Aleritas Capital (ARTAE) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED JUNE 30, 2008

or

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 000-51423

Aleritas Capital Corp.

(Exact name of registrant as specified in its charter)

Delaware	20-2679740
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7400 College Boulevard, Suite 250, Overland Park, Kansas 66210

(Address of principal executive offices including zip code)

800.732.4237

(Registrant’s telephone number, including area code)

Brooke Credit Corporation

(Former name, former address, former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

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

There were 25,849,137 shares of $.01 par value common stock outstanding on June 30, 2008.

Aleritas Capital Corp.

Consolidated Financial Statements

June 30, 2008

TABLE OF CONTENTS

		Page
	PART I – FINANCIAL INFORMATION
Item 1	Financial Statements	3
	Introductory Comments	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	5
	Consolidated Statements of Changes in Stockholders’ Equity	6
	Consolidated Statement of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4	Controls and Procedures	51
	PART II – OTHER INFORMATION
Item 1	Legal Proceedings	51
Item 1A	Risk Factors	51
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3	Defaults upon Senior Securities	52
Item 4	Submission of Matters to a Vote of Security Holders	52
Item 5	Other Information	52
Item 6	Exhibits	52
SIGNATURES		53

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Aleritas Capital Corp.

Form 10-Q

June 30, 2008

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Introductory Comments

The Consolidated Financial Statements included herein have been prepared by Aleritas Capital Corp., without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. For the purposes of this report, unless the context otherwise requires, all references herein to “Aleritas” and the “Company” shall mean Aleritas Capital Corp. and its subsidiaries. These Consolidated Financial Statements and footnote disclosures have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation of the financial statements. The Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and the related notes, as well as Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q. The results for the six months ended June 30, 2008, are not necessarily indicative of the results expected for the full year ending December 31, 2008.

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Aleritas Capital Corp.

Consolidated Balance Sheets

UNAUDITED

(in thousands, except share amounts)

	June 30, 2008			December 31, 2007
ASSETS
Current Assets
Cash	$	239		$	1,570
Restricted cash		82			210
Notes and interest receivable, net		163,262			142,467
Other receivables		11,021			3,980
Securities available for sale		69,179			87,763
Interest-only strip receivable		7,086			7,771
Deferred tax asset		13,902			4,126
Income tax receivable		852			—
Total Current Assets		265,623			247,887
Other Assets
Deferred charges, net		2,142			5,199
Servicing asset, net		5,257			6,084
Amount due from Brooke Corporation		11,839			10,936
Prepaid expenses		2,676			2,828
Other assets, net		1,688			440
Collateral Recovery		6,449			—
Total Other Assets		30,051			25,487
Total Assets	$	295,674		$	273,374
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	23,110		$	8,853
Interest payable		2,539			1,845
Income tax payable		—			2,549
Payables under participation agreements		70,470			47,360
Short-term debt		52,239			27,569
Current maturities of long-term debt		9,750			17,035
Total Current Liabilities		158,108			105,211
Non-Current Liabilities
Long-term deferred tax liability		11,754			15,036
Servicing liability		31			44
Long-term debt less current maturities		36,463			36,088
Total Liabilities		206,356			156,379
Stockholders’ Equity
Common stock, $.01 par, 99,000,000 shares authorized, 25,849,137 and 25,849,137 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively		258			258
Preferred stock, 1,000,000 shares authorized, no shares issued and outstanding		—			—
Additional paid-in capital		82,861			83,701
Additional paid-in capital—warrants		3,254			3,254
Retained earnings		3,900			26,388
Accumulated other comprehensive income (loss)		(955	)		3,394
Total Stockholders’ Equity		89,318			116,995
Total Liabilities and Stockholders’ Equity	$	295,674		$	273,374

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Aleritas Capital Corp.

Consolidated Statements of Operations

UNAUDITED

(in thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Operating Revenues
Interest income, net	$	5,527		$	5,371		$	12,165		$	12,798
Credit loss		(2,359	)		(148	)		(14,896	)		(819	)
Interest income after credit loss		3,168			5,223			(2,731	)		11,979
Gain (loss) on sale of notes receivable,		(1,730	)		4,282			(1,657	)		11,203
Impairment losses		—			—			(11,763	)		—
Other income		93			181			240			349
Total Operating Revenues		1,531			9,686			(15,911	)		23,531
Operating Expenses
Operating interest		652			368			1,414			2,033
Compensation		(819	)		622			705			1,124
Depreciation and amortization		353			283			763			576
Collateral preservation		(3,232	)		828			2,423			1,646
Other general and administrative		1,797			441			4,361			1,388
Total Operating Expenses		(1,249	)		2,542			9,666			6,767
Income (Loss) from Operations		2,780			7,144			(25,577	)		16,764
Other Expenses
Extinguishment of debt		—			—			8,210			—
Interest		915			1,470			2,486			3,140
Total Other Expenses		915			1,470			10,696			3,140
Income (Loss) before Income Taxes		1,865			5,675			(36,273	)		13,624
Income tax expense (benefit)		708			2,156			(13,784	)		5,177
Net Income (Loss)	$	1,157		$	3,518		$	(22,489	)	$	8,447
Earnings per Share:
Basic	$	0.04		$	0.19		$	(0.83	)	$	0.19
Diluted	$	0.04		$	0.19			(0.83	)		0.19
Average Shares Outstanding(in thousands):
Basic		25,849			24,536			25,849			24,536
Potential dilutive common shares		—			—			—			—
Diluted		25,849			24,536			25,849			24,536

See accompanying notes to consolidated financial statements.

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Aleritas Capital Corp.

Consolidated Statements of Changes in Stockholders’ Equity

UNAUDITED

(in thousands, except share amounts)

	Common Shares		Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2006	5,650,000		$	57		$	44,033		$	20,042		$	298		$	64,429
Equity issuance	111,523			1			(1	)								—
Recapitalization:
Elimination of equity	(5,761,523	)		(58	)		(44,032	)								(44,090	)
Common shares issued	24,536,361			245			44,129									44,374
Consideration received as a result of the merger, net of expenditures of $4,705							38,311									38,311
Share-based compensation	1,312,776			13			2,161									2,174
Warrant liability conversion							2,354									2,354
Comprehensive income:
Interest-only strip receivable, change in fair market value, net of income taxes													2,896			2,896
Currency translation adjustment, net of income taxes													200			200
Net income										6,347						6,347
Total comprehensive income																9,443
Balance, December 31, 2007	25,849,137		$	258		$	86,955		$	26,388		$	3,394		$	116,995
Equity issuance	—			—			—									—
Share-based compensation	—			—			(840	)								(840	)
Comprehensive loss:
Interest-only strip receivable, change in fair market value, net of income taxes													(4,299	)		(4,299	)
Currency translation adjustment, net of income taxes													(50	)		(50	)
Net loss										(22,489	)					(22,489	)
Total comprehensive loss																(26,838	)
Balance, June 30, 2008	25,849,137		$	258		$	86,115		$	3,899		$	(955	)	$	89,317

See accompanying notes to consolidated financial statements.

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Aleritas Capital Corp.

Consolidated Statements of Cash Flows

UNAUDITED

(in thousands)

	Six Months Ended June 30,
	2008			2007
Operating Activities
Net income (loss)	$	(22,489	)	$	8,447
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization		763			576
Amortization of debt issuance costs		66			—
Extinguishment of debt		8,210			(63	)
Change in puttable warrant obligation		—			118
Gain on sale of notes receivable		(878	)		(11,583	)
Credit loss		14,896			819
Impairment loss on securities		11,763			—
Equity incentive plan costs		(840	)		—
(Increase) decrease in assets:
Notes and interest receivable, net		(38,861	)		88,953
Other receivables		(7,041	)		(5,473	)
Other assets		(9,394	)		1,758
Increase (decrease) in liabilities:
Accounts payable		14,258			699
Other liabilities		9,051			(4,090	)
Net cash provided (used) by operating activities		(20,496	)		80,161
Investing Activities
Cash payments for deferred charges		(3,291	)		—
Cash payments for property, plant & equipment		(324	)		—
Cash payments for securities		(12,252	)		(21,941	)
Net cash used by investing activities		(15,867	)		(21,941	)
Financing Activities
Inflows from Brooke Corporation		8,416			1,784
Outflows to Brooke Corporation		(9,284	)		—
Proceeds from short-term debt, net		41,976			—
Payments for debt issuance costs		(5,255	)		—
Proceeds from long-term debt		46,213			22,213
Payments on long-term debt		(47,035	)		(83,522	)
Net cash provided (used) by financing activities		35,031			(59,525	)
Cash and Cash Equivalents
Net decrease during each period		(1,331	)		(1,305	)
At beginning of year		1,570			4,358
At end of period	$	239		$	3,053
Supplemental Disclosures
Interest paid	$	10,248		$	10,881
Income taxes paid		—			—

See accompanying notes to consolidated financial statements.

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Aleritas Capital Corporation

Notes to Consolidated Financial Statements

Data in tables is in thousands, except per share data.

1. Accounting Policies and Interim Financial Statements

The consolidated financial statements include the accounts of Aleritas Capital Corp. and its subsidiaries, except for the following qualifying special purpose entities (“QSPEs”) formed for the purpose of acquiring loans: Brooke Acceptance Company LLC, Brooke Captive Credit Company 2003, LLC, Brooke Capital Company, LLC, Brooke Securitization Company 2004A, LLC, Brooke Securitization Company V, LLC, and Brooke Securitization 2006-1, LLC. All of the foregoing entities have issued asset-backed securities in which the Company is not obligated to repay. Brooke Master Trust, LLC, a wholly owned subsidiary of Brooke Warehouse Funding, LLC, has secured senior debt in which the Company is not obligated to repay. Each of these entities is a separate and distinct entity. QSPEs are specifically excluded from consolidation under FIN46(R), “Consolidation of Variable Interest Entities.”

In the opinion of the management of Aleritas Capital, the accompanying unaudited consolidated financial statements contain all adjustments necessary, which are of a normal and recurring nature, to present fairly the financial position of the Company as of June 30, 2008 and December 31, 2007, and the results of operations for the six months ended June 30, 2008 and 2007, and the changes in stockholders equity and cash flows for the six months ended June 30, 2008. Aleritas operates in a single business segment, that of lending to locally-owned businesses that sell insurance. This includes lending to funeral homes where the sale of insurance is often an important, although not primary, part of their business. Certain prior year amounts have been reclassified to conform to the current year presentation.

(a) Organization

Aleritas Capital Corp. was incorporated under the laws of the State of Kansas on January 22, 1988, under the name Hess Monuments, Inc. Its name was changed to Brooke Management, Inc. in August 1990, then to Brooke Credit Corporation in July 1994. In July 2007 the Company merged with Oakmont Acquisition Corp. (“Oakmont”), a special purpose acquisition company (also known as a “blank check” company) that was originally incorporated in Delaware in July 2005. Subsequent to the merger, the Company is traded over-the-counter under the symbol “OTCBB: BRCR” and is organized under the laws of the state of Delaware. In January 2008, the Company began conducting business under the trade name “Aleritas Capital Corp.” shareholders voted to officially change the name of the Company to Aleritas Capital Corp. at the Shareholders meeting held on May 15, 2008. Brooke Corporation, a Kansas corporation, whose stock is listed on the NASDAQ Stock Market under the symbol “BXXX,” was previously the sole owner of the Company and, subsequent to the merger, remains the largest stockholder owning approximately 62% of the Company.

The Company is a specialty finance company that lends primarily to locally-owned businesses that sell insurance. The Company’s core target market consists of independent insurance agencies, captive insurance agencies and managing general agencies, where the sale of insurance is their primary business. In addition, the Company loans money to funeral home owners, where the sale of insurance is often an important, although not primary, part of their business. The Company’s lending programs feature the use of collateral preservation providers in the preservation of collateral and assistance with loss mitigation during the life of the originated loan. The collateral preservation providers, which include industry consultants and franchisors, such as the Company’s affiliated companies, Brooke Capital Corporation (“Brooke Capital”) a public company of which Brooke Corporation owned approximately 66% as of June 30, 2008, and its wholly owned subsidiary Brooke Capital Advisors, Inc. Aleritas also used Brooke Franchise Corporation as a collateral preservation provider before it was merged into Brooke Capital Corporation in November 2007. The Company funds its loans through a combination of the following four mechanisms: (i) off-balance sheet loan participations, involving the true sale of loan participation interests in individual loans; (ii) off-balance sheet loan securitizations, involving the issuance of rated and unrated asset-backed securities; (iii) off-balance sheet loan financing, involving the revolving funding of loan amounts from off-balance sheet warehouse facilities; and (iv) on-balance sheet funding, involving the funding of loan amounts from the Company’s cash, short-term and/or recourse participations, and warehouse lines of credit.

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The Company directly owns 100% of the membership interests ofBrooke Credit Funding, LLC that was organized in Delaware as a bankruptcy-remote special purpose entity in connection with the warehouse line of credit with Autobahn Funding Company, LLC. Brooke Credit Funding, LLC has separate financial statements which are consolidated with the Company’s financial information. This entity is the purchaser of loans originated by the Company and also the borrowing entity with Autobahn Funding Company, LLC in connection with a credit facility recorded in the Company’s financial statements as secured borrowings.

The Company directly owns 100% of the membership interests ofBrooke Warehouse Funding, LLC that was organized in Delaware as a bankruptcy-remote special purpose entity in connection with the off-balance sheet financing facility with Fountain Square Commercial Funding Corporation. Brooke Warehouse Funding, LLC has separate financial statements. Until the first quarter of 2007, this entity was the purchaser of loans originated by the Company in connection with a credit facility recorded in the Company’s financial statements as secured borrowings.Brooke Acceptance Company 2007-1, LLCwas formed during March 2007 and was a wholly-owned subsidiary of the Company which, commencing in March 2007, began purchasing loans originated by the Company pursuant to true sales. Brooke Acceptance Company 2007-1, LLC was the purchaser of loan participation interests from Brooke Warehouse Funding, LLC in connection with an off-balance sheet financing facility with Fountain Square Commercial Funding Corporation, an affiliate of Fifth Third Bank, which closed on March 30, 2007.Brooke Master Trust, LLC, a Delaware bankruptcy remote special purpose limited liability company organized on September 18, 2007, is a wholly owned subsidiary of Brooke Warehouse Funding, LLC. In December 2007, Brooke Master Trust, LLC replaced Brooke Acceptance Company 2007-1, LLC as borrower upon closing of a master trust credit facility with Fountain Square Commercial Funding Corporation (which replaced the prior facility). The financial information of Brooke Warehouse Funding, LLC is not consolidated in the Company’s financial statements. Brooke Master Trust, LLC and Brooke Acceptance Company 2007-1, LLC’s financial information is not consolidated in the Company’s financial statements.

Titan Lending Group, Inc.(“Titan”), a wholly owned subsidiary of the Company, was formed in March 2007 to originate loans to independent insurance agencies that are not franchisees of Brooke Capital. Such loans are now originated directly by the Company, and therefore, Titan has no operations. Titan has separate financial statements that are consolidated with the Company’s financial information.

The Company directly owns 100% of the stock ofBrooke Canada Funding, Inc. that was organized in New Brunswick, Canada for the purpose of originating and purchasing loans in Canada as part of the warehouse line of credit with the Canadian branch of Fifth Third Bank. Brooke Canada Funding, Inc. has separate financial statements which are consolidated in the Company’s financial statements. This entity is the purchaser of loans originated by the Company and also the borrowing entity with the Canadian branch of Fifth Third Bank. The Company has entered into a forbearance agreement with the Canadian branch of Fifth Third Bank that provides the Company the opportunity to pay off the remainder of the line by December 31, 2008.

(b) Merger with Oakmont Acquisition Corp.

Effective July 18, 2007, pursuant to the Amended and Restated Agreement and Plan of Merger dated as of April 30, 2007 (the “Merger Agreement”) by and among Oakmont Acquisition Corp. (“Oakmont”), Brooke Credit Corporation (“Brooke Kansas”) and Brooke Corporation, Brooke Kansas was merged with and into Oakmont. In connection with the merger, Oakmont changed its name to Brooke Credit Corporation (the “Surviving Corporation”). Pursuant to the Merger Agreement, each share of the issued and outstanding common stock of Oakmont was converted into one share of the validly issued, fully paid and non-assessable authorized share of common stock of the Surviving Corporation. Brooke Corporation, along with seven other former Brooke Kansas equity holders, received aggregate merger consideration of 16,304,000 shares of the Surviving Corporation’s common stock, and the common stock of Brooke Kansas was cancelled. Shares of the Surviving Corporation’s common stock received by Brooke Corporation along with shares of the Surviving Corporation purchased by the Brooke Corporation in the open market, brought Brooke Corporation’s ownership position to 62% of the Surviving Corporation’s issued and outstanding stock.

An additional aggregate of 4,000,000 shares of the Surviving Corporation’s common stock would have been issued to Brooke Corporation and the other former Brooke Kansas stockholders, or reserved for issuance pursuant to assumed warrants, in the event the Surviving Corporation achieved adjusted earnings of $15,000,000 in 2007. Adjusted earnings equals the actual audited net after tax income of the combined company adjusted to add back all actual after tax amortization expense for intangibles resulting from the merger; plus the actual after tax amount of any negative impact to earnings associated with certain warrants, including deal related

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costs arising out of the accounting treatment for warrants, put/call rights, certain options or other employee equity incentive plans; and minus an amount intended to approximate interest earned on the cash in the trust account during the period. The Surviving Corporation did not achieve the required adjusted earnings in 2007 so no additional shares were issued. An additional aggregate of 1,000,000 shares of the Surviving Corporation’s common stock would be issued to Brooke Corporation and the other former Brooke Kansas stockholders, or reserved for issuance pursuant to assumed warrants, in the event the Surviving Corporation achieves adjusted earnings of $19,000,000 in 2008.

The Surviving Corporation has two categories of warrants outstanding. First, warrants outstanding totaling 17,150,332 were issued in the initial public offering of Oakmont, but did not become exercisable until the merger between Oakmont and Brooke Kansas. Each warrant can be converted into a share of the Company’s common stock at any time prior to their expiration in July 2009 at a conversion price of $5.00 per warrant. The Company can redeem the outstanding warrants, in whole but not in part, at a price of $.01 per warrant under certain conditions. Also outstanding is an option to Morgan Joseph & Co. to purchase up to a total of 720,000 units. Each unit consists of one share of common stock and two redeemable common stock purchase warrants. Each of these warrants has a conversion price of $5.70 per warrant. This option is exercisable at $7.50 per unit and expires in July 2010.

The second category includes 1,278,229 warrants which were issued by Brooke Kansas in conjunction with its private placement of debt issued in the fourth quarter of 2006. In addition, 500,000 shares of the Surviving Corporation were reserved for issuance in connection with stock or options that may be granted from time to time under the Surviving Corporation’s 2007 Equity Incentive Plan. During the fourth quarter of 2007, 126,239 of these shares were issued under this Plan. During the second quarter of 2008, 76,239 shares were forfeited and 390,000 shares were issued under the plan.

The merger was accounted for as a reverse acquisition. Under this method of accounting, Brooke Credit Corporation was the acquiring company for financial reporting purposes. In accordance with applicable guidance, the merger was considered to be a recapitalization. Accordingly, the merger was treated as the equivalent of Brooke Credit Corporation issuing stock for the net monetary assets of Oakmont accompanied by a recapitalization. The net monetary assets of Oakmont, primarily cash, were stated at their fair value, which was equivalent to its carrying value, and accordingly no goodwill or other intangible assets were recorded. As the merger was considered a reverse acquisition, the weighted average shares outstanding for all prior periods were retroactively restated to reflect the shares that were issued in the merger, 24,536,361 shares.

Prior to the merger, $43,016,000 in cash was held in trust by Oakmont for the purpose of completing a business combination. After payments totaling $4,705,000 for professional fees and other costs related to the merger, the net proceeds were $38,311,000. The proceeds were mainly used to pay down debt. The historical results prior to July 18, 2007, were that of Brooke Kansas prior to the merger.

(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.

The following are significant estimates made by management:

• The discount, prepayment and credit loss rates used to calculate the fair value of interest-only strip receivables, servicing assets and servicing liabilities resulting from loan participation sales;

• The discount, prepayment and credit loss rates used to calculate the fair value of securities resulting from asset-backed securitizations;

• Amortization;

• Allocation of payroll and operating expenses associated with the origination and servicing of loans;

• The credit metrics employed to establish the reserve for potential credit losses; and

• Amount of current and deferred income tax expense and payable.

It is at least reasonably possible these estimates will change in the near term.

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(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.

(e) Restricted Cash

Aleritas holds amounts in escrow in a cash account for certain borrowers for the purpose of paying debt service, property taxes and/or property insurance typically paid during the first year of the loan. The balance held in escrow for these purposes was $82,000 at June 30, 2008, and $210,000 at December 31, 2007.

(f) Notes and Interest Receivable, net

The net notes receivable included as part of the “Notes and interest receivable, net” asset category are available for sale. Based on management’s experience, the carrying value approximates the fair value. Accordingly, any changes in the net notes receivable balances are classified as an operating activity. Notes receivable are shown net of the reserve for credit losses of $16,420,000 at June 30, 2008, and $1,655,000 at December 31, 2007.

(g) Other Receivables

Other receivables include amounts due from Brooke Agency Services Company LLC, a wholly owned subsidiary of Brooke Corporation, as a result of the timing of certain securitized loan payments at the end of the period and sub-servicing income due to the Company for special servicing performed by the Company in connection with the Company’s securitizations and warehouses. Most of these amounts are collected within 30 days and all amounts are collected within 12 months after the date of recording.

(h) Securities

The carrying values of securities were $69,179,000 at June 30, 2008, and $87,763,000 at December 31, 2007, and consisted primarily of three types of securities (or retained residual assets): interest-only strip receivables in loans sold, retained over-collateralization interest in loans sold and cash reserves. These securities are classified as available for sale under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The aggregate carrying values above approximate the fair value as calculated by the Company using reasonable assumptions. The value of the Company’s retained residual assets is subject to credit and prepayment risk on the transferred financial assets.

When the Company sells loans to QSPEs that qualify as true-sales under SFAS No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”(“SFAS 140”), a gain on sale is recognized when the notes receivable are sold. When the Company sells notes receivable to QSPEs, it typically retains the interest rights. The component of the gain on sale of notes receivable to QSPEs is the gain on sale Aleritas records associated with the interest-only strip receivable and retained interest benefit as described below, net of direct expenses. Unlike participation sales, in loans sold to QSPEs an unaffiliated third party is the servicer and the Company is the secondary or sub-servicer. As such, no servicing asset or liability is recorded.

When the Company sells notes receivable to QSPEs, it retains an interest-only strip receivable or retained interest. The carrying values of the interest-only strip receivables in loans sold to QSPEs were $26,619,000 and $28,144,000 at June 30, 2008, and December 31, 2007, respectively. The amount of gain or loss recorded on the sale of notes receivable to QSPEs 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. To initially obtain the fair value of the retained interest-only strip receivables resulting from the sale of notes receivable to QSPEs, quoted market prices are used if available. However, quotes are generally not available for such retained residual assets. Therefore, the Company typically estimates fair value of the interest-only strip receivables retained based on the present value of future expected cash flows estimated using management’s best estimates of key assumptions, credit losses (0.50% annually), prepayment speed (12.00% annually) and discount rates (11.00%) commensurate with the risks involved. There was no unrealized gain (loss) on the interest-only strip receivable as of June 30, 2008 as all losses were realized through impairment. The amount of unrealized loss was $(0) and ($89,000) at June 30, 2008, and December 31, 2007, respectively. The interest-only strip receivables have varying dates of maturities ranging from the fourth quarter of 2015 to the second quarter of 2021.

When the Company sells notes receivable to QSPEs, it retains an over-collateralization interest in loans sold and cash reserves. The carrying values of retained over-collateralization interests were $41,710,000 and $63,507,000 at June 30, 2008, and December 31, 2007, respectively. The carrying values of cash reserves were $850,000 and $850,000 at June 30, 2008, and

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December 31, 2007, respectively. The fair value of the over-collateralization interest in the loans sold to QSPEs that have issued asset-backed securities has been estimated at the par value (carrying value) of the underlying loans less the asset-backed securities sold. The fair value of the over-collateralization interest in the loans sold to QSPEs that have secured bank debt is based on the present value of future expected cash flows using management’s best estimates of key assumptions, credit losses (0.50% annually), prepayment speed (12.00% annually) and discount rate (11.00%) commensurate with the risks involved. The cash reserves do not represent credit enhancement reserves for benefit of the asset-backed security holders and creditors of QSPEs. These reserves are for the benefit of the third party trustee and servicer and, if not used for excessive trustee and servicer expenses, the funds will be returned to the Company once the last note receivable held by the QSPE has matured. If excessive expenses are incurred by the trustee and servicer the Company will expense the reduction of the cash reserve. No excessive expenses have been incurred by trustees and servicers to date. Therefore, the fair value of the cash reserves has been estimated at the cash value of the reserve account.

The notes receivable sold in April 2003, November 2003, June 2004, March 2005, December 2005 and July 2006 involved the issuance of asset-backed securities by the following QSPEs: 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, respectively. In September 2006, Brooke Warehouse Funding LLC entered into a receivables financing agreement with Fifth Third Bank which was classified as secured borrowings. However, in March 2007 Brooke Warehouse’s Fifth Third facility was paid off and replaced with a new off-balance sheet facility through Brooke Warehouse Funding LLC’s wholly owned QSPE, Brooke Securitization Company 2007-1 LLC. Therefore, the loans sold in March 2007 to Brooke Warehouse Funding, LLC, the Company’s special purpose entity, involved the incurrence of debt owed to Fifth Third Bank by Brooke Securitization Company 2007-1, LLC. Loans sold to Brooke Warehouse Funding, LLC were participated to Brooke Securitization Company 2007-1, LLC which were then pledged to Fifth Third Bank for the off-balance sheet debt. The purchase of loans by Brooke Warehouse Funding, LLC, the participation of those loans to Brooke Securitization Company 2007-1, LLC and the pledge to Fifth Third Bank occurred simultaneously. In December 2007 Brooke Securitization Company 2007-1, LLC was replaced by Brooke Master Trust, LLC. Loans now sold to Brooke Warehouse Funding, LLC are participated to Brooke Master Trust, LLC which are then pledged to Fifth Third Bank for the off-balance sheet debt.

Upon the sale of financial assets to QSPEs, the unaffiliated trustees over the QSPEs and the investors and lenders to the QSPEs obtain full control over the assets and the right to freely pledge or transfer the notes receivable. Servicing associated with the transferred assets is primarily the responsibility of unaffiliated servicing companies, which are compensated directly from cash flows generated from the transferred assets. The Company is retained as a secondary or sub-servicer. No servicing asset or servicing liability is recorded because servicing income is offset by servicing expense and represents the adequate compensation as determined by the market.

Although the Company does not provide recourse on the transferred notes and is not obligated to repay amounts due to investors and creditors of the QSPEs, its interests in the QSPEs are subject to loss, in part or in full, in the event credit losses exceed initial and ongoing management assumptions used in the fair market value calculation. Additionally, a partial loss of retained assets could occur in the event actual prepayments on the underlying loans exceed management’s initial and ongoing assumptions used in the fair market calculation. In the first quarter of 2008, the Company wrote down the value of the securities balance by $11,763,000 due to expected credit losses on loans in its securitizations. As credit losses are realized they are expected to initiate provisions in the securitizations documents that result in the discontinuation of cash distributions from the QSPEs until the financial ratios in the securitizations are brought back into compliance. In the fourth quarter of 2007, the Company wrote down the value of the securities balance by $5,517,000 due to expected credit losses on loans in its securitizations, actual prepayments exceeding assumed prepayments, and an increase in the prepayment assumption going forward.

Cash flows associated with the Company’s retained assets in the transferred assets are subordinate to cash flow distributions to the trustee over the transferred assets, servicer of the transferred loans, collateral preservation providers of the transferred loans, investors and creditors of the QSPEs. Actual prepayments and credit losses will impact the amount and frequency of cash flow distributions to the Company from its retained assets. Aleritas does not expect to receive cash flows from the securitizations until all financials ratios in the securitizations are within compliance and until the First State Bank note is paid.

Subsequent to the initial calculation of the fair value of retained interest, the Company utilizes a fair market calculation methodology (utilizing the same methodology used to establish the initial fair value) to determine the ongoing fair market value of the retained interest. Ongoing fair value is calculated using the then current outstanding principal of the transferred notes receivable and

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the outstanding balances due unaffiliated purchasers, which are reflective of credit losses and prepayments prior to the fair value recalculation. Additionally, the Company completes an ongoing analysis of key assumptions used in the fair market value calculation to ensure that such assumptions used in the calculation are viable, based on current and historical prepayments and credit loss trends within similar asset types. Based upon this analysis and due to recent prepayment trends, the prepayment rate assumption used in the asset valuation was increased from 10% to 12% annually in the fourth quarter of 2007. All other assumptions remained the same. Management may make necessary adjustments to key assumptions based on current and historical trends, which may result in an immediate reduction or impairment loss in the fair market value of retained interest. During 2007 the securitized pools of loans experienced an increase in the prepayment rate, and as a result, management determined that “other than temporary” impairments occurred. The Company recorded impairment losses related to the prepayment rate of $778,000 for the year ended December 31, 2007. Credit losses in the near term in the securitization portfolios are expected to be significantly higher than historical levels and higher than the .5% credit loss assumption. Management believes that this increase is directly attributable to market conditions which are cyclical such as the soft insurance marketplace and higher interest rates than when certain of the loans were originated. The .5% credit loss assumption determined by management is an average rate over the life of the portfolio. Management believes that during the remaining term of this portfolio, several cycles are likely to occur which could increase or decrease actual credit loss rates; however, management continues to believe the average rate assumption used is appropriate. Summarized in Note 3 is a sensitivity analysis or stress test on retained interests to determine the impact of 10% and 20% variances in key assumptions currently used by management to calculate the fair value of retained interests.

Note 3 also contains a table summarizing the principal balances of loans managed by the Company. Included within the table are delinquency and net credit loss trends of managed receivables.

(i) Interest-Only Strip Receivable

The aggregate carrying values of interest-only strip receivables were $7,086,000 and $7,771,000 at June 30, 2008, and December 31, 2007, respectively. Interest-only strip receivables represent the fair value of an asset resulting from the sale of notes receivable to a participating bank. The amount of unrealized gain on the interest-only strip receivable was $251,000 and $276,000 at June 30, 2008, and December 31, 2007, respectively. The interest-only strip receivables have varying maturities ranging from the second quarter of 2010 to the fourth quarter of 2026.

When Aleritas sells notes receivable to a participating bank, it retains an interest-only strip receivable. The amount of gain or loss recorded on the sale of notes receivable to a participating bank depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the interest-only strip receivable based on its relative fair value at the date of transfer. To obtain fair values, the Company estimates fair value based on the present value of future expected cash flows using management’s best estimates of the key assumptions (credit losses, prepayment speeds, and discount rates) commensurate with the risks involved.

(j) Deferred Charges

Deferred charges include loan fees paid in 2004, 2005, and 2007 to establish and to increase a line of credit with DZ Bank AG Deutsche Zentral-Genossenschaftsbank. Associated costs totaled $1,742,000, of which $696,000 was paid in 2004 to establish the line of credit, $300,000 was paid in 2005 to increase the line of credit, and $746,000 was paid in 2007 to further increase the line of credit. Also included in deferred charges are costs associated with fees paid to establish lines of credit with Fifth Third Bank and Home Federal Savings and Loan. These costs totaled $423,000 and $168,000, respectively, and were paid in 2006. These costs are amortized over the period ending at the maturity date of the respective line of credit. Additional deferred charges include $4,646,000 in costs associated with the debt offering that occurred in November 2006 which were originally amortized over the period ending at the maturity date of the debt. This debt was redeemed in March 2008 and the unamortized balance of deferred charges associated with this debt was expensed. See Note 4 for more information. Net of amortization, the balance of deferred charges was $2,142,000 and $5,199,000 at June 30, 2008, and December 31, 2007, respectively.

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(k) Prepaid Expenses and Other Assets

Prepaid expenses and other assets consisted of the following:

		June 30, 2008		December 31. 2007
Prepaid expenses:
Prepaid premiums -	financial guaranty policies	$	2,367	$	2,725
	directors and officers liability insurance		225		86
Prepaid other			67		—
Prepaid rent			17		17
Total prepaid expenses		$	2,676	$	2,828
Other assets (net of accumulated depreciation and amortization):
Contract database		$	—	$	51
Capitalized software			233		136
Bond Sinking Fund - FSB			940		—
Property and equipment			515		253
Total other assets		$	1,688	$	440

The prepaid insurance expenses consist of prepaid premium amounts on financial guaranty policies purchased through CJD & Associates, LLC, a subsidiary of Brooke Brokerage Corporation, which are issued by DB Indemnity, Ltd., (“DB Indemnity”), a captive subsidiary of Brooke Brokerage, a wholly owned subsidiary of Brooke Corporation, and prepaid directors and officers’ liability insurance. The prepaid premium amounts are refundable to the Company if the policy is cancelled. The policy would be cancelled when the loan insured by the policy is repaid or sold as part of an asset-backed securitization.

The contract database consists of legal and professional fees associated with development of standardized documents related to creating new securitizations and is amortized over a five-year period. The capitalized software is amortized over four years. The property and equipment is depreciated over five years. These assets are depreciated or amortized on a straight-line basis.

(l) Stockholders’ Equity

There were 99,000,000 shares of common stock authorized with 25,849,137 shares issued and outstanding at June 30, 2008, with a par value of $.01 a share. There were also 1,000,000 shares of preferred stock authorized but none of these shares were issued and outstanding at June 30, 2008. Additionally, there were 17,150,332 warrants issued in the initial public offering of Oakmont outstanding. Each warrant can be converted into a share of the Company’s common stock at any time prior to their expiration in July 2009 at a conversion price of $5.00 per warrant. The Company can redeem the outstanding warrants, in whole but not in part, at a price of $.01 per warrant at any time upon a minimum of 30 days’ written notice of redemption if the last sales price of the common stock equals or exceeds $8.50 per share for any 20 trading days within a 30 trading day period ending three business days before the notice of redemption is sent. Also outstanding is an option to Morgan Joseph & Co. to purchase up to a total of 720,000 units. Each unit consists of one share of common stock and two redeemable common stock purchase warrants. These warrants are identical to those noted above except that each of these warrants has a conversion price of $5.70 per warrant. This option is exercisable at $7.50 per unit and expires in July 2010. In lieu of exercise, the option may be converted into units (i.e., a “cashless exercise”) to the extent that the market value of the units at the time of conversion exceeds the exercise price of the option. The option may only be exercised or converted by the option holder.

Warrants issued in association with a $45,000,000 private placement debt offering in November 2006 remain outstanding at June 30, 2008. The company repurchased the associated note from Falcon Mezzanine Partners II, LP, FMP Co-Investment, LLC and JZ Equity Partners PLC (“Purchasers”) pursuant to a repurchase agreement filed on Form 8-K as amended by Form 8-KA, on February 14 and 15, 2008 respectively. These warrants, 1,278,229 in total, have a nominal exercise price ($0.01), are exercisable immediately and expire October 31, 2014. In July 2007 these warrants were amended to remove a put option in exchange for the issuance of an additional 127,120 warrants. Therefore, the fair market value as of July 16, 2007, is recorded as additional paid in capital. These warrants, and the associated financing, are discussed further in Note 4.

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(m) Revenue Recognition

Interest income, net. The Company recognizes interest income when earned. A portion of the interest income that the Company receives on its loans is paid out to purchasers of its loans, such as participating lenders and QSPEs that issue asset-backed securities and secure off-balance sheet bank debt. Payments to these holders are accounted for as participating interest expense, which is netted against gross interest income. Participating interest expense was $14,481,000 and $15,503,000, respectively, for the six months ended June 30, 2008 and 2007. Cash received from the off-balance sheet facility is recorded as interest income by pool using the interest yield from each pool. Any excess cash received over the yield is applied to the securities balance or other comprehensive income. Any related fees or costs associated with the issuance of the loan that are not directly offset against loan origination fees (see below) are deferred over the life of the loan. Amortization of these costs is calculated over the life of the loans as an adjustment of the interest yield.

Gain on sale of notes receivable. When the sale of a loan meets the criteria to be accounted for as a true sale, established by SFAS 140, a gain on sale is recognized when the note receivable is sold. When the Company sells notes receivable, it typically retains servicing rights and interest income. Gains or losses on sales of notes receivable depend, in part, on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold, the retained interest and the servicing assets based on their relative fair value at the date of transfer, and the proceeds received. These gains on sale are shown net of securitization fee expenses.

Loan origination fees. Loan origination fees charged to borrowers are offset against loan origination expenses incurred during the underwriting and placement of loans and are, therefore, not recorded as revenues. However, in the future if loan origination fees exceed these loan originations expense, the excess will be reported as interest income over the life of the loan as an adjustment of the interest yield. Loan origination fees reimburse the Company for cash outflows associated with the up-front issuance costs such as financial guaranty policy premiums, collateral preservation services, travel expenses for location inspections or meetings with the borrowers, and placement of the loans to outside investors.

Impairment Losses.Although the Company does not provide recourse on its transferred notes and is not obligated to repay amounts due to investors and creditors of the QSPEs, its retained assets are subject to loss, in part or in full, including in the event credit losses exceed initial and ongoing management assumptions used in the fair market value calculation. Additionally, a partial loss of retained assets could occur in the event actual prepayments exceed management’s initial and ongoing assumptions used in the fair market calculation.

On an ongoing basis, the Company determines the ongoing fair market value of the retained interest using the current outstanding principal of the transferred notes receivable and the outstanding balances due unaffiliated purchasers, which are reflective of credit losses and prepayments prior to the fair value recalculation. Additionally, the Company performs an ongoing analysis of key assumptions used in the fair market value calculation to ensure that such assumptions remain viable, based on current and historical prepayments and credit loss trends within similar asset types. Management may adjust the key assumptions based on current and historical trends, which may result in an immediate reduction or impairment loss in the fair market value of retained interest.

(n) Provision for Credit Losses

The Company’s credit loss exposure is limited to on-balance sheet loans (other than loans sold to warehouse QSPEs which are classified as on-balance sheet) and the Company’s retained interest in QSPEs that have purchased loans from the Company and issued asset-backed securities or off-balance sheet bank debt. A credit loss assumption is inherent in the calculations of retained interest-only strip receivables resulting from loans that are sold. Prior to 2007, no reserve for credit losses has been made for on-balance sheet loans held in inventory for eventual sale for two reasons. First, these loans were typically held for six to nine months before being sold to investors and, therefore, had a short-term exposure to loss. Second, commissions received by the Company’s affiliated company, Brooke Capital, are typically distributed to the Company for loan payments prior to distribution of commissions to the franchisee borrower and most other creditors thereby reducing loan losses. Losses were written off to loan loss expense as they were identified.

However, given the rapid growth that Aleritas had experienced over the past two years, the seasoning of the loan portfolio, increased delinquencies of on-balance sheet loans and management’s expectation that loans will be held longer than previously (for nine to twelve months) before being sold; Aleritas established a reserve for potential loan losses on the on-balance sheet loans in the third quarter of 2007. The reserve for credit losses includes two key components: (1) loans that are impaired under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan—an amendment of FASB Statements No. 5 and 15,” and (2) reserves for estimated losses inherent in the rest of the portfolio based upon historical and projected credit risk. In March 2008, Brooke Capital

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Corporation, an affiliate of the Company, and a collateral preservation provider for loans to franchisees of Brooke Capital Corporation provided an analysis of credit loss exposure per agency based upon their estimates regarding liquidation value of each agency. This analysis followed a decision and disclosure by Brooke Capital Corporation in November 2007 that they would place less emphasis on rehabilitating poorly performing franchisees and more emphasis on terminating or liquidating poorly performing franchisees. Brooke Capital is currently focusing its resources on the liquidation of underperforming conversion franchise businesses, which typically represent larger loan balances to the Company and its secondary market. During this time, Brooke Capital is placing less emphasis on the liquidation of start-up franchise businesses. As a result, we do expect an increase in delinquencies associated start-up franchise businesses until Brooke Capital can refocus its efforts on the liquidation of these businesses. The loan loss reserve for on balance sheet loans was increased by $2,319,000 in the second quarter 2008 to reflect the increased potential losses resulting from the liquidation of several agencies as well as potential losses on other loans in the portfolio. A reserve of $16,420,000 and $1,655,000 was held at June 30, 2008, and December 31, 2007, respectively. Management will evaluate the adequacy of the reserve on an ongoing basis in the future utilizing the credit metrics underlying the reserve and input from its collateral preservation providers.

(o) Operating Interest Expense

Operating interest expense includes interest paid by the Company to DZ Bank AG Deutsche Zentral-Genossenschaftsbank on a line of credit loan for the purpose of originating insurance agency loans and funeral home loans in the United States (prior to the current forbearance agreement), to Fifth Third Bank on a line of credit loan for the purpose of originating funeral home loans in Canada, to Fifth Third Bank on a line of credit loan for the purpose of originating insurance agency and funeral home loans in the United States (prior to March 30, 2007) and, for the period ended December 31, 2007, to Home Federal Savings and Loan Association of Nebraska on a line of credit loan for the purpose of financing the over-collateralization portion of loans funded with the aforementioned lines of credit; therefore, this interest is accounted for as an operating expense. Interest expense for these lines of credit for the six months ended June 30, 2008 and 2007 was $1,414,000 and $2,033,000, respectively.

(p) Collateral Preservation (“CP”) Expense

Collateral preservation expense is comprised of up-front, ongoing and special fees paid to CP providers. The Company hires collateral preservation providers that are industry consultants and specialists for all of the Company’s loans (See Note 10 for a discussion of related party CP providers). An initial fee is paid to the CP providers for assistance in sourcing and underwriting new loans. The majority of this expense is offset by loan origination fees charged to borrowers. An ongoing fee is also paid to the CP providers to assist the Company in preserving the loan collateral or the value of the borrower’s business. These CP providers provide monitoring, assistance and business liquidation services if required. Additional fees are generally paid to CP providers for liquidation services.

(q) Income Taxes

The Company filed its federal income tax return on a consolidated basis with Brooke Corporation until the Oakmont merger. Following the merger Aleritas files separate tax returns. The Company recorded provisions for income tax benefit of $13,784,000 for the six months ended June 30, 2008 and tax expense of $5,177,000 for the six months ended June 30 2007. This tax expense/benefit was calculated for 2008 based on the Company’s effective tax rate plus the change in deferred income taxes during the period. Deferred tax liabilities and assets were recorded in 2008 and 2007 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 estimated tax rates. Note 5 provides further detail on the Company’s taxes.

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2. Earnings Per Share Data

Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of shares of the common shares outstanding for the period. The weighted average shares outstanding for all prior periods were retroactively restated to 24,536,361 shares, the number of shares issued in the Oakmont merger. Diluted earnings per share reflect the potential dilution that could occur if certain warrants were exercised. The following reconciles the weighted average shares used for the basic earnings per share computation to the shares used for the diluted earnings per share computation.

	Six Months Ended June 30,
	2008	2007
Basic shares	25,849	24,536
Effect of dilution	—	—
Diluted shares	25,849	24,536

Potentially dilutive shares excluded from the calculation:

	Six Months Ended June 30,
	2008	2007
Warrants where the exercise price is greater than the average market price of the shares	18,590	—
Warrants which are anti-dilutive	1,278	—
Units where the exercise price is greater than the average market price of the units	720	—

The following reconciles net income as shown on the statement of operations to net income available to common stockholders.

	Six Months Ended June 30,
	2008			2007
Net income (loss)	$	(22,489	)	$	8,447
Income (loss) attributable to warrant holders		1,060			(378	)
Net income (loss) available to common stockholders for purposes of computing earnings per share	$	(21,429	)	$	8,069

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3. Notes and Interest Receivable, net

Notes and interest receivable, net consisted of the following:

	June 30, 2008			December 31. 2007
Business loans	$	597,624		$	597,306
Less: Business loans sold		(502,740	)		(520,927	)
Commercial real estate loans		79,679			80,940
Less: Real estate loans sold		(66,599	)		(63,167	)
Loans with related parties		20,122			20,076
Less: Related party loans sold**		(18,821	)		(19,786	)
Loans sold not classified as a true sale		62,004			42,146
Related party loans sold not classified as a true sale***		876			764
Total notes receivable, net		172,144			137,352
Interest earned not collected on notes*		7,537			6,770
Less: Loan loss reserve		(16,420	)		(1,655	)
Total notes and interest receivable, net	$	163,262		$	142,467

* The Company had a corresponding liability for interest payable to participating lenders in the amounts of $2,277,000 and $1,746,000 at June 30, 2008, and December 31, 2007, respectively.

** The Brooke Corporation notes receivable that have not been sold are presented in the Amount Due from Brooke Corporation line item on the Consolidated Balance Sheet and, therefore, are excluded from notes receivable and this table. See Note 9 for a further discussion of the transactions with Brooke Corporation.

*** The Brooke Corporation notes receivable that were sold in 2008 that did not qualify for true sale treatment are presented in the Amount Due from Brooke Corporation line item on the Consolidated Balance Sheets and, therefore, are excluded from notes receivable and this table.

Loan participations and the sale of loans to QSPEs that issue off-balance sheet asset-backed securities and bank debt represent the transfer of notes receivable, by sale, to “participating” lenders or QSPEs. The Company receives consideration from the transfer of notes receivable through retained interest and servicing assets. These transfers are accounted for by the criteria established by SFAS 140.

The transfers that do not meet the criteria established by SFAS 140 are classified as secured borrowings and the balances recorded as both a note receivable asset and participation payable liability. At June 30, 2008, and December 31, 2007, secured borrowings totaled $70,470,000 and $47,360,000, respectively. Of such amounts at June 30, 2008, and December 31, 2007, secured borrowings on related party loans totaled $4,927,000 and $5,214,000, respectively. Recourse on these loans is limited to the amount of actual principal and interest loss incurred and any such loss is not due for payment to the participating lender until such time as all collateral is liquidated, all actions against the borrower are completed and all liquidation proceeds applied. However, participating lenders may be entitled to periodic advances from the Company against liquidation proceeds in the amount of regular loan payments.

The following provides details concerning notes receivable sold. Purchasers of these notes receivable obtained full control over the transferred assets (i.e. notes receivable) and obtained the right, free of conditions that constrain them from taking advantage of that right, to pledge or exchange the notes receivable. Furthermore, the agreements to transfer assets do not entitle, nor obligate, the Company to repurchase or redeem the notes receivable before their maturity, except in the event of an uncured breach of warranty.

	June 30, 2008		December 31, 2007
Securitizations	$	118,527	$	128,711
Participations		222,157		232,144
Off-balance sheet warehouse facility		174,966		181,093
Participations on related party loans		9,371		14,572
Notes receivable sold	$	525,021	$	556,520

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When the Company sells notes receivable, it generally retains interest income and servicing income. Gains or losses on sales of the notes receivable depend, in part, on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold, the retained interest and the servicing assets based on their relative fair value at the date of transfer.

Aleritas is typically paid annual servicing fees ranging from 0.25% to 1.375% of the outstanding loan balance on loan participations. In those instances when annual service fees paid to the Company are less than the minimum cost of servicing, which is estimated at 0.25% of the outstanding balance, a servicing liability is recorded. Additionally, the Company often retains interest income. The Company’s right to interest income is not subordinate to the purchasers’ interests and Aleritas shares interest income with purchasers on a pro-rata basis. Although not subordinate to purchasers’ interests, the Company’s retained interest is subject to credit and prepayment risks on the transferred assets.

The Company is typically paid annual servicing fees ranging from 0.10% to 0.25% of the outstanding transferred loan balances on loans to QSPEs that qualify for true sale. Additionally, Aleritas often retains interest income. The Company’s right to interest income is subordinate to the investor and lender’s interests. As such, the Company’s retained interest is subject to credit and prepayment risks on the transferred assets.

When the Company sells loans to a QSPE an interest receivable is retained. The fair value of the difference between the loans sold and the securities issued to accredited investors, and the fair value of interest receivable is recorded as securities. A history of loans securitized follows:

	Apr 2003		Nov 2003		Jun 2004		Mar 2005		Dec 2005		Jul 2006
Loans sold initially	$	15,825	$	23,526	$	24,832	$	40,993	$	64,111	$	65,433
Asset-backed securities issued		13,350		18,500		20,000		32,000		51,500		52,346
Securities retained at June 30, 2008:
Interest-only strip receivables	$	47	$	93	$	258	$	1,758	$	2,556	$	2,774
Over-collateralization interests		461		1,277		806		1,322		5,536		4,837
Cash reserves		125		125		125		125		175		175
Total	$	633	$	1,495	$	1,189	$	3,205	$	8,267	$	7,786
Securities retained at December 31, 2007	$	1,054	$	1,263	$	2,837	$	5,902	$	9,285	$	13,977
Servicing income, six months ended:
June 30, 2008	$	—	$	1	$	1	$	7	$	10	$	13
June 30, 2007		1		1		2		8		13		16

In March 2007, the Company initiated a $150,000,000 facility to sell, on a revolving basis, a pool of its loans, while retaining residual assets such as interest-only strip receivables and a subordinated over-collateralization interest in the receivables. The eligible receivables are sold to Brooke Warehouse Funding, LLC, a wholly owned bankruptcy-remote special purpose entity, without legal recourse to the Company. Brooke Warehouse Funding, LLC then entered into a participation agreement with Brooke Securitization Company 2007-1, LLC to sell an undivided senior participation interest in all of the assets of Brooke Warehouse Funding, LLC. Brooke Securitization Company 2007-1, LLC entered into an amended and restated receivables financing agreement with Fifth Third Bank which extended a credit facility to Brooke Securitization Company 2007-1 LLC to provide funds to acquire such participation interests with a facility line of credit of $150,000,000. During 2007, Brooke Securitization Company 2007-1, LLC was replaced with Brooke Master Trust, LLC. The restated receivables financing agreement between Fifth Third Bank and Brooke Securitization Company 2007-1, LLC was terminated and replaced by a Note Purchase Agreement under which Fifth Third Bank purchases notes from the Master Trust up to a maximum principal amount of $150,000,000. The transfer qualifies for true sale treatment under SFAS 140. As of June 30, 2008, the outstanding balance of sold accounts receivable held by Brooke Warehouse Funding, LLC and participated to Brooke Master Trust, LLC totaled $180,050,000 which were removed from the consolidated balance sheet at that date. The fair value of the difference between loans sold and advanced portion on the facility, or fair value of retained residual assets, was recorded on the Company’s books as a security with a balance of $46,604,000 on June 30, 2008. This retained security was comprised of retained interest-only strip receivable totaling $19,133,000 and retained over-collateralization interests in the special purpose entity totaling $27,470,000. The Company received servicing income as sub-servicer of the facility of $176,000 and $36,000 for the six months ended June 30, 2008 and 2007, respectively. The facility contains the following financial covenants: minimum stockholders’ equity for the Company of $80 million, positive consolidated net income for the four fiscal quarter period then ending, maximum

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prepayment rate on the Company’s loan portfolio of 20%; maximum loan loss rate of 1.5%; minimum fixed charge coverage ratio as scheduled; maximum cash leverage ratio as scheduled; and maximum total leverage ratio as scheduled. The facility contains other restrictions, including but not limited to: the incurrence of indebtedness and liens; the reorganization, transfer and merger of the Company; the disposal of its properties other than in the ordinary course of business; entering into transactions with affiliates or into material agreements other than in the ordinary course of business; entering into pledge and negative pledge agreements; and the declaration of dividends, except in limited circumstances. At June 30, 2008, the Company was not in compliance with all of the terms and conditions of this facility and had an unresolved deficiency in the facility of $32,585,000 which the Company believes will be resolved primarily from liquidation of collateral and restructuring of loans. Partially as a result of this deficiency, Fifth Third has increased its program fee. However, we believe this increase is temporary. Fifth Third has not issued a notice of default with respect to the facility and is in discussions with the Company’s management to address these issues.

The table below summarizes certain cash flows received from and paid to QSPEs in connection with the Company’s off-balance sheet securitizations and credit facilities:

	Six Months Ended June 30,
	2008		2007
Proceeds from new loan sales to QSPEs*	$	5,826	$	105,822
Proceeds reinvested in QSPEs(retained equity interest)**		1,469		21,941
Servicing fees received		154		41
Other cash flows received on retained interests***		3,925		3,919
Proceeds from collections reinvested in (revolving-period) securitizations		—		—

* This amount represents total loans sold by the Company to QSPEs in connection with off-balance sheet securitizations and credit facilities.

** This amount represents the Company’s retained equity interest in the securitization or credit facility QSPEs.

*** This amount represents total cash flows received from retained interests by Aleritas other than servicing fees. Other cash flows include cash flows from interest-only strip receivables and cash above the minimum required level in cash collateral accounts.

At June 30, 2008, and December 31, 2007, the Company had transferred assets with balances, including related party loans, totaling $525,021,000 and $556,520,000, respectively. Asset transfers resulted in pretax (losses) for the six months ended June 30, 2008 and 2007, of ($905,000) and $11,583,000, respectively, before consideration of related securitization fees. The pretax gains include related party losses of $28,000 and $2,000 for the six months ended June 30, 2008 and 2007, respectively.

The fair value of retained interest-only strip receivables is calculated by estimating the net present value of interest income on loans sold using the discount rate and prepayment speeds noted in the following key economic assumptions table. The fair value of the retained interest-only strip receivables is also reduced by the amount of estimated credit losses on loans sold in qualifying special purpose entities that qualify as true sales, which are calculated using the estimated credit loss percentage noted in a following table. At June 30, 2008 and December 31, 2007, the fair value of retained interest-only strip receivables recorded by the Company was $33,705,000 and $35,915,000, respectively. Of the total at June 30, 2008, $7,086,000 was included in interest-only strip receivable on the balance sheet and $26,619,000 was included in securities.

To obtain fair values of retained interests, quoted market prices are used, if available. However, quotes are generally not available for retained interests, so the Company typically estimates fair value based on the present value of future expected cash flows estimated using management’s best estimates of key assumptions, credit losses, prepayment speed and discount rates commensurate with the risks involved.

The value of the servicing asset or liability is calculated by estimating the net present value of net servicing income (or expense) on loans sold using the discount rate and prepayment speeds noted in the following key economic assumptions table. Subsequent to the initial recording at fair value, the servicing asset is amortized in proportion to and over the period of estimated net servicing income.

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The following table provides the changes in the Company’s servicing asset and liability subsequently measured using the amortization method. The fair values exclude the servicing asset and liability on related party loans sold.

		June 30, 2008						December 31, 2007
		Servicing Asset			Servicing Liability			Servicing Asset			Servicing Liability
Carrying amount, beginning of year		$	6,025		$	16		$	4,512		$	24
Additions:
Servicing obligations that result from transfer of financial assets			427			—			3,546			—
Subtractions:
Disposals			(509	)		—			(703	)		—
Accumulated amortization			(717	)		(4	)		(1,330	)		(8	)
Carrying amount, end of period			5,226			12			6,025			16
Pertaining to related party loans sold			31			19			59			28
Total amount, end of period		$	5,257		$	31		$	6,084		$	44
Fair value as of:	Beginning of year	$	6,870		$	16		$	5,176		$	24
	End of period		5,257			14			6,870			16

The dominant risk characteristics of the underlying loans of the Company’s retained interest-only strip receivables and servicing assets have been analyzed by management to identify how to stratify these assets for the purpose of evaluating and measuring impairment. The underlying loans are very similar in virtually all respects. Accordingly, the same key economic assumptions have been used when determining the fair value of retained interest and servicing assets for all loans. No valuation allowance has been established because the fair value for the adjustable-rate loan stratum is not less than the carrying amount of the servicing assets.

Although substantially all of the Company’s loans are adjustable, a discount rate has been applied to reflect the net present value of future revenue streams. As such, changes in the net present value rate, or discount rate, resulting from interest rate variations, could adversely affect the asset’s fair value. Impairment of retained interests and servicing assets are evaluated and measured annually. The impairment testing is performed by taking the current interest and servicing revenue stream and valuing the new revenue stream with the appropriate assumptions. The new revenue stream is based on the loan balances at the date the impairment test is completed, which will include all prepayments on loans and any credit losses for those loans. The new discounted revenue stream is then compared to the carrying value on the Company’s books and, if the new value is greater than the value on the books, no impairment has occurred. If the new discounted revenue stream is less than the value on the books, further analysis is performed to determine if an “other than temporary” impairment has occurred. If an “other than temporary” impairment has occurred, the Company writes the asset to the new discounted revenue stream. During 2007 the securitized pools of loans experienced increases in the prepayment rate and, as a result, management determined that an “other than temporary” impairment occurred. The Company recorded an impairment loss of $5,517,000 for the year. The Company believes that over the life of the securitizations the prepayment rate assumption used continues to be appropriate. Additional impairment of $11,763,000 was recognized for the six months ended June 30, 2008.

For the twelve months ended June 30, 2008, the Company’s loan portfolio experienced an annualized prepayment rate of 11.3%, which was higher than management’s assumption for both fixed and variable rate loans. Management believes that this increase is directly attributable to market conditions that are cyclical in nature, such as the softening insurance marketplace. However, the assumed prepayment rate was increased to 12% in the fourth quarter of 2007 for both fixed and variable rate loans, from 8% and 10%, respectively, previously to reflect higher expected prepayment rates as the portfolio continues to season. The prepayment assumption is an average annual rate over the life of the Company’s portfolio. Management believes that during the remaining term of this portfolio, several cycles are likely to occur which could increase or decrease actual prepayment rates; however, management believes the revised average annual rate assumption is appropriate. Shorter term swings in prepayment rates typically occur because of cycles within a marketplace, such a softening and hardening of the insurance marketplace, changes in the death care rate for funeral homes and changes in the variable interest rate loans from key index rate changes. Longer term increases in prepayment rates typically result from long-term deterioration of the marketplace or increased lending competition.

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At June 30, 2008, key economic assumptions used in measuring the retained interests and servicing assets when loans were sold or securitized during the year follow(rates per annum):

	Business Loans
	Fixed & Adjustable Rate Strata
Prepayment speed*	12	%
Weighted average life(in months)	120
Expected credit losses	0.5	%
Discount rate	11	%

* During the fourth quarter of 2007, the prepayment speed assumption was changed from 10.00% to 12.00%.

At June 30, 2008, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions follow:

	Business Loans
	Fixed & Adjustable Rate Strata
Prepayment speed (annual rate):*		12	%
Impact on fair value of 10% adverse change	$	(2,034	)
Impact on fair value of 20% adverse change		(3,210	)
Expected credit losses (annual rate):		0.5	%
Impact on fair value of 10% adverse change	$	(1,678	)
Impact on fair value of 20% adverse change		(2,030	)
Discount rate (annual):		11	%
Impact on fair value of 10% adverse change	$	(2,194	)
Impact on fair value of 20% adverse change		(3,125	)

* During the fourth quarter of 2007, the prepayment speed assumption was changed from 10.00% to 12.00%.

These sensitivities are hypothetical and should be used with caution. The effect of a variation in a particular assumption on the value of the retained interest-only strip receivables and servicing assets is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

The above adverse changes for prepayment speed and discount rate are calculated on the Company’s retained interest-only strip receivables and servicing assets on loans sold totaling $515,650,000 which excludes related party loans of $9,371,000. The above adverse changes for expected credit losses are calculated on the Company’s retained interest-only strip receivables in loans sold to QSPEs.

The calculations exclude the retained interest-only strip receivables and servicing assets on related party loans sold. The interest-only strip receivables on related party loans sold were $14,000. The servicing assets on related party loans sold were $31,000.

The following illustrate how the changes in fair values were calculated for 10% and 20% adverse changes in key economic assumptions.

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Effect of Increases in Assumed Prepayment Speed on Servicing Asset

	Fixed and Adjustable Rate Strata
	10% Prepayment Increase			20% Prepayment Increase
Estimated cash flows from loan servicing fees	$	7,984		$	7,769
Servicing expense		(1,414	)		(1,359	)
Discount of estimated cash flows at 11.00% rate		(1,437	)		(1,375	)
Carrying value of servicing asset after effect of increases		5,133			5,035
Carrying value of servicing asset before effect of increases		5,226			5,226
Decrease of carrying value due to increase in prepayments	$	(93	)	$	(191	)

Effect of Increases in Assumed Prepayment Speed on Retained Interest(Interest-Only Strip Receivable, including retained interest carried in Securities balance)

	Fixed and Adjustable Rate Strata
	10% Prepayment Increase			20% Prepayment Increase
Estimated cash flows from interest income	$	47,430		$	45,357
Estimated credit losses		(4,908	)		(4,673	)
Discount of estimated cash flows at 11.00% rate		(10,772	)		(10,012	)
Carrying value of retained interests after effect of increases		31,750			30,672
Carrying value of retained interests before effect of increases		33,691			33,691
Decrease of carrying value due to increase in prepayments	$	(1,941	)	$	(3,019	)

Effect of Increases in Assumed Credit Loss Rate on Retained Interest(Interest-Only Strip Receivable, including retained interest carried in Securities balance)

	Fixed and Adjustable Rate Strata
	10% Credit Loss Increase			20% Credit Loss Increase
Estimated cash flows from interest income	$	49,661		$	49,661
Estimated credit losses		(5,675	)		(6,183	)
Discount of estimated cash flows at 11.00% rate		(11,973	)		(11,817	)
Carrying value of retained interests after effect of increases		32,013			31,661
Carrying value of retained interests before effect of increases		33,691			33,691
Decrease of carrying value due to increase in credit losses	$	(1,678	)	$	(2,030	)

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Effect of Increases in Assumed Discount Rate on Servicing Asset

	Fixed and Adjustable Rate Strata
	10% Discount Rate Increase			20% Discount Rate Increase
Estimated cash flows from loan servicing fees	$	8,212		$	8,212
Servicing expense		(1,451	)		(1,451	)
Discount of estimated cash flows		(1,729	)		(1,840	)
Carrying value of servicing asset after effect of increases		5,032			4,921
Carrying value of servicing asset before effect of increases		5,226			5,226
Decrease of carrying value due to increase in discount rate	$	(194	)	$	(305	)

Effect of Increases in Assumed Discount Rate on Retained Interest(Interest Only Strip Receivable, including retained interest carried in Securities balance)

	Fixed and Adjustable Rate Strata
	10% Discount Rate Increase			20% Discount Rate Increase
Estimated cash flows from interest income	$	49,661		$	49,661
Estimated credit losses		(5,154	)		(5,154	)
Discount of estimated cash flows		(12,816	)		(13,636	)
Carrying value of retained interests after effect of increases		31,691			30,871
Carrying value of retained interests before effect of increases		33,691			33,691
Decrease of carrying value due to increase in discount rate	$	(2,000	)	$	(2,820	)

The following illustrates the disclosure of static pool credit losses to the Company for loans sold in securitizations. “Static pool credit loss” is an analytical tool that matches credit losses with the corresponding loans so that portfolio loan growth does not distort or minimize actual loss rates. Static pool losses are calculated by summing the actual (cumulative) and projected credit losses (as of the end of each reported period) divided by the original balance of each pool of assets.

	Securitized Loans Sold in
Actual Credit Loss Percentage at	2008*		2007		2006
June 30, 2008	0.00	%	0.00	%	1.52	%
December 31, 2007			0.00	%	1.41	%
December 31, 2006					1.95	%

* There have been no loans sold in securitizations in 2007 and 2008 to date.

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The following table presents quantitative information about the loan portfolio, including balances, delinquencies and net credit losses. The related parties’ balances are excluded from the table below as is the reserve for credit loss of $16,420,000 at June 30, 2008, and $1,655,000 at December 31, 2007. At and for these same periods, the related party notes did not have any principal amounts 60 or more days past due, nor were there any credit losses on the related party notes. Notes 9 and 10 provide further discussion of the related party notes.

	Total Loan Principal				Principal Amounts 60 or More Days Past Due*				Net Credit Losses***
	June 30, 2008		December 31, 2007		June 30, 2008		December 31, 2007		Six Months Ended June 30,
Loan portfolio consists of:									2008		2007
Loans on balance sheet	$	112,956	$	116,091	$	24,113	$	13,301	$	91	$	3
Loans on balance sheet held in bankruptcy-remote warehouses		57,011		20,207		—		—		—		—
Off-balance sheet warehouse facility**		174,966		181,093		—		—		—		—
Loans participated****		222,157		232,144		13,673		7,343		318		—
Loans securitized		118,527		128,711		1,852		1,898		1,096		668
Total loans managed	$	685,617	$	678,246	$	39,638	$	22,542	$	1,505	$	671

* Loans 60 days or more past due are based on end of period loan balances.

** Net credit losses for loans in the off-balance sheet warehouse facility are accounted for through the valuation of the retained securities rather than being charged to credit loss expense.

*** The net credit losses are net of recoveries, including recoveries from the proceeds of financial guaranty policies. These losses exclude changes in the loan loss reserve.

**** Loans participated represent true sale loan participations.

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4. Bank Loans and Other Long-Term Obligations

	June 30, 2008			December 31, 2007
DZ Bank AG Deutsche Zentral-Genossenschaftsbank line of credit.New amounts available under the line were eliminated in the second quarter. Collateralized by new notes receivable. Maturity date August 2009. Interest rate is variable and was 4.45% at June 30, 2008, with interest due monthly.	$	37,758		$	14,023
Valley View Bank line of credit.Maximum line of credit available of $4,000,000. Collateralized by notes receivable. Line of credit was extended to August 2008. Interest rate is variable and was 7.25% at June 30, 2008, with interest and principal due monthly.		3,989			3,989
Fifth Third Bank, Canadian Branch line of credit.New amounts available under the line were eliminated in the second quarter (Canadian dollars).		4,822			8,967
Home Federal Savings and Loan Association of Nebraska line of credit. Maximum line of credit available of $7,500,000. Collateralized by cashflows of securities and other assets. Line of credit was paid off in March 2008.		—			6,353
Company debt with banks.These notes are payable to banks and collateralized by various assets of the Company. Interest rate on the notes is 10.00% and they mature in January and February 2009.		3,217			4,788
Bank of Kansas City line of credit.Maximum line of credit available of $1,750,000. Collateralized by notes receivable. Line of credit due February, 2009. Interest rate is variable and was 5.25% at June 30, 2008.		2,453			—
First State Bank secured term loan.Collateralized by substantially all of the Company’s assets. Minimum monthly payments of $875,000, with a final maturity in February 2013. Interest rate is variable and was 7.25% at June 30, 2008.		46,213			—
Falcon Mezzanine Partners II, LP, FMP II Co.-Investment, LLC and JZ Equity Partners PLC note payable.This $45,000,000 note had an associated discount of $2,499,000. Was collateralized by assets of the Company. Interest rate was fixed at 12.00%, with interest due quarterly. Repurchased in March 2008.					42,572
Total bank loans and notes payable		98,452			80,692
Less: Current maturities and short-term debt		(61,989	)		(44,604	)
Total long-term debt	$	36,463		$	36,088

The Company entered into a credit agreement with First State Bank, a banking corporation organized under the laws of the State of Nebraska (the “Bank”), as lead lender, along with a number of participating banks for the advancement of a $52.5 million secured term loan, under an agreement dated March 7, 2008 (the “Credit Agreement”). At June 30, 2008 the Credit Agreement had been advanced in the amount of $46,213,000.

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The Parties also entered into a Security Agreement and Pledge Agreement which gave the Bank a security interest covering substantially all of the Company’s assets, including the Company’s rights to receive any payments from a majority of the Company’s subsidiaries, and further assigned to the Bank the Company’s membership in two of the Company’s subsidiaries and a cash collateral account to be funded over an 18 month period following the closing. This provides the Bank the right to receive any payments related to certain of the Borrower’s bank and other depository accounts.

Pursuant to the Credit Agreement, the Company will make principal payments in the minimum amount of $875,000 per month over the course of the Loan with the remaining outstanding balance (including any accrued and unpaid interest) due February 28, 2013. Interest on the Loan will accrue at the rate equal to the greater of: (a) 7.25% or (b) the sum of the prime rate as published in the Wall Street Journal and 1.75% per annum.

The Credit Agreement contains several affirmative financial covenants.

The Company and its consolidated subsidiaries must maintain at all times a Tangible Net Worth (as defined in the Credit Agreement): (i) through April 30, 2009 equal to at least $76,500,000; (ii) from May 1, 2009 through April 30, 2010 equal to at least $87,500,000; and (iii) at all times thereafter, equal to at least $100,000,000. The Company must also maintain stockholders’ equity determined in accordance with generally accepted account principles equal to at least $110,000,000. The Credit Agreement requires that the Company maintain Net Loans (as defined in the Credit Agreement) in an amount not less than the lesser of: (a) the outstanding balance of the Loan and (b) $32,500,000. The Company subsequently amended the document effective May 8, 2008 as follows. The company and its consolidated affiliates must maintain and tangible net worth at all times (as defined in the credit agreement): i) through April 30, 2009, equal at least 77,500,000; ii) from May 1, 2009 through April 30, 2010 equal to at least 87,500,000; and iii) after May 1, 2010 equal to at least $100,000,000. The Company must also maintain, at all times, stockholders’ equity determined in accordance with generally accepted accounting principles of i) through April 30, 2009 equal to at least $90,000,000 (which may exclude up to $5,000,000 in unrealized losses under Accumulated Other Comprehensive Income; ii) from May 1, 2009 to April 30, 2010 equal to at least $100,000,000; and iii) after May 1, 2010, equal to at least $110,000,000. In addition net loans requirement has been increased to a minimum of $32,000,000.

The note payable to DZ Bank AG Deutsche Zentral-Genossenschaftsbank (“DZ Bank” contains certain financial covenants within the credit and security agreement. On June 19, the facility was amended, which amendment: eliminated all prepayment penalties, non-use fees and make –whole fees; limited the facility to $40,000,000, eliminating the use of the line; extended the maturity date to August 27, 2010; required that the facility be equal or less than $30,000,000 by December 31, 2008, and $20,000,000 by June 30, 2009; the company agreed to maintain a tangible net worth of no less than $50,000,000; required a monthly principal payment of $400,000; and required DZ Bank to receive 20% of all proceeds of any stock or equity issuance. In addition; Brooke Corporation and Brooke Capital provided certain guarantees and security to DZ Bank. Brooke Corporation agreed that it will maintain a tangible net worth of not less than $30,000,000; guaranteed repayment of the debt; provided a security interest in one of its subsidiaries. Brooke Capital guaranteed repayment of the debt and provided a security interest in one of its subsidiaries.

The note payable to Valley View Bank contains a covenant to maintain a minimum stockholders’ equity of $6,100,000.

The note payable to Fifth Third Bank, Canadian Branch, contains a covenant to maintain a minimum stockholders’ equity of $35,000,000.

Total balances of the Company’s bank lines of credit collateralized by notes receivable were $49,022,000 and $31,177,000 as of June 30, 2008, and December 31, 2007, respectively. These balances were collateralized by notes receivable totaling $19,469,000 and $42,504,000 as of June 30, 2008, and December 31, 2007, respectively.

The other bank loans and other long-term obligations do not contain covenants that require the Company to maintain minimum financial ratios or net worth, restrict the Company’s ability to buy or sell assets, restrict the Company’s ability to incur additional debt, nor include any subjective acceleration clauses.

Interest expense incurred on bank loans, notes payable and other long-term obligations for the six months ended June 30, 2008 and 2007 was $2,486,000 and $3,140,000, respectively. Interest incurred on the lines of credit is classified as other operating interest expense as discussed in Note 1.

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5. Income Taxes

Income tax expense is the tax calculated for the year based on the Company’s effective tax rate plus the change in deferred income taxes during the year. These elements of income tax expense follow:

	Six Months Ended June 30,
	2008			2007
Current	$	(860	)	$	—
Deferred		(12,924	)		5,177
Income tax expense (benefit)	$	(13,784	)	$	5,177

The reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate follows:

	June 30, 2008			December 31, 2007
Deferred tax liability, beginning of year	$	10,910		$	8,881
Accumulated other comprehensive income, unrealized gain on interest only strip receivables		(1,948	)		1,930
Accumulated other comprehensive income (loss) on currency exchange		(31	)		99
Gain (loss) on sale of notes receivable		(630	)		3,650
Executive equity compensation		(319	)		(826	)
Impairment losses		(4,470	)		(2,163	)
Loan losses		(5,660	)		(629	)
Other		0			(32	)
Deferred tax liability (asset), end of period	$	(2,148	)	$	10,910
Current deferred tax asset	$	(13,902	)	$	(4,126	)
Deferred tax liability: Current		—			—
Long-term		11,754			15,036
Net deferred tax liability (asset)	$	(2,148	)	$	10,910

Deferred tax liabilities were 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.

Prior to the Oakmont merger, the Company filed a consolidated federal income tax return with Brooke Corporation. For 2006, pursuant to the Servicing and Tax Allocation Agreement, the Company was obligated to pay to Brooke Corporation its share of any consolidated tax liabilities for the 2006 fiscal tax year. The amount was calculated as 38% of the Company’s taxable income, excluding any income resulting from deferred liabilities from any prior tax year or years related to gains on sale. In 2006, the Company began to recognize the deferred tax liabilities that result from the gain on sale revenues.

Effective January 1, 2007, the Company and Brooke Corporation entered into an agreement that obligates Brooke Corporation to pay back to the Company the deferred tax amounts based upon a predetermined payment schedule. The predetermined payment schedule approximates the timing these amounts will be due to the respective taxing authorities. The Company’s balance sheet reflects a deferred tax liability for these amounts until paid to the taxing authorities and a corresponding receivable from Brooke Corporation until such prepaid amounts are recovered.

Effective with the Oakmont merger on July 18, 2007, the Company began filing separate tax returns and paying its tax obligations directly to the taxing authorities.

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6. Share-Based Compensation

Statement of Financial Accounting Standards No. 123R (Revised), “Share-Based Payments,” requires the Company to measure the cost of equity classified share-based compensation awards at the grant date fair value in exchange for employee services rendered. All nonvested stock awards’ fair value is determined on the date of grant and recorded as compensation expense over the attribution period, which is generally the vesting period.

The 2007 Brooke Credit Corporation Equity Incentive Plans granted shares of post merger restricted common stock to certain of the Company’s officers as shown below.

	Grant Date	Grant Date Fair Value Per Share		Shares Granted and Outstanding	Vesting Period	Remaining Shares Available for Issuance
Plan-A - adopted July 16, 2007	7-16-07	$	5.73	1,187	2008 through 2010	—
Plan-B - adopted July 18, 2007	11-5-07		5.11	126	2009 through 2011	60

The grant date fair value was based on the closing market price of the stock on the date of the grant. These awards are subject to forfeiture if employment terminates during the vesting period. The grant date fair value of nonvested shares is recorded to expense on a straight-line basis over the vesting period. The related compensation cost was ($840,000), for the six months ended June 30, 2008, due to the expiration of previously granted stock based compensation prior to vesting. As of June 30, 2008, the total remaining unrecognized compensation cost related to the unvested stock options was $429,000, which will be expensed as follows: $96,000 ratably over the last two quarters of 2008, $191,000 in 2009 and $142,000 in 2010.

7. Employee Benefit Plans

Through 2007, the Company participated in Brooke Corporation’s defined contribution retirement plan covering substantially all employees. Employees were able to contribute up to the maximum amount allowed pursuant to the Internal Revenue Code, as amended. The Company provided a 50% matching contribution up to a maximum contribution for every dollar an employee contributed, up to a maximum contribution per individual of $3,000 for the plan year. Employer contributions of $21,000 were charged to expense in the period ended June 30, 2007. Commencing in 2008, the Company utilizes a professional employer organization which sponsors all benefit plans other than the Company’s equity incentive plan.

8. Risk Concentrations

Aleritas had the following risk concentrations at June 30, 2008:

• The Company maintains cash balances at several banks. Even so, Aleritas had account balances of $15,000 that exceeded the insurance limit of the Federal Deposit Insurance Corporation.

• Approximately 51% of the Company’s loans were to Brooke Capital franchisees. Brooke Capital is the sole collateral preservation provider for these loans.

• Aleritas, through its QSPE subsidiaries, had $141,383,000 in off-balance sheet debt outstanding to Fifth Third Bank, equaling 61% of the total assets then sold through QSPEs. The Company had an additional $ 7,822,000 of on-balance sheet debt outstanding to Fifth Third Bank. Aleritas also sold asset-backed securities totaling $49,747,000 to one financial institution, equaling 22% of the total assets then sold through QSPEs. Aleritas sold participation interests in loans totaling $97,780,000 to two financial institutions, equaling 32.6% of the participation interests then sold.

• Approximately 26%% of the total loans (both on and off-balance sheet) were located in Florida.

• Approximately 13% of the total loans (both on and off-balance sheet) were to Allstate Agents.

• Loans to the five largest obligors comprised 14% of the total loan portfolio excluding related party loans.

9. Transactions with Brooke Corporation

Prior to January 2008, the Company relied on Brooke Corporation to provide facilities, administrative support, cash management and legal services. From time to time, Brooke Corporation may guarantee contractual performance of the Company in the ordinary course of business including certain of the Company’s obligations to DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Fifth Third Bank, and securitization investors. On the First State Bank transaction, Brooke Corporation entered into an agreement with Spirit Bank, one of the participating lenders, which provided Spirit Bank with an option to have its interest swapped with Brooke Corporation.

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The Company made the following loans to Brooke Corporation.

	Loans Made to Brooke Corporation
	Nov-05		Nov-06		Jan-07			Jun-07			Aug-07			Mar-08
Initial loan balance	$	5,000	$	7,500	$	9,500		$	11,500		$	4,000		$	2,000
Balance outstanding at March 31, 2008:
Sold to unaffiliated lenders without recourse	$	—			$	—		$	9,000		$	—		$	—
Retained by BCC or sold with recourse:
Principal	$	—	$	6,346	$	—		$	2,500		$	—		$	2,000
Interest receivable		—		74		—			145						5
Total	$	—	$	6,420	$	—		$	2,645		$	—		$	2,005
Date loan was paid in full		Nov 15, ‘07		—		Jun 07			—			Sep 30, ‘07			—
Interest rate		var - 150bp over Prime		var - 350bp over Prime		10.00	%		10.00	%		12.25	%		3.00	%
Maturity		Nov 15, ‘07		Apr 15, ‘13		Dec 4, ‘07			Mar 15, ‘08			Sep 30, ‘07			May 28, ‘08

All of Brooke Corporation loan has been sold as true sale. Interest received from Brooke Corporation loans, net of participation interest paid, was $168,000 and $276,000 for the six months ended June 30, 2008 and 2007, respectively.

Pursuant to the Servicing and Tax Allocation Agreement for tax years prior to 2006, as discussed in Note 5, the Company paid Brooke Corporation amounts for taxes on pretax earnings which will become due to the respective taxing authorities. Accordingly, Brooke Corporation’s balance sheet reflected a deferred tax liability for these prepaid amounts in future years. Effective January 1, 2007, the Company and Brooke Corporation entered into an agreement that obligates Brooke Corporation to pay back to the Company the deferred tax amounts based upon a pre-determined payment schedule. The pre-determined payment schedule approximates the timing these amounts will be due to the respective taxing authorities. The Company’s balance sheet reflects a deferred tax liability for these amounts until paid to the taxing authorities and a corresponding receivable from Brooke Corporation until such prepaid amounts are recovered. At June 30, 2008, and December 31, 2007, the amount of the receivable from Brooke Corporation and the amount of the deferred tax liability resulting from the above arrangement was $3,384,000 and $4,303,000, respectively.

Effective with the Oakmont merger, Aleritas began filing separate tax returns and paying the taxing authorities directly. See Note 5 for further discussion.

The amounts due to and due from Brooke Corporation were netted, and recorded as a Brooke Corporation receivable or payable, accordingly.

	June 30, 2008			December 31, 2007
Notes and interest receivable	$	20,070		$	18,133
Less: Loans sold without recourse to unaffiliated lenders		(9,000	)		(11,500	)
Net receivable retained by Company		11,070			6,633
Other amounts receivable		3,384			4,303
Other amounts payable to Brooke Corporation		(2,615	)		—
Receivable from Brooke Corporation	$	11,839		$	10,936
Current income tax payable to Brooke Corporation	$	—		$	—

10. Related Party Information

Approximately 51% of the Company’s borrowers are retail insurance agents and agencies that are franchisees of Brooke Capital. These franchisees may have one or more of the following contractual relationships with Brooke Capital or one of its affiliates:

• Franchise Agreement.Pursuant to this agreement, Brooke Capital provides a business model, use of a registered trade name, access to suppliers, and a license for an internet-based management system. In exchange for these services, Brooke Capital charges an initial franchise fee. Brooke Capital also charges an ongoing fee that is generally 15% of the franchisee’s revenues.

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• Office Rent Agreement.Brooke Investment, Inc., a related party to Aleritas, may lease office facilities for its franchisees and will license such facilities to the franchisee for use in the operation of their businesses. In such instances, the franchisee is obligated to pay Brooke Investment rent and other facilities related costs.

• Agreement for Sale of Agency Assets.Pursuant to this agreement, Brooke Capital sells agency assets to a person or entity that has agreed to become a franchisee. The purchase price and terms of such transactions vary depending on the type, size, and location of the business as well as other factors. Although generally such transactions involve the sale of assets, infrequently businesses will be sold through the sale of stock.

• Deferred Payment Agreement.Pursuant to this agreement, Brooke Capital provides commission advances to pay for marketing, training, operational and other expenses, and defers certain amounts owed by the franchisee to Brooke Capital. In exchange, the franchisee agrees to implement a marketing plan, training plan and other plans mutually agreed upon.

Expenditures related to the fees, and the advance of fees, related to collateral preservation agreements and financial guaranty policies with the related companies noted above are detailed below.

	Fees Paid by Aleritas				Payable by Aleritas
	Six Months Ended June 30,				June 30, 2008		December 31, 2007
	2008		2007
Collateral Preservation Agreements:
Brooke Capital Corporation	$	7,950	$	636	$	3,360	$	192
CJD & Associates, LLC		—		337		—		—
Brooke Capital Advisors, Inc.		466		255		680		258
Financial Guaranty Policies:
DB Indemnity		313		408		—		34

In connection with retail insurance agency loans originated, beginning in 2004, the Company entered into Collateral Preservation Agreements with Brooke Capital. Under these agreements, Brooke Capital provides the Company and securitization trusts with collateral preservation services and assistance with loss mitigation of distressed franchise loans.

Commencing in December 2006, in connection with managing general agency loans the Company originated, the Company entered into Collateral Preservation Agreements with Brooke Capital Advisors, Inc., a wholly owned subsidiary of Brooke Capital Corporation, a public company of which Brooke Corporation owned approximately 66% as of June 30, 2008. Under this Agreement, Brooke Capital Advisors, Inc. provides the Company with collateral preservation services and assistance with loss mitigation of distressed managing general agency loans. Brooke Capital Advisors is compensated by upfront and ongoing fees paid by the Company. Brooke Capital Advisors also receives ongoing fees for collateral preservation services they provide for loans sold to Aleritas’ off-balance warehouse facility. In conjunction with loan closings and participation transactions, the Company may purchase financial guaranty policies, which are policies that help protect the participating lenders against credit losses. The policies are purchased through CJD, an indirect managing general agency subsidiary of Brooke Corporation and are issued by DB Indemnity, an indirect captive insurance company subsidiary of Brooke Corporation. Brokerage. At June 30, 2008, and December 31, 2007, the prepaid insurance expense asset for amounts paid for financial guaranty policies purchased was $2,355,000 and $2,725,000, respectively. The amount receivable from DB Indemnity for cancelled policies at June 30, 2008, and December 31, 2007, was $66,000 and $7,000, respectively.

The Company had receivables from Brooke Agency Services Company LLC, a wholly owned subsidiary of Brooke Corporation, for $0 and $984,000 at June 30, 2008, and December 31, 2007, respectively, as a result of the timing of certain securitized loan payments. Brooke Agency Services Company LLC is licensed as an insurance agency and was created to serve as the agent of record for property, casualty, life and health insurance offered by Brooke Capital’s network of franchisees. Brooke Agency Services Company LLC has acquired ownership of franchise agreements from Brooke Corporation and/or Brooke Capital as part of an arrangement to preserve collateral on behalf of the Company, as required by the securitization process. Brooke Agency Services Company LLC has contracted with Brooke Corporation and/or Brooke Capital for performance of any obligations to agents associated with all such franchise agreements.

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Related party notes receivable, interest receivable and total loss exposure associated with the notes receivable consisted of the following:

	June 30, 2008			December 31, 2007
Brooke Corporation.Various notes receivable with interest rates ranging from
3.00% to 10%. Maturities range from March 2008 to April 2013.	$	17,153		$	18,002
Less:Brooke Corporationloans sold		(13,465	)		(15,950	)
Brooke Capital Corporation.Single note receivable with an interest rate of 8.75% and a maturity of September 2015.		383			1,022
Less: Brooke Capital Corporation loans sold		(386	)		(1,022	)
Brooke Investments, Inc.Various notes receivable with interest rates ranging from 8.75% to 9.25%. Maturities range from October 2011 to January 2021.		1,806			1,891
Less:Brooke Investments, Inc.loans sold		(1,679	)		(1,602	)
CJD & Associates, LLC.Single note receivable with an interest rate of 8.75% and a maturity of November 2010.		1,027			1,213
Less:CJD & Associates, LLCloans sold		(1,057	)		(1,212	)
Plus: Related party loan participations not classified as a true sale		5,341			5,214
Total related party notes receivable, net		9,123			7,556
Interest earned not collected on related party notes *		94			194
Total related party notes and interest receivable, net	$	9,217		$	7,750

* The Company has a corresponding liability for interest payable to participating lenders of related party notes in the amounts of $33,000 and $65,000 at June 30, 2008, and December 31, 2007, respectively.

The Company received total interest of $1,136,000 and $1,207,000, for the six months ended June 30, 2008 and 2007, respectively, from related party notes receivable listed in the above table, of which $462,000 and $715,000, respectively, was paid to participating lenders.

The Company has not sold any loans made to related parties that resulted in gain on sale of notes receivables at June 30, 2008. The Company has sold loans made to related parties that have decreased the gain on sale of notes receivable by $28,000 and $3,000 at June 30, 2008 and June 30, 2007 respectively.

Loan participations purchased by related parties and the corresponding interest payable consisted of the following:

	June 30, 2008		December 31, 2007
The DB Group, Ltd.Various loan participations with interest rates ranging from
8.5% to 11%. Maturities range from December 2008 to March 2016.	$	1,424	$	1,438
DB Indemnity, Ltd.Various loan participations with interest rates ranging from
11.25% to 11.50%. Maturities range from January 2009 to January 2022.		5,772		5,904
Total related party loan participations		7,196		7,342
Interest payable to related party loan participations		—		72
Total related party loan participations and interest payable	$	7,196	$	7,414

The Company paid $18,000 and $186,000 to related party participating lenders for participating interest for the six months ended June 30, 2008 and 2007, respectively.

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Until March 2008, Aleritas maintained an unrestricted cash bank account with Brooke Savings Bank, a wholly owned subsidiary of Brooke Bancshares which is privately held by Brooke Corporation. The bank balance was $1,060,000 as of December 31, 2007.

Robert Orr, Chairman of the Board and Chief Financial Officer owns a controlling interest in Brooke Holdings, Inc. which owned 43.7% of Brooke Corporations common stock at June 30, 2008. Robert Orr is also Chairman of Brooke Corporation which owned 62% of the Company at June 30, 2008

In January 2008, the Company entered into a Business Development and Finders Fee Agreement with Quantum Ventures of Michigan, LLC (“QVM”). This agreement was approved by the Company’s directors and Governance Committee and then subsequently by the full Board of Directors (except that all related parties were excused from voting). One of the principals of QVM is Michael C. Azar, a director of the Company until his resignation on April 1, 2008, and the former President of Oakmont Acquisition Corp., which merged with Brooke Credit Corporation of Kansas on July 18, 2007. This agreement was mutually terminated in the second quarter.

11. Intangible Assets

There were no intangible assets with indefinite useful lives at June 30, 2008, and December 31, 2007. The intangible assets with definite useful lives follow:

	Intangible Assets				Amortization Expense Six Months Ended June 30,
	June 30,		December 31,
	2008		2007		2008		2007
Servicing asset	$	5,257	$	6,084
Contract database and capitalized software costs		233		187
Total	$	5,490	$	6,271	$	711	$	293

Amortization expense for intangible assets for the twelve months ended June 30, 2009, 2010, 2011, 2012 and 2013 is estimated to be $1,218,000, $1,139,000, $947,000, $771,000 and $610,000, respectively.

12. Fair Value Assets and Liabilities

The Company measures certain assets at fair value in accordance with FAS No. 157“Fair Value Measurements”. The table below summarizes all assets measured at fair value on a recurring basis at June 30, 2008. No significant unobservable inputs were used to measure these assets. In addition, the Company did not apply fair value treatment as allowed under FAS No. 159“The Fair Value Option for Financial Assets and Financial Liabilities” for any of its liabilities at June 30, 2008.

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			June 30, 2008
	Fair Value at 3/31/08		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Notes and interest receivable, net		163,262				163,262
Securities available for sale		9,776				9,776
Total Assets	$	173,038	$	—	$	173,038	$	—

See note 3 for discussion regarding valuation methodology for these assets.

13. Foreign Currency Translation

In March 2005, the Company formed a New Brunswick, Canada subsidiary, Brooke Canada Funding, Inc. Until February 2006, the subsidiary conducted limited operations and did not own any assets. During February 2006, a $10,000,000(Canadian dollars) line of credit was established with the Canadian Branch of Fifth Third Bank, as disclosed in Note 4. The current operation of Brooke Canada Funding, Inc. consists of the funding of loans in Canada for the Company. The financial position and results of operations of the Canadian subsidiary are determined using local currency, Canadian dollars, as the functional currency. Assets and liabilities of the subsidiary are translated at the exchange rate in effect at each period end. Income statement accounts are translated at the weighted average rate of exchange during the period. Translation adjustments arising from the use of different exchange rates from period to period are included in the cumulative translation adjustment included in accumulated other comprehensive income within shareholders’ equity as detailed below.

	Six Months Ended June 30, 2008
Gross translation adjustment	$	(81	)
Deferred taxes on the above		31
Net impact on accumulated other comprehensive income	$	(50	)

14. Recently Issued Accounting Standards

In August 2005, the Financial Accounting Standards Board (“FASB”) issued an exposure draft which amends Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This exposure draft seeks to clarify the derecognition requirements for financial assets and the initial measurement of interests related to transferred financial assets that are held by a transferor. The Company’s off-balance sheet transactions could be required to be reported consistent with the provisions of the exposure draft. Aleritas will continue to monitor the status of the exposure draft and consider what changes, if any, could be made to the structure of the securitizations and off-balance sheet financings to continue to exclude loans transferred to these QSPEs.

In April 2008 the Financial Accounting Standards Board (“FASB”) decided to remove the qualifying special-purpose entity concept from Statement of Financial Accounting Standards No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”and simultaneously remove the QSPE exception from consolidation in FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”. FASB also decided to amend Paragraph 9(a) to explicitly require preparers assessing legal isolation to consider all involvements with the transferred asset by entities within the consolidated group; and Paragraph 9(c) to prohibit sale accounting if the transferor has imposed a constraint on the transferee. The primary potential consequences of the tentative decision are that transferors would have to evaluate whether to consolidate any entity to which the assets are “sold” if the transferor retains an economic interest in the transferred assets, and that transfers would not be accounted for as sales if the transferor imposes a constraint on the transferee under any circumstances. An exposure draft of proposed requirements is planned by the end of June 2008, and a final Statement is planned to be effective for periods beginning after December 15, 2008. Aleritas will monitor the status of the exposure draft and consider what changes, if any, could be make to the

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structure of the securitizations and off-balance sheet financings to continue to exclude loans transferred to these QSPE’s. At June 30, 2008, the QSPE’s held loans totaling $298,979,000 which could be required to be shown on the financial statements depending on the outcome of the exposure draft.

On February 20, 2008, the FASB issued Staff Position (FSP) 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions”, (“FSP 140-3”). The FSP focuses on the circumstances that would permit a transferor and a transferee to separately evaluate the accounting for a transfer of a financial asset and a repurchase financing under SFAS 140. The FSP states that a transfer of a financial asset and a repurchase agreement involving the transferred financial asset should be considered part of the same arrangement when the counterparties to the two transactions are the same unless certain criteria are met. The criteria in the FSP are intended to identify whether (1) there is a valid and distinct business or economic purpose for entering separately into the two transactions and (2) the repurchase financing does not result in the initial transferor regaining control over the previously transferred financial assets. Its purpose is to limit diversity of practice in accounting for these situations, resulting in more consistent financial reporting. Consequently, it is the FASB’s desire to have the FSP effective as soon as practicable. This FSP would be effective for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. Early application is not permitted. The Company is in the process of evaluating the impact of the position on its financial statements.

14. Subsequent Events

Effective August 1, 2008 Lindsay Olsen and Barbara Davison both resigned from the Board of Directors, and all committees, of the company.

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

Data in tables is in thousands, except per share data and the number of loans and obligors.

Forward-Looking Information

Aleritas cautions that this report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and is subject to the safe harbor created by that Act. Among other things, these statements relate to financial condition, results of operations and business. These forward-looking statements are generally identified by the words or phrases “will,” “will allow,” “will continue,” “would,” “would be,” “expect,” “expect to,” “intend,” “intend to,” “anticipate,” “is anticipated,” “foresee,” “estimate,” “plan,” “may,” “believe,” “implement,” “build,” “project” or similar expressions and references to strategies or plans. While the Company provides forward-looking statements to assist in the understanding of its anticipated future financial performance, readers are cautioned not to place undue reliance on any forward-looking statements, which

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speak only as of the date that they are made. Forward-looking statements are subject to significant risks and uncertainties, many of which are beyond Aleritas’ control. Although the Company believes that the assumptions underlying its forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate. Actual results may differ materially from those contained in or implied by these forward-looking statements for a variety of reasons. These risks and uncertainties include, but are not limited to:

• A significant part of Aleritas’ business strategy involves originating new loans, and the failure to grow may adversely affect its business, prospects, results of operations and financial condition.

• The Company’s borrowers’ financial performance may adversely affect their ability to repay amounts due to us.

• Aleritas’ financial condition could be adversely affected if it is unable to fund its loans through sales to third parties.

• Aleritas may not be able to secure the lines of credit and additional sources of funding necessary to accommodate its growth.

• The Company makes certain assumptions regarding the profitability of its securitizations, loan participations, warehouse lines of credit and other funding vehicles which may not prove to be accurate.

• The value of the collateral securing Aleritas’ loans may be adversely affected by its borrowers’ actions.

• The value of the collateral securing and the overall quality of Aleritas’ loans may be adversely affected by actions of Collateral Preservation Providers contracted to assist in providing specialized servicing associated with loans originated by Aleritas.

• Potential litigation and regulatory proceedings could materially adversely affect the Company’s financial condition.

• Aleritas may be required to repurchase loans sold with recourse or make payments on guarantees.

• The Company is dependent on key personnel.

• Efforts to comply with the Sarbanes-Oxley Act may entail significant expenditures; while non-compliance with the Sarbanes-Oxley Act may adversely affect the Company.

• The Company may not be able to accurately report its financial results or prevent fraud if it fails to maintain an effective system of internal controls.

• The Company’s reserves for credit losses may not be adequate.

• The Company has significant liabilities maturing during future months and uncertainties in the current economic environment may adversely affect the Company’s ability to repay, renew or extend those liabilities.

• The Company’s collateral values may deteriorate if Brooke Capital Corporation is not able to assist with management and liquidation of troubled insurance agencies.

• The Company may be adversely affected if DB Indemnity is not able to pay claims made on financial guaranty policies issued to the company.

• The company will be adversely affected if it is unable to resolve potential breaches of its agreements with Fifth Third Bank, First State Bank, DZ Bank and Textron.

• Changes in economic, political and regulatory environments, governmental policies, laws and regulations, including changes in accounting policies and standards and taxation requirements (such as new tax laws and new or revised tax law interpretations) could materially adversely affect operations and financial condition.

The Company expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views or expectations, or otherwise. The Company makes no prediction or statement about the market performance of its shares of common stock.

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General

Aleritas is a specialty finance company that lends primarily to locally-owned businesses that sell insurance. The Company’s target market consists of retail insurance agencies, and managing general agencies, where the sale of insurance is their primary business. In addition, Aleritas loans money to funeral home owners, where the sale of insurance is often an important, although not primary, part of their business.

Aleritas is focused on lending to small “main street businesses” across America, primarily in insurance-related industries which have historically been underserved by traditional lenders. The Company lends to four primary types of borrowers:

• Retail insurance agents and agencies that are franchisees of Brooke Capital Corporation (“Brooke Capital”), an affiliated company.

• Retail insurance agents and agencies that are not franchisees of Brooke Capital. This lending program primarily includes loans made to captive retail insurance agents and agencies.

• Managing general agencies, in which the sale of insurance is their primary business.

• Independent funeral home owners, in which the sale of insurance is not their primary business but often an important part of their business (the sale of pre-need life insurance).

Loan balances (excluding related party loans) in which Aleritas has retained interest and/or servicing rights follow:

							Average Loan Size
	June 30, 2008			December 31, 2007			June 30, 2008		December 31, 2007
Loan portfolio composition:
On-balance sheet loans	$	169,967		$	136,298
Off-balance sheet loans		515,650			541,948
Total	$	685,617		$	678,246
Loans(number and average loan size)		1,272			1,313		$	539	$	517
Obligors(number and average loan size)		865			843			793		805
Weighted average seasoning(months)		20			16
Weighted average months to maturity		122			125
Variable loan portfolio’s average index over prime		3.77	%		3.78	%

On-balance sheet loans consist of (1) those loans held in inventory on the balance sheet, (2) those loans sold to participating lenders that do not qualify as true sales pursuant to the criteria established by SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”), and (3) those loans sold to warehouse entities that do not qualify as true sales pursuant to the criteria established by SFAS 140. Off-balance sheet loans consist of (1) those loans sold to participating lenders that qualify as true sales pursuant to the criteria established by SFAS 140, and (2) those loans sold to qualifying special-purpose entities that qualify for a true sale pursuant to the criteria established by SFAS 140. All loan balances described above and portfolio statistics described below in this section exclude related party loans.

A majority of the loans are variable rate loans based on the New York Prime rate (“Prime”) as published in the Wall Street Journal. However, there are fixed rates on 0.9% of the portfolio. Typically the interest rate adjusts daily based on Prime; however, an immaterial amount of the loans adjust monthly and annually.

The Company attempts to mitigate credit risk by retaining industry consultants and franchisors (“Collateral Preservation Providers”) to provide certain collateral preservation services, including assistance in the upfront analysis of a credit application, assistance with due diligence activities, assisting in ongoing surveillance of a borrower’s business and providing certain loss mitigation activities associated with distressed loans. Loss mitigation activities typically include marketing support, operational

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support, management services, rehabilitation services, and liquidation services. For these collateral preservation services, Aleritas shares a portion of the loan fee and interest income received on loan balances over the life of the loans and, in some instances, may be entitled to additional compensation and expense reimbursement, in excess of sharing in loan fees and interest income.

Results of Operations

In recent years, results of operations have been significantly impacted by the growth of the portfolio, the expansion of loan funding sources, the development of a securitization model and the expansion of lending programs. Results of operations for the most recent quarter have been impacted by the tightening credit market which has led to significantly lower loan origination and higher funding costs. Results have also been impacted by significantly higher collateral preservation expenses. The following table shows income and expenses and their related percentage changes.

	Three Months Ended June 30,						Percent Increase (Decrease)		Six Months Ended June 30,						Percent Increase (Decrease)
	2008			2007					2008			2007
Operating Revenues
Interest income	$	20,008		$	13,005		54	%	$	26,646		$	20,432		30	%
Participating interest expense		(14,481	)		(7,634	)	90	%		(14,481	)		(7,634	)	90	%
Expense as a percent of income		72	%		59	%				54	%		37	%
Credit loss		(2,359	)		(148	)	1493	%		(14,896	)		(819	)	1719	%
Net interest income after credit loss		3,168			5,223		-39	%		(2,731	)		11,979		-123	%
Impairment Losses		—			—		—
Gain (loss) on sale of notes receivable, r		(1,730	)		4,282		-140	%		(1,657	)		11,203		-115	%
Other income		93			181		-49	%		240			349		-31	%
Total Operating Revenues		1,531			9,686		-84	%		(4,148	)		23,531		-118	%
Operating Expenses
Operating interest		652			368		77	%		1,414			2,033		-30	%
Compensation		(819	)		622		-232	%		705			1,124		-37	%
Depreciation and amortization		353			283		25	%		763			576		32	%
Collateral preservation		(3,232	)		828		-490	%		2,423			1,646		47	%
Other general and administrative		1,797			441		308	%		4,361			1,388		214	%
Total Operating Expenses		(1,249	)		2,542		-149	%		9,666			6,767		43	%
Income (Loss) from Operations		2,780			7,144		-61	%		(13,814	)		16,764		-182	%
Extinguishment of debt		—			—		—			8,210			—		—
Interest expense		915			1,470		-38	%		2,486			3,140		-21	%
Income (Loss) before Income Taxe		1,865			5,675		-67	%		(24,510	)		13,624		-280	%
Income tax expense (benefit)		708			2,156		-67	%		(13,784	)		5,177		-366	%
Net Income (Loss)	$	1,157		$	3,518		-67	%	$	(10,726	)	$	8,447		-227	%
Basic earnings per share	$	0.04		$	0.19		-79	%	$	(0.83	)	$	0.19		-537	%
Diluted earnings per share		0.04			0.19		-79	%		(0.83	)		0.19		-537	%

Interest Income

The Company typically sells most of the loans originated to funding institutions as loan participations and to qualifying special purpose entities (“QSPEs”) in which the loans are used to issue asset-backed securities and secure off-balance sheet bank debt. Prior to either type of sale transaction, these loans are typically held on the Company’s balance sheet and earn interest income during that time. After the loans are sold, interest income continues to be earned from the retained residual assets in these off-balance sheet loans. Net interest income, excluding credit losses provisions, for the six months ended June 30, 2008 was virtually unchanged from the same period in the previous.

Participating Interest Expense

A portion of the interest income that is received on loans is paid out to the purchasers of its loans, such as participating lenders and QSPEs. Payments to these holders are accounted for as participating interest expense, which is netted against interest income in

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the consolidated statements of operations. Participating interest expense increased primarily as a result of the increase in loans sold to participating lenders and QSPEs. Participation interest expense represented 72% and 59% of interest income for the three months ended June 30, 2008 and 2007, respectively.

Credit Loss

A loan loss reserve was established during the third quarter of 2007 and was increased by $14,896,000 during the six month period ended June 30, 2008. The significant increase in the loan loss reserve has resulted primarily because the Company believes that liquidation of troubled loans is less expensive that the associated collateral preservation expenses. The increase in loan loss reserves is also the result of increasing delinquencies in loan balances held on the Company’s balance sheet. Primarily as a result of market conditions, Brooke Capital recently suspended a previously announced reduction in ongoing franchise fees, have reduced its staff un-related to basic services provided to franchisees and have terminated its commission advance program to franchisees. Management will continue to evaluate the adequacy of the reserve on an ongoing basis in the future utilizing the credit metrics underlying the reserve and input from its collateral preservation providers.

Gain on Sale of Notes Receivable

When the sale of a loan is classified as a true sale pursuant to the criteria established by SFAS 140, gains or losses are recognized, loans are removed from the balance sheet and residual assets, such as securities, interest-only strip receivables and servicing assets, are recorded. For residual assets resulting from loan participations, accounted for as a true sale, servicing assets and interest-only strip receivables are typically recorded. For residual assets resulting from loans sold to QSPEs, accounted for as a true sale, securities are typically recorded consisting primarily of three types; interest-only strip receivables in loans sold, retained over-collateralization in interests in loans sold and cash reserves. Revenues from gain on sales of notes receivable decreased significantly in 2008 primarily because difficult credit market conditions has limited loan sales.

Aleritas estimates the value of interest-only strip receivables, servicing assets and interest-only strip receivables portion of securities balances by calculating the present value of the expected future cash flows from the interest and servicing spread, reduced by an estimate of credit losses and note receivable prepayments. The interest and servicing spread is the difference between the rate on the loans sold and the rate paid to participating lenders or the rate paid to investors and lenders to QSPEs. Over time, as cash is received from the payment of interest and servicing income, the value of the residual asset is reduced by writing down the interest asset and amortizing the servicing assets.

When the sale of a loan is not classified as a true sale pursuant to the criteria established by SFAS 140, the sale is classified as a secured borrowing, no gain on sale is recognized, and the note receivable and the corresponding payable remain on the balance sheet under a participation agreement.

In a true sale, the gain on sale of notes receivable consists of the gain associated with the ongoing servicing responsibilities and gains associated with interest income received.

When the Company sells loans to participating lenders that qualify as true sales under SFAS 140, a gain on sale is recognized when the notes receivable are sold. When the Company sells notes receivable to participating lenders, it typically retains interest and servicing rights. The component of the gain on sale of notes receivable to participating lenders is the gain on sale Aleritas records associated with the interest-only strip receivable and servicing assets, net of direct expenses, as described below. Unlike loans sold to QSPEs, the Company is the primary servicer of loans sold to participating lenders and as such servicing assets and liabilities are recorded.

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The gain on sale of notes receivable has three components as detailed below.

	Six Months Ended June 30,
	2008			2007
Net gain from securitizations	$	(153	)	$	8,442
Net gain (loss) from true sale loan participations:
Interest-only strip receivable benefit (loss)		(642	)		1,606
Net gain (loss) from loan servicing		(82	)		1,538
Subtotal		(877	)		11,586
Losses from related party loan sales		(28	)		(3	)
Gain on sale of notes receivable		(905	)		11,583
Less: Securitization fee expense		(752	)		(380	)
Gain on sale of notes receivable, net	$	(1,657	)	$	11,203

The first component of the gain on sale of notes receivable is the gain on sale recorded associated with the over collateralization benefit based on a present value calculation of future expected cash flows from the retained portion of loans sold, net of prepayment and credit loss assumptions. Fluctuations in these gains, year-to-year, reflected the changing volume of loans sold to QSPEs. In addition, the spread for loans sold to QSPEs decreased from 4.13% in 2007 to 3.33% in 2008.

The second component of the gain on sale of notes receivable is the gain on sale recorded associated with the interest-only strip receivable benefit based on a present value calculation of future expected cash flows of the interest spread on the underlying participation loans sold, net of prepayment and credit loss assumptions. The spread associated with loan participations was approximately 2.08% in 2007 and 2008. However, due to tightening of credit markets, higher rates relative to the benchmark were required to be paid to the participating lenders. The spread percentages above exclude the spread associated with related party loans sold.

The third component of the gain on sale of notes receivable is the gain associated with the ongoing servicing responsibilities. When loan participation is accounted for as a true sale, servicing responsibilities are retained for which Aleritas typically receives annual servicing fees ranging from 0.25% to 1.375% of the outstanding balance. A gain or loss is recognized immediately upon the sale of a loan participation based on whether the annual servicing fees are greater or less than the cost of servicing, which is estimated at 0.25% of the outstanding loan balance. The gain or loss associated with loan servicing is determined based on a present value calculation of future cash flows from servicing the underlying loans, net of servicing expenses and prepayment assumptions. The increase in net gains from loan servicing benefits for both 2007 and 2006 was primarily the result of more loans sold as true sale loan participations as a result of the growth of the loan portfolio. Additionally, the loan servicing fee was increased by .125% at the beginning of 2006.

When the Company sells loans to QSPEs that qualify as true sales under SFAS 140, a gain on sale is recognized when the notes receivable are sold. When the Company sells notes receivable to QSPEs, it typically retains interest rights. The component of the gain on sale of notes receivable to QSPEs is the gain on sale recorded associated with the interest-only strip receivable and retained interest benefit, net of direct expenses. Unlike participation sales, in loans sold to QSPEs an unaffiliated third party is the servicer and Aleritas is a secondary or sub-servicer. As such, no servicing asset or liability is recorded.

When the Company sells its loans to QSPEs in connection with securitizations, the net proceeds have historically approximated 75% to 85% of the loan balances sold to the special purpose entity. Unlike participation sales, in securitizations an unaffiliated third party is the servicer and Aleritas is a secondary or sub-servicer. No servicing asset or liability is recorded. The remaining amount is the retained interest (the over collateralization that is provided to enhance the credit of the asset-backed securities) or the interest-only strip receivable. The initial amount of this retained interest has historically ranged from 15% to 25% of the loan balances sold, with the calculation varying depending on such factors as the type of loans being securitized (e.g. retail insurance agency—franchise, retail insurance agency—non franchise and funeral home), the relative size of principal balances of individual loans, state concentrations, borrower concentrations and portfolio seasoning. For example, in Aleritas’ securitization that closed in July 2006, loans with balances totaling $65,433,000 were sold to a QSPE. Net proceeds of $52,346,000 were received by Aleritas. With respect to

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loans sold as participations, the net proceeds received are generally 100% of the principal balance of the loans sold. In the event that Aleritas chooses to sell less than an entire loan to a participating lender, the net proceeds are generally 100% of the principal balance associated with the portion of the loan sold. Although when loans are sold pursuant to a true sale they are removed from the balance sheet, the fair value of the interest only strip receivable retained, the fair value of the difference between loans sold and securities issued to an investor (in the case of a securitization) and the fair value of cash reserves are recorded as the cash value of the reserve account.

Gains from servicing and interest benefits are typically non-cash gains as cash is received equal to the carrying value of the loans sold. A corresponding adjustment has been made on the Statement of Cash Flows to reconcile net income to net cash flows from operating activities. Gain-on-sale accounting requires Aleritas to make assumptions regarding prepayment speeds and credit losses for loans sold which qualify as true sales pursuant to the criteria established by SFAS 140. The performances of these loans are monitored, and adjustments to these assumptions will be made if necessary. Underlying assumptions used in the initial determination of future cash flows on the participation loans and loans sold to QSPEs accounted for as sales include the following:

	Business Loans
	Fixed & Adjustable Rate Strata
Prepayment speed(annual rate)	12	%
Weighted average life(in months)	120
Expected credit losses(annual rate)	0.5	%
Discount rate(annual)	11	%

During the fourth quarter of 2007, the prepayment speed assumption was changed from 10.00% to 12.00%. Several factors were considered when determining the discount rate. As a starting point for analyzing this assumption, a range of the risk-free rate was used to determine a base discount rate. This base discount rate was then adjusted for various risk characteristics associated with the sold loans.

The most significant impact from the loans sold has been the removal of loans from the Company’s balance sheet that Aleritas continues to service. The balances of those off-balance sheet assets totaled:

	June 30, 2008			December 31, 2007
Off-balance sheet unaffiliated loans	$	515,650		$	541,948
Percent of the portfolio		76	%		80	%
Related party loans off-balance sheet		9,371			14,572

The decreased level of off-balance sheet assets in 2007 was primarily the result of fewer loan originations during 2008 which were sold to off-balance sheet entities as compared to the same period in 2007 and also the reduction in existing loan balances sold to off-balance sheet entities resulting from regular principal payment reductions, prepayments and loan liquidations which have occurred in 2008.

Loan Servicing Assets and Liabilities

When the Company recognizes non-cash gains for the servicing benefits of loan participation sales, the amount is recorded as a loan servicing asset on the balance sheet. This amount is equal to an estimate of the present value of future cash flows resulting from the servicing spread. The Company recognizes such assets only when the income allocated to its servicing responsibilities exceeds its cost of servicing, which is typically estimated at 0.25% of the loan value being serviced which represents the adequate compensation as determined by the market rates paid third parties to service loans sold to QSPEs. Components of the servicing asset follow:

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	June 30, 2008
Estimated cash flows from loan servicing fees	$	8,212
Less:
Servicing expense		(1,451	)
Discount to present value		(1,535	)
Carrying value of retained servicing interest in loan participations	$	5,226
Servicing asset attributable to related party loans excluded above	$	31

In connection with the recognition of non-cash losses for the servicing liabilities of loan participation sales, the present value of future cash flows was recorded as a servicing liability. Components of the servicing liability follow:

	June 30, 2008
Estimated cash flows from loan servicing fees	$	—
Less:
Servicing expense		49
Discount to present value		(35	)
Carrying value of retained servicing liability in loan participations	$	12
Servicing liability attributable to related party loans excluded above	$	19

Loan Participations - Interest-Only Strip Receivable Asset

To the extent that the difference between the rate paid to participating lenders and the rate received from borrowers exceeds the maximum of 1.375% allocated to the servicing benefit, a non-cash asset is recognized, called an “Interest-only strip receivable asset,” on the balance sheet. This amount is equal to an estimate of the present value of expected future cash flows resulting from this interest spread, net of credit loss (to the extent loans are sold to participating lenders with recourse to Aleritas) and prepayment assumptions. Components of the interest receivable asset follow:

	June 30, 2008
Estimated cash flows from interest income	$	11,163
Less:
Estimated credit losses		—
Discount to present value		(4,091	)
Carrying value of retained interest in loan participations	$	7,072
Interest on related party loans excluded above	$	14

Securitizations - Interest-Only Strip Receivable Asset

The terms of the securitizations and off-balance sheet bank debt require the over-collateralization of the pool of loan assets that back the securities issued and off-balance sheet debt secured. The Company retains ownership of the over-collateralization interest in loans sold, which is included in its securities balances, and have historically borrowed money from commercial banks to fund this investment. The fair value of the over-collateralization interest in the loans sold to QSPEs that have issued asset-backed securities has been estimated at the par value of the underlying loans less the asset-backed securities sold. The fair value of the over-collateralization interest in the loans sold to QSPEs that have secured bank debt is based on the present value of future expected cash flows using management’s best estimates of key assumptions, credit losses (0.50% annually), prepayment speed (12.00% annually) and discount rate (11.00%) commensurate with risks involved. The fair value of the cash reserves has been estimated at the cash value of the reserve account.

Additionally, Aleritas recognizes a non-cash gain from subordinate interest spread in the loans sold, in which the Company recognizes an interest-only strip receivable included within its securities balance. The amount of gain or loss recorded on the sale of notes receivable to QSPEs depends in part of the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the assets retained based on their relative fair value at the date of transfer. To initially obtain fair value of

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retained interest-only strip receivable resulting from the sale of notes receivable to QSPEs, quoted market prices are used, if available. However, quotes are generally not available for such retained residual assets. Therefore, a fair value is typically estimated for these assets. The fair value of the interest-only strip receivables retained is best on the present value of future expected cash flows using managements best estimate of key assumptions, credit losses (0.50% annually), prepayment speed (12.00% annually) and discount rate (11.00%) commensurate with the risks involved.

Although Aleritas does not provide recourse on the transferred notes and is not obligated to repay amounts due to investors and creditors of the QSPEs, the retained interest assets are subject to loss, in part or in full, in the event credit losses exceed initial and ongoing management assumptions used in the fair market value calculation. Additionally, a partial loss of retained assets could occur in the event actual prepayments exceed management’s initial and ongoing assumptions used in the fair market calculation.

The carrying values of securities, resulting from loan sale activities to QSPEs, follow:

	June 30, 2008		December 31, 2007
Interest-only strip receivables	$	26,619	$	28,144
Retained over-collateralization interest in loans sold		41,710		58,769
Cash reserves		850		850
Securities resulting from sales to QSPEs	$	69,179	$	87,763

Components of the interest receivable portion of securities follow:

	June 30, 2008
Estimated cash flows from interest income	$	38,498
Less:
Estimated credit losses		(5,154	)
Discount to present value		(6,725	)
Carrying value of interest receivable portion of securities	$	26,619

Compensation Expense

The significant decrease in compensation expense for the six months ended June 30, 2008, was primarily due to a decrease of restricted stock of $1,461,000 in the second quarter due to the expiration of previously granted stock based compensation prior to vesting. Compensation expense was lower due to staff reductions subsequent to the end of the first quarter.

Collateral Preservation Expense

Collateral preservation expense includes up-front, ongoing and special fees paid to collateral preservation providers to provide sourcing and underwriting assistance and ongoing loan monitoring and loss mitigation services. This expense decreased significantly for the six months ended June 30, 2008 because many of the fees paid by the Company to collateral preservation consultants during the first quarter of 2008 were billed to securitization trusts in the second quarter of 2008 as provided in the corresponding securitization trust documents.

Other General and Administrative Expenses

The increase in these expenses for the three months ended June 30, 2008, was primarily due to a decrease of loan origination fees which typically offset certain operating expenses.

Interest Expense

Interest expense decreased due to the refinancing of the private placement debt offering in the first quarter of 2008 with lower cost debt.

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Income Tax Expense

Income tax expenses, effective tax rates and tax liabilities are detailed below.

	Six Months Ended June 30,
	2008			2007
Income tax expense (benefit)	$	(13,784	)	$	5,177
Effective tax rate		38	%		38	%
	June 30, 2008			December 31, 2007
Current income tax liabilities	$	—		$	2,549
Deferred income tax liabilities (asset), net		(2,148	)		10,910

The Company historically filed a consolidated federal income tax return with Brooke Corporation. Effective with the Oakmont merger on July 18, 2007, the Company began filing separate tax returns which caused the effective tax rate to increase. Amounts that are deferred for tax purposes are deferred on Aleritas’ balance sheet as deferred income tax payables. In addition, Aleritas records amounts due to taxing authorities in future years for those amounts previously paid to Brooke Corporation; a corresponding receivable from Brooke Corporation is recorded. As a result, a significant deferred tax liability was recorded during 2006 for these amounts.

Balance Sheet

The following table provides selected assets and liabilities and their related percentage changes.

	June 30, 2008			December 31, 2007		Percent Increase (Decrease)
Notes and interest receivable	$	163,262		$	142,467	15	%
Securities		69,179			87,763	-21	%
Interest-only strip receivable		7,086			7,771	-9	%
Deferred charges		2,142			5,199	-59	%
Receivable from Brooke Corporation		11,839			10,936	8	%
Accounts payable		23,110			8,853	160	%
Payable under participation agreements		70,470			47,360	49	%
Deferred income tax liability (asset), net		(2,148	)		10,910	-96	%
Short-term debt		52,239			27,569	89	%
Long-term debt		46,213			53,123	-13	%

Securities

The securities balance primarily consists of two types of securities, interest-only strip receivables in QSPEs, retained over-collateralization interests in QSPEs that have purchased loans from the Company, and cash reserves. The terms of the securitizations and off-balance sheet bank debt require the over-collateralization of the pool of loan assets that back the securities and off-balance sheet debt secured. Aleritas retains ownership in the QSPEs, which is included in its securities balances. As cash is received for the interest-only strip receivable as well as the principal attributable to the over-collateralization retained interest, the securities balance declines. As of June 30, 2008, securities balances decreased primarily due to a $11,763,000 impairment recorded at June 30, 2008 related to expected losses on loans held by QSPE’s.

Accounts Payable

Accounts payable include ordinary accrued expenses and amounts due to the securitization entities, warehouse facilities and participating banks. Accounts payable increased significantly in 2008 primarily as a result of a delay in making loan payments and loan payoffs to the above mentioned entities. Approximately $3 million of the accounts payable relate to loan payments received by the Company which are pending delivery to securitization entities, warehouse facilities and participating lenders. Resolution of these amounts are expected to result from repayment of advances, made on behalf of securitization entities, warehouse facilities and participating lenders to Brooke Capital and other Collateral Preservation Providers in connection with management and liquidation of loans held by these entities. In most cases, the amount of the advances made on behalf of these entities exceeds the accounts payable amount. Progress has been made in reducing the payables balance after the end of the quarter.

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Payables under Participation Agreements

Payables under Participation agreements is the amount owed to funding institutions that have purchased participating interests in loans pursuant to transactions that do not meet the true sale test of SFAS 140. Payables under Participation agreements increased in the second quarter of 2008, because the Company sold more loans pursuant to transactions that did not qualify as true sale participations. Most of the maturity dates associated with these Payables under Participation Agreements are within 12 months, some of which are less than 30 days. Aleritas has historically utilized the issuance of Payable under Participation Agreements as a component of its capital structure. This type of funding involves a higher degree of risk, as the Company is typically funding long-term assets with short-term liabilities.

Debt

During the first six months of 2008, short-term debt increased significantly as the result of refinancing a subordinate debt lender and as the result of deteriorating credit markets making the sale of loans more difficult.

Deferred Income Tax Liability (Asset) Net

The increase in the deferred income tax asset primarily resulted from the significant impairment expense and increase in loan loss reserves that incurred during the first six months of 2008.

Loan Quality

Credit losses incurred on the loan portfolio follow:

		Six Months Ended June 30,
		2008			2007
Credit losses on all loans		$	14,896		$	819
Summary of Credit Losses:
Retail insurance agencies -	franchise	$	1,504		$	—
	non-franchise
Managing general agencies
Funeral homes
Related parties
Total credit losses		$	1,504		$	—
Credit Loss Analysis:
On-balance sheet loans:
Loans charged off, net of recoveries		$	91		$	3
Increase in the loan loss reserve			14,896			—
Total credit losses - on-balance sheet loans		$	14,987		$	3
Percent of on-balance sheet loans			8.8	%		0.0	%
Off-balance sheet loans:
Credit losses incurred - warehouse facility*		$	—		$	—
	participations		318			—
	securitizations		1,096			668
Total credit losses - off-balance sheet loans		$	1,414		$	668
Annualized percent of off-balance sheet loans			0.5	%		0.3	%

* Net credit losses for loans in the off-balance sheet warehouse facility are accounted for through the valuation of the retained securities rather than charged to credit loss expense.

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Credit losses increased significantly in 2008 primarily because the Company believes that liquidation of troubled loans is less expensive than payment of collateral preservation expenses to assist troubled borrowers. The increase in loan loss reserves is also the result of increasing delinquencies in loan balances held on the Company’s balance sheet.

Loan balances delinquent 60 days or more are detailed below.

	June 30, 2008				December 31, 2007
	Amount		Percent of Loans		Amount		Percent of Loans
On-balance sheet loans	$	24,113			$	13,301
Off-balance sheet loans - warehouse facility		—				—
participations		13,673				7,343
securitizations		1,852				1,898
Total loan balances delinquent 60 days or more	$	39,638	5.8	%	$	22,542	3.3	%
Percent of delinquent loans associated with:
Retail agency loans - franchise			77	%			91	%
non-franchise			0	%			0	%
Independent funeral home owners			13	%			9	%
Managing general agencies			0	%			0	%
Other			10	%
Delinquent loans to related entities	$	—			$	—	0	%

Loans to start-up franchisees of Brooke Capital mostly represent franchisees that did not meet the required commission threshold in order to quality for a longer amortizing franchise loan. Delinquencies associated with these start-up franchisee loans represented 53.3% of the total loan balances delinquent 60 days or more. In addition, Brooke Capital has temporarily reduced active marketing of these locations in order to focus its efforts on the liquidation of conversion franchise businesses. As a result of this significant increase in start-up franchise loan delinquencies, Aleritas has restricted the funding of start-up franchise loans associated with non peer-to-peer financing transactions until these delinquencies are significantly reduced or eliminated.

Aleritas believes one important factor regarding credit quality for the Company, its participating lenders and investors, results from the cash management feature imposed by Aleritas on retail borrowers representing 64.2% and 64% of on and off-balance sheet loans at June 30, 2008, and December 31, 2007, respectively, excluding related party loans. Under this cash management feature, debt servicing associated with these loans are typically submitted directly by the insurance companies or deducted from commissions received by Brooke Capital prior to payment of commissions to the borrower and most other creditors. Aleritas believes that credit problems associated with retail agency loans are more likely to be identified when the Company monitors borrower revenues on a monthly or quarterly basis rather than by monitoring Aleritas’ loan delinquencies.

Aleritas believes another important factor regarding credit quality for the Company, its participating lender and purchasers of its loans, is utilization of Collateral Preservation Providers to perform collateral preservation services. These services assist the lender in monitoring borrower performance, advising borrowers and otherwise assisting Aleritas in the preservation of collateral and improvement of borrower financial performance.

The level of credit losses and payment delinquencies increased during 2007 and 2008. Aleritas believes that these increases were primarily attributable to increased strain placed on its borrowers resulting from conditions in which Aleritas had little or no control, such as a softening premium insurance market, increased franchise fees and reduction of services by Brooke Capital. Many of its borrowers are primarily engaged in insurance agency and brokerage activities and derive revenues from commissions paid by insurance companies, which commissions are based in large part on the amount of premiums paid by their customers to such insurance companies. Premium rates are determined by insurers based on a fluctuating market. Historically, property and casualty insurance premiums have been cyclical in nature, characterized by periods of severe price competition and excess underwriting capacity, or soft markets, which generally have an adverse effect upon the amount of commissions earned by insurance agency borrowers, followed by periods of high premium rates and shortages of underwriting capacity, or hard markets. The current insurance market generally may be characterized as “soft,” with a flattening or decreasing of premiums in most lines of insurance. As a result of the challenging insurance market and increasing interest rate environment of the last several years, collateral preservation providers have provided increased levels of collateral preservation and loss mitigation support. If conditions persist, Collateral Preservation Providers have demanded increased collateral preservation.

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Aleritas relies on the recruitment activities of Brooke Capital for the resale of franchise businesses, including start-up franchise businesses with little or no business revenues. Over the past three to six months, the Company believes Brooke Capital has experienced difficulty in its recruitment activities which has resulted in an increase in delinquent franchise loans and agencies under management by Brooke Capital. Declining recruitment activities on the part of Brooke Capital is expected to have a negative impact on its franchise portfolio and Aleritas is closely monitoring this situation and the impact it may have on its loan loss reserve.

Although the Company does not provide recourse on the transferred notes and is not obligated to repay amounts due to investors and creditors of the QSPEs, its retained assets are subject to loss, in part or in full, in the event credit losses exceed initial and ongoing management assumptions used in the fair market value calculation. Additionally, a partial loss of retained assets could occur in the event actual prepayments exceed calculation. Following a write down of the value and the securities balance by $5,517,000 in the fourth quarter of 2007, the Company further wrote down its securities balance by $11,763,000 in the first quarter of 2008 to reflect the expected losses associated with the liquidation of several underlying franchise agencies.

Perhaps a greater risk to Aleritas is the indirect exposure to credit losses that may be incurred by participating lenders and investors and lenders that provide funding to the Company’s QSPEs. In those cases in which Aleritas does not bear direct exposure to credit loss, if losses by participating lenders and investors and lenders that provide funding to its QSPEs reach unacceptable levels, then Aleritas may not be able to sell or fund loans in the future. The Company’s business model requires access to funding sources to originate new loans, so the inability to sell loans would have a significant adverse effect on Aleritas.

Liquidity and Capital Resources

The components of the change in cash and cash equivalents for the period follow:

	Six Months Ended June 30,
	2008			2007
Net cash:
Provided (used) by operating activities	$	(20,496	)	$	80,161
Used by investing activities		(15,867	)		(21,941	)
Provided (used) by financing activities		35,031			(59,525	)
Cash and cash equivalents:
Net decrease for the period		(1,331	)		(1,305	)
At beginning of year		1,570			4,358
At end of period	$	239		$	3,053
Current ratio(current assets to current liabilities):
At June 30, 2008, and December 31, 2007		1.67			2.36

The significant cash outflow resulting from operating activities was primarily the result of an increase of loans held on the Company’s balance sheet. During the first six months of 2008, inventoried loans increased significantly partially as the result of deteriorating credit markets making the sale of loans more difficult.

The cash used in investing activities resulted from a cash outflow for the purpose of acquiring subordinate investment interests in loan pools sold to off-balance sheet QSPEs.

During March 2008, the Company closed on a credit facility to refinance approximately $52.5 million of debt securities. However, the replacement loan was not fully funded due to deteriorating credit markets and the Company was required to tap nearly all of its available liquid resources to fund the deficit which impacted our ability to meet other funding commitments.

As a result of the unfavorable credit markets, the Company does not expect to originate any significant amount of new loans during the third quarter. The most significant additional source of liquidity for the Company during the third quarter will be the expected repayment by Brooke Capital of servicing advances made by Aleritas in the approximately amount of $7,000,000. Aleritas expects repayment of these amounts as the securitization trusts pays Brooke Capital for collateral preservation service fees it earned during the first six months of 2008.

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The Company’s continues to seek alternative sources of capital such as the sale of common or preferred equity. However, the Company is also considering the alternative of discounting loans to meet its liquidity requirements.

Loan Participations (True Sales)

The Company must now rely on loan participation sales as its main source of funding for new loans and the sale of loan participation interests remains an essential source of funding operations and other uses. Loan participation balances, including on and off-balance sheet loan participations and excluding related party loan participations, was $274,376,000 and $274,920,000, respectively, at June 30, 2008, and December 31, 2007.

Community banks, primary buyers of loan participations from the Company, have been impacted by the difficult credit environment. As a result, these community banks are less inclined to purchase loan participations from the Company.

In some cases, the Company has agreed to reduce borrower balances on loans sold to participating lenders as a condition of extending credit to Aleritas, in which the Company has a $13,000,000 contingent liability.

Additionally, the Company may have liquidated or sold loans which were previously held by participating lenders in which the Company is working with those participating lenders regarding the purchase of other loans in the Company’s inventory. The Company has a $1,100,000 contingent liability in this regard.

Loan Participations (Not True Sales)

The Company has Payables under Participations which have repurchase agreements requiring the Company to repurchase the participation at some point in the future from 2 weeks to 12 months. These short term participations are not true sales and resemble commercial paper obligations. At June 30, 2008, the Company had $60,110,000 of Payables under Participations outstanding with repurchase dates within the next 8 months unless extended. If these short term participations are not replaced with longer term notes, extended or other banks are unwilling to take on these obligations, our cash reserves or other liquid amounts may be unable to cover these amounts.

Asset Securitizations

In recent years, Aleritas has relied on securitizations to fund a large portion of the loan portfolio. No asset-backed securities were issued in 2008 and 2007. Based on recent developments in the credit markets, especially as they relate to asset securitizations, the buying pool of prospective purchasers has been significantly reduced. As a result of this market condition, the Company may be required to provide increased credit enhancement with reduced interest spreads in order to entice prospective purchasers to participate in asset securitizations completed by the Company in the future, if there is a market at all. If the market for these securities is such that this is not possible, then Aleritas will attempt to partially offset the impact with the sale of more loan participations through the lender network but that may not be possible.

Off-Balance Sheet Bank Debt

During the first quarter of 2007, the Company structured an off-balance sheet transaction, involving the sale of loans to Brooke Warehouse Funding, in which loans were used by Brooke Warehouse Funding, LLC to secure bank debt, through its wholly owned subsidiary, from Fifth Third Bank, in which Aleritas is not obligated to repay. Previously, Brooke Warehouse Funding secured bank debt directly from Fifth Third Bank, which was categorized as on-balance sheet bank debt to Aleritas. As of June 30, 2008, the outstanding balance of sold accounts receivable held by Brooke Warehouse Funding, LLC and participated to Brooke Master Trust 2007-1, LLC totaled $174,966,000. Based on recent developments in the credit markets, especially as they relate to off-balance sheet bank debt, the pool of prospective lenders of such off-balance sheet debt has been significantly reduced. As a result of this market condition, the Company may be required to provide increased credit enhancement with reduced interest spreads in order to entice prospective lenders to extend such credit in the future, if there is a market at all. If the market for such debt is such that this is not possible, then the Company believes that the funding shortfall can be partially offset with the sale of more loan participations through the lender network and with increased borrowing from on-balance sheet bank lines of credit. Although mostly offset by amounts owed by Fifth Third for collateral preservation fees, the Company has $2,846,000 of funds that it has received and not remitted to Fifth Third. Fifth Third has not issued a notice of default with respect to the facility and is in discussions with the Company’s management. Management believes they will be able to come to an agreement with Fifth Third regarding collateral preservation fees and that will allow the facility to be in compliance with the Agreement although there can be no assurance that the Company will reach a satisfactory resolution.

Although entirely offset by amounts owed by off-balance sheet entities for collateral preservation fees, the Company has $794,000 of funds that it has received and not remitted to other off-balance sheet entities. These other off-balance sheet entities have

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not issued a notice of default and they are in discussions with the Company’s management. Management believes they will be able to come to an agreement with these off-balance sheet entities regarding collateral preservation fees and that will allow the entities to be in compliance although there can be no assurance that the Company will reach a satisfactory resolution.

On-Balance Sheet Bank Debt

The Company entered into a credit agreement with First State Bank, a banking corporation organized under the laws of the State of Nebraska (the “Bank”), as lead lender, along with a number of participating banks for the advancement of a $52.5 million secured term loan, under an agreement dated March 7, 2008 (the “Credit Agreement”). At June 30, 2008 the Credit Agreement had been advanced in the amount of $46,213,000. The Company has an obligation to repurchase $6.5 million of the notes issued under the credit agreement by year end 2008 if requested by the participating banks.

The Parties also entered into a Security Agreement and Pledge Agreement which gave the Bank a security interest covering substantially all of the Company’s assets, including the Company’s rights to receive any payments from a majority of the Company’s subsidiaries, and further assigned to the Bank the Company’s membership in two of the Company’s subsidiaries and a cash collateral account to be funded over an 18 month period following the closing. This provides the Bank the right to receive any payments related to certain of the Borrower’s bank and other depository accounts.

Pursuant to the Credit Agreement, the Company will make principal payments in the minimum amount of $875,000 per month over the course of the Loan with the remaining outstanding balance (including any accrued and unpaid interest) due February 28, 2013. Interest on the Loan will accrue at the rate equal to the greater of: (a) 7.25% or (b) the sum of the prime rate as published in the Wall Street Journal and 1.75% per annum. The proceeds were used to pay off the Company’s private placement fixed rate notes and the Home Federal Savings and Loan Association line of credit.

If in any such case the Company is unsuccessful in securing a replacement participating lender, it may be required to fund the purchase of the related participation interest through a separate entity to be substituted as a Lender participating in the Loan (which substitution will, however, be subject to approval of First State Bank). A dispute between one or more of those existing Lenders and the Company could arise if the Company is unable to find a replacement participant lender or obtain FSB’s approval to substitute entity as a replacement participant.

On-Balance Sheet Private Placement Debt

In November 2006, Aleritas closed a private placement debt offering consisting of $45,000,000 in 12% per annum fixed rate notes, with 1,014,673 warrants, to a group of accredited institutional investors. Approximately $18.2 million of the loan proceeds were used to repay borrowings used to fund the over-collateralization requirements associated with securitizations previously closed by Aleritas, and the remainder of the proceeds was used to fund Aleritas’ growing loan portfolio and pay various closing costs associated with the transaction. The direct debt issuance costs related to the note issuance totaled $4,646,000. These costs were deferred and are being amortized using the effective interest method over the life of the notes. This includes warrants issued to the placement agent, Morgan Joseph & Co. Inc., in the amount of 2% of the offering or $900,000. The number of shares exercisable under the placement agent warrants is 263,556. These were repurchased on March 7, 2008 pursuant to a repurchase agreement filed on Form 8-K, as amended by Form 8-KA, on February 14 and 15, 2008, respectively.

On-Balance Sheet Bank Lines of Credit

In recent years, Aleritas has funded an increasing number of originated loans through its warehouse lines of credit providers, leading up to the time of loan securitizations. Additionally, as part of its bank lines of credit, the Company is required to over-collateralize loans funded through these warehouse lines, and in some cases Aleritas funds these over-collateralization requirements by utilizing other lines of credit or short-term debt. As of June 30, 2008, the Company had four bank lines of credit with virtually no availability, as compared to four bank lines of credit with a cumulative availability of $172 million on December 31, 2007. At June 30^th DZ Bank indicated that there was some disagreement over the calculation of the borrowing base under the Company’s agreement as amended in June 2008. Management believes they will be able to come to an agreement with DZ in this regard.

With regards to line of credit obligation to Fifth Third Canada, on July 7, 2008 the Company and Fifth Third Bank entered into a forbearance agreement that required the Company to repay the facility by December 31, 2008.

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Subject to the above uncertainties, the Company believes that its existing cash, cash equivalents and funds generated from operating, investing and financing activities will be sufficient to satisfy normal financial needs for the next twelve months. Additionally, subject to the above, Aleritas believes that funds generated from future operating, investing and financing activities will be sufficient to satisfy future financing needs, including the required annual principal payments of the long-term debt and any future tax liabilities.

Proposed Accounting Changes

In April 2008 the Financial Accounting Standards Board (“FASB”) decided to remove the qualifying special-purpose entity concept from Statement of Financial Accounting Standards No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”and simultaneously remove the QSPE exception from consolidation in FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”. FASB also decided to amend Paragraph 9(a) to explicitly require preparers assessing legal isolation to consider all involvements with the transferred asset by entities within the consolidated group; and Paragraph 9(c) to prohibit sale accounting if the transferor has imposed a constraint on the transferee. The primary potential consequences of the tentative decision are that transferors would have to evaluate whether to consolidate any entity to which the assets are “sold” if the transferor retains an economic interest in the transferred assets, and that transfers would not be accounted for as sales if the transferor imposes a constraint on the transferee under any circumstances. An exposure draft of proposed requirements is planned by the end of June 2008, and a final Statement is planned to be effective for periods beginning after December 15, 2008. Aleritas will monitor the status of the exposure draft and consider what changes, if any, could be made to the structure of the securitizations and off-balance sheet financings to continue to exclude loans transferred to these QSPE’s. At June 30, 2008, the QSPE’s held loans totaling $307,117,000 which could be required to be shown on the financial statements depending on the outcome of the exposure draft.

Impact of Inflation and General Economic Conditions

The level of credit losses for Aleritas and payment delinquencies increased during 2007 and continued to increase during 2008 due, in part, to higher interest rates and a softening insurance market. Aleritas expects increased levels of delinquencies, defaults and credit losses as the full impact of these market conditions are felt by Aleritas borrowers.

The actual annualized prepayment rate on Aleritas loans has decreased to 11.3% during the twelve months ended June 30, 2008, primarily due to increased asset ownership transfers to other borrowers within the portfolio, new loan documents being executed on existing loans to improve security interests and the increasing interest rate environment. The Company expects that, over the remaining life of the Aleritas loan portfolio, several cycles of increasing and decreasing prepayment rates will likely occur, primarily resulting from fluctuations in key interest rates and changes in the insurance marketplace.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The level of credit losses for Aleritas and payment delinquencies increased during 2007 and continued to increase during the first six months of 2008 due, in part, to increasing interest rates, the seasoning of the loan portfolio and a softening insurance market. Aleritas expects increased levels of delinquencies, defaults and credit losses as the full impact of these market conditions are felt by Aleritas borrowers. In addition, Brooke Capital Corporation has announced that it will be aggressively liquidating under performing franchisees or otherwise removing them from the franchise system. The majority of loans in the Company’s portfolio has a variable interest rate based upon the prime rate and adjusts daily. To the extent interest rates increase significantly, borrowers may have a more difficult time making their principal and interest payments.

The actual annualized prepayment rate on Aleritas loans decreased to 11.3% during the twelve months ended June 30, 2008, primarily due to increased asset ownership transfers to other borrowers within the portfolio, new loan documents being executed on existing loans to improve security interests and the increasing interest rate environment. The Company expects that, over the remaining life of the Aleritas loan portfolio, several cycles of increasing and decreasing prepayment rates will likely occur, primarily resulting from fluctuations in key interest rates and changes in the insurance marketplace.

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Item 4. Controls and Procedures.

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

As of the end of the period covered by this report, the Company has carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective at the reasonable assurance level. The Company has experienced a reduction in staff due to the current credit crunch that has resulted in stretching the resources of the Company. The Company believes, however, that such reduction does not impair the Company’s ability to provide its results, but does affect the Company’s timeliness of its reporting.

There have been no changes in internal controls over financial reporting (as defined in Rule 13(a) or Rule 15d–15(f) of the Exchange Act) during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Aleritas has from time to time been party to claims and lawsuits that are incidental to its business operations. While ultimate liability with respect to these claims and litigation is difficult to predict, Aleritas believes that the amount, if any, that the Company is required to pay in the discharge of liabilities or settlements in these matters will not have a material adverse effect on consolidated results of operations or financial position.

In the second quarter, a lawsuit was commenced against the Company by a direct lender representing less than $3,000,000 in debt. In addition, an affiliated bank to this direct lender was the participant on a loan made by the Company and sued the Company as servicer on the loan. Both lawsuits were successfully concluded in the second quarter.

The Company has received reservation of rights letters from certain lenders, including both on-balance sheet and off-balance sheet entities regarding breaches of the underlying documents. Although none of the entities have called a default, these matters are being closely monitored by the Company.

Item 1A. Risk Factors

The Company’s Annual Report on Form 10-K for the year ended December 31, 2007, includes a detailed discussion of the risks the Company faces. The information presented below updates this discussion and should be read in conjunction with the risk factors discussed in the Form 10-K.

Our liquidity or ability to raise debt or equity capital may be limited

Liquidity in our bank network and capital markets has become significantly more constrained and interest rates available to us have increased significantly relative to benchmark rates. This liquidity crunch has had an impact on our bank network’s ability to purchase loans from us. It has also restricted their ability to extend maturities on short-term notes (Payable under Participations) and in some cases forced them to request repayment. Our ability to satisfy our cash requirements may also be constrained by restrictions on cash flow in our securitizations and warehouse facilities. In certain circumstances all of the cashflow generated in a securitization or warehouse may be available solely to pay asset-backed security holders which reduces the cashflow available to fund such things as: interest, expenses, minimum payments on our First State Bank senior debt and other operating expenses.

In addition, if our bank network and other capital providers were to lose confidence in our business model and loan portfolio, our liquidity position could degrade further which would have a material adverse affect on the Company.

Actions designed to enhance our liquidity may be unsuccessful

The Company is actively pursuing measures to improve our liquidity position. We are also actively evaluating other alternatives for enhancing our liquidity position including the sale of assets and raising additional equity capital through the sale of common stock, preferred stock

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or securities that are convertible into common stock. These measures are subject to a number of uncertainties and there can be no assurance that any of them will be completed. If we are not able to successfully complete one or more of these measures, it could have a material adverse effect on our Company. Any public equity rights offering will likely dilute the ownership percentage of any existing shareholder.

Finally, if the Company is unable to remit payment on its outstanding payables within a timeframe that is required by our lenders, then the Company’s liquidity may be materially adversely affected.

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

None

Item 3. Defaults upon Senior Securities

None

Item 5. Other Information

None

Item 6. Exhibits

The following exhibits are filed as part of this report. Exhibit numbers correspond to the numbers in the exhibit table in Item 601 of Regulation S-K:

None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 14, 2008	ALERITAS CAPITAL CORP.
	By	/s/ Michael S. Hess
		Michael S. Hess, President and Chief Executive Officer
	By	/s/ Robert D. Orr
		Robert D. Orr, Chairman and Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.1
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.1
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 1
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 1

¹ Filed herewith.

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