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Brooke Capital Corporation
Combined Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss)
(in thousands, except per share data)


										Retained			Accumulated
							Additional			Earnings			Other
	Common			Common			Paid-In			(Accumulated			Comprehensive
	Shares			Stock			Capital			Deficit)			Loss			Total
Balances, December 31, 2006 (Restated)		2,666,666		$	27		$	20,459		$	9,919		$	(167	)	$	30,238
Exercise of warrant, net of related costs		547,820			5			388			—			—			393
Purchase and retirement of common stock		(128,669	)		(1	)		(737	)		—			—			(738	)
Restricted stock awards		390,000			4			(4	)		—			—			—
Equity compensation costs		—			—			244			—			—			244
Issuance of stock in connection with merger		5,000,000			50			(50	)		—			—			—
Dividend to Parent prior to consummation of merger		—			—			(5,928	)		(13,489	)		—			(19,417	)
Comprehensive income:
Net income		—			—			—			2,338			—			2,338
Changes in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects		—			—			—			—			(311	)		(311	)

Total comprehensive income																	2,027

Balances, December 31, 2007		8,475,817			85			14,372			(1,232	)		(478	)		12,747
Equity compensation costs		—			—			319			—			—			319
Restricted stock forfeited		(10,000	)		—			—			—			—			—
Restricted stock awards		1,990,000			20			(20	)		—			—			—
Comprehensive loss:
Net loss		—			—			—			(17,922	)		—			(17,922	)
Changes in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects		—			—			—			—			(567	)		(567	)
Total comprehensive loss																	(18,489	)

June 30, 2008 (unaudited)		10,455,817		$	105		$	14,671		$	(19,154	)	$	(1,045	)	$	(5,423	)

Note: On November 15, 2007, Brooke Franchise Corporation was merged with and into Brooke Capital Corporation. Upon closing of the transaction, Brooke Franchise paid out its total stockholders’ equity of $19,417,000 in the form of a dividend to its then-parent, Brooke Corporation. Results of operations for Brooke Capital and Brooke Franchise have been combined since the date both companies have been under the common control of Brooke Corporation (December 8, 2006).

See accompanying summary of accounting policies and notes to financial statements.

Brooke Capital Corporation
Notes to Combined Financial Statements
UNAUDITED

1. Summary of Significant Accounting Policies

(a) Organization

Brooke Capital Corporation, formerly First American Capital Corporation (the “Company”), is a financial services company incorporated under the laws of the State of Kansas with its principal office located in Overland Park, Kansas. The Company has been listed on the American Stock Exchange since August 30, 2007 under the symbol “BCP.” The Company’s primary business purpose is franchising insurance and related businesses and providing services to its franchisees through its network of regional offices, service centers and sales centers. Other business purposes of the Company are to provide consulting services to business sellers and collateral preservation assistance to lenders. In addition, the Company uses its industry contacts and expertise in insurance brokerage to broker loans for, and consult with, managing general agencies and managing general agencies that own insurance companies, specializing in hard-to-place insurance sales, captive insurance agencies and funeral homes. The Company will also use its expertise to preserve collateral and monitor insurance agency borrowers on behalf of lenders.

Affiliates of the Company have entered into revenue sharing agreements with the Company, which provide that any and all revenues paid under an affiliate’s name are transferred to the Company. These combined financial statements represent the financial position, results of operations, and cash flows of the resulting economic entity known as Brooke Capital Corporation.

The Company is a majority-owned subsidiary of Brooke Corporation (sometimes referred to “Parent” or as the “Parent Company”), a Kansas corporation, whose stock is listed on the NASDAQ Stock Exchange under the symbol “BXXX.” Brooke Corporation’s registered office is located in Overland Park, Kansas.

The subsidiaries of the Company are as follows:

First Life America Corporation (“First Life” or “FLAC”) is a licensed insurance company distributing a broad range of individual life and annuity insurance products to individuals in eight states. As a sale of First Life is pending, it has been presented as a discontinued operation and its assets and liabilities being sold are presented as held-for-sale in these financial statements.

Brooke Capital Advisors, Inc. (“Brooke Capital Advisors” or “BCA”), formerly First Life Benefits, is a broker that in the past offered life, health, disability and annuity products underwritten by other companies and complementing those products offered by First Life America Corporation. Beginning on December 8, 2006, Brooke Capital Advisors, Inc. began operating a managing general agency loan brokerage and consulting business.

Brooke Investments, Inc. is a Kansas corporation that acquires real estate for lease to franchisees or other purposes. In addition, to help preserve collateral interests, Brooke Investments enters into real estate leases that are subleased or licensed to franchisees. Effective July 1, 2008, all franchise operations were transferred to Brooke Investments, Inc. and it became the named franchisor.

Brooke Agency, Inc. is a Kansas corporation. Brooke Agency acquires for investment those insurance agencies or funeral homes where local ownership is not considered critical to financial performance. Brooke Agency does not have any employees or incur operating expenses because the Company usually retains a share of the commissions to provide personnel and facilities.

Brooke Life and Health, Inc., a Kansas corporation, is a licensed insurance agency that sells life and health insurance through the Company’s network of franchise agents, subagents and insurance producers.

The American Heritage, Inc., a Kansas corporation, consults with and otherwise assists agent buyers under the trade name of Heritage Agency Consultants.

First Brooke Insurance and Financial Services, Inc. is a Texas corporation used for licensing purposes.

The American Agency, Inc., a Kansas corporation, consults with agent sellers and brokers agency sales under the trade name of Agency Business Consultants.

Brooke Funeral Services Company, LLC, a Delaware corporation, was created to offer funeral services and life insurance through the Company’s network of funeral franchisees. Brooke Funeral Services Company, LLC has acquired ownership of franchise agreements from Brooke Corporation and/or the Company as part of an arrangement to preserve collateral on behalf of Aleritas Capital Corp., a majority-owned subsidiary of Brooke Corporation, as required by the securitization process. Brooke Funeral Services Company, LLC has contracted with Brooke Corporation and/or the Company for performance of any obligations to agents associated with all such franchise agreements.

First Capital Venture, Inc. is a shell company with no operations and no plans for operations at this time.

The affiliates included in these combined statements are as follows:

Brooke Agency Services Company LLC is licensed as an insurance agency and was created to offer property, casualty, life and health insurance through the Company’s network of franchisees. Brooke Agency Services Company LLC has acquired ownership of certain franchise agreements from Brooke Corporation and/or the Company as part of an arrangement to preserve collateral on behalf of Aleritas Credit Corp., as required by the securitization process. Brooke Agency Services Company LLC is a wholly-owned subsidiary of Brooke Corporation and has contracted with Brooke Corporation and/or the Company for performance of any obligations to agents associated with all such franchise agreements.

Brooke Agency Services Company of Nevada, LLC, is a licensed Nevada insurance agency, wholly-owned by Brooke Corporation, that holds insurance contracts in Nevada for the Company.

The Company has business transactions with another affiliate, Aleritas Capital Corp., “Aleritas,” a Delaware corporation, operating as a specialty finance company lending primarily to locally-owned businesses that sell insurance. Aleritas is a majority-owned subsidiary of Brooke Corporation and its stock is traded over the counter (OTCBB: BRCR).

(b) Basis of Presentation

On November 15, 2007, the Company completed a merger with Brooke Franchise Corporation (“Brooke Franchise”), which was then a wholly-owned subsidiary of Brooke Corporation. Pursuant to the Merger Agreement, Brooke Franchise was merged with and into the Company, resulting in the Company being the survivor. The transaction was accounted for in accordance with the guidance under Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” issued by the Financial Accounting Standards Board (“FASB”).

This merger represented a transaction between entities under common control. Accordingly, the Company has recorded the assets and liabilities of Brooke Franchise at their carrying amounts at the date of transfer as if the transaction had taken place as of the beginning of the fiscal year 2007. In addition, the Company’s results of operations and other changes in financial position for 2007 have been reported as if the merger had occurred at the beginning of the period.

Prior periods’ financial statements and related disclosures have been restated to furnish comparative information for the periods during which the Company and Brooke Franchise have been under common control.

The accompanying financial statements include the consolidated financial statements of the Company and its subsidiaries combined with the financial statements of certain affiliates as noted above. All significant intracompany accounts and transactions have been eliminated in both the consolidated and the combined financial statements.

The accompanying combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which for First Life America Corporation, differ from statutory accounting practices prescribed or permitted by the Kansas Insurance Department (“KID”).

A complete summary of significant accounting policies is included in Note 1 to the audited financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2007.

Discontinued Operation - On July 18, 2008, the Company entered into an agreement to sell its wholly-owned life insurance subsidiary, First Life America Corporation (“First Life” or “FLAC”) to First Trinity Financial Corporation. The sale is subject to customary regulatory approval by the Kansas Insurance Department. During the second quarter 2008, the Company had committed to a plan to sell First Life. Accordingly, as of June 30, 2008, First Life has been presented as a discontinued operation and its assets and liabilities being sold are presented as held-for-sale in the Company’s combined financial statements. All periods presented have been reclassified to reflect this discontinued operation. See additional information in Note 20.

(c) Use of Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities and disclosures. Accordingly, the actual amounts could differ from those estimates. Any adjustments applied to estimated amounts are recognized in the year in which such adjustments are determined. It is at least reasonably possible these estimates will change in the near term.

(d) Cash Equivalents

For purposes of the statements of cash flows, the Company considers all cash on hand, cash in banks and short-term investments purchased with a maturity of three months or less to be cash and cash equivalents. Restricted cash is not included in cash equivalents. The carrying value of cash and cash equivalents approximates their estimated fair values.

(e) Allowance for Doubtful Accounts

The Company estimates that a certain level of accounts receivable, primarily franchisee account balances, will be uncollectible; therefore, allowances of $6,700,000 and $1,114,000 at June 30, 2008 and December 31, 2007, respectively, have been established. The Company has historically assisted its franchisees with cash flow by providing commission advances because of cyclical fluctuations in commission receipts, but expects repayment of all such advances within the 30-day franchise statement cycle and is placed on a watch list if not paid within four months. At June 30, 2008, the amount of allowance was determined after analysis of several specific factors, including franchise advances classified as “watch” status. Effective August 15, 2008, the Company will no longer provide commission advances.

The following schedule entitled “Valuation and Qualifying Accounts” summarizes the Allowance for Doubtful Accounts activity for the periods ended June 30, 2008 and December 31, 2007. Additions to the allowance for doubtful accounts are charged to expense. Charges to expense during 2007 were reduced as a result of Brooke Corporation’s guaranty of certain receivables of Brooke Franchise totaling $2,485,000 in connection with the November 15, 2007 merger transaction:

Valuation and Qualifying Accounts
(in thousands)


	Balance at
	Beginning of		Charges to				Balance at
	Period		Expenses		Write Offs		End of Period
Allowance for Doubtful Accounts
Year ended December 31, 2007	$	1,466	$	4,276	$	4,628	$	1,114
Period ended June 30, 2008	$	1,114	$	6,645	$	1,059	$	6,700

The Company does not accrue interest on loans that are 90 days or more delinquent and payments received on all such loans are applied to principal. Loans and accounts receivable are written off when management determines that collection is unlikely. This determination is made based on management’s experience and evaluation of the debtor’s circumstances.

(f) Revenue Recognition

Commissions. The Company has estimated and accrued a liability for commission refunds of $404,000 and $481,000 at June 30, 2008 and December 31, 2007, respectively.

Interest income, net. The Company recognizes interest income when earned.

(g) Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation on buildings and land improvements is calculated using the straight-line method over the estimated useful lives of the respective assets. Depreciation on furniture, equipment and automobiles is calculated using both straight-line and accelerated methods over the estimated useful lives of the respective assets. The estimated useful lives are generally as follows:


Buildings and leasehold improvements		39 years

Land improvements		15 years

Furniture and equipment		3 to 10 years

Automobiles		5 years

(h) Amortizable Intangible Assets

Amortization was $28,000 and $31,000 for the six-month periods ended June 30, 2008 and 2007, respectively.

(i) Income Taxes

The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under accounting principles generally accepted in the United States of America and balances determined for tax reporting purposes.

(j) Investment in Businesses

The number of businesses purchased to hold in inventory for sale for the six-month periods ended June 30, 2008 and 2007 was 2 and 11, respectively. Correspondingly, the number of businesses sold from inventory for the six-month periods ended June 30, 2008 and 2007 was 5 and 9, respectively. At June 30, 2008 and December 31, 2007, the “Investment in Businesses” inventory consisted of 3 businesses and 6 businesses, respectively, with fair market values totaling $951,000 and $9,413,000, respectively.

(k) Net Earnings Per Share Data

Basic net income per common share is calculated by dividing net income by the weighted average number of shares of the Company’s common stock outstanding. Diluted net income is calculated by including the weighted average effect of dilutive warrants outstanding during the periods. The weighted average number of shares issuable upon the exercise of outstanding warrants assumes that the applicable proceeds from such exercises are used to acquire treasury shares at the average price of common stock during the periods. Basic and diluted earnings per share from continuing operations for the three and six-month periods ended June 30, 2008 and 2007 were determined as follows (adjusted for the 1-for-3 reverse stock split effective in April 2007 and the issuance of 5,000,000 shares in connection with the merger of Brooke Franchise with and into the Company):


	Three-Month Periods Ended					Six-Month Periods Ended
	June 30,					June 30,
*(in thousands, except share data)*	2008			2007		2008			2007
Numerator:
Net income (loss) — from continuing operations — numerator for basic earnings per share	$	(15,090	)	$	1,148	$	(18,001	)	$	3,857
Effect of dilutive securities		0			0		0			0

Numerator for diluted earnings per share		(15,090	)		1,148		(18,001	)		3,857

Denominator:
Average common shares outstanding (after the effect of 1-for-3 reverse stock split and issuance of 5,000,000 shares to effect merger) used for basic and diluted earnings per share		8,487,685			8,101,568		8,480,652			8,063,890

Earnings (loss) per share from continuing operations:
Basic and diluted	$	(1.78	)	$	0.14	$	(2.12	)	$	0.48

Diluted earnings per share for the above periods excludes the impact of outstanding warrants to purchase 49,999 shares as the impact would be antidilutive.

(l) Other Current Assets

Included in other current assets are certain deposits and prepaid and other current amounts. The carrying values of these other assets approximate their fair values.

(m) Advertising

Total advertising and marketing expenses for the six-month periods ended June 30, 2008 and 2007 were $6,673,000 and $7,371,000, respectively.

(n) Restricted Cash

The Company holds insurance commissions for the special purpose entities Brooke Acceptance Company, LLC, Brooke Captive Credit Company 2003, LLC, Brooke Securitization Company 2004A, LLC, Brooke Capital Company, LLC, Brooke Securitization Company V, LLC, and Brooke Securitization Company 2006-1, LLC, all wholly-owned subsidiaries of Aleritas Capital Corp., for the purpose of making future loan payments, and the use of these funds is restricted. The amount of commissions held at June 30, 2008 and December 31, 2007 was $234,000 and $171,000, respectively.

(o) Stock-Based Compensation

The Company has granted restricted stock awards to certain officers and directors pursuant to The Brooke Capital Corporation 2007 Equity Incentive Plan. Compensation costs were determined based upon the fair value of the awards on their respective grant dates and are being recorded as expense over the related vesting periods.

2. Transactions with the Parent Company

The Company is a majority-owned subsidiary of Brooke Corporation. The Company relies on Brooke Corporation to provide facilities, administrative support, cash management, and accounting services. The Company pays a monthly administrative fee for these shared services. For the three-month periods ended June 30, 2008 and 2007, the total amount paid to the Parent Company was $450,000 and $735,000, respectively. For the six-month periods ended June 30, 2008 and 2007, the total amount paid to the Parent Company was $900,000 and $1,935,000, respectively.

The majority of cash required for operations is kept in a common corporate checking account and amounts due to or amounts due from the Parent Company are netted, and recorded on the balance sheet as a Parent Company receivable or Parent Company payable, accordingly. The Parent Company receivable at June 30, 2008 and December 31, 2007 resulted primarily from the additional cash generated from the Company’s purchase and sale of a business activity. At June 30, 2008 and December 31, 2007, the Company reported receivables from its Parent Company and other related parties of $22,862,000 and $18,441,000, respectively, as a result of this and other transactions with affiliates. Included in the current balance is $4,700,000 related to the Delta Plus Holdings transaction of retail business, along with $1,014,000 for the guarantee of accounts receivable. Transactions between affiliates in the normal course of operations were $4,236,000 with the remaining in common accounts.

On March 30, 2007, Brooke Corporation acquired Delta Plus Holdings, Inc., a holding company based in Missouri. At the same time, all of the insurance agency assets of Christopher Joseph & Company, a direct subsidiary of Delta Plus Holdings, Inc., were sold to Brooke Franchise Corporation for $8,984,000. Christopher Joseph & Company operated retail insurance offices in Missouri, Kansas, Florida and Oklahoma, marketing personal and commercial products for other affiliated and non-affiliated insurance companies. The retail offices of Christopher Joseph & Company have since been sold or converted to Brooke franchise offices.

At June 30, 2008 and December 31, 2007, the Company reported income taxes refundable of $11,322,000 and $1,187,000, respectively. These amounts represent income taxes expected to be refunded as a result of the Company’s ability to carry back current net operating losses through its consolidated returns filed with the Parent Company in prior years.

In accordance with the shared services agreement with Brooke Corporation, property and equipment for the Company were to be provided by Brooke Corporation. On June 30, 2007, Brooke Franchise purchased property and equipment from Brooke Corporation related to franchise operations. The Company, as successor in interest, has continued to make such purchases since that date. Accordingly, the fees paid by the Company to Brooke Corporation in connection with the shared services agreement were reduced during 2007.

Brooke Corporation has guaranteed loans on behalf of the Company.

3. Accounts and Notes Receivable, net

At June 30, 2008 and December 31, 2007, accounts and notes receivable consist of the following (in thousands):


	June 30, 2008			December 31, 2007
Business loans	$	3,600		$	4,263
Less: Business loans sold		(3,134	)		(1,662	)
Plus: Loan participation classified as secured borrowing		3,134			1,662
Allowance for loan losses		(800	)		—

Total notes receivable, net		2,800			4,263
Interest earned not collected on notes		81			322
Customer receivables		22,928			24,596
Allowance for doubtful accounts		(6,700	)		(1,114	)

Total accounts and notes receivable, net	$	19,109		$	28,067

Loan participations represent the transfer of notes receivable, by sale, to “participating” lenders. These transfers are accounted for by the criteria established by SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Of the notes receivable sold at June 30, 2008 and December 31, 2007, none were accounted for as sales because the transfers did not meet the criteria established by SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

4. Property and Equipment

A summary of property and equipment at June 30, 2008 and December 31, 2007 is as follows (in thousands):


	June 30, 2008			December 31, 2007
Land	$	202		$	202
Buildings and leasehold improvements		6,811			6,767
Furniture and equipment		5,014			5,664
Computer equipment		3,234			3,655
Automobiles		978			1,051

Total property and equipment		16,239			17,339
Accumulated depreciation and amortization		(4,244	)		(4,162	)

Net property and equipment	$	11,995		$	13,177

Depreciation expense was $935,000 and $42,000 during the six-month periods ended June 30, 2008 and 2007, respectively.

As discussed in Note 2, on June 30, 2007, Brooke Franchise acquired property and equipment from Brooke Corporation related to franchise operations. In the past, property and equipment were provided to the franchise operations by Brooke Corporation in connection with a shared services agreement. Property and equipment received from Brooke Corporation was recorded by Brooke Franchise using the initial cost basis and accumulated depreciation of the assets transferred.

5. Bank Loans, Notes Payable, and Other Long-Term Obligations

At June 30, 2008 and December 31, 2007, bank loans, notes payable and other long-term obligations consist of the following (in thousands):


	June 30,			December 31,
	2008			2007
Seller notes payable. These notes are payable to the sellers of businesses that the Company has purchased and are collateralized by assets of the businesses purchased. Some of these notes have an interest rate of 0% and have been discounted at a rate of 5.50% to 9.75% and maturities ranging through January 2011. A particular seller note payable has an interest rate of 7.00% and matures September 2015.	$	16,154		$	19,123
Columbian Bank and Trust Company, due July 2008. Interest rate is variable and was 5.00% at June 30, 2008. Interest and principal are due in one payment at maturity. Collateralized by accounts receivable.		7,500			4,355
Citizens Bank and Trust Company, due August 2008. Interest rate is variable at Prime plus 3.00% and is due quarterly with principal due at maturity. Interest rate was 8.00% at June 30, 2008. Parent Company has pledged stock it owns in Aleritas Credit Corp. and the Company.		8,750			9,000
Participating Lenders, due December 2011. Interest rate is variable and was 9.50% at June 30, 2008. Principal payments are scheduled during the note’s term with the unpaid balance due at maturity (December 31, 2011). Collateralized by stock in subsidiary and other assets.		12,137			12,382
Aleritas Credit Corp., due September 2015. Interest rate is variable and was 8.50% at June 30, 2008. Interest and principal are due monthly. Collateralized by various assets of the Company.		383			1,022
First National Bank of Phillipsburg, variable interest rate (7.75% at June 30, 2008) with scheduled principal payments through maturity at August 2017. Collateralized by real estate.		707			728
Aleritas Credit Corp., various notes with variable interest rates from 8.50% to 9.00% at June 30, 2008, with maturities ranging from October 2011 to January 2021. Principal payments are scheduled on each note through its respective maturity date. Collateralized by real estate.		1,807			1,891
Fidelity Bank, variable interest rate (7.75% at June 30, 2008) with scheduled principal payments through maturity at September 2021. Collateralized by real estate.		1,950			1,990

Total bank loans and notes payable		49,388			50,491
Less: Current maturities and short-term debt		(33,049	)		(32,122	)

Total long-term debt	$	16,339		$	18,369

The renewal rights associated with the collateral interests of seller notes payable had estimated annual commissions of $37,165,000 and $47,282,000 at June 30, 2008 and December 31, 2007, respectively.

In connection with the outstanding loan and related debt agreements with Citizens Bank and Trust Company and various participating lenders, the Company has committed to certain covenants wherein the Company, certain of the Company’s subsidiaries and/or Parent will maintain certain benchmarks with respect to their: (1) regulatory status; (2) outstanding litigation; (3) liquidity; and (4) solvency as defined in the relevant agreement.

In addition, the Company has agreed to certain restrictions applicable to it and certain of its subsidiaries regarding, among other things, (1) investment in other affiliates, (2) payment of any dividends or distributions, (3) incurrence of additional debt, (4) pledging of certain assets, (5) reorganization and merger, and (6) disposition of assets.

On March 11, 2008, Keith Bouchey, President and CEO of Brooke Corporation, resigned and on March 12, 2008, the stock price of Aleritas fell below the stated value in the loan covenants on the Citizens Bank and Trust note. During March 2008, the note was renegotiated with a maturity of May 30, 2008 and a new minimum stated value for Aleritas stock held as collateral. Since that time, the stock has traded below the current minimum stated value and the maturity date was extended to August 29, 2008. In connection with the recently announced sale of First Life, the Company has committed that it will apply the proceeds from this sale toward the ultimate retirement of this note. Accordingly, Citizens has agreed in principle to extend the note until the sale of First Life is consummated. The sale is subject to customary regulatory approval by the Kansas Insurance Department and is expected to close before the end of 2008.

None of the Amortizable Intangible Assets described in Note 15 and none of the Acquisitions and Divestitures described in Note 12 were financed with seller notes payable at June 30, 2008.

Interest incurred on bank loans and notes payable for the six-month periods ended June 30, 2008 and 2007 was $1,632,000 and $1,258,000, respectively. Interest payable was $973,000 and $1,314,000 at June 30, 2008 and December 31, 2007, respectively.

The future scheduled maturities of debt are as follows (in thousands):


Twelve-Month Periods Ending
June 30,
2009	$	33,049
2010		3,225
2011		2,611
2012		7,312
2013		413
Thereafter		2,778

	$	49,388

6. Leases

The Company leases space for itself and on behalf of its agents. Future long-term payments related to these operating leases at June 30, 2008 are as follows (in thousands):


Twelve-Month Periods Ending
June 30,
2009	$	8,729
2010		5,810
2011		2,563
2012		798
2013		279
Thereafter		204

Total	$	18,383

7. Income Taxes

Federal income tax expense differs from the amount computed by applying the statutory Federal income tax rate for the six-month periods ended June 30, 2008 and 2007 as follows:


	Six-Month Periods Ended
	June 30,
	2008			2007
U.S. Federal statutory tax rate		(35	)%		35	%
State statutory rate		(4	)		4
Miscellaneous		1			(1	)

		(38	)%		38	%

Deferred tax assets and liabilities are recorded to recognize the future tax consequences of temporary differences between financial reporting amounts and the tax basis of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the years in which the differences are expected to reverse. The Company’s net deferred tax assets/liabilities arising from continuing operations at June 30, 2008 include the benefit associated with net operating loss carryforwards and this amount is largely offset by a valuation allowance.

At December 31, 2007, the Company had net operating loss carryforwards of approximately $5,741,000 on a consolidated basis. Net operating loss carryforwards of $168,000 resulted from non-life insurance operations and were generated prior to the base period for tax consolidation purposes. These loss carryforwards expire in 2011 and 2012 and can only be used to offset taxable income resulting from non-life insurance operations. Net operating loss carryforwards of $4,608,000 resulted from non-life insurance operations and were generated either during or subsequent to the base period for tax consolidation purposes. These loss carryforwards expire in 2018 through 2025 and can be used to offset either taxable income resulting from non-life insurance operations or 35% of taxable income resulting from life insurance operations subject to certain limitations.

The Company filed a consolidated federal income tax return with First Life and Brooke Capital Advisors for the year ended December 31, 2006 and plans to do so for the period ended November 15, 2007 (the effective date of its merger with Brooke Franchise). The Company filed as a part of the Brooke Corporation consolidated federal return for the remaining portion of 2007 and plans to so file for the period ended June 29, 2008 as Brooke Corporation’s ownership of the Company exceeded 80% through that date. Prior to the merger, Brooke Franchise had historically been included as a part of the consolidated returns filed by Brooke Corporation.

8. Employee Benefit Plans

Substantially all of the Company’s employees are eligible to participate in Brooke Corporation’s defined contribution retirement plan. Employees may contribute up to the maximum amount allowed pursuant to the Internal Revenue Code, as amended. The Company will match 50% of employee contributions up to a maximum of $3,000 or 3% of compensation and may contribute an additional amount to the plan at the discretion of the Board of Directors. During the six-month period ended June 30, 2008, the Company recorded $128,000 in employer contributions to the plan. No employer contributions were recorded during the six months ended June 30, 2007.

9. Concentration of Credit Risk

Credit risk is limited by emphasizing investment grade securities and by diversifying the investment portfolio among various investment instruments. Certain cash balances exceed the maximum insurance protection of $100,000 provided by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. At June 30, 2008, the Company had account balances of $3,146,000 that exceeded the insurance limit of the Federal Deposit Insurance Corporation.

10. Segment and Related Information

The Company’s operations are conducted through its Insurance Agency Operations and Corporate segments.

The Company’s insurance agency operations include its franchise operations and the insurance agency consulting activities conducted through Brooke Capital Advisors. Franchise operations include the sale of insurance, financial and credit services on a retail basis through franchisees. Through Brooke Capital Advisors, consulting services are provided to managing general agencies and collateral preservation services relating to such agencies’ loans. This business expanded in 2007 to include similar services for funeral home businesses and loans related thereto. Revenues, expenses, assets and liabilities that are not allocated to one of the two reportable segments are categorized as “Corporate.” Activities associated with Corporate include functions such as accounting, auditing, legal, human resources and investor relations.

As of June 30, 2008, the related financial results of First Life America Corporation are presented as a discontinued operation and the assets and liabilities of that business are presented as held-for-sale in the combined financial statements. First Life sells life insurance and annuity products in eight states throughout the Midwest. All periods presented have been reclassified to reflect this discontinued operation. See Note 20 for additional information.

The segments’ accounting policies and reporting practices are the same as those described in the summary of significant accounting policies.

The tables below reflect summarized financial information concerning the Company’s reportable segments for the three and six-month periods ended June 30, 2008 and 2007 (in thousands):


							Elimination
	Insurance						of
	Agency						Intersegment			Continuing			Discontinued
	Operations			Corporate			Activity			Operations			Operation
Three-Month Period Ended June 30, 2008
Insurance commissions	$	27,201		$	—		$	—		$	27,201		$	—
Collateral preservation		3,557			—			—			3,557			—
Insurance premiums earned		—			—			—			—			898
Interest income		130			70			129			71			408
Consulting fees		—			—			—			—			—
Initial franchise fees for basic services		—			—			—			—			—
Loss on sale of businesses and assets		(4,954	)		—			—			(4,954	)		—
Other income		175			—			—			175			61

Total Operating Revenues		26,109			70			129			26,050			1,367

Interest expense		696			75			129			642			—
Commissions expense		22,072			—			—			22,072			49
Payroll expense		6,018			52			—			6,070			134
Depreciation and amortization		479			13			—			492			195
Provision for doubtful accounts		8,076			—			—			8,076			—
Other operating expenses		12,865			160			—			13,025			933

Income Before Income Taxes		(24,097	)		(230	)		—			(24,327	)		56

Segment assets		75,000			12,000			(16,000	)		71,000			35,000

Expenditures for segment assets	$	368		$	—		$	—		$	368		$	—


Three-Month Period Ended June 30, 2007
Insurance commissions	$	27,615		$	—		$	—		$	27,615		$	—
Collateral preservation		1,363			—			—			1,363			—
Insurance premiums earned		—			—			—			—			849
Interest income		95			82			—			177			352
Consulting fees		3,740			—			—			3,740			—
Initial franchise fees for basic services		7,095			—			—			7,095			—
Initial franchise fees for buyers assistance plans		70			—			—			70			—
Gain on sale of businesses		1,161			—			—			1,161			—
Other income		696			—			—			696			60

Total Operating Revenues		41,835			82			—			41,917			1,261

Interest expense		705			—			—			705			—
Commissions expense		22,126			—			—			22,126			50
Payroll expense		5,997			190			—			6,187			116
Depreciation and amortization		31			11			—			42			212
Provision for doubtful accounts		1,337			—			—			1,337			—
Other operating expenses		9,503			257			—			9,760			667

Income Before Income Taxes		2,136			(376	)		—			1,760			216

Segment assets		86,000			1,000			—			87,000			31,000

Expenditures for segment assets	$	6,551		$	—		$	—		$	6,551		$	—

The table below reflects summarized financial information concerning the Company’s reportable segments for the six-month periods ended June 30, 2008 and 2007 (in thousands):


							Elimination
	Insurance						of
	Agency						Intersegment			Continuing			Discontinued
	Operations			Corporate			Activity			Operations			Operation
Six-Month Period Ended June 30, 2008
Insurance commissions	$	60,798		$	—		$	—		$	60,798		$	—
Collateral preservation		9,270			—			—			9,270			—
Insurance premiums earned		—			—			—			—			2,000
Interest income		590			132			638			84			805
Consulting fees		250			—			—			250			—
Initial franchise fees for basic services		1,320			—			—			1,320			—
Loss on sale of businesses and assets		(5,800	)		—			—			(5,800	)		—
Other income		360			6			—			366			121

Total Operating Revenues		66,788			138			638			66,288			2,926

Interest expense		2,127			143			638			1,632			—
Commissions expense		46,982			—			—			46,982			104
Payroll expense		12,026			75			—			12,101			312
Depreciation and amortization		937			25			—			962			385
Provision for doubtful accounts		8,428			—			—			8,428			—
Other operating expenses		24,884			315			—			25,199			2,046

Income Before Income Taxes		(28,596	)		(420	)		—			(29,016	)		79

Segment assets		75,000			12,000			(16,000	)		71,000			35,000

Expenditures for segment assets	$	1,035		$	—		$	—		$	1,035		$	13

Six-Month Period Ended June 30, 2007
Insurance commissions	$	59,623		$	—		$	—		$	59,623		$	—
Collateral preservation		2,254			—			—			2,254			—
Insurance premiums earned		—			—			—			—			1,922
Interest income		173			89			—			262			667
Consulting fees		4,730			—			—			4,730			—
Initial franchise fees for basic services		19,965			—			—			19,965			—
Initial franchise fees for buyers assistance plans		455			—			—			455			—
Gain on sale of businesses		1,842			—			—			1,842			—
Other income		19			—			—			19			124

Total Operating Revenues		89,061			89			—			89,150			2,713

Interest expense		1,258			—			—			1,258			—
Commissions expense		44,967			—			—			44,967			109
Payroll expense		11,759			214			—			11,973			240
Depreciation and amortization		46			27			—			73			394
Provision for doubtful accounts		4,383			—			—			4,383			—
Other operating expenses		19,927			384			—			20,311			1,747

Income Before Income Taxes		6,721			(536	)		—			6,185			223

Segment assets		86,000			1,000			—			87,000			31,000

Expenditures for segment assets	$	6,551		$	—		$	—		$	6,551		$	_2

11. Related Party Information

Transactions with Brooke Corporation, the Parent Company, are described in Note 2.

Aleritas, a majority-owned subsidiary of Brooke Corporation, is a licensed finance company that originates loans to franchisees of the Company. Aleritas funds the loans it originates by selling loan participation and asset-backed securities to community banks and other finance companies. In 2003, Aleritas worked with Standard and Poors to create a new securitization asset class for insurance agency loans. To date there have been six securitizations completed. Aleritas has executed promissory notes with a majority of businesses that have franchise agreements with the Company. Proceeds from these notes reduce the receivables for the Company from franchisees.

In connection with loans originated through Aleritas, beginning in 2004, the Company has entered into separate Collateral Preservation Agreements with Aleritas. Under these agreements, the Company provides Aleritas with collateral preservation services and assistance with loss mitigation of distressed loans. On certain loan types, the Company is compensated by upfront and ongoing fees paid by Aleritas. For the six-month periods ended June 30, 2008 and 2007, $9,270,000 and $2,254,000 in compensation was paid to the Company for services provided under these agreements. At June 30, 2008 and December 31, 2007, Aleritas owed $1,161,000 and $449,000, respectively, to the Company under this agreement. During the six-month periods ended June 30, 2008 and 2007, net compensation received by the Company totaled $8,416,000 and $291,000, respectively, under these agreements.

In September 2005, Aleritas made a loan to Brooke Franchise, in the amount of $1,190,000, with a maturity date of September 15, 2015. The balance of this loan was $383,000 at June 30, 2008 and $1,022,000 at December 31, 2007. Terms of the loan state a variable interest rate, daily adjustable, of 3.50% above the New York Prime Rate with payments of principal and interest due monthly. At June 30, 2008 and December 31, 2007, respectively, interest payable on this loan totaled $1,000 and $5,000.

During 2005 and 2006, Aleritas made various loans to Brooke Investments (totaling $1,807,000 at June 30, 2008 and $1,891,000 at December 31, 2007) with variable interest rates and maturities ranging from October 2011 to January 2021. Principal payments are scheduled on each note through its respective maturity date and interest rates were 8.50% to 9.00% at June 30, 2008. At June 30, 2008 and December 31, 2007, respectively, interest payable on these loans totaled $7,000 and $8,000.

During the six-month periods ended June 30, 2008 and 2007, interest expense on these loans with Aleritas totaled $116,000 and $180,000, respectively.

In December 2007, Brooke Capital Advisors, Inc., a wholly-owned subsidiary of the Company, loaned $12,382,000 to the Company. The interest rate on the loan is variable, at 4.50% over the Prime Rate as published in The Wall Street Journal, and monthly payments of $222,000 are scheduled with a final payment of $5,910,000 due in December 2011. Payment of the loan is secured by the guaranty of Brooke Corporation and by the Company’s pledge of its stock in First Life. Upon the expected closing of the sale of First Life by the Company and the pay-off of the loan from Citizens Bank and Trust, Brooke Corporation intends to pledge five million of its shares of Company common stock as replacement collateral. The Company has also agreed to pledge its stock in Delta Plus Holdings, Inc. and certain Delta Plus subsidiaries, including Traders Insurance Company, upon the acquisition of Delta Plus from Brooke Corporation. Brooke Capital Advisors initially sold the entire participating interest in this loan to Brooke Holdings, Inc.; however, at June 30, 2008, all but $1,061,000 of the $12,137,000 amount outstanding has been sold to other participating lenders, and $6,554,000 remained payable to Brooke Holdings, Inc. The amount payable to Brooke Holdings is reported as a part of accounts payable. In addition, during March 2008, the Company loaned $1,980,000 to Brooke Holdings, Inc. At June 30, 2008, all but $480,000 of this amount had been sold to a participating lender. Brooke Holdings, Inc. is controlled by Robert D. Orr, Chairman of the Board and Chief Executive Officer of the Company, and Leland G. Orr, President and Chief Executive Officer of Brooke Corporation and formerly Chief Financial Officer of the Company, who owned approximately 74% and 22%, respectively, of its outstanding shares of stock as of August 15 2008.

The DB Group, Ltd., a wholly-owned subsidiary of Brooke Brokerage Corporation, is a captive insurance company incorporated in Bermuda. The DB Group, Ltd. insures a portion of the professional insurance agents’ liability exposure of the Company, its affiliated companies and its franchisees and had a policy in force on June 30, 2008 that provided $5,000,000 of excess professional liability coverage. Brooke Brokerage Corporation is a wholly-owned subsidiary of Brooke Corporation that serves as a parent holding company to the DB Group, Ltd. and other subsidiaries involved in the brokerage business.

Anita Lowry is the sister of Robert D. Orr, Chairman of the Board and Chief Executive Officer of the Company and Leland G. Orr, President and Chief Executive Officer of Brooke Corporation and formerly Chief Financial Officer of Brooke Capital Corporation and is the mother of Michael S. Lowry, Vice President of Aleritas, and is married to Don Lowry. Don and Anita Lowry are shareholders of American Heritage Agency, Inc. of Hays, Kansas. The Company and American Heritage Agency, Inc. entered into a franchise agreement on February 28, 1999 pursuant to which American Heritage Agency, Inc. participates in the Company’s franchise program. Don and Anita Lowry sold American Heritage Agency, Inc. during the first quarter of 2008.

The Company maintains deposit accounts with Brooke Savings Bank, a wholly-owned subsidiary of Brooke Bancshares, Inc., which is a wholly-owned subsidiary of Brooke Corporation. At June 30, 2008 and December 31, 2007, the Company had $4,813,000 and $2,613,000, respectively, on deposit with the Bank.

12. Acquisitions and Divestitures

On March 30, 2007, Brooke Franchise acquired all of the insurance agency assets of Christopher Joseph & Company, a subsidiary of Delta Plus Holdings, Inc., from Brooke Corporation. Christopher Joseph & Company was acquired on that same date by Brooke Corporation in connection with its acquisition of Delta Plus. See Note 2 for more information about this transaction.

During May 2007, Brooke Franchise acquired a 100% interest in Brooke Investments, Inc., from Brooke Corporation. Brooke Investments acquires real estate for lease to franchisees, for corporate use and other purposes. See Note 6 for more information regarding the Company’s operating leases. Effective July 1, 2008, all franchise operations were transferred to Brooke Investments, Inc. and it became the named franchisor.

On September 28, 2007, Brooke Franchise acquired 60 insurance agency locations from entities associated with Chicago-based J and P Holdings Inc. The agencies currently sell auto insurance under the trade names of Lone Star Auto, Insurance Xpress, Car Insurance Store, Hallberg Insurance Agency and Hallberg Xpress in Colorado, Illinois, Kansas, Missouri and Texas. The acquired agencies will be converted into Brooke franchises or merged into existing Brooke franchise locations. At June 30, 2008, 53 of the acquired agencies had been so converted or merged.

13. Stockholders’ Equity Transactions

On December 8, 2006, the Company closed on a Stock Purchase and Sale Agreement (“2006 Stock Purchase Agreement”) with Brooke Corporation. Pursuant to the agreement, the Company committed, through a series of steps, to sell shares of common stock that would represent approximately 55% of the outstanding shares of the Company to Brooke Corporation in exchange for $3,000,000 in cash and execution of a Brokerage Agreement. At closing, the Company issued 3,742,943 shares of common stock (1,247,647 shares after the effects of the April 2007 1-for-3 reverse stock split) to Brooke Corporation, representing approximately 46.8% of the Company’s then authorized, issued and outstanding common stock, for $2,552,000 and executed and delivered the Brokerage Agreement. As part of the closing, the Company issued Brooke Corporation a warrant to purchase an additional 1,643,460 shares of common stock (547,820 shares, post-split) for $448,000, such shares to be authorized for issuance pursuant to then forthcoming amendments to the Company’s Articles of Incorporation. The Articles of Incorporation were amended on January 31, 2007, and Brooke Corporation exercised the Warrant on the same day.

As part of the consideration under the 2006 Stock Purchase Agreement, Brooke Capital Advisors and CJD & Associates, L.L.C. (“CJD”), Brooke Corporation’s brokerage subsidiary, entered into an agreement by which, as of that date, Brooke Capital Advisors began transacting all new managing general agent loan brokerage business (formerly operated by CJD). CJD operated such a business prior to closing of the 2006 Stock Purchase Agreement and, as part of the Brokerage Agreement, agreed not to engage in any new managing general agent loan brokerage business. Pursuant to the terms of the 2006 Stock Purchase Agreement, Brooke Corporation will contribute funds to the Company as additional consideration for the issuance of the shares of the Company’s common stock acquired, to the extent the pretax profits of Brooke Capital Advisors do not meet a three-year $6 million pretax profit goal in accordance with an agreed upon schedule set forth in the 2006 Stock Purchase Agreement. Brooke Capital Advisors reported pretax income of approximately $7,773,000 and $1,084,000 during 2007 and 2006, respectively. During the first six months of 2008, Brooke Capital Advisors reported a pretax loss of $1,705,000.

The Warrant issued in connection with the 2006 Stock Purchase Agreement was exercised by Brooke Corporation on January 31, 2007. Warrants outstanding at December 31, 2007 and June 30, 2008 include one issued to a former officer and another to a former outside director of the Company for 16,666 and 33,333 shares, respectively. These warrants were authorized by the Company’s former Board of Directors prior to the closing of the 2006 Stock Purchase Agreement. The warrants became exercisable on December 8, 2006 either in whole or in part for a period of ten years from that date at an exercise price of $1.72 per share, the assumed market price of the Company’s stock at the date of grant ($5.16 per share after the effects of the April 2007 1-for-3 reverse stock split). The fair value of these warrants was estimated as of the grant date using an accepted valuation model in accordance with SFAS No. 123R, “Share-Based Payment.” Significant assumptions included a risk-free rate of 4.56%, and expected volatility of 10% and a dividend rate of 0%. In the case of the former officer, the estimated value of the warrant, $32,000, was recorded as compensation expense. In the case of the former director, the estimated value of the warrant, $64,000, was recorded as a reduction of related stock issuance costs. Warrants outstanding are considered in the Company’s reported diluted earnings per share to the extent they are deemed to have a dilutive effect on reported earnings.

Coincident with the closing of the 2006 Stock Purchase Agreement, other warrants previously issued by the Company and held by Brooke Corporation were cancelled. Three separate warrants would have allowed Brooke Corporation to purchase up to 50,000 shares of common stock (for each warrant) at prices of $1.71, $3.35 and $5.00, respectively, beginning in 2012 or immediately prior to any earlier change of control involving the Company and were due to expire no later than 2015. The warrants were issued in connection with an earlier transaction wherein the Company acquired 450,500 shares of its common stock previously held by Brooke Corporation for a purchase price of $770,000 ($1.71 per share). All but $200,000 of the purchase price was financed by Aleritas, a wholly-owned subsidiary of Brooke Corporation at that time, at a fixed interest rate of 8% over a ten-year period. The note to Aleritas was paid in full prior to the closing of the 2006 Stock Purchase Agreement.

On January 31, 2007, the Company’s shareholders approved certain amendments to the Company’s articles of incorporation to: (1) increase its authorized shares of common stock from 8,000,000 to 25,000,000 million shares; (2) increase its authorized shares of preferred stock from 550,000 to 1,550,000; and (3) reduce the par value of its common stock from $.10 to $.01 per share. In addition, the shareholders approved a 1-for-3 reverse stock split by which each three shares of outstanding common stock would be reverse split into one share of common stock. The reverse split was effective on April 13, 2007.

On April 2, 2007, the Company concluded a modified “Dutch auction” tender offer for shares of its common stock, purchasing 379,248 shares (126,416 shares post-split) at a price of $1.60 per share ($4.80 per share post-split) for an aggregate purchase price of approximately $607,000. Upon completion of the offer and the following reverse stock split (effective on April 13, 2007), the Company had 3,085,817 shares of common stock outstanding (after the purchase of fractional shares representing the equivalent of 2,253 shares).

As discussed in Note 14, during 2007 and 2008 the Company’s Board of Directors made awards of restricted shares of its common stock to officers and directors of the Company under The Brooke Capital Corporation 2007 Equity Incentive Plan.

On November 15, 2007, the Company issued 5,000,000 shares of its common stock to Brooke Corporation in connection with the completion of its merger with Brooke Franchise wherein Brooke Franchise was merged with and into the Company, resulting in the Company being the survivor. An additional 2,250,000 shares of the Company’s common stock has been reserved for issuance to Brooke Corporation as merger consideration pursuant to contingent earn-out payments tied to adjusted earnings of the Company (excluding its subsidiaries) in calendar years 2007 and 2008. The Company did not achieve the 2007 adjusted earnings goals and thus will not issue 1,125,000 of the shares otherwise reserved as additional contingent merger consideration applicable to the 2007 earn-out.

Changes in stockholders’ equity related to this merger have been reported in the Company’s consolidated statements of stockholders’ equity included in these financial statements. Transactions between the companies were not material prior to the merger.

Prior year’s financial statements and related disclosures have been restated to furnish comparative information for the period during which the Company and Brooke Franchise have been under common control.

Following is a summary of the amounts of revenue and net income reported in these financial statements for 2007 as previously reported by the separate companies (in thousands):


Six-Month Period Ended June 30, 2007	Operating Revenues		Net Income (Loss)
Brooke Franchise	$	84,820	$	2,348
Brooke Capital		7,043		1,732

On a combined basis		91,863		4,080
Less discontinued operation		2,713		223

From continuing operations	$	89,150	$	3,857

Prior to the merger, Brooke Corporation owned 100% of Brooke Franchise and 53% of the Company. As a result of the closing of the merger, Brooke Corporation owned approximately 81% of the Company’s common stock. At June 30, 2008, Brooke Corporation owned approximately 66% of the Company’s stock.

14. Stock-Based Compensation

The Brooke Capital Corporation 2007 Equity Incentive Plan (the “Plan”), which is shareholder-approved, allows the Company to provide incentives and rewards to those employees and directors largely responsible for the success and growth of the Company and its direct and indirect subsidiaries. The Company believes that such incentives and rewards more closely align the interests of such persons with those of the shareholders of the Company.

The Plan authorizes the issuance of up to 2,400,000 shares of Company common stock to be issued pursuant to awards made under the Plan in the form of non-qualified stock options, incentive stock options, restricted shares of common stock, stock appreciation rights, performance units and restricted share units. On August 15, 2007 and June 30, 2008, the Compensation Committee of the Board of Directors of the Company awarded restricted shares of 390,000 and 1,990,000, respectively, to officers and directors of the Company or its affiliates. At June 30, 2008, a total of 2,370,000 of these restricted shares remain outstanding.

Pursuant to the Restricted Shares Agreement between the Company and each recipient, the recipients are entitled to receive dividends and vote their shares in matters submitted to shareholder vote. Transfer restrictions lapse in one-third annual increments and will automatically lapse for approximately 1,900,000 of the shares awarded upon the sale of all or substantially all of the assets of the Company or the sale by Brooke Corporation, the Company’s controlling shareholder, of all of its Company common stock. For the remaining shares outstanding, transfer restrictions will lapse for 50% of all remaining unvested shares upon such a sale or change in control, and will lapse for all remaining unvested shares upon the first anniversary of such an event.

The fair value of an award is determined based upon the market price for the Company’s common stock during the ten consecutive trading days immediately preceding the valuation date, as set forth in the Plan. Accordingly, the fair value for the restricted share awards granted on June 30, 2008 were determined to be $2.32 per share. As the shares of the Company’s common stock were not listed for trading on any exchange on the August 15, 2007 award date (prior to their listing on the American Stock Exchange on August 30, 2007), the Compensation Committee determined the fair value for the restricted share awards granted on August 15, 2007 to be $5.00 per share, as provided under the terms of the Plan.

During the six-month period ended June 30, 2008, the Company recorded approximately $319,000 in compensation cost along with related deferred income tax benefits of $121,000. As of June 30, 2008, there was $5,955,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized on a straight-line basis over the remaining terms of the three year vesting periods ending on August 15, 2010 and June 30, 2011.

Accordingly, the Company expects to record additional compensation cost related to this plan as follows:


Periods Ended December 31,
Six months then ended 2008	$	1,084,000
Year ended 2009		2,169,000
Year ended 2010		1,932,000
Year ended 2011		770,000

Total	$	5,955,000

15. Amortizable Intangible Assets

There are no intangible assets with indefinite useful lives at June 30, 2008. The intangible assets with definite useful lives had values of $525,000 and $553,000 at June 30, 2008 and December 31, 2007, respectively. Amortization expense on intangible assets, including those sold during the year, was $28,000 and $31,000 for the six-month periods ended June 30, 2008 and 2007.

Amortization expense for amortizable intangible assets for the twelve-month periods ending June 30, 2009, 2010, 2011, 2012 and 2013 is estimated to be $53,000, $47,000, $42,000, $37,000 and $29,000, respectively.

16. Supplemental Cash Flow Disclosures


	Six-Month Periods Ended
	June 30, 2008		June 30, 2007
Supplemental disclosures (in thousands):
Cash paid for interest	$	1,973	$	600

Cash paid for income tax	$	—	$	—

Business inventory decreased from December 31, 2007 to June 30, 2008. During the six-month periods ended June 30, 2008 and 2007, the statements of cash flows reflect the purchase of businesses into inventory provided by sellers totaling $105,000 and $11,021,000, respectively, the write down to realizable value of inventory of $4,317,000 and $300,000, respectively, and the change in inventory of $8,462,000 and $(1,433,000), respectively. Payments on seller notes were $2,970,000 and $4,790,000 in 2008 and 2007, respectively.


	Six-Month Periods Ended
*(in thousands)*	June 30, 2008			June 30, 2007
Purchase of business inventory	$	(370	)	$	(18,439	)
Sale of business inventory		4,620			27,727

Net cash provided from sale of business inventory		4,250			9,288
Cash provided by sellers of business inventory		(105	)		(11,021	)
Write down to realizable value of inventory		4,317			300

(Increase) decrease in inventory on balance sheet	$	8,462		$	(1,433	)

17. Contingencies

Previously, the Company had been expected to issue 500,000 shares of its common stock to Brooke Corporation in connection with the completion of the Exchange Agreement, dated August 31, 2007, as amended, among Brooke Corporation, Delta Plus and the Company wherein the Company would have received all of the outstanding stock of Delta Plus. Continued difficulty in the general credit markets has required the Company to forego committing capital for insurance company operations. Accordingly, the Company is exploring strategic alternatives, including the currently pending sale of First Life and either the termination of the Exchange Agreement or the sale of Delta Plus by the Company if the Exchange Agreement is completed. The Company intends to use proceeds from the sale of First Life to repay short-term bank debt.

Brooke Corporation currently owns 100% of Delta Plus and 66% of the Company. If the Exchange Agreement is completed, Brooke Corporation is expected to own approximately 67% of the Company’s common stock.

Various lawsuits have arisen in the ordinary course of the Company’s business. In each of the matters and collectively, the Company believes the ultimate resolution of such litigation will not result in any material adverse impact to the financial condition, operations or cash flows of the Company.

18. New Accounting Standards

(a) Adoption of New Accounting Standards

Fair Value Option and Fair Value Measurement - In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157.” This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard was effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

Fair Value Measurement - Statement 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Statement 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

	•		Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

	•		Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.

	•		Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

(b) Not Yet Effective

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.” This Statement establishes principles and requirements for how an acquirer recognizes and measures tangible assets acquired, liabilities assumed, goodwill and any noncontrolling interests and identifies related disclosure requirements for business combinations. Measurement requirements will result in all assets, liabilities, contingencies and contingent consideration being recorded at fair value on the acquisition date, with limited exceptions. Acquisition costs and restructuring costs will generally be expensed as incurred. This Statement is effective for the Company for business combinations in which the acquisition date is on or after January 1, 2009. Management is currently assessing what impact, if any, the application of this standard could have on the Company’s results of operations and financial position.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. This Statement is effective for the Company beginning on January 1, 2009. It is not expected that adoption of this Statement will have a material impact on the operating results or financial condition of the Company.

19. Reclassifications

Certain accounts in the prior period financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements.

20. Discontinued Operation — Disclosure

On July 18, 2008, the Company entered into an agreement to sell its wholly owned life insurance subsidiary, First Life America Corporation (“First Life” or “FLAC”) to First Trinity Financial Corporation. During the second quarter 2008, the Company had committed to a plan to sell First Life. Accordingly, as of June 30, 2008, First Life has been presented as a discontinued operation and its assets and liabilities being sold are presented as held-for-sale in the Company’s combined financial statements. All periods presented have been reclassified to reflect this discontinued operation.

(a) Financial Statement Presentation

At June 30, 2008, no impairment charges have been required in connection with the Company’s assessment of the assets and liabilities of the discontinued operation. Reported results for the discontinued operation do not include the allocation of interest expense on debt that will be repaid as a result of the sale as such debt was not incurred for or otherwise used in connection with the life insurance subsidiary’s operation. No other consolidated interest expense was allocated to the discontinued operation for the periods ended June 30, 2008 and 2007.

The major classes of assets and liabilities reported as held-for-sale are as follows (in thousands):


	(unaudited)
	June 30, 2008		December 31, 2007
Cash	$	1,210	$	459
Investment securities available-for-sale		18,675		18,867
Other current assets		6,975		6,661

Total Current Assets		26,860		25,987
Net Property and Equipment		2,693		2,718
Deferred charges, net		5,503		5,406

Total Assets		35,056		34,111

Future annuity benefits		19,565		18,735
Future policy benefits		7,580		7,035
Other liabilities		931		873

Total Liabilities		28,076		26,643

Net Assets	$	6,980	$	7,468

The financial results of the discontinued operation are as follows:


	Three		Three					Six		Six
	Months		Months		2008			Months		Months		2008
	Ended		Ended		% Increase			Ended		Ended		% Increase
	June 30,		June 30,		(decrease)			June 30,		June 30,		(decrease)
	2008		2007		over 2007			2008		2007		over 2007
	(in thousands)							(in thousands)
REVENUES
Insurance premiums earned	$	898	$	849		6	%	$	2,000	$	1,922		4	%
Interest income		408		352		16			805		667		21
Other income		61		60		2			121		124		(3	)

Total revenues		1,367		1,261		8			2,926		2,713		8
EXPENSES
Commission expense		49		50		(2	)		104		109		(5	)
Payroll expense		134		116		16			312		240		30
Depreciation and amortization		195		212		(8	)		385		394		(2	)
Other expenses		933		667		40			2,046		1,747		17

Total expenses		1,311		1,045		25			2,847		2,490		14

Income from discontinued operation		56		216		(74	)		79		223		(65	)

(b) Investments

First Life classifies all of its fixed maturity and equity investments as available-for-sale. Available-for-sale fixed maturities are carried at fair value with unrealized gains and losses, net of applicable taxes, reported in other comprehensive income. Equity securities are carried at fair value with unrealized gains and losses, net of applicable taxes, reported in other comprehensive income. Realized gains and losses on sales of investments are recognized in operations on the specific identification basis. Interest earned on investments is included in net investment income.

The amortized cost and fair value of investments at June 30, 2008 were $19,982,000 and $18,675,000, respectively. Gross unrealized gains and losses at that date were $79,000 and $1,386,000, respectively.

The amortized cost and fair value of investments at December 31, 2007 were $19,465,000 and $18,867,000, respectively. Gross unrealized gains and losses at that date were $157,000 and $755,000, respectively.

The fair values for investments in fixed maturities are based on quoted market prices.

Included in investments are securities, which have been pledged to various state insurance departments. The fair values of these securities were $2,292,000 and $2,279,000 at June 30, 2008 and December 31, 2007, respectively.

During the six-month period ended June 30, 2008, First Life had approximately $1,000 in gross realized investment gain. First Life had no gross realized investment gains or losses during the six-month period ended June 30, 2007.

The components of other comprehensive loss and related tax effects during the six-month periods ended June 30, 2008 and 2007 are as follows (in thousands):


	Six-Month Periods Ended
	June 30,
	2008			2007
Unrealized holding losses on available-for-sale securities:
Unrealized holding gains (losses) during the period	$	(708	)	$	(432	)
Less: Reclassification adjustment for gains included in net income		1			—
Tax benefit		142			87

Other comprehensive income (loss)	$	(567	)	$	(345	)

(c) Other Current Assets

First Life has purchased certain lottery prize cash flows, representing the assignments of the future payment rights from lottery winners at a discounted price. Payments on these cash flows will be made by state run lotteries and as such are backed by the general credit of the respective states. At June 30, 2008 and December 31, 2007, the carrying value of these other assets was approximately $3,816,000 and $3,527,000, respectively. Also included in other current assets are certain deposits and prepaid and other current amounts. The carrying values of these other assets approximate their fair values.

(d) Property and Equipment

Property and equipment represents the land, building and furniture, fixtures and equipment used in the discontinued operation’s location in Topeka, Kansas. Approximately 12,500 of the 20,000 square feet of space is leased to two tenants and those leases run through 2010 and 2011. Depreciation expense recorded was approximately $44,000 and $35,000, respectively, during the six-month periods ended June 30, 2008 and 2007.

(e) Deferred Policy Acquisition Costs

Deferred policy acquisition costs at June 30, 2008 and December 31, 2007 were as follows (in thousands):


	June 30, 2008			December 31, 2007
Deferred policy acquisition costs	$	11,017		$	10,579
Accumulated amortization		(5,514	)		(5,173	)

Net	$	5,503		$	5,406

Deferred policy acquisition costs amortization of $341,000 and $359,000 was recorded during the six-month periods ended June 30, 2008 and 2007.

(f) Policy and Contract Liabilities

Annuity contract liabilities (future annuity benefits) are computed using the retrospective deposit method and consist of policy account balances before deduction of surrender charges, which accrue to the benefit of policyholders. Premiums received on annuity contracts are recognized as an increase in a liability rather than premium income. Interest credited on annuity contracts is recognized as an expense.

Traditional life insurance policy benefit liabilities (future policy benefits) are computed on a net level premium method using assumptions with respect to current yield, mortality, withdrawal rates and other assumptions deemed appropriate by the Company.

Policy claim liabilities represent the estimated liabilities for claims reported plus claims incurred but not yet reported. The liabilities are subject to the impact of actual payments and future changes in claim factors.

Policyholder premium deposits represent premiums received for payment of future premiums on existing policyholder contracts. The premium deposits are recognized as an increase in a liability rather than premium income. Interest credited on the premium deposits is recognized as an expense.

(g) Income Taxes

Deferred tax assets and liabilities are recorded to recognize the future tax consequences of temporary differences between financial reporting amounts and the tax basis of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the years in which the differences are expected to reverse. Significant components of First Life’s deferred income taxes at June 30, 2008 would include a deferred tax liability of $920,000 related to its deferred policy acquisition costs and deferred tax assets of $155,000 and $261,000 related to its net operating loss carryforwards and net unrealized losses on available-for-sale investment securities, respectively.

As of December 31, 2007, First Life had net operating loss carryforwards of $833,000 from life insurance operations that were generated either during or subsequent to the base period for tax consolidation purposes. These loss carryforwards expire in 2022 through 2025. Capital loss carryforwards of $37,000 will expire in 2009 and 2010.

First Life was included in the Company’s consolidated federal income tax return for the year ended December 31, 2006 and would also be included for the period ended November 15, 2007 (the effective date of its merger with Brooke Franchise). First Life is taxed as a life insurance company under the provisions of the Internal Revenue Code and will be required to file a separate tax return for the five years following the November 15, 2007 merger transaction.

(h) Statutory Requirements

First Life prepares its statutory-basis financial statements in accordance with statutory accounting practices (“SAP”) prescribed or permitted by the Kansas Insurance Department (“KID”). Currently, “prescribed” statutory accounting practices include state insurance laws, regulations, and general administrative rules, as well as the National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures Manual and a variety of other NAIC publications. “Permitted” statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. During 1998, the NAIC adopted codified statutory accounting principles (“Codification”). Codification replaced the NAIC Accounting Practices and Procedures Manual and was effective January 1, 2001. The impact of Codification was not material to First Life’s statutory-basis financial statements.

Principal differences between GAAP and SAP include: (a) costs of acquiring new policies are deferred and amortized for GAAP; (b) benefit reserves are calculated using more realistic investment, mortality and withdrawal assumptions for GAAP; (c) statutory asset valuation reserves are not required for GAAP; and (d) available-for-sale fixed maturity investments are reported at fair value with unrealized gains and losses reported as a separate component of shareholders’ equity for GAAP.

Statutory restrictions limit the amount of dividends, which may be paid by First Life to the Company. Generally, dividends during any year may not be paid without prior regulatory approval, in excess of the lesser of (a) 10% of statutory shareholders’ surplus as of the preceding December 31 or (b) statutory net operating income for the preceding year. In addition, First Life must maintain the minimum statutory capital and surplus required for life insurance companies in those states in which it is licensed to transact life insurance business.

The KID imposes on insurance enterprises minimum risk-based capital (“RBC”) requirements that were developed by the NAIC. The formulas for determining the amount of RBC specify various weighing factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by ratio of the enterprises regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. First Life has a ratio that is in excess of the minimum RBC requirements; accordingly, the Company’s management believes that First Life meets the RBC requirements.

(i) Reinsurance

In order to reduce the risk of financial exposure to adverse underwriting results, insurance companies reinsure a portion of their risks with other insurance companies. First Life has entered into agreements with Optimum Re Insurance Company (“Optimum Re”) of Dallas, Texas, and Wilton Reassurance Company (“Wilton Re”) of Wilton, CT, to reinsure portions of the life insurance risks it underwrites. Pursuant to the terms of the agreements, First Life retains a maximum coverage exposure of $50,000 on any one insured.

Pursuant to the terms of the agreement with Optimum Re, First Life generally pays no reinsurance premiums on first year individual business. However, SFAS No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” requires the unpaid premium to be recognized as a first year expense and amortized over the estimated life of the reinsurance policies. First Life records this unpaid premium as “reinsurance premiums payable” in the accompanying balance sheet and as “reinsurance premiums ceded” in the accompanying income statement. To the extent that the reinsurance companies are unable to fulfill their obligations under the reinsurance agreements, First Life remains primarily liable for the entire amount at risk.

First Life is party to an Automatic Retrocession Pool Agreement (the “Reinsurance Pool”) with Optimum Re, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the World. The agreement provides for automatic retrocession of coverage in excess of Optimum Re’s retention on business ceded to Optimum Re by the other parties to the Reinsurance Pool. First Life’s maximum exposure on any one insured under the Reinsurance Pool is $50,000.

(j) Other Regulatory Matters

First Life is currently licensed to transact life and annuity business in the states of Kansas, Texas, Illinois, Oklahoma, North Dakota, Kentucky and Nebraska. Due to the varied processes of obtaining admission to write business in new states, management cannot reasonably estimate the time frame of expanding its marketing presence.

On May 3, 2007, First Life was released from its Memorandum of Understanding with the Ohio Department of Insurance. First Life’s license had been previously suspended as its statutory capital had fallen below the minimum required level in Ohio of $2,500,000. While the license had been reinstated during 2006, the Company had been prohibited from writing new business in that state while under the Memorandum. At December 31, 2007, First Life’s statutory basis capital and surplus was $3,801,000, which is in excess of the aforementioned minimum requirement.

21. Subsequent Event

On July 18, 2008, the Company entered into a Stock Purchase Agreement (the “Agreement”) to sell its wholly-owned life insurance subsidiary, First Life America Corporation, to First Trinity Financial Corporation for a purchase price not to exceed $8,000,000 in cash, as adjusted in accordance with the Agreement. The transaction is subject to approval by the Kansas Insurance Department. The Company intends to use proceeds from the sale to reduce short-term debt. As of June 30, 2008, First Life has been presented as a discontinued operation and its assets and liabilities being sold are presented as held-for-sale in the Company’s combined financial statements. All periods presented have been reclassified to reflect this discontinued operation. See Note 20 for additional information.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion below, as well as other portions of this Form 10-Q, contain forward-looking statements that are not based upon historical information. Such forward-looking statements are based upon information currently available to management and management’s perception thereof as of the date of this Form 10-Q. Readers can identify these forward-looking statements by the use of such verbs as “expects,” “anticipates,” “believes” or similar verbs or conjugations of such verbs. The actual results of operations of Brooke Capital Corporation (“Brooke Capital” or the “Company”) could materially differ from those indicated in forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the section entitled “Forward-Looking and Cautionary Statements,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, which is on file with the U.S. Securities and Exchange Commission (File No. 0-25679) incorporated by reference and in Part I Item 1A — “Risk Factors” in the Form 10-K and Part II Item 1A — “Risk Factors” in this Form 10-Q. Readers are strongly encouraged to consider these factors when evaluating forward-looking statements. Forward-looking statements contained in this Form 10-Q will not be updated.

This discussion is intended to clarify and focus on our results of operations, certain changes in our financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1 of this Form 10-Q. This discussion should be read in conjunction with those consolidated financial statements and the related notes, and is qualified by reference to them.

References in this report to “we,” “us” and “our” are to Brooke Capital Corporation and one or more of our subsidiaries, as the context requires.

Amounts in this section have been rounded to the nearest thousand, except percentages, ratios, per share data, numbers of franchise locations and numbers of businesses. Unless otherwise indicated, or unless the context otherwise requires, references to years in this section mean our fiscal years ended December 31.

General

Difficult credit markets have had a significant adverse affect on our sale of new franchises. Without revenues from the sale of new franchises, we have been forced to reduce expenses significantly with the primary expense reductions resulting from shrinking our franchise network by terminating, for cause, troubled franchisees requiring extensive support and assistance. Our expense reductions include personnel layoffs, facility closings and writing off producer development investments.

Our expansion plans for selling life insurance and auto insurance policies issued by wholly-owned insurance company subsidiaries have been discontinued. However, because we believe that our distribution system and recruiting process represents a tremendous asset to insurance companies, we are instead pursuing a partnership with one or more insurance companies.

Continuing Operations - Insurance agency revenues are generated from commissions paid on the sale of property and casualty insurance policies issued through third party insurance companies, but sold through independent insurance agents. Commission revenues typically represent a percentage of insurance premiums paid by policyholders. Premium amounts and commission percentage rates are established by third-party insurance companies, so we have little or no control over the commission amount generated from the sale of a specific insurance policy. Revenues are also generated from initial franchise fees, collateral preservation fees, seller consulting fees and borrower consulting fees.

Discontinued Operation - On July 18, 2008, we entered into an agreement to sell our wholly-owned life insurance subsidiary, First Life America Corporation, to First Trinity Financial Corporation. At June 30, 2008, our insurance company operations segment has been presented as a discontinued operation and our assets and liabilities being sold are presented as held-for-sale in our combined financial statements. No impairment charges have been required in connection with our assessment of the assets and liabilities of the discontinued operation. First Life America Corporation continues to conduct business as it has in the past, generating revenues from the issuance of life insurance and annuity policies sold by independent insurance agents.

Results of Operation

A merger between us and Brooke Franchise Corporation (“Brooke Franchise”) occurred November 15, 2007, with our being the surviving corporation. This merger represented a transaction between entities under common control. Accordingly, we have recorded the assets and liabilities of Brooke Franchise at their carrying amounts at the date of transfer as if the transaction had taken place as of the beginning of the period. In addition, our results of operations and other changes in financial position for the prior year have been reported as if the merger had occurred at the beginning of the period.

Prior years’ financial statements and related disclosures have been restated to furnish comparative information for the period during which Brooke Franchise and we had been under common control.

Our combined results of operations have been significantly impacted in the second quarter by shrinking the franchise network primarily through closing, relocating or selling company-owned stores and establishing corresponding reserves for agency inventory write downs of $3,631,000, lease buyouts and equipment write downs of $3,323,000, producer development write downs of $5,500,000 and other restructuring expenses of $338,000. Although core revenues from sales commissions are unchanged for the three and six month periods ending June 30, 2008, total revenues have significantly decreased because franchise network growth, and the corresponding initial franchise fees from the sale of new franchises, have been adversely impacted by the current credit markets. Although our basic business model remains unchanged, we have changed operations by closing corporate facilities, laying off corporate personnel and otherwise decreasing expenses to match decreases in revenues. The following table shows income and expenses (in thousands, except percentages) from continuing operations for the three and six months ended June 30, 2008 and 2007, and the percentage changes from year to year.


	Three			Three					Six			Six
	Months			Months		2008			Months			Months		2008
	Ended			Ended		% Increase			Ended			Ended		% Increase
	June 30,			June 30,		(decrease)			June 30,			June 30,		(decrease)
	2008			2007		over 2007			2008			2007		over 2007
REVENUES
Insurance commissions	$	27,201		$	27,615		(2	)%	$	60,798		$	59,623		2	%
Collateral preservation		3,557			1,363		161			9,270			2,254		311
Consulting fees		—			3,740		(100	)		250			4,730		(95	)
Gain (loss) on sale of businesses		(3,631	)		1,161		(413	)		(4,477	)		1,842		(343	)
Initial franchise fees for basic services		—			7,095		(100	)		1,320			19,965		(93	)
Initial franchise fees for buyers assistance plans		—			70		(100	)		—			455		(100	)
Loss on sale of assets		(1,323	)		—		—			(1,323	)		—		—
Interest income		71			177		(60	)		84			262		(68	)
Other income		175			696		(75	)		366			19		1,826

Total operating revenues	$	26,050		$	41,917		(38	)%	$	66,288		$	89,150		(26	)%


	Three			Three					Six			Six
	Months			Months		2008			Months			Months		2008
	Ended			Ended		% Increase			Ended			Ended		% Increase
	June 30,			June 30,		(decrease)			June 30,			June 30,		(decrease)
	2008			2007		over 2007			2008			2007		over 2007
EXPENSES
Commission expense	$	22,072		$	22,126		—	%	$	46,982		$	44,967		4	%
Payroll expense		6,070			6,187		(2	)		12,101			11,973		1
Depreciation and amortization		492			42		1,071			962			73		1,218
Provision for doubtful accounts		8,076			1,337		504			8,428			4,383		92
Other operating expenses		13,025			9,760		33			25,199			20,311		24

Total operating expenses		49,735			39,452		26			93,672			81,707		15
Income (loss) from continuing operations		(23,685	)		2,465		(1,060	)		(27,384	)		7,443		(467	)
Interest expense		642			705		(9	)		1,632			1,258		30

Income (loss) before income taxes from continuing operations	$	(24,327	)	$	1,760		(1,482	)	$	(29,016	)	$	6,185		(569	)
Net Income from discontinued operation	$	56		$	216		(74	)	$	79		$	223		(65	)
Total assets (at period end)
Continuing operations	$	71,000		$	87,000		18	%	$	71,000		$	87,000		18	%
Discontinued operation	$	35,000		$	31,000		13	%	$	35,000		$	31,000		13	%

A more detailed description of our financial condition and operating results as reported by insurance agency operations and corporate activities segments and discontinued operation (previously our insurance company operations) follows. The significant changes in revenues, expenses and net income from the above table are primarily attributable to our insurance agency segment. (See Insurance Agency Operations segment).

The following table shows selected assets and liabilities (in thousands, except percentages) as of June 30, 2008 and December 31, 2007, and the percentage change in those balances.


					2008
	As of		As of		% Increase
	June 30,		December 31,		(decrease)
	2008		2007		over 2007
Accounts and notes receivable, net	$	19,109	$	28,067		(32	)%
Other receivables		1,749		2,086		(16	)
Income taxes refundable		11,322		1,187		853
Property and equipment		11,995		13,177		(9	)
Accounts payable		21,837		7,141		205
Premiums payable		3,001		5,322		(44	)
Debt		49,388		50,491		(2	)
Net assets of discontinued operation, held-for-sale	$	6,980	$	7,468		(7	)

Accounts and notes receivable primarily include amounts owed by our franchisees. These balances have dropped significantly as expansion of our franchise operations has slowed due to the weakening economy and our “New Era” initiative beginning in the fourth quarter of 2007 to emphasize quality of franchisees over quantity of franchisees. A loss reserve exists for our credit loss exposure to these receivable balances from franchisees. (See Insurance Agency Operations segment, below.)

Customer receivables, notes receivables, interest earned not collected on notes and allowance for doubtful accounts are the items that comprise our accounts and notes receivable, net, as shown on our combined balance sheet.

Other receivables represent amounts due from participating lenders.

Income taxes refundable increased as a result of our losses incurred during 2008.

Accounts payable, which includes franchise payables, payroll payables and other accrued expenses, increased in part as a result of amounts due to Brooke Holdings, Inc.

The premiums payable liability category is comprised primarily of amounts due to insurance companies for premiums that are billed and collected by our franchisees. Premiums payable decreased primarily from temporary fluctuations in agent billed activity.

We use short-term and long-term debt to finance the expansion of the franchise operations. See Note 6 to the financial statements for a summary of debt outstanding and information regarding its terms and scheduled maturities.

Analysis by Segment

The insurance agency operations segment represents our primary reportable segment and includes our franchising activities, our collateral preservation activities and our insurance agency consulting activities. Our franchise agency operations include the sale of insurance, financial and credit services on a retail basis through franchisees.

Revenues, expenses, assets and liabilities that are not allocated to the insurance agency operations segment are categorized as “Corporate.” Activities associated with Corporate include functions such as accounting, auditing, legal, human resources and investor relations.

Our discontinued operation consists of the issuance of life insurance policies by First Life. First Life sells life insurance and annuity products in eight states throughout the Midwest.

Insurance Agency Operations


	Three			Three					Six			Six
	Months			Months		2008			Months			Months		2008
	Ended			Ended		% Increase			Ended			Ended		% Increase
	June 30,			June 30,		(decrease)			June 30,			June 30,		(decrease)
	2008			2007		over 2007			2008			2007		over 2007
	(in thousands)								(in thousands)
REVENUES
Insurance commissions	$	27,201		$	27,615		(2	)%	$	60,798		$	59,623		2	%
Collateral preservation		3,557			1,363		161			9,270			2,254		311
Consulting fees		—			3,740		(100	)		250			4,730		(95	)
Gain (loss) on sale of businesses and assets		(4,954	)		1,161		(526	)		(5,800	)		1,842		(414	)
Initial franchise fees for basic services		—			7,095		(100	)		1,320			19,965		(93	)
Initial franchise fees for buyers assistance plans		—			70		(100	)		—			455		(100	)
Interest income		130			95		37			590			173		241
Other income		175			696		(75	)		360			19		1,795

Total operating revenues		26,109			41,835		(37	)		66,788			89,061		(25	)


	Three			Three					Six			Six
	Months			Months		2008			Months			Months		2008
	Ended			Ended		% Increase			Ended			Ended		% Increase
	June 30,			June 30,		(decrease)			June 30,			June 30,		(decrease)
	2008			2007		over 2007			2008			2007		over 2007
	(in thousands)								(in thousands)
EXPENSES
Commission expense	$	22,072		$	22,126		—	%	$	46,982		$	44,967		4	%
Payroll expense		6,018			5,997		—			12,026			11,759		2
Depreciation and amortization		479			31		1,445			937			46		1,937
Provision for doubtful accounts		8,076			1,337		504			8,428			4,383		92
Other operating expenses		12,865			9,503		35			24,884			19,927		25

Total operating expenses		49,510			38,994		27			93,257			81,082		15
Income (loss) from operations		(23,401	)		2,841		(924	)		(26,469	)		7,979		(432	)
Interest expense		696			705		(1	)		2,127			1,258		69

Income (loss) before income taxes	$	(24,097	)	$	2,136		(1,228	)%	$	(28,596	)	$	6,721		(525	)%
Total assets (at period end)	$	75,000		$	86,000		13	%	$	75,000		$	86,000		13	%

Commission revenues are from sales commissions on policies sold by franchisees that are written, or issued, by third-party insurance companies. Commission revenues typically represent a percentage of insurance premiums paid by policyholders. Premium amounts and commission percentage rates are established by independent insurance companies, so we have little or no control over the commission amount generated from the sale of a specific insurance policy written through a third-party insurance company.

Collateral preservation, or servicing, income is composed of initial, ongoing and special fees paid by the lender (Aleritas Capital Corp. (“Aleritas”)) for providing services such as underwriting, monitoring, rehabilitating, managing and liquidating insurance agencies. For the three months ended June 30, 2008 and 2007, special collateral preservation fees were $2,410,000 and $0, respectively. For the six months ended June 30, 2008 and 2007, those fees were $6,784,000 and $0, respectively. Collateral preservation fees increased significantly from payments for assistance provided to troubled agencies.

Initial franchise fees decreased significantly primarily due to a difficult credit market and secondarily as a result of our “New Era” initiative to emphasize quality of franchisees over quantity of franchisees.

Commission expense increased because insurance commission revenues increased and franchisees are typically paid a share of insurance commission revenue. Commission expense represented approximately 81% and 80% of insurance commission revenue for the three month periods ended June 30, 2008 and 2007, respectively. Commission expense represented approximately 77% and 75% of insurance commission revenue for the six month periods ended June 30, 2008 and 2007, respectively.

We have sometimes retained an additional share of franchisees’ commissions as payment for franchisees’ optional use of our service or sales centers. However, we have discontinued providing this service.

Profit sharing commissions, or our share of insurance company profits paid by insurance companies on policies written by franchisees, and other such performance compensation, were $351,000 for the three months ended June 30, 2008, as compared to $443,000 for the three months ended June 30, 2007. Profit sharing commissions were $4,034,000 for the six months ended June 30, 2008, as compared to $4,655,000 for the six months ended June 30, 2007. Profit sharing commissions represented approximately 1.3% and 1.6%, respectively, of insurance commissions for the three months ended June 30, 2008 and 2007. Profit sharing commissions represented approximately 6.6% and 7.8%, respectively, of insurance commissions for the six months ended June 30, 2008 and 2007. Franchisees do not receive any share of profit sharing commissions.

Net commission refund liability is our estimate of the amount of our share of retail commission refunds due to insurance companies resulting from future policy cancellations. As of June 30, 2008, and December 31, 2007, we recorded corresponding total commission refund liabilities of $404,000 and $481,000, respectively. Correspondingly, commission refund expense decreased to reflect this lower estimate.

Other operating expenses represented approximately 49% and 23%, respectively, of total operating revenues for the three months ended June 30, 2008 and 2007. Other operating expenses represented approximately 37% and 22%, respectively, of total operating revenues for the six months ended June 30, 2008 and 2007. Other operating expenses increased at a faster rate than total operating revenues primarily as the result of shrinking the franchise network primarily through closing or liquidating company-owned stores and establishing corresponding reserves for agency inventory write downs of$3,631,000, lease buyouts and equipment write downs of $3,323,000, producer development write downs of $5,500,000 and other restructuring expenses of $338,000.

Advertising expenses decreased to $1,262,000 for the three months ended June 30, 2008, from $1,858,000 for the three months ended June 30, 2007. Advertising expenses decreased to $3,178,000 for the six months ended June 30, 2008, from $4,283,000 for the six months ended June 30, 2007.

The following table summarizes information relating to revenues and expenses associated with insurance agent relationships primarily as defined in the franchise agreement. Variances in expenses may be attributable to improved allocations of expenses among business units, which began in 2007 and continued in 2008.

Comparison of Net Commissions Breakdown to Corresponding Expenses Breakdown
(in thousands)¹


	Recurring		Expenses		Service
	Franchise		Incurred for		Center Fees
	Royalties		Operation of		Collected						Expenses
	Collected from		Phillipsburg		from		Expenses		Profit Sharing		Incurred for
	Franchisees for		Support		Franchisees		Incurred for		Commissions		Mass Media &
	Support		Services		for Service		Operation of		Collected from		Logo
	Services		Campus		Centers		Service Centers		Insurance Cost		Advertising

Three Months Ended June 30, 2008	$	2,045	$	2,588	$	663	$	1,537	$	351	$	1,262
Six Months Ended June 30, 2008	$	4,245	$	5,575	$	1,284	$	3,197	$	4,034	$	3,178
Three Months Ended June 30, 2007	$	3,058	$	2,118	$	861	$	1,879	$	443	$	1,858
Six Months Ended June 30, 2007	$	5,868	$	4,665	$	1,763	$	3,570	$	4,655	$	4,283


¹		We also received commissions from the sale of investment securities that are not directly related to insurance sales.

Initial Franchise Fee Revenue

Basic Services. A certain level of basic services is initially provided to all franchisees, whether they acquire an existing business and convert it into a Brooke franchise, start up a new Brooke franchise location or acquire a company developed franchise location. These basic services include services usually provided by other franchisors, including a business model, a license to use registered trademarks, access to suppliers and a license for an Internet-based information system. The amount of the initial franchise fees typically paid for basic services is currently $165,000.

Revenues from initial franchise fees for basic services are recognized as soon as we deliver the basic services to the new franchisee. Upon completion of this commitment, we have no continuing obligation to the franchisee with regards to basic services.

We added only one new franchise location during the three months ended June 30, 2008, compared to 40 new franchise locations during the three months ended June 30, 2007. We added only two new franchise locations during the six months ended June 30, 2008, compared to 130 new franchise locations during the six months ended June 30, 2007. The rate of new franchise location growth has stalled, primarily as the result of the continuing restricted credit market environment and, in part, our “New Era” initiative beginning in the fourth quarter of 2007 to emphasize quality of franchisees over quantity of franchisees.

The following table summarizes information relating to initial franchise fees for basic services (in thousands, except for number of locations):

Summary of Initial Franchise Fees for Basic Services
and the Corresponding Number of Locations


	Start-up Related Initial				Conversion Related				Company Developed
	Franchise Fees for Basic				Initial Franchise Fees for				Initial Franchise Fees for				Total Initial Franchise
	Services				Basic Services				Basic Services				Fees for Basic Services
	(Locations)				(Locations)				(Locations)				(Locations)
Three Months Ended June 30, 2008	$	—	(1	)	$	—	(0	)	$	—	(0	)	$	—	(1	)
Six Months Ended June 30, 2008		—	(1	)		1,320	(1	)		—	(0	)		1,320	(2	)
Three Months Ended June 30, 2007		3,630	(22	)		2,640	(13	)		825	(5	)		7,095	(40	)
Six Months Ended June 30, 2007		10,395	(63	)		7,260	(55	)		2,310	(12	)		19,965	(130	)

Buyers Assistance Plan Services. Buyers assistance plans provide assistance to franchisees for the initial acquisition and conversion of businesses. These services include, for example, compilation of an inspection report. The amount of the fee charged franchisees for these services typically varies based on the level of assistance, which in turn is largely determined by the size of the acquisition. We therefore typically base our fees for buyers assistance plans on the estimated revenues of the acquired business. All initial franchise fees (for both basic services and for buyer assistance plans) are paid when an acquisition closes. In past years, a significant part of our commission growth has come from such acquisitions of existing businesses that are subsequently converted into Brooke franchises.

The total amount of initial fees paid by a franchisee is first allocated to basic services, and if the franchise is an acquired and converted business, the excess of such fees over the amount allocated to basic services is allocated to buyers assistance plan services. The initial franchisee fee for basic services tends to be uniform among franchisees, and the total initial franchisee fees can be limited by competitive pressures. The decrease in initial franchise fees for buyers assistance plans is primarily attributable to an increase in the amount charged for initial franchise fees for basic services and the establishment of a cap, or maximum amount, on initial franchise fees for buyers assistance plans that are charged for each acquisition.

We perform substantially all of the buyers assistance plan services before an acquisition closes and, therefore, typically recognize all of the initial franchise fee revenue for buyers assistance plan services at the time of closing.

Buyers assistance plan services are not applicable to the purchase by franchisees of company-developed or already-franchised businesses. In addition, buyers assistance plan services are not typically provided to franchisees selling to other franchisees and are not provided to franchisees purchasing businesses that were purchased by us in the preceding 24 months. Businesses that were converted into Brooke franchises and received buyers assistance plan services totaled 1 and 3, of new franchise locations for the three and six months ended June 30, 2007, respectively. There were no such conversions during 2008.

Seller and Borrower-Related Revenues. Seller and borrower-related revenues typically are generated when a business is acquired for sale to a franchisee or when assisting a business in securing a loan. Seller and borrower-related revenues include consulting fees paid directly by sellers or borrowers, gains on sale of businesses from deferred payments, gains on sale of businesses relating to company-owned stores, and gains on sale of businesses relating to inventory. A primary aspect of our business is the buying and selling of businesses. Therefore, all seller and borrower-related revenues are considered part of normal business operations and are classified on our income statement as operating revenue. Seller and borrower-related revenues decreased $8,532,000, or 174%, to $(3,631,000), for the three months ended June 30, 2008, from $4,901,000 for the three months ended June 30, 2007. Seller and borrower-related revenues decreased $10,799,000, or 164%, to $(4,227,000), for the six months ended June 30, 2008, from $6,572,000 for the six months ended June 30, 2007. The significant increase in seller and borrower-related revenues from 2007 to 2008 is primarily attributable to a decrease in borrower consulting fees generated, due to the continuing restricted credit market environment.

Consulting Fees. We help sellers prepare their insurance agency businesses for sale by developing business profiles, tabulating revenues, sharing our document library and general sale preparation. We also generate revenues from consulting with insurance agency borrowers and assisting them in securing loans. The scope of consulting engagements is largely determined by the size of the business being sold or the loan being originated. Consulting fees are typically based on the transaction value, are contingent upon closing of the transaction, and are paid at closing. We complete consulting obligations at closing and are not required to perform any additional tasks for sellers or borrowers. Therefore, with no continuing obligation on our part, consulting fees paid directly by sellers or borrowers are immediately recognized as income. The decrease in consulting fees from 2007 to 2008 is primarily attributable to the continuing restricted credit market environment and, in part, to our “New Era” initiative, beginning in the fourth quarter of 2007, to emphasize quality of franchisees over quantity of franchisees.

Gains on Sale of Businesses from Deferred Payments. Our business includes the buying and selling of insurance agencies and occasionally holding them in inventory. When purchasing an agency, we typically defer a portion of the purchase price, at a low or zero interest rate, to encourage the seller to assist in the transition of the agency to one of our franchisees. We carry our liability to the seller at a discount to the nominal amount we owe, to reflect the below-market interest rate. When we sell an acquired business to a franchisee (typically on the same day it is acquired), we generally sell it for the full nominal price (i.e. before the discount) paid to the seller. When the sale price of the business exceeds the carrying value, the amount in excess of the carrying value is recognized as a gain.

Gains on sale resulting primarily from discounted interest rates were 0 for the three months ended June 30, 2008, compared to $443,000 for the three months ended June 30, 2007. Gains on sale resulting primarily from discounted interest rates were $5,000 for the six months ended June 30, 2008, compared to $1,124,000 for the six months ended June 30, 2007. The decrease in gains from 2007 to 2008 was primarily due to the continuing restricted credit market environment and, in part, to our “New Era” initiative, beginning in the fourth quarter of 2007, to emphasize quality of franchisees over quantity of franchisees.

We regularly negotiate below-market interest rates on the deferred portion of the purchase prices we pay sellers. We consider these below market interest rates to be a regular source of income related to the buying and selling of businesses. Although we have a continuing obligation to pay the deferred portion of the purchase price when due, we are not obligated to prepay the deferred portion of the purchase price or to otherwise diminish the benefit of the below-market interest rate upon which the reduced carrying value was based.

The calculation of the reduced carrying value, and the resulting gain on sale of businesses, is made by calculating the net present value of scheduled future payments to sellers at a current market interest rate. The following table provides information regarding the corresponding calculations (in thousands, except percentages and number of days):

Calculation of Seller Discounts Based On Reduced Carrying Values


							Interest
							Rate Used			Full				Gain on
	Beginning		Weighted			Weighted	for Net			Nominal		Reduced		Sale from
	Principal		Average			Average	Present			Purchase		Carrying		Deferred
	Balance		Rate			Maturity	Value			Price		Value		Payments
Three Months Ended June 30, 2008	$	—		—	%	— days		—	%	$	—	$	—	$	—
Six Months Ended June 30, 2008		60		7.75		304 days		7.75			65		60		5
Three Months Ended June 30, 2007		3,683		9.75		602 days		9.75			13,598		13,155		443
Six Months Ended June 30, 2007	$	9,561		9.75	%	514 days		9.75	%	$	23,982	$	22,858	$	1,124

Gains on Sale of Businesses — Company-Owned Stores. If we expect to own and operate businesses for more than one year, we consider these businesses to be company-owned stores and treat such transactions under purchase accounting principles, including booking intangible assets and recognizing the related amortization expense. By contrast, businesses purchased for resale to our franchisees (usually within one year) are carried at cost as business inventory, without the booking of intangible assets. There were no gains on sale resulting from the sale of company-owned stores for the three months ended June 30, 2008 and 2007. There were no gains on sale resulting from the sale of company-owned stores for the six months ended June 30, 2008 and 2007.

Gains on Sale of Businesses — Inventoried Stores. As noted above, acquired businesses are typically sold on the same day as acquired for the same nominal price paid to the seller. However, this is not always the case and businesses are occasionally held in inventory. As such, gains and losses are recorded when an inventoried business is ultimately sold and carrying values of inventoried businesses are adjusted to estimated market value when market value is less than cost. Gains (losses) on sale resulting from the sale of inventoried stores were $(302,000) and $718,000 for the three months ended June 30, 2008 and 2007, respectively. Gains (losses) on sale resulting from the sale of inventoried stores were $(1,153,000) and $718,000 for the six months ended June 30, 2008 and 2007, respectively.

Franchise Collateral Preservation (CPA) Expenses. CPA activities are separated into two general categories. The first category of CPA activities consists primarily of support services provided by our Phillipsburg, Kansas campus personnel for all franchisees pursuant to a franchise agreement and the corresponding recurring expenses are paid from recurring franchise fees collected from franchisees and fees paid by lenders pursuant to Collateral Preservation Agreements (see above). Recurring franchise fee revenues totaled $2,045,000 and $3,058,000, respectively, during the three months ended June 30, 2008 and 2007. Recurring franchise fee revenues totaled $4,245,000 and $5,868,000, respectively, during the six months ended June 30, 2008 and 2007. Associated support services expenses totaled $2,558,000 and $2,118,000, respectively, during the three months ended June 30, 2008 and 2007. Associated support services expenses totaled $5,575,000 and $4,665,000, respectively, during the six months ended June 30, 2008 and 2007.

The second category of CPA activities consists primarily of the extra monitoring and consulting with borrowers provided by national and regional personnel pursuant to collateral preservation agreements with lenders. Collateral preservation fee revenues totaled $5,396,000 and $2,440,000, respectively, during the three months ended June 30, 2008 and 2007. Collateral preservation fee revenues totaled $12,240,000 and $4,383,000, respectively, during the six months ended June 30, 2008 and 2007. Associated collateral preservation expenses totaled $14,076,000 and $7,763,000, respectively, during the three months ended June 30, 2008 and 2007. Associated collateral preservation expenses totaled $22,028,000 and $16,283,000, respectively, during the six months ended June 30, 2008 and 2007.

Franchise Recruitment Expenses. We believe that we have a good agent program and have improved our process for recruiting and identifying insurance agents who we believe have the personal attributes required to be successful at starting or operating an insurance agency business. Because not all agents have the personal attributes required for success as insurance agency owners, we continue to recruit to replace those less suited. Recruitment plays a critical role in assisting lenders in the preservation of collateral so that businesses on which the lender has foreclosed or exercised its private right of sale can be sold to new franchisees who may be more capable or more willing to successfully operate an insurance agency. Recruitment personnel expenses totaled $587,000 and $689,000, respectively, during the three months ended June 30, 2008 and 2007. Recruitment personnel expenses totaled $1,210,000 and $1,612,000, respectively, during the six months ended June 30, 2008 and 2007.

Income/Loss Before Income Taxes. We incurred a loss before income taxes of $24,097,000 during the three months ended June 30, 2008, as compared to income before taxes of $2,136,000 during the three months ended June 30, 2007. We incurred a loss before income taxes of $28,596,000 during the six months ended June 30, 2008, as compared to income before taxes of $6,721,000 during the six months ended June 30, 2007. The loss incurred during 2008 was primarily the result of shrinking the franchise network through closing, relocating or selling company-owned stores and establishing corresponding reserves for agency inventory write downs, lease buyouts and equipment write downs, producer development write downs and other restructuring expenses. The 2008 loss was also the result of a reduction in the amount of initial franchise fee revenues and other associated consulting fees due to the continuing restricted credit market environment, and, in part, to our “New Era” initiative beginning in the fourth quarter of 2007, to emphasize quality of franchisees over quantity of franchisees.

Company-Owned Stores. Because our franchising philosophy is predicated on local ownership and generating revenues from sales commissions paid to franchisees on the sale of insurance policies issued by third-party insurance companies, an increasing percentage of inventoried, managed, pending, franchisor-developed and franchisee-developed stores relative to franchisee-owned stores is generally undesirable from a franchising perspective. Accordingly, during the second quarter of 2008, we significantly reduced the number of company-owned stores by closing, relocating, selling or preparing to sell, 147 company-owned stores resulting in non typical expenses for associated reserves and write offs totaling $13,425,000.

We believe that we have a good agent program and have improved our process for recruiting and identifying insurance agents who we believe have the personal attributes required to be successful at starting or operating an insurance agency business. Because not all agents have the personal attributes required for success as insurance agency owners, we continue to recruit to replace those less suited.

Same Store Sales. Revenue generation, primarily commissions from insurance sales, is an important factor in franchise financial performance and revenue generation is carefully analyzed by us. Twenty-four months after initial conversion of an acquired business, we consider a franchise “seasoned” and the comparison of current to prior year revenues a more reliable indicator of franchise performance. Combined same store sales of seasoned converted franchises and start up franchises for the twelve months ended June 30, 2008 and 2007 decreased 5.7% and increased 0.1%, respectively. The median annual revenue growth rates of seasoned converted franchises and qualifying start up franchises for the twelve months ended June 30, 2008 and 2007 were 2.0% and 3.4%. All same store calculations exclude profit sharing commissions. Same store calculations are based entirely on commissions allocated by us to franchisees’ monthly statements. We are unable to determine the impact, if any, on same store calculations resulting from commissions that franchisees receive but do not process through us as required by their franchise agreement.

Same store sales performance has been adversely affected by the “soft” property and casualty insurance market, which is characterized by a flattening or decreasing of premiums by insurance companies. Our franchisees predominately sell personal lines insurance, with more than 50% of our total commissions resulting from the sale of auto insurance policies, and we believe that the insurance market has been particularly soft with regards to premiums on personal lines insurance policies. We are beginning to see indications that the market may be “firming,” which may have an effect on same store sales performance in the future.

Franchise Balances. We categorize the balances owed by franchisees as either statement balances or non-statement balances. Statement balances are generally short-term and non-statement balances are generally longer term. We believe the most accurate analysis of franchise balances occurs immediately after settlement of franchisees’ monthly statements and before any additional entries are recorded to their account. Therefore, the following discussion of franchise balances is as of the settlement date that follows the corresponding commission month.

Statement Balances. We have historically assisted franchisees with short-term cash flow assistance by advancing commissions and granting temporary extensions of due dates for franchise statement balances owed by franchisees to us. Franchisees sometimes require short-term cash flow assistance because of cyclical fluctuations in commission receipts. Short-term cash flow assistance is also required when franchisees are required to pay us for insurance premiums due to insurance companies prior to receipt of the corresponding premiums from policyholders. The difference in these amounts has been identified as the “uncollected accounts balance” and this balance is calculated by identifying all charges to franchise statements for net premiums due insurance companies for which a corresponding deposit from policyholders into a premium trust account has not been recorded. Despite commission fluctuations and uncollected accounts balances, we expect franchisees to regularly pay their statement balances within a 30-day franchise statement cycle.

Any commission advance that remains unpaid after 120 days is placed on “watch” status. The increase in watch statement balances is partially attributable to financial stress resulting from less commission revenues due to reduction of premium rates by insurance companies. In early April 2008, we notified our franchisees that we will no longer provide commission advances after August 15, 2008 because they are expensive to administer and collect. Management believes that this change alone will not have an adverse effect on franchisees’ businesses, since sufficient notice has been provided, which allows franchisees to build funds internally or obtain outside credit.

The following table summarizes total statement balances, uncollected account balances and watch statement balances as of June 30, 2008 and December 31, 2007 (in thousands).


	As of		As of
	June 30,		December 31,
	2008		2007
Total Statement Balances	$	9,918	$	9,662
Uncollected Accounts* (Included in Above Total Statement Balances)	$	2,773	$	3,688
Watch Statement Balances (Included in Above Total Statement Balances)	$	9,652	$	9,077
Watch Statement Uncollected Accounts**	$	1,941	$	1,657


*		These amounts are limited to uncollected balances for franchisees with unpaid statement balances as of June 30, 2008 and December 31, 2007.

**		These amounts are limited to uncollected balances for franchisees with watch statement balances as of June 30, 2008 and December 31, 2007.

Non-Statement Balances. Separate from short-term statement balances, we also extend credit to franchisees for long-term producer development, including hiring and training new franchise employees, and for other reasons not related to monthly fluctuations of revenues. These longer-term non-statement balances are not reflected in the short-term statement balances referenced above and totaled $11,717,000 and $9,798,000, respectively, as of June 30, 2008, and December 31, 2007. Management intends to limit significantly the availability of non-statement balance funds.

Reserve for Doubtful Accounts. As part of the agreement to merge Brooke Franchise into Brooke Capital, Brooke Corporation continues to agree to guarantee the repayment of franchise balances outstanding as of June 30, 2007. The reserve increased significantly primarily to reflect the expected write offs of franchise balances related to producer development of closed, relocated or sold stores. The amount of our reserve for doubtful accounts was $6,700,000 as of June 30, 2008 and was $1,114,000 on December 31, 2007. Franchise balances outstanding as of June 30, 2008, and December 31, 2007 totaled $21,635,000 and $19,460,000, respectively.

The following table summarizes the Reserve for Doubtful Accounts activity for the periods ended June 30, 2008 and December 31, 2007 (in thousands). Additions to the reserve for doubtful accounts are charged to expense. Write offs in the table below are net of reimbursement from Brooke Corporation pursuant to its guaranty of franchise balances in connection with the merger.

Valuation and Qualifying Accounts


	Balance at				Write Off		Write Off
	Beginning of		Charges to		Statement		Non-Statement		Balance at
	Period		Expenses		Balances		Balances		End of Period
Allowance for Doubtful Accounts
Six months ended June 30, 2008	$	1,114	$	6,645	$	421	$	638	$	6,700
Year ended December 31, 2007	$	1,466	$	4,276	$	961	$	3,667	$	1,114

Insurance Agency Consulting Activities

Through our wholly-owned subsidiary, Brooke Capital Advisors, Inc. (“BCA”), we provide consulting services to managing general agencies and collateral preservation services relating to such loans. This business expanded in 2007 to include similar services for funeral home businesses and loans related thereto. During the three months ended June 30, 2008 and 2007, BCA generated $0 and $3,300,000 respectively, in loan brokerage and other related consulting fees. Income derived from collateral preservation services and related activities represented a total of $611,000 and $688,000, respectively, during the three months ended June 30, 2008 and 2007. BCA became a part of our business on December 8, 2006, in connection with Brooke Corporation’s acquisition of a controlling interest in us on that date.

During the six months ended June 30, 2008 and 2007, BCA generated $230,000 and $3,300,000 respectively, in loan brokerage and other related consulting fees. Income derived from collateral preservation services and related activities represented a total of $1,370,000 and $943,000, respectively, during the six months ended June 30, 2008 and 2007.

Expenses related to the loan brokerage activity during the three months ended June 30, 2008 and 2007 included compensation related expenses of $475,000 and $514,000, respectively. Other expenses during the three months ended June 30, 2008 and 2007 included loan brokerage expenses of $0 and $125,000, respectively, and shared services expenses of $435,000 and $435,000, respectively, paid to Brooke Corporation.

Expenses related to the loan brokerage activity during the six months ended June 30, 2008 and 2007 included compensation related expenses of $888,000 and $649,000, respectively. Other expenses during the six months ended June 30, 2008 and 2007 included loan brokerage expenses of $66,000 and $125,000, respectively, and shared services expenses of $870,000 and $435,000, respectively, paid to Brooke Corporation.

Corporate Activities


	Three			Three						Six			Six
	Months			Months			2008			Months			Months			2008
	Ended			Ended			% Increase			Ended			Ended			% Increase
	June 30,			June 30,			(decrease)			June 30,			June 30,			(decrease)
	2008			2007			over 2007			2008			2007			over 2007
	(in thousands)									(in thousands)
REVENUES
Interest income	$	70		$	82			(15	)%	$	132		$	89			48	%
Other income		—			—			—			6			—			—

Total operating revenues		70			82			(15	)		138			89			55
EXPENSES
Payroll expense		52			190			(73	)		75			214			(65	)
Depreciation and amortization		13			11			18			25			27			(7	)
Other operating expenses		160			257			(38	)		315			384			(18	)

Total operating expenses		225			458			(51	)		415			625			(34	)
Loss from operations		(155	)		(376	)		59			(277	)		(536	)		48
Interest expense		75			—			—			143			—			—

Loss before income taxes	$	(230	)	$	(376	)		39		$	(420	)	$	(536	)		22
Total assets (at period end)	$	12,000		$	1,000			1,100	%	$	12,000		$	1,000			1,100	%

We reported receivables from affiliates of $22,862,000 and $18,441,000 at June 30, 2008 and December 31, 2007, respectively. Our cash balances are sometimes commingled with the balances of Brooke Corporation and its other subsidiaries for cash management purposes. We receive and/or pay interest for the availability/use of these funds. Interest income and interest expense are primarily the result of amounts advanced from our subsidiary, BCA, and loaned to our franchise operating division and other Brooke Corporation affiliates. Where appropriate, these amounts are eliminated in consolidation. During the three and six months ended June 30, 2008, we recorded $15,000 and $30,000, respectively, in expense in connection with shared services agreements with Brooke Corporation.

Other operating expenses during the three months ended June 30, 2008 and 2007 include legal and professional fees of $119,000 and $201,000, respectively. Other operating expenses during the six months ended June 30, 2008 and 2007 include legal and professional fees of $240,000 and $315,000, respectively.

Discontinued Operation

Life insurance policy premiums are currently generated entirely through First Life America Corporation.


	Three		Three					Six		Six
	Months		Months		2008			Months		Months		2008
	Ended		Ended		% Increase			Ended		Ended		% Increase
	June 30,		June 30,		(decrease)			June 30,		June 30,		(decrease)
	2008		2007		over 2007			2008		2007		over 2007
	(in thousands)							(in thousands)
REVENUES
Insurance premiums earned	$	898	$	849		6	%	$	2,000	$	1,922		4	%
Interest income		408		352		16			805		667		21
Other income		61		60		2			121		124		(3	)

Total revenues		1,367		1,261		8			2,926		2,713		8
EXPENSES
Commission expense		49		50		(2	)		104		109		(5	)
Payroll expense		134		116		16			312		240		30
Depreciation and amortization		195		212		(8	)		385		394		(2	)
Other expenses		933		667		(40	)		2,046		1,747		(17	)

Total expenses		1,311		1,045		25			2,847		2,490		14

Income from discontinued operation		56		216		(74	)		79		223		(65	)
Total assets (at period end)	$	35,000	$	31,000		13	%	$	35,000	$	31,000		13	%

Net premium income increased from $849,000 during the three months ended June 30, 2007, to $898,000 for the three months ended June 30, 2008. Net premium income increased from $1,922,000 during the six months ended June 30, 2007, to $2,000,000 for the six months ended June 30, 2008.

Net interest income increased $56,000 or 16% for the three months ended June 30, 2008, compared to the same period for 2007 and increased $138,000 or 21% for the six months ended June 30, 2008, compared to the same period for 2007, due primarily to the increased size of our investment portfolio.

Operating expenses totaled $1,311,000 and $1,045,000 for the three months ended June 30, 2008 and 2007, respectively. Included in total operating expenses were policy reserve increases of $249,000 and $152,000 for the three months ended June 30, 2008 and 2007, respectively. Operating expenses totaled $2,847,000 and $2,490,000 for the six months ended June 30, 2008 and 2007, respectively. Included in total operating expenses were policy reserve increases of $544,000 and $482,000 for the six months ended June 30, 2008 and 2007, respectively. Life insurance reserves are actuarially determined based on such factors as insured age, life expectancy, mortality and interest assumptions. As more life insurance is written and existing policies reach additional durations, policy reserve requirements will continue to increase.

Our death claims expense increased to $241,000 during the three months ended June 30, 2008 as compared to $104,000 during the same time period in 2007 and increased to $562,000 during the six months ended June 30, 2008 as compared to $417,000 during the same time period in 2007. Increases in death claims expense are reflective of the continued maturation of the final expense policies, which are generally purchased by consumers in their senior years.

Commission expense is based on a percentage of premiums and is determined in the product design. Additionally, higher percentage commissions are paid for first year business than renewal year. As our focus has shifted to marketing our life insurance products instead of our annuity products, gross and net commission expense has declined.

Policy acquisition costs deferred result from the capitalization of costs related to the sales of life insurance and include commissions on first year business, medical exam and inspection report fees, and salaries of employees directly involved in the marketing, underwriting and policy issuance functions. The level of these costs deferred has declined due to reduced levels of commission expense paid on issuance of annuity contracts in 2008 as compared to 2007. Amortization of deferred policy acquisition costs was $172,000 and $195,000 for the three month periods ended June 30, 2008 and 2007, respectively. Amortization of deferred policy acquisition costs was $341,000 and $359,000 for the six month periods ended June 30, 2008 and 2007, respectively. Management performs quarterly reviews of the recoverability of deferred acquisition costs based on current trends as to persistency, mortality and interest. These trends are compared to the assumptions used in the establishment of the original asset in order to assess the need for impairment. Based on the results of the aforementioned procedures performed by management, no impairments have been recorded against the balance of deferred acquisition costs.

Liquidity and Capital Resources

Our sources of capital primarily include cash from operations and debt.

Our cash and cash equivalents were $229,000 as of June 30, 2008, compared to $2,174,000 at December 31, 2007. During the six months ended June 30, 2008, net cash of $2,395,000 was provided by operating activities which primarily resulted from an increase in accounts and expense payables. Net cash of $1,048,000 was used in investing activities primarily for the purchase of securities. Net cash of $3,292,000 was used in financing activities, primarily from net payments to affiliates of $4,421,000.

Our cash and cash equivalents were $21,127,000 as of June 30, 2007, compared to $12,366,000 at December 31, 2006. During the six months ended June 30, 2007, net cash of $10,505,000 was provided by operating activities which primarily resulted from an increase in purchase of business inventory provided by sellers. Net cash of $6,553,000 was used in investing activities primarily for the purchase of property and equipment. Net cash of $4,809,000 was provided by financing activities, primarily from proceeds on debt.

Our current ratios (current assets to current liabilities) were 0.89 and 1.00, respectively, at June 30, 2008 and December 31, 2007. We expect the current ratio to return to approximately 1.00 upon the sale of First Life and the application of sale proceeds to short term debt.

The current credit environment has made it difficult for us to raise debt or equity to fund the expansion of insurance company operations. As such, we entered into an agreement on July 18, 2008, to sell our life insurance subsidiary, First Life America Corporation, and are considering either the termination of our Exchange Agreement with Brooke Corporation to acquire a non-standard auto company, Delta Plus Holdings Inc., or the sale of Delta Plus Holdings by us if the Exchange Agreement is completed. We intend to use proceeds from the sale of First Life to repay short term bank debt.

Our company is focused on the distribution of insurance through franchised insurance agents. During the second quarter, our company made a difficult transition by reducing operating expenses to levels that are less than expected recurring revenues from royalties, servicing fees and profit sharing fees.

As a result, we are reasonably confident that third quarter cash flows will be sufficient to pay operating expenses in the third quarter provided that we receive the servicing fees for collateral preservation consulting that are owed to us by securitization trusts.

During this difficult second quarter transition, we incurred carry over payable balances to sellers, vendors and landlords of approximately $3,800,000 for which third quarter cash flows will not be sufficient to repay. However, we have negotiated payment terms with most of these creditors which permit payment over an extended period, so we do not believe that this will create a liquidity issue.

We are also reasonably confident that annualized operating expenses have been sufficiently reduced so that 2009 cash flows will be positive, provided that our line of credit lender continues our lending relationship.

Subject to the above uncertainties, we believe that our existing cash, cash equivalents and funds generated from operating, investing and financing activities will be sufficient to satisfy our normal financial needs. Additionally, subject to the above, we believe that funds generated from future operating, investing and financing activities and potential liquidation of assets will be sufficient to satisfy our future financing needs, including the required annual principal payments of our long-term debt and any future tax liabilities.

Capital Commitments

The following summarizes our contractual obligations as of June 30, 2008, and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in thousands):


	Payments Due by Period
			Less Than		1 to 3		3 to 5		More Than
Contractual Obligations	Total		1 Year		Years		Years		5 Years
Short-term borrowings	$	8,063	$	8,063	$	—	$	—	$	—
Long-term debt		41,325		24,986		5,836		7,725		2,778
Interest payments*		6,433		2,393		2,421		853		766
Operating leases (facilities)		18,383		8,729		8,373		1,077		204

Total from continuing operations		74,204		44,171		16,630		9,655		3,748

Discontinued operation	$	27,145	$	2,443	$	5,429	$	6,243	$	13,030


*		Includes interest on short-term and long-term borrowings. For additional information on the debt associated with these interest payments see Note 6 to our combined financial statements.

Our principal capital commitments consist of bank lines of credit, term loans, deferred payments to business sellers and obligations under leases for our facilities. We have entered into enforceable, legally binding agreements that specify all significant terms with respect to the contractual commitment amounts in the table above.

Capital commitments of our discontinued operation include future annuity and policy benefits. While annuity contracts have scheduled payments, the timing of the cash flows associated with life insurance policies is uncertain and can vary significantly.

Critical Accounting Policies

Our established accounting policies are summarized in Note 1 to our combined financial statements for the years ended December 31, 2007 and 2006, and the periods ended June 30, 2008 and 2007. As part of our oversight responsibilities, we continually evaluate the propriety of our accounting methods as new events occur. We believe that our policies are applied in a manner that is intended to provide the user of our financial statements with a current, accurate and complete presentation of information in accordance with generally accepted accounting principles.

We believe that the following accounting policies are critical. These accounting policies are more fully explained in Note 1 to our combined financial statements for the years ended December 31, 2007 and 2006, and the periods ended June 30, 2008 and 2007.

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. The following discussions summarize how we identify critical accounting estimates, the historical accuracy of these estimates, sensitivity to changes in key assumptions, and the likelihood of changes in the future. The following discussions also indicate the uncertainties in applying these critical accounting estimates and the related variability that is likely to result during the remainder of 2008.

Franchisees’ Share of Undistributed Commissions. We are obligated to pay franchisees a share of all commissions we receive. Prior to allocation of commissions to a specific policy, we cannot identify the policy owner and do not know the corresponding share (percentage) of commissions to be paid. We estimate the franchisee’s share of commissions to determine the approximate amount of undistributed commissions that we owe to franchisees.

An estimate of franchisees’ shares of undistributed commissions is made based on historical rates of commission payout, management’s experience and the trends in actual and forecasted commission payout rates. Although commission payout rates will vary, we do not expect significant variances from year to year. We regularly analyze and, if necessary, immediately change the estimated commission payout rates based on the actual average commission payout rates. The commission payout rate used in 2007 to estimate franchisees’ share of undistributed commissions was 85% and the actual average commission payout rate to franchisees (net of profit sharing commissions) was 80% for the three months ended June 30, 2008 and was 80% for the six months ended June 30, 2008. We believe that these estimates may change slightly with the reduction of service centers during the remainder of 2008.

Reserve for Doubtful Accounts. Our reserve for doubtful accounts is comprised primarily of a reserve for estimated losses related to amounts owed to us by franchisees for short-term credit advances, which are recorded as monthly statement balances, and longer-term credit advances, which are recorded as non-statement balances. Losses from advances to franchisees are estimated by analyzing all advances recorded to franchise statements that had not been repaid within the previous four months; all advances recorded as non-statement balances for producers who are in the first three months of development, total franchise statement balances; total non-statement balances; historical loss rates; loss rate trends; potential for recoveries; and management’s experience. Loss rates will vary and significant growth in our franchise network could accelerate those variances. The effect of any such variances can be significant. The estimated reserve for doubtful accounts as of June 30, 2008 was $6,700,000. The estimated reserve was approximately 144% of the actual amount of losses from advances made to franchisees for the twelve months ended June 30, 2008, approximately 31% of the actual total combined franchise statement and non-statement balances as of June 30, 2008, and approximately 69% of the actual combined advances recorded to franchise statements that had not been repaid during the four-month period ended June 30, 2008 and recorded as non-statement balances for producers in the first three months of development.

Amortization and Useful Lives. We acquire insurance agencies and other businesses that we intend to hold for more than one year. We record these acquisitions as Amortizable intangible assets. Accounting for Amortizable intangible assets, and the subsequent tests for impairment are summarized in Note 1(h) to our combined financial statements for the years ended December 31, 2007 and 2006. The rates of amortization of Amortizable intangible assets are based on our estimate of the useful lives of the renewal rights of customer and insurance contracts purchased. We estimate the useful lives of these assets based on historical renewal rights information, management’s experience, industry standards, and trends in actual and forecasted commission payout rates. The rates of amortization are calculated on an accelerated method (150% declining balance) based on a 15-year life. As of December 31, 2007, we tested Amortizable intangible assets for impairment and the resulting analysis indicated that our assumptions were historically accurate and that the useful lives of these assets exceeded the amortization rate. The Amortizable intangible assets have a relatively stable life and unless unforeseen circumstances occur, the life is not expected to change in the foreseeable future. Because of the relatively large remaining asset balance, changes in our estimates could significantly impact our results.

Income Tax Expense. An estimate of income tax expense (benefit) is based primarily on historical rates of actual income tax payments. The estimated effective income tax rate used in 2007 to calculate income tax expense was 38%. Although not expected, significant changes in our estimated tax rate could significantly impact our results. We believe this estimate will not change significantly during 2008. Deferred income taxes are recorded on the differences between the tax bases of assets and liabilities and the amounts at which they are reported in the combined financial statements. Recorded amounts are adjusted to reflect changes in income tax rates and other tax law provisions as they become enacted.

Revenue Recognition Policies. Revenue recognition is summarized in Note 1(f) to our combined financial statements for the years ended December 31, 2007 and 2006.

Accounting policies critical to our discontinued operation would include the following:

Deferred Policy Acquisition Costs. Commissions and other costs of acquiring life insurance, which vary with, and are primarily related to, the production of new business have been deferred to the extent recoverable from future policy revenues and gross profits. The acquisition costs are being amortized over the premium paying period of the related policies using assumptions consistent with those used in computing policy reserves.

Future Policy Benefits. Traditional life insurance policy benefit liabilities are computed on a net level premium method using assumptions with respect to current yield, mortality, withdrawal rates, and other assumptions deemed appropriate by us.

Future Annuity Benefits. Annuity contract liabilities are computed using the retrospective deposit method and consist of policy account balances before deduction of surrender charges, which accrue to the benefit of policyholders. Premiums received on annuity contracts are recognized as an increase in a liability rather than premium income. Interest credited on annuity contracts is recognized as an expense.

Reinsurance. Reinsurance is one of the tools that First Life uses to accomplish its business objectives. A variety of reinsurance vehicles is currently in use. Reinsurance supports a multitude of corporate objectives including managing statutory capital, reducing volatility and reducing surplus strain. At the customer level, it increases First Life’s capacity, provides access to additional underwriting expertise, and generally makes it possible First Life to offer products at competitive levels that First Life could not otherwise bring to market without reinsurance support.

Investments. First Life classifies all of its fixed maturity and equity investments as available-for-sale. Available-for-sale fixed maturities are carried at fair value with unrealized gains and losses, net of applicable taxes, reported in other comprehensive income. Equity securities are carried at fair value with unrealized gains and losses, net of applicable taxes, reported in other comprehensive income. Substantially all of First Life’s available-for-sale securities’ fair values are determined using quoted prices provided by nationally recognized securities exchanges and other sources. Mortgage loans on real estate are carried at cost less principal payments. Other investments are carried at amortized cost. Discounts originating at the time of purchase, net of capitalized acquisition costs, are amortized using the level yield method on an individual basis over the remaining contractual term of the investment. Policy loans are carried at unpaid balances. Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase and are carried at cost, which approximates fair value. Realized gains and losses on sales of investments are recognized in operations on the specific identification basis. Interest earned on investments is included in net investment income.

With respect to the previously described critical accounting policies, we believe that the application of judgments and assumptions is consistently applied and produces financial information which fairly depicts the results of operations for all years presented.

Recently Issued Accounting Pronouncements

See Note 18 to our combined financial statements for a discussion of the effects of the adoption of new accounting standards, including Statement of Financial Accounting Standard No. 157, “Fair Value Measurements,” which became effective for us in 2008.

Contractual Obligations

See Note 5 to our combined financial statements for tabular disclosure of information related to our long-term contractual obligations as of June 30, 2008, and December 31, 2007, incorporated herein by this reference.

Related Party Transactions

See Notes 2 and 11 to our combined financial statements for information about related party transactions.

Impact of Inflation and General Economic Conditions

There have been no material changes to the description of the impact of inflation and general economic conditions reported in our annual report on Form 10-K for the year ended December 31, 2007, except as noted below.

Although inflation has not had a material adverse effect on our financial condition or results of operations, increases in the inflation rate are generally associated with increased interest rates. A significant and sustained increase in interest rates could adversely affect our franchisees’ ability to repay their variable rate loans and thereby adversely affect their operations. Such an interest rate increase could also adversely affect our profitability by increasing our interest expenses and other operating expenses. The continuing restricted credit market environment could also have an adverse impact on our operations, and has caused us to plan for a no-growth scenario for at least the remainder of 2008.

A significant change in interest rates or in the willingness to extend credit could have a significant and adverse impact on lenders’ ability to make loans to our franchisees, and, by extension, on our ability to continue expanding our agency network.

Our business is also dependent on the cyclical pricing of property and casualty insurance, which may adversely affect our franchisees’ performance and, thus, our financial performance. Our franchisees primarily derive their revenues from commissions paid by insurance companies, which commissions are based largely on the level of premiums charged by such insurance companies. In turn, we earn fees from our franchisees based upon the commissions earned by our franchisees. Because these premium rates are cyclical, our financial performance is dependent, in part, on the fluctuations in insurance pricing. Although the current insurance market generally may be characterized as “soft,” with a flattening or decreasing of premiums in most lines of insurance, it is likely that insurance pricing will decrease further in the future, subjecting us to lower commissions on the insurance placed by our franchisees.

A steep decline in insurance pricing could have a significant and adverse impact on our franchisees, because the commissions that they earn would likely decrease along with insurance pricing. That adverse impact would likely reduce our share of our franchisees insurance commissions and could also hurt our franchisees’ ability to make timely payment of principal and interest on their loans.

A general decline in economic activity in the United States or in one of the states or geographic regions in which we operate, such as California, Texas, the Southwest, the Midwest or the Southeast, could also affect our results and financial condition.

An adverse change in economic activity could reduce the ability of individuals and small businesses — the key customers for our franchisees — to purchase insurance and other financial services. In such event, the revenue growth rate of our franchisees could flatten or decline, in turn reducing our revenues and hurting our franchisees’ ability to make timely interest and principal payments on their loans.

All other schedules have been omitted because they are either inapplicable or the required information has been provided in the combined financial statements or the notes thereto.

ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There was no material change during the quarter from the information set forth in Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in the Annual Report on Form 10-K for the year ended December 31, 2007.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods required under the Securities and Exchange Commission’s rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of the end of the period covered by this report, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in alerting management on a timely basis of material information required to be disclosed in our reports at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

There are no material changes during the quarter in the Risk Factors disclosed in Item 1A -“Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Appointment of Certain Officers

On August 15, 2008, the Board appointed Robert D. Orr as Chief Executive Officer, effective immediately. Mr. Orr, 54, is the founder of Brooke Corporation (an affiliate of the Company, “Brooke”). Mr. Orr has served as a director of Brooke since its inception in 1986 and served as its Chief Executive Officer from 1986 until October 2007. Additionally, he was Brooke’s President from 1986 until 1991 and has been its Chairman of the Board since 1991. Prior to focusing full time as the Chairman of the Board of Brooke, Mr. Orr served as President of Farmers State Bank, Phillipsburg, Kansas, Chairman of the Board of Brooke State Bank, Jewell, Kansas, President of First National Bank, Smith Center, Kansas, and a self-employed insurance agent for American Family Insurance Company. Mr. Orr is an honors graduate from Fort Hays State University in Hays, Kansas, with a Bachelor of Arts degree in Political Science. He also completed the Graduate School of Banking program at the University of Colorado. Mr. Orr is the author of a book published in 2000 about the sale of insurance and financial services in the internet age entitled Death of an Insurance Salesman? Related party disclosures with respect to Mr. Orr were disclosed in the Company’s definitive proxy statement filed on April 28, 2008, in the section titled “Certain Relationships and Related Party Transactions.”

On August 15, 2008, the Board appointed Travis W. Vrbas, as Chief Financial Officer and Treasurer, effective immediately. Mr. Vrbas, Brooke’s Chief Financial Officer since March 2008, has been with Brooke since March 2003. Since joining Brooke, Mr. Vrbas was responsible for the Sarbanes-Oxley compliance of Brooke and its subsidiaries. Mr. Vrbas has worked closely with Brooke’s external auditors during quarterly reviews, SOX testing and year-end audits. Since January 2004, Mr. Vrbas has also served as a liaison to the Chief Financial Officer of Brooke with respect to its SEC filings and other accounting matters. Mr. Vrbas received a Bachelor of Science Degree in Accounting from Kansas State University and is a Phi Kappa Phi.

ITEM 6. EXHIBITS


Exhibit No.		Description

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)

	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)

	32.1	Certificate of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350 (*)

	32.2	Certificate of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350 (*)


(*)		Filed herewith


Kansas		48-1187574

(State of incorporation)		(I.R.S. Employer Identification Number)


	Page Numbers

PART I FINANCIAL INFORMATION		3

Item 1. Financial Statements		3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		32

Item 3. Quantitive and Qualitative Disclosure About Market Risk		50

Item 4. Controls and Procedures		50

PART II OTHER INFORMATION		50

Item 1. Legal Proceedings		50

Item 1A. Risk Factors		50

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		51

Item 3. Defaults Upon Senior Securities		51

Item 4. Submission of Matters to a Vote of Security Holders		51

Item 5. Other Information		51

Item 6. Exhibits		52

SIGNATURES		53

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2


	For six-month periods ended
				(restated)
	June 30, 2008			June 30, 2007
Cash flows from operating activities:
Net (loss) income	$	(17,922	)	$	4,080
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		962			73
Loss (gain) on sale of businesses		4,477			(1,842	)
Loss (gain) on sale of assets		1,323			—
(Increase) decrease in assets:
Accounts and notes receivable		8,958			119
Other receivables		274			(7,433	)
Other current assets		(11,234	)		3,629
Business inventory		4,831			(1,733	)
Purchase of business inventory provided by sellers		105			11,021
Payments on seller notes for business inventory		(2,970	)		(4,790	)
Increase (decrease) in liabilities:
Accounts and expenses payable		14,696			4,855
Other liabilities		(1,105	)		2,526

Net cash provided by operating activities		2,395			10,505

Cash flows from investing activities:
Cash payments for property and equipment		(1,048	)		(6,553	)

Net cash used in investing activities		(1,048	)		(6,553	)

Cash flows from financing activities:
Advances to Parent and Affiliates		(4,421	)		1,172
Increases in short-term borrowings		3,007			—
Proceeds on debt		—			3,992
Payments on debt		(1,878	)		(355	)

Net cash used in financing activities		(3,292	)		4,809

Net increase (decrease) in cash and cash equivalents		(1,945	)		8,761
Cash and cash equivalents, beginning of period		2,174			12,366

Cash and cash equivalents, end of period	$	229		$	21,127


	For		Withheld
Robert D. Orr		6,795,800		0

Paul E. Burke, Jr.		6,795,800		0

Richard E. Gill		6,795,800		0

Michael S. Hess		6,795,800		0

Kyle Garst		6,795,800		0

Dane S. Devlin		6,795,800		0


þ		Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934


o		Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934


	For three-month periods ended
				(restated)
	June 30, 2008			June 30, 2007
Operating Revenues
Insurance commissions	$	27,201		$	27,615
Collateral preservation		3,557			1,363
Consulting fees		—			3,740
Gain (loss) on sale of business		(3,631	)		1,161
Initial franchise fees for basic services		—			7,095
Initial franchise fees for buyer assistance plans		—			70
Loss on sale of assets		(1,323	)		—
Interest income		71			177
Other income		175			696

Total Operating Revenues		26,050			41,917

Operating Expenses
Commissions expense		22,072			22,126
Payroll expense		6,070			6,187
Depreciation and amortization		492			42
Provision for doubtful accounts		8,076			1,337
Other operating expenses		13,025			9,760

Total Operating Expenses		49,735			39,452

Income (Loss) From Operations		(23,685	)		2,465

Other Expenses
Interest expense		642			705

Total Other Expenses		642			705

Income (Loss) from Continuing Operations Before Income Taxes		(24,327	)		1,760
Income tax expense (benefit)		(9,237	)		612

Net Income (Loss) from continuing operations		(15,090	)		1,148
Net Income from discontinued operation		56			216

Net Income (Loss)	$	(15,034	)	$	1,364

Net Income (Loss) Per Share:
Basic and diluted
Net income (loss) from continuing operations	$	(1.78	)	$	0.14
Net income from discontinued operation		0.01			0.03

Net income (loss)	$	(1.77	)	$	0.17


	BROOKE CAPITAL CORPORATION
Date: August 18, 2008	By:	/s/ ROBERT D. ORR
		Robert D. Orr
		Chief Executive Officer