Special Note: Certain statements set forth below under this caption constitute "forward-looking statements" within the meaning of the Reform Act. See "Special Note Regarding Forward-Looking Statements" in the Notes to Consolidated Condensed Financial Statements.

We provide the following discussion to assist in understanding our financial position as of August 31, 2009, and results of operations for the three and six months ended August 31, 2009 and 2008. As you read this discussion, refer to our Consolidated Condensed Statements of Income and our Consolidated Condensed Balance Sheet. We analyze and explain the differences between periods in the material line items of these statements. We presume that readers have read or have access to our Annual Report on Form 10-K for Fiscal 2009. The Notes to the Consolidated Condensed Financial Statements contained in our Annual Report note the significant accounting policies used in preparing our financial statements, including policies relating to the recognition of revenue and the recording of investments in life insurance policies. We presume that readers understand the effect of these policies.

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 which 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 purchaser has obligated itself to make the purchase. We defer $100 per viatical settlement and $200 per life settlement to cover minor monitoring services provided subsequent to the settlement date. We amortize this deferred cost over the anticipated life expectancy of the insureds.

On March 27, 2006, FASB Staff Position No. FTB 85-4-1 Accounting for Life Settlement Contracts by Third-Party Investors (FSP FTB 85-4-1) was issued. The FASB Staff Position states that an investor may elect to account for its investments in life settlement contracts using either the investment method or the fair value method. The election shall be made on an instrument-by instrument basis and is irrevocable. Under the investment method, an investor shall recognize the initial investment at the purchase price plus all initial direct costs. Continuing costs (policy premiums and direct external costs, if any) to keep the policy in force shall be capitalized. Under the fair value method, an investor recognizes the initial investment at the purchase price. In subsequent periods, the investor re-measures the investment at fair value in its entirety at each reporting period and recognizes change in fair value earnings (or other performance indicators for entities that do not report earnings) in the period in which the changes occur. We adopted FSP FTB 85-4-1 as of March 1, 2006 (the beginning of Fiscal 2007) and chose to value all of our investments in life settlement contracts using the investment method. As of August 31, 2009, the total of our investment in life settlements held for our own account was valued at $16,210,686.

We establish litigation and policy analysis loss reserves based on our best estimates as to the ultimate outcome of contingent liabilities. This reserve 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 this reserve, 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 reserve 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 should not have a material impact on our financial statements.

As of October 9, 2009, the only material change between our estimates and actual results in the current or prior periods relates to the litigation with the State of Florida. See Item1, Legal Proceedings, Page 27. In that instance, we were unable to estimate an amount or time with regard to the resolution of that action, so no estimation of potential liability was made. That action was fully and completely resolved during the current period, resulting in a charge of $770,000 to settlement expense in the most current quarter.

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 in the proper period. Because of the uncertainty about when policy advances will be collected, we follow the practice of reserving all premium advances at the time such advances are made. When premium advances are repaid, the repayments are netted against premium expense. We have not experienced any material changes in our estimates of collectability versus actual results in the current or prior periods.

We review the carrying value of the 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 at August 31 and February 28, 2009.

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 an asset's life in combination with the Internal Revenue Service rules and guidelines for depreciable lives for specific types of assets.

We must evaluate the carrying value of our investment in owned policies. We adjust our total basis in the policies, (original cost plus capitalized premiums), based on assumptions made about remaining life expectancy, funds needed to maintain the asset until maturity, capitalization rates and potential return. This evaluation provides us with any impairment of individual policies and also provides us with an estimate of fair market value.

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.

New Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Effective March 1, 2008, management adopted SFAS 157 with the exception of certain non-financial assets and non-financial liabilities that were specifically deferred by SFAS No. 157-2. In February 2008, the FASB issued Staff Position No. SFAS 157-2 (FSP No.157-2), Effective Date of FASB Statement No. 157, that defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, for certain nonfinancial assets and nonfinancial liabilities. Adoption of SFAS 157-2 at March 1, 2009, did not have a material impact on our financial condition, results of operations or cash flows. In April 2009, the FASB issued Staff Position No. SFAS 157-4 (FSP No.157-4), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, that provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, when the volume and level of activity for the asset or liability have significantly decreased. FSP No. 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. Adoption of FSP No. 157-4 during the six months ended August 31, 2009 had no impact on our financial condition, results of operations or cash flows.

In December 2007, the FASB issued Statement No. 160, Non-Controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. SFAS No. 160, among other things, provides guidance and establishes amended accounting and reporting standards for a parent company's non-controlling interest in a subsidiary. SFAS No. 160 was adopted on March 1, 2009, and had no impact on our financial condition, results of operations or cash flows.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161"). SFAS No. 161 expands the disclosure requirements in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities about an entity's derivative instruments and hedging activities. Adopted on March 1, 2009, we currently have no derivatives and hedging activities and so the adoption of SFAS No. 161 had no impact on our financial condition, results of operations or cash flows.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 directs the GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 became effective on November 15, 2008. SFAS 162 does not have a material impact on our financial condition, results of operations or cash flows.

In April 2009, FASB issued FSP No. 107-1/APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. Entities shall include disclosures about the fair value of financial instruments whenever it issues summarized financial information for interim reporting periods. Entities shall disclose in the body or in the accompanying notes of its summarized financial information the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by Statement 107. Adopted March 1, 2009, FSP 107-1/APB28-1 had no impact on our financial condition, results of operations or cash flows.

In April 2009, FASB issued FSP No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of the other-than-temporary impairments on debt and equity securities in the financial statements. Adoption of FSP 115-2 and FAS 124-2 during the six months ended August 31, 2009, had no impact on our financial condition, results of operations or cash flows.

In May 2009, the FASB issued Statement No. 165, Subsequent Events ("SFAS 165"). SFAS 165 requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. We have evaluated subsequent events through October 9, 2009 and have determined that we have no subsequent events to report. Adoption of SFAS 165 during the six months ended August 31, 2009, had no impact on our financial condition, results of operations or cash flows.

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("SFAS 168"). SFAS 168 will become the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants Emerging Issues Task Force, and related accounting literature. SFAS 168 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. SFAS 168 will be effective for financial statements issued for reporting periods that end after September 15, 2009. This will have an impact on our financial statements since all future references to authoritative accounting literature will be references in accordance with SFAS 168.

In September 2009, the FASB issued Accounting Standards Update No. 2009-05, Fair Value Measurement and Disclosures: Measuring Liabilities at Fair Value ("ASU 2009-05"). ASU 2009-05 is effective for the first reporting period after September 2009. The guidance provides clarification on measuring liabilities at fair value when a quoted price in an active market is not available. In such circumstances, ASU 2009-05 specifies that a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance. We do not believe we have any liabilities that will need to be measured at fair value and anticipate no impact of this update on our financial condition, results of operations or cash flows.

Life Partners

General. Life Partners Holdings, Inc. ("We" or "Life Partners") is a 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". These financial transactions involve the purchase of the life insurance policies of terminally ill persons (viatical settlements) or elderly persons (life settlements) 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 viatical and life settlement transactions. Both viatical and 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 to use as he or she wishes. 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.

Over the past few years, the distinction between viatical and life settlements has diminished and the markets have largely merged. Many state regulations govern both types of transactions in the same manner and the services we provide for both types of transactions are the same. Thus, we view both viatical and life settlements to be within the same line of business and do not distinguish between them for financial reporting purposes. Throughout this report, we refer to all of our transactions generally as "life settlements".

We are a financial services company, providing purchasing services for life settlements to our client base. We do this by matching life settlors with purchasers. 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 investment 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 98,000 purchaser transactions associated with the purchase of over 6,100 policies totaling over $2.1 billion in face value. We believe our experience, infrastructure and intellectual capital gives 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, 2009 and 2008:

                                                    Three Months                         Six Months
                                               2009              2008              2009              2008
Number of settlements                                 52                50               104                98
Face value of policies                     $ 148,942,938     $ 187,830,823     $ 285,205,442     $ 369,170,531
Average revenue per settlement             $     558,761     $     495,775     $     543,261     $     502,315
Net revenues derived*                      $  16,201,940     $  13,411,954     $  31,487,424     $  25,672,228


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We have increased our efforts to market our services to institutional clients and have been successful in attracting institutional clients. We will continue these marketing efforts to institutions and seek to develop services and lines of business specifically tailored for the needs of institutional clients.

Comparison of the Three Months Ended August 31, 2009 and 2008

We reported net income of $7,625,015 for the three months ended August 31, 2009 ("the Second Quarter of this year"), compared to net income of $6,603,491 for the three months ended August 31, 2008 ("the Second Quarter of last year"). Our stronger net income resulted primarily from a 17.2% increase in revenues and our ability to reduce brokerage fees. The number of settlements transacted increased from 50 to 52, the average revenue per settlement increased by 12.7%, and total revenues net of brokerage fees increased by 20.8%.

Revenues: Revenues increased by $4,266,841 or 17.2% from $24,788,725 in the Second Quarter of last year to $29,055,566 in the Second Quarter of this year. This increase was due primarily to a 12.7% increase in our average revenue per settlement from $495,775 in the Second Quarter of last year to $558,761 in the Second Quarter of this year. This, in conjunction with reduced brokerage and licensee fees, resulted in a 20.8% increase in the net revenues derived.

During the periods, demand for our services remained strong and the number of policies presented to us which met our purchasing qualifications remained steady. Growth in supply of policies with higher face values continued to increase and we anticipate this supply trend to continue for the foreseeable future. Most of our competitors have adopted a single or preferred client business model, which relies on a relatively narrow purchaser base. In contrast, we employ a multi-client business model and our purchaser base is much broader. While a single purchaser may account for a substantial share of revenues during a particular quarterly period, we do not intend to become reliant upon any single purchaser and expect that no single purchaser will account for a substantial share of revenues during the long-term.

We believe the increasing demand for our services comes from several factors, one of which is an investment trend toward diversifying investment portfolios and avoiding economically sensitive investments. Returns on life settlements are based on the inherent value in the face value of life insurance policies, which are purchased at a discount to face value and adjusted for projected future premiums and the projected holding period of the policy to maturity. For this reason, life settlement returns are not correlated to traditional equity and debt markets and commodity investments. We benefit from the investment community searching for non-correlated, asset-based investments. Although we serve both domestic and international purchasers, domestic purchasers accounted for 98.5% of our revenues during the Second Quarter of this year. The ratio of domestic clients to international clients was relatively unchanged from last year. We do not anticipate significant changes in the ratio between domestic and foreign business during the remainder of this fiscal year.

Another contributing factor has been the greater supply of higher face value policies. We believe there is a growing awareness of the secondary market for insurance policies among potential sellers, especially for those with higher face value policies. This growing awareness has resulted in an expansion of the supply of eligible policies, especially policies with higher face values. We believe much of our increased business is due to the greater supply of higher face value policies, and we believe this trend will continue.

Brokerage and Referral Fees: Brokerage and referral fees increased 13.0% or $1,476,855 from $11,376,771 in the Second Quarter of last year to $12,853,626 in the Second Quarter of this year. Brokerage and referral fees as a percentage of gross revenue declined from 45.8% in the Second Quarter of last year to 44.2% in the Second Quarter of this year. In the Second Quarter of this year, broker referrals accounted for 100% of the total face value of policies transacted compared with 99.9% of the policies transacted in the Second Quarter of last year. Due to an increase in the number of brokers in the market that are presenting policies to us, we have noted a reduction in the concentration of brokers that provide policies to us. For the Second Quarter of this year, only two brokers accounted for more than 10% of the face value of all completed transactions, and constituted 29.2% of the total face value of completed transactions compared to the Second Quarter of last year in which policies presented from five brokers having 10.0% or more of the face value transacted constituted 65.7% of the total face value of all completed transactions.

Brokerage and referral fees generally increase or decrease with revenues, face values of policies transacted and the volume of transactions, although the exact ratio may vary according to a number of factors. 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 is not represented by a broker and the life settlor presents a policy to us directly.

Some states are moving to license life settlement brokerage activity, which may result in the capping of fees or greater disclosure of fees, either of which would tend to lower the fees.

Expenses: Operating and administrative expenses increased by 30.5% or $1,186,677 from $3,891,061 in the Second Quarter of last year to $5,077,738 in the Second Quarter of this year due primarily to increases in settlement costs, aircraft travel expenses and employee and executive bonuses due to increased profitability. A significant portion of the settlement costs was the result of a settlement with the State of Florida in the amount $770,000. See Item 1, Legal Proceedings, Page 27.

During the Second Quarters of this year and last year, we made premium advances of $542,651 and $608,776, respectively, and were reimbursed $148,141 and $100,784, respectively. In the typical life settlement, policy premiums for the insured's projected life expectancy are added to the purchase price and reserved to pay future premiums. When the premium reserve is exhausted, purchasers are contractually obligated to pay policy premiums. In some instances, purchasers have failed to pay the premiums and we have 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 these premiums will come most likely as a priority payment from the policy proceeds when an insured dies. We record the premium advances as an expense at the time of the advance and treat reimbursements as a . . .