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 Condensed Consolidated 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 August 31, 2012, and February 29, 2012, our investments in life settlements held for our own account were carried at $2,788,515 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 $704,030 and $370,004 during the First Half of this year and last year, 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 notes receivable 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 2011, 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 Half of this year or 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 Condensed Consolidated Financial Statements.

New Accounting Pronouncements

Recent accounting pronouncements have been issued including ASU 2011-06. For a discussion of these pronouncements, refer to Note 3 of our Condensed Consolidated 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 143,000 purchaser transactions involving over 6,500 policies totaling over $3 billion in face value. We believe our experience, infrastructure and intellectual capital provide us a unique market position and will enable us to maintain sustainable growth 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 three and six months ended August 31, 2012 and 2011:

                                          Three Months Ended Aug. 31,          Six Months Ended Aug. 31,
                                             2012               2011             2012             2011
Number of settlements                                 3               16               13                34
Face value of policies                  $    16,000,000     $ 63,100,000     $ 46,650,000     $ 112,043,976
Avg. revenue per settlement             $     1,020,863     $    675,709     $    677,088     $     607,198
Net revenues derived*                   $       651,570     $  3,649,307     $  2,817,728     $   7,333,700

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

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

We reported a net loss of $(1,849,325) for the three months ended August 31, 2012 (the "Second Quarter of this year"), compared to a net loss of $(323,183) for the three months ended August 31, 2011 (the "Second Quarter of last year"). Our lower net income resulted primarily from a 71.7% decrease in revenues, an 82.1% decrease in revenues net of brokerage fees, and a 21.1% decrease in total operating and administrative expenses, which was largely attributable to a 51.8% decrease in legal and professional expenses. The number of life settlement transactions we brokered decreased from 16 to 3, but the average revenue per settlement was increased by 51% from $675,709 in the Second Quarter of last year compared to $1,020,863 in the Second Quarter of this year.

The dramatic decrease in revenue was due to two factors. First, we believe the life settlement market declined from approximately $8 billion in face value transactions in calendar 2009 to approximately $4 billion in calendar 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 2012. 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. In addition, the SEC filed a civil action against us in January 2012 as a result of their investigation. These developments significantly impacted our operations. Compared to the Second Quarter of last year, we closed a lower number of settlements (3 from 16), had lower aggregate face values ($16 million from $63.1 million) and realized lower total net revenues derived ($0.65 million from $3.6 million). The increase in the average revenue per settlement reflects the fact that our revenue decreases result generally from decreases in purchaser demand for life settlements and not in the availability of policies for life settlement transactions. We also believe the small number of transactions completed during the Second Quarter of this year was due in part to a seasonal lag in the return of transaction documents during the summer months. Many of the transactions that we expected to complete in the Second Quarter of this year were not completed until after the close of that period. Thus, we do not believe this reduction in transactions to be a trend and, based on the number of transactions completed during the first month of the Third Quarter of this year, we expect the Third Quarter of this year to have a substantially higher number of transactions than the Second Quarter of this year.

Revenues: Revenue decreased by $7,748,762, or 71.7%, from $10,811,349 in the Second Quarter of last year to $3,062,587 in the Second Quarter of this year. Brokerage fees declined by 66.3% or $4,751,025 due to fewer transactions during the Second Quarter of this year resulting in an 82.1% decrease in Revenues net of brokerage fees in the Second Quarter of this year.

Although the general decline in the life settlement markets may have had some effect on us, the greater impact upon demand for our services appears to have come from the critical news articles and the uncertainty related to legal actions by the SEC and private litigants. 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. Since the start of our current fiscal year (March 1, 2012), approximately 1,800 of our clients have been paid over $43 million in proceeds from their life settlement transactions, and we believe the amount of payouts will increase during the remainder of this fiscal year. Since many of our life settlement purchasers are repeat purchasers, we believe the payouts will restore some demand in the remainder of this fiscal year and the following fiscal year and will enable us to gradually rebuild our markets. However, the uncertainty of the pending litigation described above is likely to continue to adversely affect our operating results. Restoration of demand approaching levels we recorded in fiscal 2011 is unlikely to occur until and unless we are able to favorably resolve the civil actions brought by the SEC and private litigants.

Brokerage and Referral Fees: Brokerage and referral fees decreased $4,751,025 from $7,162,042 in the Second Quarter of last year to $2,411,017 in the Second Quarter of this year. Brokerage and referral fees as a percentage of gross revenue increased from 66% in the Second Quarter of last year to 79% in the Second Quarter of this year. We believe the increase was due primarily to a policy resale accommodation to institutional clients, in which we cover their resale fees to encourage reinvestment of the sale proceeds. In the Second Quarter of this year, broker referrals accounted for 100% of the total face value of policies transacted, which is unchanged from the Second Quarter of last year. For the Second Quarter of this year, three brokers accounted for more than 10% of the face value of all completed transactions and constituted 100% of the total face value of completed transactions. For the Second Quarter of last year, three brokers accounted for more than 10% of the face value of all completed transactions and constituted 52.3% 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.

Expenses: Operating and administrative expenses decreased by 21%, or $877,821, from $4,158,321 in the Second Quarter of last year to $3,280,500 in the Second Quarter of this year. The decrease is primarily due to decreased legal and professional fees which were $834,838 and $1,732,960 in the Second Quarter of this year and last year, respectively. Legal and professional fees are a result of the legal fees associated with the SEC and shareholder suits and were lower due to lower activity and partial coverage by insurance.

Impairment of investments in policies in the Second Quarter of this year was $32,112, compared to $109,175 in the Second Quarter of last year.

During the Second Quarter of this year and last year, we made premium advances of $1,132,644 and $1,815,516, respectively, were reimbursed from maturities and collections $647,544 and $1,123,727, respectively, and wrote off as bad debt $108,879 and $137,022, 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. We bill and collect the purchasers' proportionate share and may advance premiums pending collection. In some instances, purchasers have failed to pay the premiums and 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. The provision for bad debt is a reserve generally relating to premium payments we make on certain viatical settlements, which will likely be uncollectible if and when the policies mature. Net premium advance expense for the Second Quarter of this year and last year was $242,250 and $232,011, respectively, primarily as a result of the increased number of policies exhausting escrow. See the discussion of Policy Advances within Critical Accounting Estimates, Assumptions and Policies on page 18.

Settlement costs decreased 56.2%, or $151,900, from $270,400 in the Second Quarter of last year to $118,500 in the Second Quarter of this year.

Other Income (Expenses): Total other income was largely unchanged from $103,474 in the Second Quarter of last year to $94,080 in the Second Quarter of this year.

Income Taxes:As a result of our losses in fiscal 2012 and in the current fiscal 2013, we have accrued net operating losses, which can be used to offset future taxable income and are recorded as income tax benefit. Our income tax benefit increased from $82,357 in the Second Quarter of last year to a $685,525 benefit in the Second Quarter of this year due to higher operating losses in the current period compared to smaller losses in the previous period.

Comparison of the Six Months Ended August 31, 2012 and 2011

We reported a net loss of $812,294 for the six months ended August 31, 2012 (the "First Half of this year"), compared to net loss of $1,197,327 for the six months ended August 31, 2011 (the "First Half of last year"). Our lower net income resulted primarily from a 57.4% decrease in revenues, a 61.6% decrease in revenues net of brokerage fees, and a 22.8% decrease in total operating and administrative expenses, which was largely attributable to a 51.2% decrease in legal and professional expenses. Lower net income was partially offset by sales of a large portion of our Investments in Policies for $8.9 million, resulting in a $3.5 million gain. The number of life settlement transactions we brokered decreased from 34 to 13, while the average revenue per settlement increased 11.5% from $607,198 in the Second Half of last year compared to $677,088 in the Second Half of this year

The dramatic decrease in revenue was due to two factors. First, we believe the life settlement market declined from approximately $8 billion in face value transactions in calendar 2009 to approximately $4 billion in calendar 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 2012. 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. In addition, the SEC filed a civil action against us in January 2012 as a result of their investigation. These developments significantly impacted our operations. Compared to the First Half of last year, we closed a lower number of settlements (13 from 34), had lower aggregate face values ($46.7 million from $112 million) and realized lower total net revenues derived ($2.8 million from $7.3 million). The slight increase in the average revenue per settlement reflects the fact that our revenue decreases result generally from decreases in purchaser demand for life settlements and not in the availability of policies for life settlement transactions. We also believe the small number of transactions completed during the Second Quarter of this year was due in part to a seasonal lag in the return of transaction documents during the summer months. Many of the transactions that we expected to complete in the Second Quarter of this year were not completed until after the close of that period. We do not believe this reduction in transactions to be a trend and, based on the number of transactions completed during the first month of the Third Quarter of this year, we expect the Third Quarter of this year to have a substantially higher number of transactions than the Second Quarter of this year.

Revenues: Revenues decreased by $11,842,600, or 57.4% from $20,644,744 in the First Half of last year to $8,802,144 in the First Half of this year. Brokerage fees declined 55% or $7,326,628 due to fewer transactions during the Second Quarter of this year, resulting in a 61.6% decrease in revenues net of brokerage fees.

Although the general decline in the life settlement markets may have had some effect on us, the greater impact upon demand for our services appears to have come from the critical news articles and the uncertainty related to legal actions by the SEC and private litigants. 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. Since the start of our current fiscal year (March 1, 2012), approximately 1,800 of our clients have been paid over $43 million in proceeds from their life settlement transactions, and we believe the amount of payouts will increase during the remainder of this fiscal year. Since many of our life settlement purchasers are repeat purchasers, we believe the payouts will restore some demand in the remainder of this fiscal year and the following fiscal year and will enable us to gradually rebuild our markets. The uncertainty of the pending litigation described above will continue, however, to adversely affect our operating results. Restoration of demand approaching levels we recorded in fiscal 2011 is unlikely to occur until and unless we are able to favorably resolve the civil actions brought by the SEC and private litigants.

Brokerage and Referral Fees: Brokerage and referral fees decreased 55% or $7,326,628 from $13,311,044 in the First Half of last year to $5,984,416 in the First Half of this year. Brokerage and referral fees as a percentage of gross revenue increased from 64% in the First Half of last year to 68% in the First Half of this year. In the First Half of this year, broker referrals accounted . . .