nine Months Nine Months
Dec 31, Dec 31,
2003 2004
----------- -----------

Cash flows from operating activities
Net income (loss) $ (59,250) $ 1,544,724
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 29,317 --
Gain on Exchange Transaction -- (1,569,476)
Net change in current assets and current liabilities (91,989) (135,607)

----------- -----------
Net cash from operating activities (121,922) (160,359)
----------- -----------

Cash flows from investing activities
Collections applied to finance receivables 24,573 --
Interest receivable-Gateway Energy Corporation (100,219) (101,250)
Subsidiary preferred stock dividends, net 68,425
Project price upside payments received -- 80,653
Acquisitions of property, plant and equipment -- (813,335)
Minority interest contributions -- 538,335
----------- -----------
Net cash provided by (used in) investing activities (7,221) (295,597)
----------- -----------

Cash flows from financing activities
Change in checks issued in excess of cash balances 89,692 13,455
Issuance of subsidiary preferred stock 900,000 315,000
Subscriptions receivable-subsidiary preferred stock (900,000) --
Increase in notes payable 80,900
Common stock issued for services and payables -- 78,566
Payments on notes payable (29,145) --
Advances from related party 26,400 --
Subsidiary preferred stock dividends paid -- (31,965)
----------- -----------
Net cash provided by financing activities 86,947 455,956
----------- -----------

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

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

Cash paid for interest $ 4,369 $ --
=========== ===========

Related party advances converted to Demand Note $ 508,787 $ --
=========== ===========

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
December 31, 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"). In addition, as of
October 14, 2004, through ADAC, the Company owns 52.5% of Elgin Holdings, LLC
("Elgin"). ADAC and Elgin are engaged in operations in the energy industry.

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 December 31, 2004, include the
accounts of the Company, ADAC and Elgin Holdings, LLC, a limited liability
company in which ADAC has a 52.5% interest and manager control. The consolidated
financial statements (Statement of Operations and Statement of Cash Flows) as of
December 31, 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, Plant and Equipment

All property, furniture, and equipment as of March 31, 2004 was owned by AIH and
accordingly included in the Exchange Transaction and the determination of the
gain thereon. At December 31, 2004, property, plant and equipment, all of which
is held in Elgin, consisted of construction work in progress of $265,000 related
to a pipeline and natural gas treating facilities located in Hardin County,
Texas, and $548,000 of acreage and related costs for property located in Madison
County, Texas.

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

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.

(C) 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). During the quarter ended
December 31, 2004, this gain was reduced by $59,925 as a result of a final
settlement of certain payables and certain additional costs related to the
Exchange Transaction.

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 in fiscal year 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.

For the nine month's ended December 31, 2004, the Company's wholly owned
subsidiary (ADAC) accrued $101,250, the minimum guaranteed return and received
$80,653 in price upside payments. These payments were offset to the accrued
minimum guaranteed return. During the nine month's ended December 31, 2004, ADAC
also accrued Series A Preferred Stock dividends payable of $67,534, representing
66-2/3% of such minimum guaranteed return and paid cash dividends of $31,965.
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.

NOTE E - NOTES PAYABLE

At December 31, Notes Payable consisted of the following:

Due to bank, $91,250, interest at prime, due June 20, 2005 with renewable
terms, guaranteed by Mr. Holtgraves, and Mr. Horbach,

Due ARGUS, $200,450 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 -NEW AGREEMENTS

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 as provided for in the LLC's
Regulations. As of December 31, 2004, the Company had funded $315,000. In March
2005, the Company funded an additional $170,000, leaving a balance of $110,000
remaining to be funded in fiscal year 2005. The capital funding is being raised
by ADAC through a private placement of a new series (Series B) of participating
preferred stock. The various agreement transaction requirements were completed
on November 15, 2004. The Company owns 52.5% of the LLC, and holds two of the
three manager positions, such positions filled by Charles A. Holtgraves and
Larry J. Horbach, directors and officers of the Registrant

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.

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, 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, $30,413 of which will represent a prepayment by the Company of the
license and other fees due Advanced Extraction Technologies ("AET") for the
processing of a minimum of 5,000 Mcf per day. The balance of the advance
($60,837) will be repaid by Gateway from Gateway's share of the initial project
cash flows. 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.

Settlement With AFI Capital Corporation

The $52,815 due to AFI Capital Corporation 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.

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 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 December 31, 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 Nine Month's Ended December 31, 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, which gain was
reduced by $59,925 as a result of a final settlement of certain payables and
certain additional costs related to the Exchange Transaction during the quarter
ended December 31, 2004.

In the quarter ended December 31, 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 as provided for in the LLC's Regulations. As of December 31,
2004, the Company had funded $315,000. In March 2005, the Company funded an
additional $170,000, leaving a balance of $110,000 remaining to be funded in
fiscal year 2005. The capital funding is being raised by ADAC through a private
placement of a new series (Series B) of participating preferred stock. The
various agreement transaction requirements were completed on November 15, 2004.
The Company owns 52.5% of the LLC, and holds two of the three manager positions,
such positions filled by Charles A. Holtgraves and Larry J. Horbach, directors
and officers of the Registrant

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, $30,413 of which will represent a prepayment by the
Company of the license and other fees due Advanced Extraction Technologies
("AET") for the processing of a minimum of 5,000 Mcf per day. The balance of the
advance ($60,837) will be repaid by Gateway from Gateway's share of the initial
project cash flows. 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 nine months ended December 31, 2004 consisted of
the interest and guaranteed return from the Madisonville Project. During the
quarter and nine months ended December 31, 2004, the Company's wholly owned
subsidiary (ADAC) accrued $33,750 and $101,250 respectively, the minimum
guaranteed return, and received $23,582 and $80,653 respectively, in price
upside payments. These payments were offset to the accrued minimum guaranteed
return. During the quarter and nine months ended December 31, 2004, ADAC also
accrued Series A Preferred Stock dividends payable of $22,500 and $67,534
respectively, representing 66-2/3% of such minimum guaranteed return and paid
cash dividends of $7,011 and $31,965 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 $10,801 and $35,173 after general and
administrative costs of $19,169 and $55,857 and interest of $3,780 and $11,228.
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 three months 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). During the quarter ended December 31, 2004, this
gain was reduced by $59,925 as a result of a final settlement of certain
payables and certain additional costs related to the Exchange Transaction.

Part II

Item 1. Legal Proceedings
None

Item 2. Changes in Securities
103,000 shares of common stock were issued for $78,566 of
services and payables.

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 14, 2005 Charles A. Holtgraves
Chairman, President, and
Treasurer