Special Note: Certain statements in this quarterly report on Form 10-Q concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items, estimates as to size, growth in or projected revenues from the life settlement market, developments in industry regulations and the application of such regulations, expected outcomes of pending or potential litigation and regulatory actions, and our strategies, plans and objectives, together with other statements that are not historical facts, are "forward-looking statements" as that term is defined under the federal securities laws. All of these forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission, ("SEC"), including our Annual Report on Form 10-K for the year ended February 29, 2012 ("Fiscal 2012"), particularly in the sections entitled "Item 1A - Risk Factors" and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or reflect the occurrence of unanticipated events.

Critical Accounting Estimates, Assumptions and Policies

Our discussion and analysis of financial condition and results of operations are based on our Consolidated Condensed Financial Statements that were prepared in accordance with accounting principles generally accepted in the United States of America. To guide our preparation, we follow accounting policies, some of which represent critical accounting policies as defined by the SEC. The SEC defines critical accounting policies as those that are both most important to the portrayal of a company's financial condition and results and require management's most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates involve significant judgments, assumptions and estimates by management that may have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent liabilities, and the reported amounts of income and expenses during the reporting period that management considers critical accounting estimates. The judgments, assumptions and estimates used by management are based on historical experience, management's experience, knowledge of the accounts and other factors that are believed to be reasonable. Because of the nature of the judgments and assumptions made by management, actual results may differ materially from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations. Areas affected by our estimates and assumptions are identified below.

We recognize income at the time a settlement closes and the purchasers have made the obligation to make the purchase. We defer revenue equal to the estimated costs to monitor policies into the future, and we amortize this deferred cost over the anticipated life expectancy of the insureds.

We sometimes make short-term advances to facilitate a life settlement transaction. These amounts are included in "Accounts receivable - trade", and are collected as the life settlement transactions close. All amounts are considered collectible as we are repaid the advance before any of the other parties involved in the transaction receive funds.

We follow the guidance contained in ASC 325-30, Investments in Insurance Contracts, to account for our investments in life settlement contracts. ASC 325-30 states that a purchaser may elect to account for its investments in life settlement contracts using either the investment method or the fair value method. The election is made on an instrument-by instrument basis and is irrevocable. Under the investment method, a purchaser recognizes the initial investment at the purchase price plus all initial direct costs. Continuing costs (e.g., policy premiums and direct external costs, if any) to keep the policy in force are capitalized. Under the fair value method, a purchaser recognizes the initial investment at the purchase price. In subsequent periods, the purchaser re-measures the investment at fair value in its entirety at each reporting period and recognizes changes in fair value earnings (or other performance indicators for entities that do not report earnings) in the period in which the changes occur. We elected to value our investments in life settlement contracts using the investment method. As of May 31, 2012, and February 29, 2012, our investments in life settlements held for our own account were carried at $2,861,323 and $8,858,534, respectively.

We review the carrying value of our investments in policies for impairment whenever events and circumstances indicate that we might not recover the carrying value of the policies from future maturities. In cases where undiscounted expected proceeds from future maturities are less than the carrying value, we recognize an impairment loss equal to an amount by which the carrying value (including expected future costs to maintain the policies) exceeds the expected proceeds. Based on this assessment, we recorded impairment costs for investments in policies of $671,918 and $260,829 during the First Quarter of this year and last, respectively.

We establish litigation and policy analysis loss accruals based on our best estimates as to the ultimate outcome of contingent liabilities. This loss analysis is necessary to properly match current expenses to currently recognized revenues and to recognize that there is a certain amount of liability associated with litigation and policy losses. Through these accruals, we recognize the estimated cost to settle pending litigation as an expense. These estimates are reviewed on a quarterly basis and adjusted to management's best estimate of the anticipated liability on a case-by-case basis. A high degree of judgment is required in determining these estimated accrual amounts since the outcomes are affected by numerous factors, many of which are beyond our control. As a result, there is a risk that the estimates of future litigation and policy analysis loss costs could differ from our currently estimated amounts. Any difference between estimates and actual final outcomes could have a material impact on our financial statements.

We must make estimates of the collectability of accounts and premium advances. The accounts associated with these areas are critical to recognizing the correct amount of revenue and expenses in the proper period. Within the last quarter of fiscal 2010, issues were resolved which have enabled us to better estimate the collectability of premium advances. The agreement with the State of Texas allowed us to specifically identify a class of investors for whom we made premium advances, and which, under the terms of the agreement, will be uncollectible. Our historical success of collecting premium advances enabled us to build a body of evidence by which we can demonstrate full collectability of the remaining balance of advanced premiums. As a result of the resolution of the suit, the reserve for uncollectible premium advances is based on our best estimate and historical data and premium advances are no longer fully reserved.

We review the carrying value of our property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment includes current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, there was no impairment during the First Quarter of this year and last year.

We must evaluate the useful lives of our property and equipment to assure that an adequate amount of depreciation is being charged to operations. Useful lives are based generally on specific knowledge of life for specific types of assets.

We are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include a tax provision or reduce our tax benefit in the statements of income. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

We have not made any material changes to our critical accounting estimates or assumptions or the judgments affecting the application of those estimates or assumptions. We discuss our significant accounting policies, including those policies that are not critical, in Note 2 of our Consolidated Condensed Financial Statements.

New Accounting Pronouncements

Recent accounting pronouncements have been issued including ASU 2011-06, ASU 2011-04, ASU 2011-05 and ASU 2011-12. For a discussion of these pronouncements, refer to Note 3 of our Consolidated Condensed Financial Statements.

Life Partners

General. Life Partners Holdings, Inc. ("we" or "Life Partners") is a specialty financial services company and the parent company of Life Partners, Inc. ("LPI"). LPI is the oldest and one of the most active companies in the United States engaged in the secondary market for life insurance known generally as "life settlements". LPI facilitates the sale of life settlements between sellers and purchasers, but does not take possession or control of the policies. The purchasers acquire the life insurance policies at a discount to their face value for investment purposes.

The Secondary Market for Life Insurance Policies. LPI was incorporated in 1991 and has conducted business under the registered service mark "Life Partners" since 1992. Our operating revenues are derived from fees for facilitating life settlement transactions. Life settlement transactions involve the sale of an existing life insurance policy to another party. By selling the policy, the policyholder receives an immediate cash payment. The purchaser takes an ownership interest in the policy at a discount to its face value and receives the death benefit under the policy when the insured dies.

We are a specialty financial services company, providing purchasing services for life settlements to our client base. We facilitate these transactions by identifying, examining, and purchasing the policies as agent for the purchasers. To meet market demand and maximize our value to our clients, we have made significant investments in proprietary software and processes that enable us to facilitate a higher volume of transactions while maintaining our quality controls. Since our inception, we have facilitated over 140,000 purchaser transactions involving over 6,500 policies totaling over $3.0 billion in face value. We believe our experience, infrastructure and intellectual capital provide us a unique market position within the life settlement market.

The following table shows the number of settlement contracts we have transacted, the aggregate face values of those contracts, and the revenues we derived, for the First Quarter of this year and last year:

                                   Three Months Ended May 31,
                                      2012              2011
Number of settlements                        10               18
Face value of policies           $   30,650,000     $ 48,943,976
Average revenue per settlement   $      573,956     $    546,300
Net revenues derived*            $    2,166,158     $  3,684,392

* Net revenues derived are exclusive of brokerage and referral fees.

Since the economic crisis in 2008, the life settlement market has declined by more than half. In addition, our business was further affected by an investigation and subsequent suit by the Securities and Exchange Commission (the "SEC") and a series of news articles that were critical of our operations. A number of private legal actions resulted from these events. For a full disclosure of legal proceedings, please refer to our Annual Report on Form 10-K for the fiscal year ended February 29, 2012. Following these events, we have experienced a substantial drop in purchaser demand through our licensee network, which has resulted in substantially lower revenues and operating losses.

Comparison of the Three Months Ended May 31, 2012 and 2011

We reported net income of $1,037,031 for the First Quarter of this year, compared to a net loss of $(874,144) for the First Quarter of last year. Our net income resulted primarily from selling a large portion of our Investments in Policies for $8.9 million, resulting in a $3.5 million gain. There was a 41.6% decrease in revenues, a 41.2% decrease in revenues net of brokerage fees, and a 24.3% decrease in total operating and administrative expenses, which was largely attributable to a 50.6% decrease in legal and professional expenses.

The decrease in revenue was due to two factors. First, we believe the life settlement market declined from approximately $7.6 billion in face value transactions in calendar 2009 to approximately $3.8 billion in calendar years 2010 and 2011, and the market has continued to perform at this lower level. A second contributing factor was the publication of news articles criticizing our operations coupled with our disclosure of a pending SEC investigation, both of which occurred in the fourth quarter of fiscal 2011. The articles and disclosure of the pending investigation resulted in a significant drop in the price of our common stock and were followed by civil suits based generally on alleged false disclosures or omissions. These developments significantly impacted our operations. Compared to the First Quarter of last year, we closed a lower number of settlements (10 from 18), lower aggregate face values ($30.7 million from $48.9 million) and lower total net revenues derived ($2.2 million from $3.7 million). The increase in the average revenue per settlement (to $573,956 from $546,300) indicates that policies are generally available for life settlement transactions and that our gross revenue decreases result generally from decreases in purchaser demand for life settlements.

Revenues: Revenues decreased by $4,093,838, or 41.6%, from $9,833,395 in the First Quarter of last year to $5,739,557 in the First Quarter of this year. Brokerage fees declined by $2,575,604, resulting in a 41.2% decrease in the net revenues derived.

It is difficult to discern the respective impacts of the general decline in the life settlement markets and the specific adverse developments affecting us. The greater impact upon demand for our services appears to have come from the critical news articles and the uncertainty related to the SEC investigations. These developments have especially hurt our licensee network and purchaser base. Our business model is somewhat unique in the industry in that we are the only publicly held, life settlement company and the only prominent company with a broad, retail base. We believe the publicity from the news articles affected our client base more acutely than the articles might have affected a company with an institutional-oriented base. We believe the articles portrayed us in a false light, and we have worked with our licensees and clients to restore lost confidence and rebut the charges in the articles. We expect that we can gradually repair our client base and restore demand, but anticipate that the declines from these events will continue to adversely affect our operating results in fiscal 2013. Restoration of demand approaching levels we recorded in fiscal 2010 may not occur, however, until and unless we are able to resolve the SEC investigation favorably and the life settlement market strengthens.

Brokerage and Referral Fees: Brokerage and referral fees decreased 41.9%, or $2,575,604, from $6,149,003 in the First Quarter of last year to $3,573,399 in the First Quarter of this year. Brokerage and referral fees as a percentage of gross revenue remained relatively unchanged from 62.5% in the First Quarter of last year to 62.3% in the First Quarter of this year. In the First Quarter of this year, broker referrals accounted for 100% of the total face value of policies transacted, which is unchanged from the First Quarter of last year. For the First Quarter of this year, five brokers who each accounted for more than 10% of the face value of all completed transactions, constituted 98% of the total face value of completed transactions. For the First Quarter of last year, six brokers accounted for more than 10% of the face value of all completed transactions, and constituted 87% of the total face value of completed transactions. No one licensee accounts for more than 10% of the brokerage and referral fees expense.

Brokerage and referral fees generally increase or decrease with revenues, face values of policies transacted, and the volume of transactions, although the exact ratio of fees may vary. Brokers may adjust their fees with the individual policyholders whom they represent. In some instances, several brokers may compete for representation of the same seller, which may result in lower broker fees. Referral fees also vary depending on factors such as varying contractual obligations, market demand for a particular kind of policy or life expectancy category and individual agreements between clients and their referring financial planners. No broker fees are paid when a life settlor presents a policy to us directly.

Many states now license life settlement brokerage activity, which may result in the capping of fees or the increased disclosure of fees. Industry analysts have suggested that these regulations could tend to lower the fees, although we have yet to see such result.

Expenses: Total operating and administrative expenses decreased by 24.3% or $1,241,786 from $5,117,904 in the First Quarter of last year to $3,876,118 in the First Quarter of this year. The decrease is primarily due to legal and professional expense declining $1,036,490, from $2,047,571 in the First Quarter of last year to $1,011,081 in the First Quarter of this year. Legal and professional expense declined primarily as a result of the legal fees associated with the SEC investigation being paid by our director and officers' insurance carrier, a decline in audit and accounting fees from the prior year, and lower activity in lawsuits filed in previous periods. Other outside services was the only other significant operating and administrative expense that changed; it increased due to increased operating expenses relating to the escrow agent utilized for transactions closed before March 2008.

Impairment of investments in policies in the First Quarter of this year was $671,918, compared to $260,829 in the First Quarter of last year.

During the First Quarter of this year and last year, we made premium advances of $989,703 and $1,237,817, respectively, and were reimbursed $423,508 and $1,072,082, respectively. In a typical life settlement, policy premiums for the insured's projected life expectancy are added to the purchase price and those future premium amounts are set aside in an escrow account to pay future premiums. When the future premium amounts are exhausted, purchasers are contractually obligated to pay the additional policy premiums. In some instances, purchasers have failed to pay the premiums and, for business goodwill, we have repurchased the policy or advanced the premiums to maintain the policies. While we have no contractual or other legal obligation to do so, and do not do so in every instance, we have made premium advances as an accommodation to certain purchasers based on our assumptions that we will ultimately recoup the advances. While some purchasers repay the advances directly, reimbursements of these premiums will come most likely as a priority payment from the policy proceeds when an insured dies. Net premium advance expense for the First Quarter of this year and last year was $275,031 and $620,042, respectively, primarily as a result of the decreased number of policies exhausting escrow. See the discussion of Policy Advances within Critical Accounting Estimates, Assumptions and Policies on page 18.

Settlement costs decreased $263,370, from $342,974 in the First Quarter of last year to $79,604 in the First Quarter of this year. Last year's expense included a large settlement for a policy payout.

Total other income increased from $142,646 in the First Quarter of last year to $3,345,923 in the First Quarter of this year, primarily due to a gain on the sales of the majority of our Investments in Policies. We sold all of our viatical positions and approximately 40% of our life settlements portfolio to unrelated parties in May 2012. The total gain realized was $3,482,470. We anticipate selling the remainder of our life settlements portfolio within the next twelve months. As a result, we are recording the portfolio as a current asset. Its carrying value as of May 31, 2012, was $2,861,323, net of impairment. See Footnote 11 in the notes to Consolidated Condensed Financial Statements for more information about our Investments in Policies. On May 1, 2012, we settled our note receivable for a payment of $350,000, resulting in a loss of $231,096.

Income Taxes: Income tax expense increased from a benefit of $(416,722) in the First Quarter of last year to expense of $598,932 in the First Quarter of this year, due to a loss in the prior year versus pretax income in the current year.

Contractual Obligations and Commitments



Our outstanding contractual obligations and commitments as of May 31, 2012 were:



                                              Due in less          Due in             Due in           Due after
                                Total         than 1 year       1 to 3 years       4 to 5 years         5 years
Operating leases              $  184,720     $      79,388     $       94,776     $       10,556     $            -
Total obligations             $  184,720     $      79,388     $       94,776     $       10,556     $            -

Liquidity and Capital Resources

Operating Activities: Net cash flows used by operating activities for the First Quarter of this year were $(1,760,006). Uses of cash flow resulted primarily from the gain on the sale of investments in policies of $3,482,470, income tax overpayments of $3,190,001, prepaid expenses of $851,500 and premium advances of $566,195. The increase in prepaid expenses results from prepaid commissions. A deferred income tax decrease of $3,422,313, net income of $1,037,031 and impairment of Investments in Policies of $671,918 reduced the amount of cash flow used by operating activities. Net cash flows used by operating activities for the First Quarter of last year were $2,333,421, primarily from a net loss of $874,144, a lowering of net income taxes payable of $1,116,669 and a reduction of accounts payable of $870,972.

Investing Activities: Net cash flow provided by investing activities was $4,992,248 during the First Quarter of this year. This was primarily from the proceeds from sales of Investments in Policies of $4,693,178 and the sale of Investment Securities of $400,000, less $64,337 for the purchases of property and equipment and $68,686 of purchases of policies for investment purposes. Net cash flow provided by investing activities for the First Quarter of last year was $774,783. This amount consists of $968,253 of proceeds from sales of securities and $234,774 proceeds from maturities of owned policies less $200,341 for purchases of owned policies, $190,782 for an additional investment in the life settlements trust and $37,108 for purchases of property and equipment.

Financing Activities: For the First Quarter of this year and the First Quarter of last year, we used $1,864,744 and $3,733,115, respectively, to pay dividends.

Working Capital and Capital Availability: As of May 31, 2012, we had working capital of $20,893,527, which reflects a working capital decrease of $2,311,284 during the last twelve month period, primarily due to payments of dividends and operating losses, less the sale of the Investment in Policies. Our cash and cash equivalents decreased $9.6 million over the last year, from $22.3 million to $12.7 million as of May 31, 2011 and May 31, 2012, respectively.

Outlook

We anticipate that our revenues and recurring expenses for the remaining fiscal quarters of fiscal 2013 will be consistent with those of the First Quarter of this year. We believe that life settlements as an asset class are attractive alternatives for persons seeking to diversify investment portfolios and avoid economically sensitive investments. Since the returns on life settlements are based on policy maturities, they are not correlated to traditional equity and debt markets and commodity investments. We believe the life settlement market will rebound, although we cannot say when or to what extent a rebound might occur.

The large drops in revenues, the significant legal and professional fees, and operating losses have eroded the strength of our financial condition. The SEC suit has been highly damaging to our business, and we do not anticipate a recovery in our revenues and net income while the SEC suit continues. We are conserving our cash in anticipation that the suit will not be quickly resolved. We have decreased our stock dividends and may make further cuts and could eliminate the dividends. We are reducing our investments, including investments in policies.

Until we can realize improved operating results, we shall rely on our working capital position, which is strong, and we believe we have sufficient cash and cash equivalents to support our short and long-term operations. We do not anticipate a need for future borrowings or stock sales.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet arrangements or transactions.

iTEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our risk exposure in the financial markets consists of exposure to market driven interest rate changes. We invest our excess cash in depository accounts with financial institutions. We attempt to protect and preserve our funds by placing our cash with 10 different institutions. We periodically review the financial stability of the institutions with which we deposit funds. We do not hold derivative financial instruments or financial instruments such as credit default swaps, auction rate securities, mortgage-backed securities or collateralized debt obligations in our investment portfolio.

Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk. Because our business strategy does not rely on generating material returns from our investment portfolio or cash holdings, we do not expect our market risk exposure on our interest-bearing assets to be material.