United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2008.

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

For the transition period from                      to                     .

BROOKE CAPITAL CORPORATION

(Exact Name of small business issuer in its charter)

Kansas		48-1187574
(State of incorporation)		(I.R.S. Employer Identification Number)

8500 College Blvd. , Overland Park, Kansas 66210
(Address of principal executive offices)

Issuer’s telephone number (913) 661-0123

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

Common Stock, $.01 Par Value – 8,465,817 shares as of May 1, 2008

 

 

BROOKE CAPITAL CORPORATION

INDEX TO FORM 10-Q

		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			31
Item 3. Quantitive and Qualitative Disclosure About Market Risk			49
ITEM 4. Controls and Procedures			49
PART II OTHER INFORMATION			49
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 3. Defaults Upon Senior Securities			49
Item 4 Submission of Matters to a Vote of Security Holders			49
Item 5. Other Information			50
Item 6. Exhibits			50
SIGNATURES			50
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Brooke Capital Corporation
Combined Balance Sheets
(in thousands, except share amounts)

ASSETS

		(unaudited)
		March 31, 2008				December 31, 2007
Current Assets
Cash		$	4,401			$	2,633
Restricted cash			257				171
Investment securities available-for-sale			18,852				18,867
Accounts and notes receivable, net			35,614				30,567
Receivables from Parent and affiliates			22,567				18,441
Other receivables			3,877				2,443
Income taxes receivable			2,290				1,094
Other current assets			4,759				3,979
Advertising supply inventory			679				929
Total Current Assets			93,296				79,124
Investment in Businesses			5,655				9,413
Property and Equipment
Cost			21,560				20,951
Less: Accumulated depreciation			(5,649	)			(5,242	)
Net Property and Equipment			15,911				15,709
Other Assets
Deferred charges, net			5,452				5,406
Amortizable intangible assets, net			539				553
Net Other Assets			5,991				5,959
Total Assets		$	120,853			$	110,205

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

Brooke Capital Corporation
Combined Balance Sheets
(in thousands, except share amounts)

LIABILITIES AND STOCKHOLDERS’ EQUITY

		(unaudited)
		March 31, 2008				December 31, 2007
Current Liabilities
Future annuity benefits		$	19,104			$	18,735
Future policy benefits			7,531				7,261
Total Policy and Contract Liabilities			26,635				25,996
Accounts payable			11,824				7,353
Premiums payable to insurance companies			5,063				5,322
Producer payable			5,249				4,500
Interest payable			1,864				1,314
Income tax payable			404				—
Other current liabilities			8,424				2,144
Short-term debt			8,237				5,056
Current maturities of long-term debt			26,221				27,066
Total Current Liabilities			93,921				78,751
Non-Current Liabilities
Deferred income tax payable			186				338
Long-term debt less current maturities			17,087				18,369
Total Liabilities			111,194				97,458
Stockholder’s Equity
Common stock, $.01 par value, 25,000,000 shares authorized, 8,465,817 and 8,475,817 shares issued and outstanding			85				85
Additional paid-in capital			14,533				14,372
Accumulated deficit			(4,120	)			(1,232	)
Accumulated other comprehensive loss			(839	)			(478	)
Total Stockholders’ Equity			9,659				12,747
Total Liabilities and Stockholders’ Equity		$	120,853			$	110,205

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

Brooke Capital Corporation
Combined Statements of Operations
UNAUDITED
(in thousands, except per share data)

		For three-month periods ended
						(restated)
		March 31, 2008				March 31, 2007
Operating Revenues
Insurance commissions		$	33,596			$	32,008
Collateral preservation			5,714				891
Consulting fees			250				314
Gain (loss) on sale of business			(846	)			681
Initial franchise fees for basic services			1,320				12,870
Initial franchise fees for buyer assistance plans			—				385
Interest income			410				400
Insurance premiums earned			1,101				1,073
Other income			251				63
Total Operating Revenues			41,796				48,685
Operating Expenses
Commissions expense			24,965				23,095
Payroll expense			6,209				5,910
Depreciation and amortization			660				179
Other operating expenses			13,638				14,517
Total Operating Expenses			45,472				43,701
Income (Loss) From Operations			(3,676	)			4,984
Other Expenses
Interest expense			990				553
Total Other Expenses			990				553
Income (Loss) Before Income Taxes			(4,666	)			4,431
Income tax expense (benefit)			(1,778	)			1,715
Net Income (Loss)		$	(2,888	)		$	2,716
Net Income (Loss) Per Share:
Basic and diluted		$	(0.34	)		$	0.34

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

Brooke Capital Corporation
Combined Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss)

														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			—				—				161				—				—				161
Restricted stock forfeited			(10,000	)			—				—				—				—				—
Comprehensive loss:
Net loss			—				—				—				(2,888	)			—				(2,888	)
Changes in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects			—				—				—				—				(361	)			(361	)
Total comprehensive loss																							(3,249	)
March 31, 2008 (unaudited)			8,465,817			$	85			$	14,533			$	(4,120	)		$	(839	)		$	9,659

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

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). Accordingly, results of operations prior to that date represent Brooke Franchise only as it has been controlled by Brooke Corporation for all periods presented. See Note 14.

Brooke Capital Corporation
Combined Statements of Cash Flows
UNAUDITED
(in thousands)

		For three-month periods ended
						(restated)
		March 31, 2008				March 31, 2007
Cash flows from operating activities:
Net (loss) income		$	(2,888	)		$	2,716
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization			660				179
Loss (gain) on sale of businesses			846				(681	)
Acquisition costs capitalized			(214	)			(251	)
Provision for restricted stock awards			161				—
Provision for deferred income taxes			(61	)			—
Amortization of premium and accretion of discount on available-for-sale securities			12				10
Interest credited on annuities and premium deposits			221				173
(Increase) decrease in assets:
Accounts and notes receivable			(5,047	)			1,574
Other receivables			(1,520	)			(6,402	)
Other current assets			(1,891	)			(384	)
Business inventory			2,807				(2,951	)
Purchase of business inventory provided by sellers			105				6,121
Payments on seller notes for business inventory			(1,412	)			(1,519	)
Increase (decrease) in liabilities:
Policy and contract liabilities			268				329
Accounts and expenses payable			4,471				3,259
Other liabilities			7,724				2,404
Net cash provided by operating activities			4,242				4,577
Cash flows from investing activities:
Purchase of available-for-sale securities			(1,255	)			(2,651	)
Principal reductions on available-for-sale securities			808				12
Cash payments for property and equipment			(680	)			(2	)
Purchase of lottery cash flows			—				(506	)
Proceeds from lottery cash flows			164				164
Net cash used in investing activities			(963	)			(2,983	)
Cash flows from financing activities:
Deposits on annuity contracts			806				1,801
Surrenders on annuity contracts			(657	)			(253	)
Exercise of warrant, net of related costs			—				393
Advances to Parent and Affiliates			(4,126	)			(6,805	)
Increases in short-term borrowings			3,181				—
Payments on debt			(715	)			(149	)
Net cash used in financing activities			(1,511	)			(5,013	)
Net increase (decrease) in cash and cash equivalents			1,768				(3,419	)
Cash and cash equivalents, beginning of period			2,633				14,344
Cash and cash equivalents, end of period		$	4,401			$	10,925

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 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.

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.

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

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.

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 Brooke Credit Corporation (d/b/a Aleritas Capital Corporation beginning in January 2008), 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.

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 Brooke Credit Corporation, as required by the securitization process. Brooke Agency 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.

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

The Company has business transactions with another affiliate, Brooke Credit Corporation (d/b/a Aleritas Capital Corporation, “Aleritas”), a Kansas 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.

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 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.

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.

(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 $1,200,000 and $1,114,000 at March 31, 2008 and December 31, 2007, respectively, have been established. The Company regularly assists 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 March 31, 2008, the amount of allowance was determined after analysis of several specific factors, including franchise advances classified as “watch” status.

The following schedule entitled “Valuation and Qualifying Accounts” summarizes the Allowance for Doubtful Accounts activity for the periods ended March 31, 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												Balance at
		Beginning of				Charges to								End of
		Period				Expenses				Write Offs				Period
Allowance for Doubtful Accounts
Year ended December 31, 2007		$	1,466			$	4,276			$	4,628			$	1,114
Period ended March 31, 2008		$	1,114			$	350			$	264			$	1,200

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 $429,000 and $481,000 at March 31, 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 $14,000 and $15,000 for the three month periods ended March 31, 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 three-month periods ended March 31, 2008 and 2007 was 2 and 7, respectively. Correspondingly, the number of businesses sold from inventory for the three-month periods ended March 31, 2008 and 2007 was 3 and 3, respectively. At March 31, 2008 and December 31, 2007, the “Investment in Businesses” inventory consisted of 5 businesses and 6 businesses, respectively, with fair market values totaling $5,655,000 and $9,413,000, respectively.

(k) Deferred Policy Acquisition Costs

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

		March 31, 2008				December 31, 2007
Deferred policy acquisition costs		$	10,794			$	10,579
Accumulated amortization			(5,342	)			(5,173	)
Net		$	5,452			$	5,406

Deferred policy acquisition costs amortization of $168,000 and $164,000 was recorded during the three-month periods ended March 31, 2008 and 2007.

(l) 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 for the three-month periods ended March 31, 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
		March 31,
(in thousands, except per share data)		2008				2007
Numerator:
Net income (loss) — numerator for basic earnings per share		$	(2,888	)		$	2,716
Effect of dilutive securities			—				—
Numerator for diluted earnings per share		$	(2,888	)		$	2,716
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			8,473,619				8,031,880
Earnings (loss) per share:
Basic and diluted		$	(0.34	)		$	0.34

(m) Other Current Assets

The Company 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 March 31, 2008 and December 31, 2007, the carrying value of these other assets was approximately $3,429,000 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 approximates their fair values.

(n) Advertising

Total advertising and marketing expenses for the three-month periods ended March 31, 2008 and 2007 were $3,707,000 and $4,076,000, respectively.

(o) 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 wholly-owned subsidiaries of Brooke Credit Corporation, for the purpose of making future loan payments and the use of these funds is restricted. The amount of commissions held at March 31, 2008 and December 31, 2007 was $257,000 and $171,000, respectively.

(p) 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.

(q) Investments

The Company 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. See Note 3 for additional information about the Company’s investments.

(r) 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.

2. Transactions with 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 March 31, 2008 and 2007, the total amount paid to the Parent Company was $450,000 and $1,200,000, 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 March 31, 2008 and December 31, 2007 resulted primarily from the additional cash generated from the Company’s purchase and sale of business activity. At March 31, 2008 and December 31, 2007, the Company reported receivables from its Parent Company and other related parties of $22,567,000 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 $1,691,000 for the guarantee of accounts receivable. Transactions between affiliates in the normal course of operations were $3,480,000 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 March 31, 2008 and December 31, 2007, the Company reported income taxes receivable to Parent of $2,290,000 and $1,094,000, respectively.

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. Investments

The amortized cost and fair value of investments at March 31, 2008 and December 31, 2007 are summarized as follows (in thousands):

						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
March 31, 2008
U.S. Government Agency		$	1,325			$	30			$	—			$	1,355
Corporate bonds			18,337				179				1,215				17,301
Total			19,662				209				1,215				18,656
Equity securities			239				9				52				196
		$	19,901			$	218			$	1,267			$	18,852
December 31, 2007
U.S. Government Agency		$	2,132			$	21			$	—			$	2,153
Corporate bonds			17,094				129				700				16,523
Total			19,226				150				700				18,676
Equity securities			239				7				55				191
		$	19,465			$	157			$	755			$	18,867

The amortized cost and fair value of fixed maturities at March 31, 2008, by contractual maturity, are shown below (in thousands). Actual maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations:

		Amortized Cost				Fair Value
Due in one year or less		$	896			$	883
Due after one year through five years			4,615				4,450
Due after five years through ten years			7,899				7,438
Due after ten years			5,892				5,458
Mortgage-Backed securities			360				427
		$	19,662			$	18,656

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 $1,986,000 and $2,279,000 at March 31, 2008 and December 31, 2007, respectively.

During the three-month periods ended March 31, 2008 and 2007, the Company had no gross realized investment gains or losses.

The components of the Company’s other comprehensive loss and related tax effects during the three-month periods ended March 31, 2008 and 2007 are as follows (in thousands):

		Three-Month Periods Ended
		March 31,
		2008				2007
Unrealized holding losses on available-for-sale securities:
Unrealized holding gains (losses) during the period		$	(451	)		$	20
Less: Reclassification adjustment for gains included in net income			—				—
Tax benefit			90				(4	)
Other comprehensive income (loss)		$	(361	)		$	16

4. Accounts and Notes Receivable, net

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

		March 31, 2008				December 31, 2007
Business loans		$	12,324			$	6,763
Less: Business loans sold			(7,995	)			(1,662	)
Plus: loan participation classified as secured borrowing			7,995				1,662
Total notes receivable, net			12,324				6,763
Interest earned not collected on notes			411				322
Customer receivables			24,079				24,596
Allowance for doubtful accounts			(1,200	)			(1,114	)
Total accounts and notes receivable, net		$	35,614			$	30,567

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 March 31, 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.”

5. Property and Equipment

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

		March 31, 2008				December 31, 2007
Land		$	559			$	559
Buildings and leasehold improvements			9,543				9,482
Furniture and equipment			6,316				5,844
Computer equipment			4,164				4,015
Automobiles			978				1,051
Total property and equipment			21,560				20,951
Accumulated depreciation and amortization			(5,649	)			(5,242	)
Net property and equipment		$	15,911			$	15,709

Depreciation expense was $478,000 and $33,000 during the three-month periods ended March 31, 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.

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

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

		March 31,				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 range from March 2008 to January 2011. A particular seller note payable has an interest rate of 7.00% and matures September 2015.		$	17,711			$	19,123
Columbian Bank and Trust Company, due July 2008. Interest rate is variable and was 5.25% at March 31, 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 May 2008. Interest rate is variable at Prime plus 3.00% and is due quarterly with principal due at maturity. Interest rate was 8.25% at March 31, 2008. Parent Company has pledged stock it owns in Brooke Credit Corporation and the Company.			9,000				9,000
Participating Lenders, due December 2011. Interest rate is variable and was 10.25% at March 31, 2008. Principal payments are scheduled during the note’s term with the scheduled balance of approximately $8,154,000 due at maturity (December 31, 2011.) Collateralized by stock in subsidiary and other assets.			12,382				12,382
Aleritas Capital Corporation, due September 2015. Interest rate is variable and was 8.75% at March 31, 2008. Interest and principal are payable in 120 monthly payments of $16,080. Collateralized by various assets of the Company.			411				1,022
First National Bank of Phillipsburg, variable interest rate (7.75% at March 31, 2008) with scheduled principal payments through maturity at August 2017. Collateralized by real estate.			720				728
Aleritas Capital Corporation, various notes with variable interest rates from 8.75% to 9.25% at March 31, 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.			1,851				1,891
Fidelity Bank, variable interest rate (7.75% at March 31, 2008) with scheduled principal payments through maturity at September 2021. Collateralized by real estate.			1,970				1,990
Total bank loans and notes payable			51,545				50,491
Less: Current maturities and short-term debt			(34,458	)			(32,122	)
Total long-term debt		$	17,087			$	18,369

The renewal rights associated with the collateral interests of seller notes payable had estimated annual commissions of $43,407,000 and $47,282,000 at March 31, 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 $9,000,000 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. During April 2008, the stock has traded below the current minimum stated value. The Company expects to retire the note when due, May 30, 2008.

None of the Amortizable Intangible Assets described in Note 16 and none of the Acquisitions and Divestitures described in Note 13 were financed with seller notes payable at March 31, 2008.

Interest incurred on bank loans and notes payable for the three-month periods ended March 31, 2008 and 2007 was $990,000 and $553,000, respectively. Interest payable was $1,864,000 and $1,314,000 at March 31, 2008 and December 31, 2007, respectively.

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

Twelve-Month Periods Ending
March 31,
2009		$	34,458
2010			2,683
2011			2,571
2012			8,572
2013			413
Thereafter			2,848
		$	51,545

7. Leases

The Company leases space for itself and on behalf of its agents. Future long-term payments related to these operating leases at March 31, 2008 are as follows (in thousands):

Twelve-Month Periods Ending
March 31,
2009		$	13,958
2010			10,286
2011			4,990
2012			1,941
2013			435
Thereafter			234
Total		$	31,844

The Company occupies approximately 7,500 square feet of its building in Topeka, Kansas. The Company has leased 10,000 square feet under a lease that runs through June 30, 2011. The remaining 2,500 square feet are leased for a period that will end on August 31, 2010. Tenant improvement costs of approximately $103,000 are being depreciated on a straight line basis over the lease term ending August 31, 2010.

8. Income Taxes

The Company’s current and deferred income tax (benefit) expense for the three-month periods ended March 31, 2008 and 2007 was as follows (in thousands):

		Three-Month Periods Ended
		March 31,
		2008				2007
Current		$	(1,717	)		$	1,715
Deferred			(61	)			—
		$	(1,778	)		$	1,715

Federal income tax expense differs from the amount computed by applying the statutory Federal income tax rate for the three-month periods ended March 31, 2008 and 2007 as follows:

		Three-Month Periods Ended
		March 31,
		2008				2007
U.S. Federal statutory tax rate			(35	)%			35	%
State statutory rate			(4	)%			4	%
Increase (decrease) in valuation allowance			0	%			0	%
Miscellaneous			1	%			0	%
			(38	)%			39	%

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 the Company’s net deferred tax liability are as follows (in thousands):

		March 31, 2008				December 31, 2007
Deferred tax liability:
Deferred policy acquisition costs		$	915			$	903
Other			40				38
Total deferred tax liability			955				941
Deferred tax asset:
Net operating loss carryforward		$	1,790			$	1,806
Net unrealized investment loss			210				120
Other			209				111
Total deferred tax asset			2,209				2,037
Valuation allowance			(1,440	)			(1,434	)
Net deferred tax asset			769				603
Net deferred tax liability		$	186			$	338

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. Net operating loss carryforwards of $965,000 resulted from life insurance operations and 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 $44,000 will expire in 2009 and 2010.

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 plans to file as a part of the Brooke Corporation consolidated federal return for the remaining portion of 2007. 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. Prior to the merger, Brooke Franchise has historically filed as a part of the consolidated returns filed by Brooke Corporation.

9. 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 three-month periods ended March 31, 2008, the Company recorded $62,000 in employer contributions to the plan. No employer contributions were recorded during the three months ended March 31, 2007.

10. 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 March 31, 2008, the Company had account balances of $11,685,000 that exceeded the insurance limit of the Federal Deposit Insurance Corporation.

11. Segment and Related Information

The Company’s two reportable segments consisted of its Insurance Company Operations and its Insurance Agency Operations. Insurance company operations include the issuance of life insurance policies by First Life America Corporation. First Life sells life insurance and annuity products in eight states throughout the Midwest.

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.

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

The table below reflects summarized financial information concerning the Company’s reportable segments for the three-month periods ended March 31, 2008 and 2007 (in thousands):

		Insurance				Insurance								Elimination of
		Agency				Company								Intersegment				Consolidated
		Operations				Operations				Corporate				Activity				Totals
2008
Insurance commissions		$	33,596			$	—			$	—			$	—			$	33,596
Collateral preservation			5,714																5,714
Insurance premiums earned			—				1,101				—				—				1,101
Interest income			460				397				62				(509	)			410
Consulting fees			250				—				—				—				250
Initial franchise fees for basic services			1,320				—				—				—				1,320
Loss on sale of businesses			(846	)			—				—				—				(846	)
Other income			185				60				6				—				251
Total Operating Revenues			40,679				1,558				68				(509	)			41,796
Interest expense			1,431				—				68				(509	)			990
Commissions expense			24,910				55				—				—				24,965
Payroll expense			6,008				178				23				—				6,209
Depreciation and amortization			458				190				12				—				660
Other operating expenses			12,371				1,112				155				—				13,638
Income Before Income Taxes			(4,499	)			23				(190	)			—				(4,666	)
Segment assets			89,015				34,188				160				(2,510	)			120,853
Expenditures for segment assets		$	667			$	13			$	—			$	—			$	680
2007
Insurance commissions		$	32,008			$	—			$	—			$	—				32,008
Collateral preservation			891																891
Insurance premiums earned			—				1,073				—				—				1,073
Interest income			78				315				7				—				400
Consulting fees			314				—				—				—				314
Initial franchise fees for basic services			12,870				—				—				—				12,870
Initial franchise fees for buyers assistance plans			385				—				—				—				385
Gain on sale of businesses			681				—				—				—				681
Other income			(2	)			65				—				—				63
Total Operating Revenues			47,225				1,453				7				—				48,685
Interest expense			553				—				—				—				553
Commissions expense			23,036				59				—				—				23,095
Payroll expense			5,762				124				24				—				5,910
Depreciation and amortization			—				181				16				(18	)			179
Other operating expenses			13,290				1,082				127				18				14,517
Income Before Income Taxes			4,584				7				(160	)			—				4,431
Segment assets			77,909				30,528				1,768				—				110,205
Expenditures for segment assets		$	—			$	2			$	—			$	—			$	2

12. 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 originated loans 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 three-month periods ended March 31, 2008 and 2007, $5,714,000 and $891,000 in compensation was paid to the Company for services provided under these agreements. At March 31, 2008 and December 31, 2007, Aleritas owed $1,134,000 and $449,000, respectively, to the Company under this agreement. During the three-month periods ended March 31, 2008 and 2007, net compensation received by the Company totaled $5,585,000 and $891,000, 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 $411,000 at March 31, 2008. 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 March 31, 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 $1,851,000 at March 31, 2008) 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 8.75% to 9.25% at March 31, 2008. At March 31, 2008 and December 31, 2007, respectively, interest payable on these loans totaled $7,000 and $8,000.

During the three-month periods ended March 31, 2008 and 2007, interest expense on these loans with Aleritas totaled $68,000 and $90,000, respectively.

In December 2007, Brooke Holdings, Inc. loaned $12,382,000 to the Company. Brooke Holdings, Inc. owned almost 43% of the outstanding common stock in Brooke Corporation at December 31, 2007. Brooke Holdings, Inc. is controlled by Robert D. Orr, Chairman of the Board of the Company, and Leland G. Orr, Chief Financial Officer of the Company, who owned approximately 74% and 22%, respectively, of its outstanding shares of stock as of April 11, 2008. The interest rate on the loan is variable, at 4.50% over the Prime Rate as published in the Wall Street Journal, and annual principal payments are scheduled with a final payment of $8,154,000 due in December 2011. Payment of the loan is secured by a pledge of the Company’s stock in First Life. The Company has also agreed to pledge its stock in Travelers Insurance Company, upon its acquisition of Delta Plus Holdings, Inc. At March 31, 2008, all but $1,082,000 of this amount has been sold to other participating lenders and $7,072,000 remains payable to Brooke Holdings, Inc. and is reported as a part of accounts payable. In addition, during March 2008, the Company loaned $1,980,000 to Brooke Holding, Inc. At March 31, 2008, all but $480,000 of this amount had been sold to a participating lender.

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 March 30, 2008 that provided $5,000,000 of excess professional liability coverage.

Anita Lowry is the sister of Robert D. Orr, Chairman of the Board of the Company and Leland G. Orr, Chief Financial Officer of Brooke Capital Corporation and is the mother of Michael S. Lowry, Senior 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 March 31, 2008 and December 31, 2007, the Company had $8,846,000 and $2,613,000, respectively, on deposit with the Bank.

13. 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 7 for more information regarding the Company’s operating leases.

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 March 31, 2008, 49 of the acquired agencies had been sold.

14. 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, a subsidiary of the Company, 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 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 2007 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 three months of 2008, Brooke Capital Advisors reported a pretax loss of $18,000.

The Warrant issued in connection with the above Agreement was exercised by Brooke Corporation on January 31, 2007. Warrants outstanding at December 31, 2007 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 above Agreement. The warrants became exercisable on December 8, 2006 either in whole or in part for a period of 10 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, the finance 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 15, on August 15, 2007, the Company’s Board of Directors awarded 390,000 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. Pursuant to the Agreement and Plan of Merger dated August 31, 2007, as amended September 20, 2007, as amended November 15, 2007, by and among Brooke Corporation, Brooke Franchise and the Company; Brooke Corporation has agreed it will not transfer the Company’s common stock that it received in the merger transaction for a period of 180 days after the closing date unless the Company would otherwise consent.

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):

		Operating Revenues				Net Income (Loss)
Three-Month Period Ended March 31, 2007
Brooke Franchise		$	46,975			$	2,798
Brooke Capital			1,710				(82	)
On a combined basis		$	48,685			$	2,716

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.

15. 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, the Compensation Committee of the Board of Directors of the Company awarded 390,000 restricted shares to officers and directors of the Company or its subsidiary. At March 31, 2008, a total of 380,000 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 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.

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. As the shares of the Company’s common stock were not listed for trading on any exchange on the 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 three-month period ended March 31, 2008, the Company recorded approximately $161,000 in compensation cost along with related deferred income tax benefits of $61,000. As of March 31, 2008, there was $1,495,000 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.

16. Amortizable Intangible Assets

There are no intangible assets with indefinite useful lives at December 31, 2007. The intangible assets with definite useful lives had values of $539,000 and $553,000 at March 31, 2008 and December 31, 2007, respectively. Amortization expense on intangible assets, including those sold during the year, was $14,000 and $15,000 for the three-month periods ended March 31, 2008 and 2007.

Amortization expense for amortizable intangible assets for the twelve-month periods ending March 31, 2009, 2010, 2011, 2012 and 2013 is estimated to be $54,000, $48,000, $43,000, $38,000 and $32,000, respectively.

17. Supplemental Cash Flow Disclosures

		Three-Month Periods Ended
		March 31, 2008				March 31, 2007
Supplemental disclosures (in thousands):
Cash paid for interest		$	440			$	252
Cash paid for income tax		$	—			$	—

Business inventory decreased from December 31, 2007 to March 31, 2008. During the three-month periods ended March 31, 2008 and 2007, the statements of cash flows reflect the purchase of businesses into inventory provided by sellers totaling $105,000 and $6,121,000, respectively, the write down to realizable value of inventory of $686,000 and $300,000, respectively, and the change in inventory of $3,758,000 and $3,632,000, respectively. Payments on seller notes were $1,412,000 and $1,519,000 in 2008 and 2007, respectively.

		Three-Month Periods Ended
(in thousands)		March 31, 2008				March 31, 2007
Purchase of business inventory		$	(370	)		$	(8,958	)
Sale of business inventory			3,547				11,147
Net cash provided from sale of business inventory			3,177				2,189
Cash provided by sellers of business inventory			(105	)			(6,121	)
Write down to realizable value of inventory			686				300
(Increase) decrease in inventory on balance sheet		$	3,758			$	(3,632	)

18. Statutory Requirements

The Company’s life insurance subsidiary, First Life America Corporation (“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.

19. 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.

20. Contingencies

During the second quarter of 2008, the Company is 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 will receive 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 potential sale of First Life and either the termination of our exchange agreement with Brooke Corporation to acquire Delta Plus or the sale of Delta Plus if the exchange agreement is completed. Subject to lender and regulatory approvals, proceeds from the sale of First Life would be used to repay short-term bank debt.

Prior to consummation of the exchange, Brooke Corporation owns 100% of Delta Plus and 81% of the Company. As a result of closing the exchange agreement, Brooke Corporation is expected to own approximately 82% 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.

21. 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.

22. 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 on 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.

To estimate fair value of its available-for-sale Investment Securities, the Company obtains quoted prices provided by nationally recognized securities exchanges and other sources.

Assets measured at fair value on a recurring basis are summarized below:

Using Quoted

Prices in Active

Using Significant

Markets for

Other

Using Significant

Identical Assets

Observable

Unobservable

March 31, 2008

(Level 1)

Inputs (Level 2)

Inputs (Level 3)

Assets:

Available-for-sale securities

$

18,852

$

18,852

$

—

$

—

(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.

23. 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.

24. Subsequent Event

On May 5, 2008, the Company announced that it was reducing its staff by approximately 17% by reducing its work force at its Overland Park, Kansas national office and its agent service centers.

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 the Company’s results of operations, certain changes in its 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.

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

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

Insurance company revenues are generated from the issuance of life insurance and annuity policies sold by independent insurance agents through First Life America Corporation (“First Life”), a Kansas domiciled life insurance company subsidiary.

Insurance agency revenues are also 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.

Results of Operation

A merger between Brooke Capital Corporation and Brooke Franchise Corporation (“Brooke Franchise”) occurred November 15, 2007, with Brooke Capital 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 Brooke Capital have been under common control.

Our combined results of operations have been significantly impacted by expansion of franchise locations in prior years and the recent slow down in the expansion of our franchise operations. The following table shows income and expenses (in thousands, except percentages) for the three months ended March 31, 2008 and 2007, and the percentage change from year to year.

										2008
		Three Months				Three Months				% Increase
		Ended				Ended				(decrease)
		March 31, 2008				March 31, 2007				over 2007
REVENUES
Insurance commissions		$	33,596			$	32,008				5	%
Collateral preservation			5,714				891				541
Consulting fees			250				314				(20	)
Gain (loss) on sale of businesses			(846	)			681				(224	)
Initial franchise fees for basic services			1,320				12,870				(90	)
Initial franchise fees for buyers assistance plans			—				385				(100	)
Insurance premiums earned			1,101				1,073				3
Interest income			410				400				3
Other income			251				63				298
Total operating revenues			41,796				48,685				(14	)

										2008
		Three Months				Three Months				% Increase
		Ended				Ended				(decrease)
		March 31, 2008				March 31, 2007				over 2007
EXPENSES
Commission expense			24,965				23,095				8
Payroll expense			6,209				5,910				5
Depreciation and amortization			660				179				269
Other operating expenses			13,638				14,517				(6	)
Total operating expenses			45,472				43,701				4
Income (loss) from operations			(3,676	)			4,984				(174	)
Interest expense			990				553				79
Income (loss) before income taxes		$	(4,666	)		$	4,431				(205	)
Total assets (at period end)		$	120,853			$	110,205				10	%

A more detailed description of our financial condition and operating results as reported by the insurance company operations, insurance agency operations and corporate activities segments 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 Operation Segment)

The following table shows selected assets and liabilities (in thousands, except percentages) as of March 31, 2008 and December 31, 2007, and the percentage change from year to year.

										2008
										% Increase
		As of				As of				(decrease)
		March 31, 2008				December 31, 2007				over 2007
Investments		$	18,852			$	18,867				0	%
Accounts and notes receivable			35,614				30,567				17
Other receivables			3,877				2,443				59
Property and equipment			15,911				15,709				1
Deferred charges			5,452				5,406				1
Accounts payable			11,824				7,353				61
Policy and contract liabilities			26,635				25,996				2
Premiums payable			5,063				5,322				(5	)
Debt			51,545				50,491				2

Premiums generated from the sale of annuity and other life insurance products are invested in securities that we classify as available-for-sale.

Accounts and notes receivable primarily include amounts owed by our franchisees. These balances have not changed 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 Operation 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 increased primarily from amounts due from participating lenders.

Deferred charges include primarily the fees associated with the costs of acquiring life insurance by First Life. Policy and contract liabilities increased with the sale of annuities and other life insurance products.

Accounts payable, which includes franchise payables, payroll payables and other accrued expenses, increased primarily from 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

Our two reportable segments are Insurance Company Operations and Insurance Agency Operations.

Our insurance company operations include the issuance of life insurance policies by First Life. First Life sells life insurance and annuity products in eight states throughout the Midwest.

Our insurance agency operations include our franchise agency operations, 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 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.

Insurance Company Operations

										2008
		Three Months				Three Months				% Increase
		Ended				Ended				(decrease)
		March 31, 2008				March 31, 2007				over 2007
		(in thousands)
REVENUES
Insurance premiums earned		$	1,101			$	1,073				3	%
Interest income			397				315				26
Other income			60				65				(8	)
Total operating revenues			1,558				1,453				7
EXPENSES
Commission expense			55				59				(7	)
Payroll expense			178				124				44
Depreciation and amortization			190				181				5
Other operating expenses			1,112				1,082				3
Total operating expenses			1,535				1,446				6
Income from operations			23				7				229
Interest expense			—				—				—
Income before income taxes		$	23			$	7				229
Total assets (at period end)		$	34,188			$	30,528				12	%