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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

For the transition period from                      to                     

Commission file number: 000-31698

BROOKE CORPORATION

(Exact name of registrant as specified in its charter)

10950 Grandview Drive, Suite 600, Overland Park, Kansas 66210

(Address of principal executive offices) (Zip Code)

Issuer’s telephone number: (913) 661-0123

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (Check One):     Yes x    No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨    No x

As of June 30, 2004 there were 9,361,798 shares of the registrant’s sole class of common stock outstanding.

Brooke Corporation

Consolidated Financial Statements

For the Six Months Ended June 30, 2004 and 2003

Contents

Brooke Corporation

INDEPENDENT ACCOUNTANTS’ REPORT

To the Board of Directors

Brooke Corporation:

We have reviewed the accompanying consolidated balance sheets of BROOKE CORPORATION as of June 30, 2004 and 2003, and the related consolidated statements of income for the three-month and six-month periods then ended and the changes in stockholders’ equity and cash flows for the six months then ended. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

Summers, Spencer & Callison, CPAs, Chartered

Topeka, Kansas

July 30, 2004

3

PART I – FINANCIAL STATEMENTS

Item 1. Financial Statements

Brooke Corporation

Consolidated Balance Sheets

(unaudited)

JUNE 30, 2004 and 2003

Brooke Corporation

Consolidated Balance Sheets

(unaudited)

JUNE 30, 2004 and 2003

LIABILITIES AND STOCKHOLDERS’ EQUITY

Brooke Corporation

Consolidated Statements of Income

(unaudited)

THREE MONTHS ENDED JUNE 30, 2004 AND 2003

Brooke Corporation

Consolidated Statements of Income

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

Brooke Corporation

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

Brooke Corporation

Consolidated Statements of Cash Flows

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

1. Summary of Significant Accounting Policies

(a) Organization

Brooke Corporation (the “Company”) was incorporated under the laws of the State of Kansas on January 17, 1986. The Company has been listed on the American Stock Exchange under the symbol “BXX” since May 29, 2003. The Company’s registered office is located in Overland Park, Kansas. On June 30, 2004, Brooke Holdings, Inc. owned 64.46% of the Company’s common stock. The Company’s business operations include recruiting franchisees and consulting with franchisees through its franchise subsidiary, lending to franchisees through its finance company subsidiary and brokering insurance through its brokerage subsidiary. The Company owns directly, or indirectly through another subsidiary, 100% of the stock of all subsidiaries.

Operating Subsidiaries:

Although the Company has multiple subsidiaries, the Company’s business operations are typically performed by one of three operating subsidiaries: Brooke Franchise Corporation, Brooke Credit Corporation and CJD & Associates, L.L.C. Separate annual audited financial statements are prepared for each operating subsidiary and each operates independently from the other two operating subsidiaries, and from the Company, to perform its specific business purpose. Each operating subsidiary is also responsible for its own obligations, maintains its own separate funds, generates revenue in its own right, hires its own employees and maintains separate boards of directors. The Company provides accounting, administrative and legal support for the activities of its three operating subsidiaries. Company revenues are typically limited to dividends and administrative fees from these operating subsidiaries.

Brooke Franchise Corporation, is a Missouri corporation. On November 15, 2002, the Company changed the subsidiary name from Interstate Insurance Group, LTD to Brooke Franchise Corporation so that the corporate name better identifies the subsidiary’s business purpose. The primary business purpose of this subsidiary is franchising and providing services to franchisees through its network of regional offices and service centers.

Brooke Credit Corporation, a Kansas corporation, is a licensed finance company that originates loans primarily to the Company’s franchisees. This subsidiary also originates other types of loans through independent loan brokers and loan agents. Loans originated by Brooke Credit Corporation, and its loan brokers, are sold on a wholesale basis to participating lenders and other investors.

CJD & Associates, L.L.C. is a Kansas limited liability company. This subsidiary is a licensed insurance agency that sells insurance programs and excess surplus insurance on a wholesale basis, under the trade names of Davidson-Babcock, Texas All Risk and All Risk General Agency, through the Company’s network of agents and through agents not necessarily affiliated with the Company.

Acquisition Subsidiaries:

The Brooke Agency, Inc. and Brooke Investments, Inc. subsidiaries are used to acquire insurance agency and real estate assets for long term investment. Separate financial statements are typically prepared for each acquisition subsidiary because each secures loans from Brooke Credit Corporation and other lenders to fund their acquisitions.

Brooke Agency, Inc. is a Kansas corporation. Brooke Agency acquires for investment those insurance agencies that specialize in the types of insurance sales, such as auto insurance, where local ownership is less important to success. (note: Brooke Franchise Corporation typically acquires for resale those insurance agencies that specialize in the types of insurance sales where local ownership is important to success.) Brooke Franchise Corporation retains a share of commissions to provide personnel and facilities to this subsidiary. Brooke Agency does not typically have any employees or incur operating expenses.

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

1. Summary of Significant Accounting Policies (cont.)

(a) Organization (cont.)

Brooke Investments, Inc. is a Kansas corporation. Although no such acquisitions have been made, Brooke Investments intends to acquire real estate for lease to franchisees. Although the Company will provide certain administrative and legal support, Brooke Investments will retain all lease payments and pay all other related expenses. Revenues from this subsidiary will typically be limited to dividends.

Captive Subsidiaries:

The DB Group, LTD and DB Indemnity, LTD subsidiaries were incorporated in the country of Bermuda as captive insurance companies. Separate financial statements are prepared for Bermuda subsidiaries as required by the Bermuda government. Each captive insurance company subsidiary is responsible for its own obligations, maintains its own separate funds and generates revenue in its own right. The captive insurance company subsidiaries are wholly owned by CJD & Associates, LLC and revenues are typically limited to dividends.

The DB Group, LTD was incorporated for the purpose of underwriting, as a reinsurer, a small portion of the insurance written by CJD & Associates, LLC. There were no premiums written by this subsidiary in 2003 or during the period ending June 30, 2004.

DB Indemnity, LTD was incorporated under the laws of Bermuda and is licensed as a Class 1 insurer under the Insurance Act 1978 of Bermuda and related regulations for the purpose of insuring a portion of the professional insurance agents’ liability exposure of Brooke Franchise Corporation’s franchisees and for the purpose of issuing financial guaranty policies to Brooke Credit Corporation, its successors and assigns.

Securitization Subsidiaries:

Brooke Agency Services Company LLC, Brooke Acceptance Company LLC, Brooke Captive Credit Company 2003, LLC and Brooke Securitization Company 2004A, LLC were organized in Delaware as bankruptcy-remote special purpose entities as part of the process of securitizing Brooke Credit Corporation’s loan portfolio. To the extent required by the securitization process, separate financial statements are prepared for each securitization subsidiary.

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 franchise agreements from the Company and/or Brooke Franchise Corporation 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 the Company and/or Brooke Franchise Corporation for performance of any obligations to agents associated with all such franchise agreements.

Brooke Acceptance Company LLC, Brooke Captive Credit Company 2003, LLC, and Brooke Securitization Company 2004A, LLC are the purchasers of Brooke Credit Corporation loans pursuant to a true sale and the issuer of certain floating rate asset backed notes issued pursuant to various agreements. The financial information of these subsidiaries is not consolidated with the Company’s financial information.

Other Subsidiaries:

Subsidiaries have been established for contractual operations but any revenues generated by these subsidiaries are assigned to one of the operating subsidiaries for performance of any associated obligations. These subsidiaries include Brooke Life and Health, Inc., The American Heritage, Inc., Texas All Risk General Agency, Inc., All Risk General Agency, Inc., All Drivers, Inc., Marshall’s Auto Insurance Agency, Inc., Old Bank Building Insurance Agency, Inc., A Plus Insurance Agency, Inc. and First Brooke Insurance and Financial Services, Inc.

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

1. Summary of Significant Accounting Policies (cont.)

(a) Organization (cont.)

Subsidiaries have been established for regulatory, licensing, security or other purposes and do not typically conduct any operations or own any assets. These subsidiaries include Brooke Bancshares, Inc., The American Agency, Inc., TAR Holding Company Inc., Brooke Funeral Services Company, LLC, and Brooke Agency Services Company of Nevada, LLC.

(b) 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.

The following are significant estimates made by management: accrued commission refund obligations, reimbursement from agents for commission refund obligations, accrued producer payable expense, useful lives of assets, Buyers Assistance Program unearned, insurance claim losses, loss expense, and earned percentages, the fair value assumptions utilized for interest-only strip receivables, Buyers Assistance Program net cash flow expenditures associated with commission performance, amortization, and pro-ration of payroll and operating expenses associated with the origination of loans. It is at least reasonably possible these estimates will change in the near term.

(c) 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.

(d) Allowance for Bad Debts

The Company generally considers all accounts and notes receivable to be fully collectible, therefore no allowance has been recognized for uncollectible amounts. However, as more fully disclosed in footnote 1(o), the Company has established an allowance for receivables resulting from the uncertain timing and amounts of commissions payments due to the Company pursuant to the cash flow assistance provisions of the Company’s Buyer Assistance Plan.

(e) Revenue Recognition

Commission revenue on insurance policy premiums is generally recognized as of the effective date of the policies or, in certain cases, as of the effective date or billing date, whichever is later. Contingent and profit sharing commissions are generally recognized when received. Premiums due from the insured to the Company are reported as assets of the Company and as corresponding liabilities, net of commissions, to the insurance carriers.

In the event of cancellation or reduction in premiums, for policies billed by an insurance carrier, a percentage of the commission revenue is often returned to the insurance carrier. The commission refunds are calculated by the insurance carriers and are typically deducted from amounts due to the Company from insurance carriers. The Company has estimated and accrued a liability for commission refunds of $882,137 and $433,325 as of June 30, 2004 and 2003, respectively.

Through its brokerage subsidiary, CJD & Associates, L.L.C., the Company receives fees for the placement and issuance of policies that are in addition to, and separate from, any sales commissions paid by insurance companies. These policy fees are not refundable and the Company has no continuing obligation.

The Company recognizes interest income when earned.

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

1. Summary of Significant Accounting Policies (cont.)

(e) Revenue Recognition (cont.)

Loan participation represents the transfer of notes receivable to participating lenders. When the transfer meets the criteria to be accounted for as a true sale, established by SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, the gain on sale of a note receivable is recognized when the note is sold to participating lenders and other investors. When the Company sells participations in notes receivables to investors, it retains servicing rights and interest income which are retained interests in the loan participations. Gains or losses on sales of notes receivable depends, in part, on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer.

Loan origination fees charged to borrowers are offset with loan origination expenses.

Through its subsidiary The American Heritage, Inc., the Company provides consulting, marketing and cash flow assistance to agency or business owners during the first months of ownership through a Buyers Assistance Plan (“BAP”) program. The Company has allocated the fees paid by agents for BAP assistance to each of the services provided by the Company and the fee associated with a particular service is recognized as revenue using the percentage of completion accounting method by referencing the costs incurred to date.

Many of the BAP services (inspection reports, operations analysis, marketing plan development) are generally provided by the Company before, or within thirty days after, franchise acquisition. As such, approximately 82% of those fees related to BAP agreements were immediately recognized as revenue. Any remaining BAP fees are typically recognized throughout the BAP period as the remaining BAP related services are performed.

Revenues from facilitator fees, gains on sale of agencies or businesses, seller consulting and seller discounts are recognized immediately because the Company has no continuing obligation.

Through its subsidiary DB Indemnity Ltd., excess liability premiums are recorded on the accrual basis and included in income on a pro-rata basis over the term of the policies. Unearned premium reserves are established to cover the unexpired portion of premiums written and assumed. Financial guarantee policies are non-refundable and are considered to be earned at inception.

(f) Property and Equipment

Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. The following summarizes the estimated useful lives used by the Company for various asset categories:

(g) Excess of Cost Over Fair Value of Net Assets

Included in other assets are unamortized costs of purchased subsidiaries (Brooke Life and Health, Inc., The American Agency, Inc., CJD & Associates, L.L.C., TAR Holding Company, Inc., Texas All Risk General Agency, Inc., All Drivers, Inc., Marshall’s Auto Insurance, Inc., Old Bank Building Insurance Agency, Inc, and A Plus Insurance Agency, Inc. ) in excess of the fair value of underlying net tangible assets acquired. The balance is being amortized over a 15-year period using an accelerated 150% declining balance switching to straight-line method. Amortization was $244,173 and $110,560 for the periods ended June 30, 2004 and 2003, respectively.

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

1. Summary of Significant Accounting Policies (cont.)

On July 1, 2002, the Company acquired 100% of the outstanding shares of CJD & Associates, L.L.C. and $1,416,779 of the initial purchase price was allocated to Excess Cost of Purchased Subsidiary. The sellers may be entitled to an increase of the initial purchase price based on the amount of monthly net revenues received in future periods. In accordance with paragraph 80 of APB 16, “Business Combinations,” any such payments for an increased purchase price shall be recorded as Excess Cost of Purchased Subsidiary when made. Additional payments of the purchase price have been made in the amount of $641,180 since the initial purchase.

On November 30, 2003, CJD & Associates, L.L.C. acquired 100% of the outstanding shares of Texas All Risk General Agency, Inc. and TAR Holding Company, Inc. which collectively own 100% of the outstanding shares All Risk General Agency, Inc. $1,000,000 of the initial purchase price was allocated to Excess Cost of Purchased Subsidiary. The sellers may be entitled to an increase of the initial purchase price based on the amount of monthly net revenues received in future periods. In accordance with paragraph 80 of APB 16, “Business Combinations,” any such payments for an increased purchase price shall be recorded as Excess Cost of Purchased Subsidiary when made. Additional payments of the purchase price have been made in the amount of $387,398 since the initial purchase.

On March 31, 2004, the Company acquired 100% of the outstanding shares of All Drivers, Inc. The purchase price of $1,345,000 was allocated to Excess Cost of Purchased Subsidiary. The seller is not entitled to any additional increases in purchase price.

On May 27, 2004, the Company acquired 100% of the outstanding shares of Marshall’s Auto Insurance, Inc., Old Bank Building Insurance Agency, Inc. and A Plus Insurance Agency, Inc. The purchase price of $859,313 was allocated to Excess Cost of Purchased Subsidiary. The sellers are not entitled to any additional increases in purchase price.

(h) Income Taxes

Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected 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 periods in which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes.

(i) Investment in Businesses

The amount of assets included in the “Investment in Businesses” category is the total of purchase prices paid, or market prices if lower, for business assets that Brooke Franchise Corporation acquires to hold in inventory for sale to its franchisees. These assets are carried at the lower of cost or market because they are available for sale and not held for investment. The number of businesses purchased for this purpose for the period ending June 30, 2004 and 2003 was 22 and 28, respectively. Correspondingly, the number of businesses sold from inventory for the period ending June 30, 2004 and 2003 was 22 and 28, respectively. At June 30, 2004, the “Investment in Businesses” inventory consisted of a Colorado agency at a fair market value of $366,983.

(j) Gain or Loss on Sale of Businesses

“Investment in Businesses” gains or losses are the difference between the sales price and the book value of the business, which is carried at the lower of cost or fair value. Businesses are typically sold in the same units as purchased. However, in instances where a part, or segment, of a business unit is sold, then management estimates the fair value of the segment of the business unit being sold and the difference between the sales price and the resulting fair value estimation is the amount of the gain or loss. Any such fair value estimation is evaluated for reasonableness by comparing the market value estimation of the segment to the book value for the entire business unit. Fair value estimations are based on comparable sales information that takes into consideration business characteristics such as customer type, customer account size, supplier size and billing methods.

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

1. Summary of Significant Accounting Policies (cont.)

(k) Contracts Database

The Contracts Database asset consists of the legal and professional fees associated with development of standardized loan documents by Brooke Credit Corporation. These contracts are available for sale to others that make these types of loans, by first purchasing a license from Brooke Credit Corporation. A complete review and revision is scheduled for all loan documents every five years, therefore, the asset is being amortized over a five-year period.

Also included in this asset are the legal and professional fees associated with development of standardized documents relating to the securitization and rating of loan pools in Brooke Credit Corporation’s portfolio. The development of these contracts creates a new security asset class, or program, whereby Brooke Credit Corporation can securitize multiple loan pools each year with significantly lower additional legal and professional fees incurred. This asset is being amortized over a five-year period because the benefits of this new asset class are expected to last at least five years and because significant changes to the associated standardized documents will probably not be required for five years.

(l) Deferred Charges

Deferred charges relate to costs associated with the public offering of bonds. Selling expenses, auditor fees, legal costs and filing charges associated with the Company’s public offering totaled $1,070,043 and have been offset against stock proceeds. Similar costs associated with the Company’s public offering of bonds totaled $614,658 and are classified as prepaid expenses that are amortized over a period ending at bond maturity. Net of amortization, the balance of all such prepaid expenses as of June 30, 2004 was $223,617.

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

1. Summary of Significant Accounting Policies (cont.)

(m) Equity Rights and Privileges

All of the Company’s outstanding shares of the 9% cumulative convertible preferred stock were converted into 10,296 (20,592 split adjusted) shares of common stock during the quarter ended December 31, 2003.

The holders of the 2002 and 2002A convertible preferred stock are entitled to receive a cumulative dividend in cash at the rate of 10% of the liquidation value of such stock per share per annum if determined by the Board of Directors. The holders of 2002 and 2002A convertible preferred stock do not have any voting rights and their conversion rights have expired. In the case of liquidation or dissolution of the Company, the holders of the 2002 and 2002A convertible preferred stock shall be entitled to be paid in full the liquidation value, $25 per share before the holders of common stock.

The holders of 2002B convertible preferred stock are entitled to receive a cumulative dividend in cash at the rate of 9% of the liquidation value of such stock per share per annum if determined by the Board of Directors. The holders of 2002B convertible preferred stock do not have any voting rights and their conversion rights have expired. In the case of liquidation or dissolution of the Company, the holders of the 2002B convertible preferred stock shall be entitled to be paid in full the liquidation value, $32 per share, after payment of full liquidation value to the holders of 2002 convertible preferred stock, 2002A convertible preferred stock, and before the holders of common stock.

The Board of Directors designated 200,000 shares of preferred stock as 2003 convertible preferred stock; however, no shares of the 2003 convertible preferred stock have been issued and the Board of Directors has indicated that no such shares will be issued.

In April 2004, the Board of Directors, upon shareholder approval, reduced the par value of the common stock from $1.00 to $.01 per share. In addition, the number of authorized common shares increased from 9,500,000 to 99,500,000.

The common stockholders shall possess all rights and privileges afforded to capital stock by law, subject to holders of convertible preferred stock.

(n) Per Share Data

Basic net income per share is calculated by dividing net income, less preferred stock dividends declared in the period (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned), by the average number of shares of the Company’s common stock outstanding. Total preferred stock dividends declared during the period ended June 30, 2004 and 2003 were $97,120 and $99,045, respectively. Diluted net income per share is calculated by including the probable conversion of preferred stock to common stock, and then dividing net income, less preferred stock dividends declared on non-convertible stock during the period (whether or not paid) and the dividends accumulated for the period on non-convertible cumulative preferred stock (whether or not earned), by the adjusted average number of shares of the Company’s common stock outstanding.

The prior year comparative earnings per share calculation has been adjusted to reflect the 2 for 1 stock split in 2004. The number of shares outstanding was not changed.

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

1. Summary of Significant Accounting Policies (cont.)

(n) Per Share Data (cont.)

(o) Buyer Assistance Plan

Through its subsidiary The American Heritage, Inc., the Company offers a consulting and cash flow assistance program (Buyer Assistance Plan or “BAP”) to provide assistance to franchisee buyers during the first months of ownership. Although most of the BAP services provided by the Company are performed in the first month of ownership, some of the BAP services are performed later and a portion of BAP fees are therefore deferred until the cost of providing the service is incurred. Unearned buyer assistance plan and other related fees were $445,660 and $1,174,042 at June 30, 2004 and 2003, respectively.

Net cash flow assistance related to commission performance is recognized as an expense at the end of the BAP period, because of the uncertain timing of commission payments during ownership transition. Although not determinable until the end of the BAP period, the amount of the Company’s net cash flow assistance expenditures associated with commission performance becomes more certain as the BAP period progresses. As such, if the amount of cumulative net cash flow assistance provided by the Company exceeds the actual commissions, then an allowance for any such excess amount is immediately charged to expense and the amount recognized as expense at the end of the BAP period adjusted accordingly. If necessary, as the BAP period nears expiration, the Company increases the allowance from that calculated above to the amount of estimated loss. The Company has estimated this allowance for the periods ended June 30, 2004 and 2003 to be $0 and $17,811, respectively.

(p) Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries except for Brooke Acceptance Company LLC, Brooke Captive Credit Company 2003, LLC and Brooke Securitization Company 2004A, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation of the financial statements.

(q) Accounts and Notes Receivable, Net

The net notes receivable included as part of the “Accounts and Notes Receivable, Net” asset category are available for sale and are carried at the lower of cost or market. Accordingly, any changes in the net notes receivable balances are classified as an operating activity.

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

1. Summary of Significant Accounting Policies (cont.)

(r) Other Receivables

Included in this category are reimbursements due from agents for possible cancellation of policies, advances to agents for buyers assistance plan commissions, and receivables from sellers on contracts of services. Most of these amounts are collected within 30 days from borrowers or agents and all amounts are collected within 12 months from date of recording.

(s) Advertising

The Company expenses the costs of advertising as they are incurred. Total advertising expense for the period ending June 30, 2004 and 2003 was $1,615,729 and $936,139, respectively.

(t) Restricted Cash

Cash payments are made monthly to First National Bank of Phillipsburg as trustee for the Industrial Revenue Bonds. These funds are held by the trustee for payment of semi-annual interest and principal payments to bond holders on January 1^st and July 1^st. The amount of cash held at First National Bank of Phillipsburg was $60,592 at June 30, 2004.

The Company holds insurance commissions for the special purpose entity Brooke Acceptance Company LLC for the purpose of making future loan payments and the use of these funds is restricted. The amount of commissions held at June 30, 2004 was $183,616.

(u) Agency Assets

Included in other assets are unamortized costs of agency assets. The balance is being amortized over a 15-year period using an accelerated 150% declining balance switching to straight-line method. Amortization expense was $159,248 and $13,599 for the period ended June 30, 2004 and 2003, respectively.

On August 1, 2002, the Company acquired insurance agency assets operating under the trade-name of Bornstein Financial Group for an initial purchase price of $200,000. On August 8, 2003, an additional payment of $100,000 was made and the purchase price increased to $300,000. The seller is not entitled to any additional increases in purchase price based future revenues. In accordance with paragraph 80 of APB 16, “Business Combinations,” this additional payment was recorded as an Agency Asset. The balance of this agency asset is being amortized over a 15-year period using an accelerated 150% declining balance switching to straight-line method.

As a result of the acquisition of CJD & Associates, L.L.C. on July 1, 2002, the Company recorded additional agency assets of $99,357 (net of accumulated amortization of $96,106). The balance of this agency asset is being amortized over a 15-year period using an accelerated 150% declining balance switching to straight-line method.

The Company acquired the rights to the web-site “Agencies4Sale.com” in February 2003 for $25,000. The purchase price is being amortized over a 15-year period using an accelerated 150% declining balance switching to straight-line method.

On January 30, 2004, the Company acquired insurance agency assets from Total Budget Insurance Services, Inc. for a purchase price of $1,576,828. The seller is not entitled to any additional increases in purchase price. The balance of this agency asset is being amortized over a 15-year period using an accelerated 150% declining balance switching to straight-line method.

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

1. Summary of Significant Accounting Policies (cont.)

(u) Agency Assets (cont)

On February 27, 2004, the Company acquired insurance agency assets from Budget-1 Insurance Agency, Inc. for a purchase price of $633,000. The seller is not entitled to any additional increases in purchase price. The balance of this agency asset is being amortized over a 15-year period using an accelerated 150% declining balance switching to straight-line method.

On February 24, 2004, the Company acquired insurance agency assets from Brent and Haeley Mowery for a purchase price of $498,628. The seller is not entitled to any additional increases in purchase price. The balance of this agency asset is being amortized over a 15-year period using an accelerated 150% declining balance switching to straight-line method.

On March 1, 2004, the Company acquired insurance agency assets from James Ahlin for a purchase price of $844,957. The seller is not entitled to any additional increases in purchase price. The balance of this agency asset is being amortized over a 15-year period using an accelerated 150% declining balance switching to straight-line method.

On June 26, 2004, the Company acquired insurance agency assets from Pacific Coast Insurance Group for a purchase price of $2,860,000. The sellers are not entitled to any additional increases in purchase price. The balance of this agency asset is being amortized over a 15-year period using an accelerated 150% declining balance switching to straight-line method.

(v) Securities

Included in Securities are investments in loan securitizations which represents the transfer of notes receivable by sale, to a bankruptcy-remote special purpose entity that issues asset backed notes to accredited investors. Based on management’s experience the carrying value of $17,900,917 for the marketable security approximates the fair value.

In October 2003, the Company acquired approximately 9% of the stock outstanding in First American Capital Corporation. This investment is held at lower of cost or market and the carrying value of $772,255 approximates the fair value.

The Company holds 400 Troy ounces of silver at lower of cost or market. The carrying value of $1,198 is below current market price.

(w) Losses and Loss Expenses

Through its subsidiary DB Indemnity, Ltd., losses and loss expenses paid are recorded when advised by the insured. Outstanding losses and loss adjustment expense adjustments represent the amounts needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred before the balance sheet date. These amounts are based upon estimates of losses reported by the insureds plus an estimate for losses incurred but not reported based upon the report of an independent actuary.

Management believes that the provision for outstanding losses and loss expenses will be adequate to cover the ultimate net cost of losses incurred to the balance sheet date but the provision is necessarily an estimate and may ultimately be settled for a significantly greater or lesser amount. It is at least reasonably possible that management will revise this estimate significantly in the near term. Any subsequent differences arising are recorded in the period in which they are determined.

Brooke Corporation

Notes to Consolidated Financial Statements

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

2. Notes Receivable

At June 30, 2004 and 2003, accounts and notes receivable consist of the following: