|UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-KSB
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|x | Annual
      Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
      1934    
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|  |                                                                                                      
|  | For
      the fiscal year ended:  February 28, 2005                                                  
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|  | or                                                                                                   
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|o | Transition
      Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
      1934
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|  | Commission
      File Number: 0-7900                                                                 
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|  | LIFE
      PARTNERS HOLDINGS, INC.(Name of small business issuer in its charter)                     

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|Texas
(State of incorporation)                                   | 74-2962475
 (I.R.S. Employer ID no.)
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|204 Woodhew
Waco, Texas
(Address of Principal Executive Offices) | 76712
(Zip Code)                    

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|Issuers telephone number, including area code: 254-751-7797                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|Securities registered pursuant to Section 12(b) of the Act: None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|Securities registered pursuant to Section 12(g) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|Common Stock (par value $0.01 per share)(Title of Class)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing requirements for at least
the past 90 days. YesxNoo
Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained
herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB.o
Revenues of issuer for year ended February 28, 2005: $18,746,098
Aggregate market value of voting stock held by non-affiliates as of May 11, 2005: $17,885,137
Shares of Common Stock, $.01 par value, outstanding as of May 11, 2005: 9,615,586
DOCUMENTS INCORPORATED BY REFERENCE
Our definitive proxy statement in connection with the Annual Meeting of Shareholders to be filed with
the Commission pursuant to Regulation 14A, is incorporated by reference into Part II, Item 5 and
Part III of this report.

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|LIFE PARTNERS HOLDINGS, INC.  
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|                              
|2005 Form 10-KSB Annual Report
|                              
|Table of Contents             
|                              

|Item   |                                                                                                     | Page No.
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|      
|Part I
|       | Special Note Regarding Forward-Looking Statements                                                   |         
|1.     | Description of Business                                                                             |         
|       | Risk Factors                                                                                        |         
|2.     | Description of Property                                                                             |         
|3.     | Legal Proceedings                                                                                   |         
|4.     | Submission of Matters to a Vote of Security Holders                                                 |         
|       |                                                                                                     |         
|       | Part II                                                                                             |         
|5.     | Market for Our Common Stock, Related Shareholder Mattersand Our Purchases of Equity Securities.     |         
|6.     | Managements Discussion and Analysis                                                                |         
|7.     | Financial Statements                                                                                |         
|8.     | Changes in and Disagreements with Accountants on 
    Accounting and Financial Disclosures          |         
|8A.    | Controls and Procedures                                                                             |         
|8B.    | Other Information                                                                                   |         
|       |                                                                                                     |         
|       | Part III                                                                                            |         
|9.     | Directors and Executive Officers                                                                    |         
|10.    | Executive Compensation                                                                              |         
|11.    | Security Ownership of Certain Beneficial Owners and Management 
    and Related Shareholder Matters |         
|12.    | Certain Relationships and Related Transactions                                                      |         
|13.    | Exhibits                                                                                            |         
|14.    | Principal Accountant Fees and Services                                                              |         
|       | Signatures                                                                                          |         
|       | Table of Contents to Consolidated Financial Statements and Notes                                    |         
|       | Exhibit Index                                                                                       |         
|       |                                                                                                     |         

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|PART I
Special Note Regarding Forward-Looking Statements
Certain statements in this annual report on Form 10-KSB concerning our business prospects or future
financial performance: anticipated revenues, expenses, profitability or other financial items, growth
in the viatical or life settlement markets or our projected sales in such markets, developments in
industry regulations and the application of such regulations, 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. Forward-looking statements involved a number of risks, uncertainties
and other factors, which could cause actual results to differ materially from those stated in such
statements. Factors that could cause or contribute to such differences include, but are not limited
to, those discussed in this annual report on Form 10-KSB, particularly in the sections entitled Item
1  Business  Risk Factors and Item 6  Managements Discussion
and Analysis. 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.
Item 1. Description of Business
Life Partners
General.  Life Partners Holdings, Inc. (We or Life Partners) is the parent company
of Life Partners, Inc. (LPI). LPI is the oldest and one of the largest viatical and life
settlement companies in the world. In addition, we are the only publicly held viatical and life settlement
company in the world.
The Viatical and Life Settlement Business.  LPI was incorporated in 1991 and has conducted business under the registered service mark Life
Partners since 1992. Our revenues are principally derived from fees for facilitating the purchase
of viatical and life settlement contracts. A viatical settlement is the sale of a life insurance
policy by a terminally ill person to another party. By selling the policy, the insured (a viator)
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 viator dies. Our worldwide client base of viatical settlement purchasers are high net worth individuals
or small institutional purchasers.
A life settlement differs from a viatical settlement in that the insured in a life settlement (a life
settlor) is not terminally ill, is 65 years of age or older, and has a life expectancy of ten years
or less. Life settlements are an attractive transaction to persons who purchased life insurance for
income protection or estate planning, but no longer need the insurance due to growth in their investment
portfolios or other changes in circumstances. Life settlements also appeal to persons who want to
make immediate gifts to their beneficiaries. In these instances, the insured may feel the insurance
is no longer needed. Because these policies often have substantially larger face values, their acquisition
costs are higher. Therefore, purchasers of life policies are generally large institutional purchasers,
although smaller face value policies are attractive to the same kind of investor in a viatical settlement.
Since the market for viatical settlements has grown to include life expectancies that are often associated
with life settlements and the age and medical condition of many life settlors
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|gives them a life expectancy that is the same as many viators, the distinction between these two market
segments has diminished and the markets have largely merged. 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.
Our role in a viatical or life settlement transaction is the same. We match viators or life settlors
with purchasers. We facilitate these transactions by identifying, examining, and purchasing the policies
as agent for the purchasers. LPI locates potential viators and life settlors through a network of
brokers, insurance, financial and estate planning professionals, through personal referrals and through
Internet and print media advertising. Brokers are typically compensated based on a percentage of
the face value of a viators policy, which is paid upon the closing of a settlement. Estate
planning professionals and financial planners typically operate on a fee-for-service basis, which
is paid directly by their client. We have long-term relationships with most of the countrys
viatical and life settlement brokers and believe that these brokers adhere to applicable regulatory
requirements when conducting their business. In the fiscal year ended February 28, 2005, broker referrals
accounted for 73% of our business. Policies presented by one broker constituted 46% of all transactions
closed during the fiscal year.
Purchasers generally come to us through a network of financial planners. We develop this network through
referrals and have long-standing relationships with most of the financial planners. Although these
financial planners can be compensated through fee-based consultations paid by the purchaser, we compensate
most of the financial planners based on the amount invested. The compensation of financial planners
is paid in cash generally upon the closing date of the transaction. We have also developed and continue
to develop relationships with institutional purchasers, either directly or through advisors to such
institutional purchasers.
Life settlements have grown in relationship to viatical settlements, and the relatively higher acquisition
costs of life settlements has led us develop relationships with institutional purchasers. We have
devoted substantial marketing and client development resources to attracting institutional purchasers,
both domestically and abroad and both directly and through their advisors. We have experienced success
in attracting such clients and believe that we will continue to attract such institutions as we devote
more time and resources into cultivating relationships with them. One disincentive for domestic institutional
investment has been the accounting treatment applied to viatical and life settlements. As noted in
a recent Wall Street Journal article and in the SEC filings of American International Group and Berkshire
Hathaway, generally accepted accounting principals currently require a settlement purchaser to charge
as a capital loss the difference between the purchase price and the cash surrender value of the policy,
if any. The purchaser realizes gains only when the policy matures. The Financial Accounting Standards
Board is reviewing this accounting treatment and considering whether a settlement should be treated
as an investment asset, which we believe more accurately reflects the nature of the transaction.
If treated as an investment asset, a purchaser would incur no charge upon purchase. We believe adoption
of this more favorable accounting treatment will spur institutional investment, especially in the
domestic market. Such a change will also have a positive effect on policies in which we own an interest.
To purchase a viatical or life settlement, a prospective purchaser first submits a purchaser application,
which contains personal information such as the purchasers name and address as well as affirmative
representations establishing the purchaser as financially sophisticated. A purchaser will also submit
an agency agreement and special power of attorney, which appoints us as a limited agent of the purchaser
to act on his or her behalf in purchasing a viatical settlement. Unless specifically waived by a
purchaser, the agency agreement limits our authority to policies issued by an insurance carrier having
an A.M. Best rating of A- or better, to policies beyond their
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|contestable period (generally two years or older), and, in the case of viatical settlements, to insureds
diagnosed as terminally ill. While in the past most insureds have had a life expectancy of 60 months
or less, we have expanded this market to include insureds with life expectancies of up to seven years
for viatical settlements and up to 15 years for life settlements, depending on the purchasing parameters
of each client. As we identify and qualify policies, which generally fit within the purchasing parameters
of our clients, we distribute insurance and current medical status information on these policies
(with the viators name and other identifying information redacted) throughout our financial
planner network. We also make available to each financial planner standard disclosures discussing
the nature and risks of viatical and life settlement purchases. A purchaser can then, in consultation
with his financial planner or other professionals available to them, select one or more policies,
specify the portion of the policy or policies to be purchased (to diversify their positions, individual
purchasers generally buy fractional interests in one or more policies and not an entire policy, while
institutional purchasers tend to purchase entire policies), and submit a reservation form either
electronically or by fax. At the same time, the purchaser mails or wires the acquisition price to
the escrow agent and mails or faxes a policy funding agreement to us. The policy funding agreement
identifies the policy or policies to be purchased, the acquisition price, the administrative services
provided, and the escrow arrangements for receipt and disbursement of funds. In essence, we act upon
the instructions of the purchasers as their purchasing agent.
For the protection of the sellers ownership interest and the purchasers monetary interest,
all transactions are closed through an independent escrow agent, Sterling Trust Co. (Sterling),
which is a wholly-owned subsidiary of Matrix Bancorp, Inc. (Nasdaq NMS: MTXC). Sterling will close
a purchase when it receives from purchasers executed policy funding agreements and the acquisition
price for a policy, verifies that the policy is in full force and effect and that no security interest
has attached to the policy, and receives a transfer of policy ownership form acknowledged by the
insurance company. Sterling then pays the seller the offer price (net of fees and costs). After the
closing, we send confirmation of the transaction to the purchaser as well as a copy of the assignment
documents.
After closing the transaction, we generally hold title to the policy as nominee for the purchaser.
Responsibility for policy premium costs passes to the purchaser, who typically funds the premium
costs through deposits with Sterling. A viators or life settlors personal information
is protected by regulations promulgated by the Texas Department of Insurance. A purchaser will receive
a copy of the policy and the transfer of ownership (which has the viator or life settlor named as
the insured), but will not receive viator contact information, which is available only to licensed
viatical companies (like Life Partners). We monitor the viators and life settlors health
status and notify Sterling upon their death. We also notify purchasers in instances in which the
premium escrow account has been exhausted so that the purchaser can replenish the account to keep
the policy from lapsing.
We pioneered the foregoing transaction design and, since our formation, we have participated in the
purchase of viatical and life settlement transactions totaling almost $461 million in face value.
The Viatical and Life Settlement Market and Competition. According to public filings, we estimate that the total face value of viatical and life settlement
transactions completed during 2004 was approximately $2.0 billion. This figure gives us a market share
of approximately 3.25%. These figures reflect both viatical and life settlements transacted by us
and others, but not all of our competitors are active in all segments of the market. The life settlement
market emerged out of the viatical settlement market because the transactions are so similar in nature.
Whether an insured has a reasonably definable life expectancy because he or she is terminally ill
or because of advanced age, a present value for the policy can be reasonably calculated. This is
the essence
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|of both viatical and life settlement transactions. Unlike some of our competition, which have more
restrictive purchasing parameters, we have developed markets for all types of life expectancies in
order to accommodate the investment goals of our clients as well as the individual circumstances
of the policies presented to us. We believe this business model makes us more competitive in the
market and provides us with greater flexibility. We also believe that this model provides a stronger
platform for our sustainable growth as a company. Markets are segmented by length of life expectancy
and policy face value. The amount of competition in these markets varies according to the demand
for such policies.
We believe the viatical and life settlement market in general will substantially increase during the
next year due to a number of factors. First, market demand from purchasers remains very strong for
these transactions. While our historical core of individual purchasers continue to have a high degree
of interest in life expectancies between two and seven years, we have also developed substantial
interest from and purchased policies for institutional purchasers, which tend to favor longer life
expectancies. We also note that competition for such policies has increased, indicating that there
is an increased awareness among the financial markets in general of the value of life settlements
as an investment vehicle. Whether the purchaser is a high net worth individual or an institution,
we believe this strong market demand is due, in part, to a continued cautious attitude of purchasers
toward equities and continued low yields from interest bearing instruments, even in light of recent
interest rate hikes by the Federal Reserve. We believe we have successfully educated many individual
and institutional purchasers about the potential returns available from viatical and life settlements
and the inherent diversity they offer from traditional types of investments. Continued general economic
uncertainty has led many purchasers to seek alternative investment strategies that diversify their
portfolios and avoid economically sensitive investments. Viatical and life settlements provide diversification
and are largely independent of the factors contributing to economic downturns, such as interest rate
fluctuations and increasing fuel costs. We believe that interest from both individual and institutional
purchasers will continue to grow steadily throughout the next fiscal year.
Because newer medical treatments have improved the longevity and quality of life of some terminally
ill individuals, we have responded to the effects of the newer medical treatments by tightening our
policy analysis standards, reducing offer prices to viators to reasonably adjust for the present
value of the policy, and expanding our markets to include viators with longer life expectancies.
While we accept policies presented by viators with any type of terminal illness, over 90% of the
viatical settlements we facilitate are with viators living with AIDS.
As a form of competition to viatical and life settlements, the life insurance industry has responded
with policy features offering various pre-death, cash benefits (sometimes called accelerated death
benefits). While in some cases accelerated death benefits may compete with viatical settlements,
we do not expect that the availability of accelerated death benefits to affect the viatical or life
settlement market significantly at this time. The availability of accelerated death benefits is generally
more restricted than viatical or life settlements. For example, policies often limit such benefits
to persons who have a life expectancy of less than one year, in contrast to viatical and life settlements
that are usually available to persons with life expectancies of two to ten years. Viatical and life
settlements generally offer sellers greater amounts than they would receive under accelerated death
benefit provisions. An insurance companys willingness to offer a competitive accelerated death
benefit, and the amount of such benefit, may be affected by imputed policy lapse rates. The availability
and amount of an accelerated death benefit negatively impacts lapse rates, which could increase policy
rates. The competition for new policies limits policy rates and may, indirectly, limit the availability
and amount of accelerated death benefits. In addition, we are aware of at least one insurance company
actively purchasing life settlements using one of our competitors as its agent.
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|The viatical and life settlement market has been negatively affected by some companies using illegal
or questionable business practices. We believe that state and federal regulators have effectively
identified and shut down most of the companies that were engaged in such practices. The result of
these law enforcement actions has been to reduce the amount of competition for both policies and
purchasers. Although state and federal law enforcement officials successfully employed existing laws
to curb these illegal practices, state legislatures and insurance regulators have passed laws and
adopted regulations requiring the licensing of viatical brokers and settlement companies, mandated
disclosures to viators or purchasers or both, and instituting periodic reporting requirements, and
setting forth prohibited business practices. We believe these laws and regulations have generally
had a positive effect on the industry and on our ability to compete in the viatical marketplace.
We are licensed as a viatical and life settlement company in the State of Texas and information about
us is available through the Texas Department of Insurance or on its website at: https://wwwapps.tdi.state.tx.us/pcci/pcci_show_profile.jsp?tdiNum8967842&companyName=Life+Partners%2c+ Inc.&sysTypeCode=PA
The foregoing developments - improved medical treatments, the insurance industrys addition of
pre-death cash benefits, law enforcement pressure on companies operating illegally and increasing
government regulation - have decreased the number of viatical and life settlement companies, both
those purchasing for their own accounts and those, like us, who act as agents for our purchasers.
We estimate the number of viatical and life settlement companies actively purchasing for their own
account or as agents for purchasers to be fewer than five and the number of viatical and life settlement
brokers at about 25. We are unaware of any company that purchases viatical settlements exclusively.
The market has matured and developed to a point where there is no effective market distinction between
viatical and life settlements. Our competitors purchase either life settlements exclusively or, like
us, a combination of viatical and life settlements. While we believe we are one of the largest viatical
and life settlement companies (based on face value of policies settled), competition within the viatical
and life settlement market is active among the few companies in this sector and we will continue
to experience competition for new viators and life settlors. This competition will have an effect
on the prices we pay viators and life settlors, the amount of brokerage and referral fees we pay
and the prices we set for the acquisition of policies. We believe the overall market for viatical
and life settlements will increase as more seniors become aware of their option to liquidate an unwanted
policy through a life settlement. In light of our experience in the market and our estimates concerning
competition and supply and demand for policies, we believe our total business volume for viatical
and life settlements will be $80 to $85 million in face value for the fiscal year 2006. We base this
estimate on the level of business volume we experienced last year as well as an extrapolation from
the current years business volume. Although it was less than we had estimated, our total business
volume during the 2005 fiscal year was approximately $65.1 million in face value, which is an increase
of 55% over the $42 million of our total business volume in fiscal year 2004.
The following table shows the number of viatical and life settlement contracts we have transacted,
the aggregate face values and purchase prices of those contracts, and the revenues we derived, for
our fiscal years ended February 28, 2003, February 29, 2004 and February 28, 2005:
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|                               | 2003 |            | 2004 |   | 2005       | 
|------------------------------ | ---- | ---------- | ---- | - | ---------- | 
|
|Number of settlements          |      | 326        |      |   | 333        | 
|Face value of policies         | $    | 43,629,000 |      | $ | 41,953,000 | 
|Average revenue per settlement | $    | 37,357     |      | $ | 46,837     | 
|                               |      |            |     
|Total net revenues derived(1)  | $    | 6,066,000  |      | $ | 8,218,000  | 

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|(1) The revenues derived are exclusive of referring brokerage and referral fees.

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|Industry Regulation and Taxation
General.  When the viatical market first arose, it was sparsely regulated. Due in part to abuses within
the industry, which were well-publicized, both the federal government and various states moved to
regulate the market in the mid-1990s. The regulations generally took two forms. One sought
to apply consumer protection-type regulations to the market. This application was designed to protect
both viators and purchasers. Another sought to apply securities regulations to the market, which
was designed to protect purchasers. Various states have also used their insurance regulations to
attack instances of insurance fraud within the industry.
Consumer Protection Licensing. The consumer protection-type regulations arose largely from the draft of a model law and regulations
promulgated by the National Association of Insurance Commissioners (NAIC). At least 35 states have
now adopted some version of this model law or another form of regulation governing viatical settlement
companies in some way. These laws generally require the licensing of viatical providers and brokers,
require the filing and approval of viatical settlement agreements and disclosure statements, describe
the content of disclosures that must be made to potential viators, describe various periodic reporting
requirements for viatical settlement companies and prohibit certain business practices deemed to
be abusive.
Licensing in Texas. We are licensed by the Texas Department of Insurance. Under the Texas requirements, we must file
our transaction documents with the state for approval, make certain disclosures to viators, offer
a 15-day right of rescission to the viator, file certain annual reports with the state, and abstain
from unfair business practices. Because all of our transactions occur in Texas, the Department of
Insurance has jurisdiction to investigate complaints from any viator, irrespective of the state in
which that viator lives.
In 1999, Texas became the first state to regulate life settlements as well as viatical settlements.
The Texas regulatory scheme for life settlements is identical to the regulatory scheme applicable
to viatical settlements. It requires licensing of providers and brokers, implements various reporting
requirements and mandates required disclosures. Life Partners is licensed with the State of Texas
as a viatical and life settlement company.
Securities Regulations.  Some states and the Securities and Exchange Commission have attempted to treat viatical settlements
as securities under federal or state securities laws and have successfully done so in circumstances
in which the transactions were structured as securities. No state or federal regulatory body or private
litigant has successfully asserted that our viatical and life settlements are securities under state
or federal law. Due to the manner in which we structure our settlements and utilizing, in some instances,
the exceptions and exemptions under securities laws, such laws have not limited our business model
to a significant extent.
We believe that a combination of consumer protection-type laws and existing insurance regulations provide
an appropriate framework for regulation of the industry. The widespread application of securities
laws would, as a practical matter, prevent us and other viatical and life settlement companies from
marketing settlements with little or no benefit to purchasers. Each of our purchasers has represented
themselves to be sophisticated individuals or institutions, which have little need for the protections
afforded by the securities laws. At this point, the possible application of such laws has not had
an adverse, material effect on our business, but we cannot give assurance that our business would
not be materially and adversely impacted by a securities-based action.
Insurance Regulation. As a viatical and life settlement company, we facilitate the transfer of ownership in life insurance policies, but do not participate in the issuance of policies. We are not required to be licensed as an insurance company or an insurance professional. We do,
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|however, deal with insurance companies
and professionals in our business and are indirectly affected by the regulations covering them. The
insurance industry is highly regulated, and these regulations affect us in numerous ways. We must
understand the regulations as they apply to policy terms and provisions and the entitlement to, and
collectibility of, policy benefits. We rely upon the protections against fraudulent conduct that
these regulations offer and we rely upon the licensing of companies and individuals with whom we
do business.
Taxation.  In 1996, Congress passed the Health Insurance Portability and Accountability Act. This act
exempts from taxation proceeds received in a viatical settlement paid to terminally ill viators (those
having a life expectancy of 24 months or less) and chronically ill viators (those who are incapable
of at least two daily-living activities, such as eating and bathing, and require supervision). The
tax exemption applies only if the viatical settlement company is licensed in the state in which the
viator resides, or if the viator resides in a state that does not license viatical companies, if
the viatical company can certify that it complies with the model act provisions. Because we are licensed
in Texas, we believe that, under the 1996 act, qualifying viators will not be subject to federal
income tax from viatical settlements that we facilitate. Since most states follow the Federal income
tax definitions, the receipt of settlement proceeds is generally exempt for state income tax purposes also.
The act does not exempt the receipt of life settlement proceeds. Life settlement proceeds would typically
be taxed as ordinary income to the extent that the proceeds exceed the premiums paid for the insurance
policy.
Employees
As of February 28, 2005, we had 37 direct employees, none of whom are represented by a labor union,
as well as over 1,000 licensees who act as independent contractors and refer clients to us for the
purchase of viatical and life settlements. We continuously review benefits and other matters of interest
to our employees and consider our employee relations to be satisfactory.
More about Life Partners
Our executive offices are located at 204 Woodhew, Waco, Texas 76712 and our telephone number is 254-751-7797.
Our corporate information website is www.lphi.com. Our informational website for viators and life settlors is www.lifepartnersinc.com.
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|RISK FACTORS
In addition to other information in this annual report on Form 10-KSB and in the documents we are incorporating
by reference, the following risk factors should be carefully considered in evaluating us and our
business. Such factors significantly affect or could significantly affect our business, operating
results or financial condition. This annual report on Form 10-KSB contains forward-looking statements
that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Actual results could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth below and elsewhere in this annual report on Form 10-KSB.
We Are Operating in Markets that May Change Dramatically
We are operating in the viatical and life settlement markets. The viatical settlement market is just
over a decade old. While the market saw tremendous growth in its initial years, the market growth
in recent years has moderated somewhat. The life settlement market is less than seven years old.
How and to what extent it will develop is uncertain. A 2003 report by the insurance consulting firm
Conning & Co. estimates the life settlement market at approximately $2 billion per year
in face value. While we have demonstrated our ability to originate, underwrite and place life settlements
as well as viatical settlements, any dramatic growth will depend heavily upon the entry of institutional
purchasers. Whether we can attract institutional purchasers will depend on our ability to convince
these purchasers that we can originate sufficient numbers of qualified policies for purchase and
that our policy analysis and pricing practices are sound. Until we attract a sufficient number of
institutional clients to provide for consistent and predictable demand, our financial performance
during any period may be dramatically affected by the entry or departure of one or more of our institutional
clients from the market.
While we are among the most experienced and largest companies within these markets, our prospects must
be considered in light of the risks, expenses and difficulties encountered by those attempting to
operate in rapidly evolving markets. We cannot assure you that we will be successful in addressing
the risks we face. The failure to do so could have a material adverse effect on our business, financial
condition, and results of future operations.
Our Operating Results in One or More Future Periods Are Likely to Fluctuate and May Fail to Meet Expectations.
Our operating results in the viatical market have fluctuated in the past and may fluctuate significantly
in the future depending on purchaser demand for viatical and life settlements and the timing of settlement
closings. Because of these or other factors, our operating results may, in some future period, fall
below market expectations. In such event, the market price of our securities might fall. Moreover,
fluctuations in our operating results may also result in volatility in the market price of our securities.
Our Success Depends on Maintaining Relationships Within Our Referral Networks
We rely primarily upon brokers to refer potential viators and life settlors to us and upon financial
planners, known as licensees, to refer viatical and life settlement purchasers to us. These relationships
are essential to our operations and we must maintain these relationships to be successful. We do
not have fixed contractual arrangements with the brokers or financial planners and they are free
to do business with our competitors. In addition, the pool of viatical brokers and referring financial
planners is relatively small, which can increase our reliance on our existing relationships. During
the 2005 and 2004 fiscal years, a single broker accounted for 46% and 43%,
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|respectively, of the policies that were purchased through us. The loss of this broker could have a
material effect on our financial operations. We have attempted to ameliorate this risk by increasing
our advertising and market presence in order to attract viators and life settlors to us directly.
During the last fiscal year, 27% of all policies closed were presented to us directly. This amount
of policies presented to us directly is an increase of 2% over last year and is more than three times
the total amount of policies presented by our second most active broker. However, many viators and
life settlors are more comfortable having their policies presented through brokers, and the extent
to which we may be able to attract viators and life settlors directly is unknown. As we develop our
own network of insurance and financial planning professionals, known as producers, to refer potential
sellers to us, we expect referrals from this source to grow. As with brokers, our ability to build
and maintain these relationships will depend upon our closing rates and the level of compensation
we pay to the referring professional. The compensation paid to the referring professional will affect
the offer price to the seller and the compensation we receive. We must balance these interests successfully
to build our referring network and attain greater profitability.
Substantial Growth in the Life Settlement Market Will Depend on Institutional Sources of Capital
Since 1997, we have expanded our business plans to include the life settlement market by soliciting
life settlors and establishing a division dedicated exclusively to attracting and interacting with
large financial institutions. During the course of the past year, we began attracting and purchasing
policies for institutional clients as well as for our high net worth clients. Because of the large
capital requirements associated with the purchase of life settlements, attracting institutional clients
will be key to substantial growth of our company.
Because we have focused on the expansion of our business to institutional clients during the past year,
we have reduced our emphasis on developing a capital markets vehicle for financing life settlements.
While we intend to explore our options in this area, it is not an immediate priority for our business
plan over the next year.
We have devoted substantial marketing and client development resources to attracting institutional
clients, both domestically and abroad. We have already experienced success in attracting such clients
and we believe that we will continue to attract such institutions as we devote more time and resources
into cultivating relationships with them. We believe that the development of such relationships will
fuel substantial growth of our company, but we cannot be certain during what period or periods any
such institution may choose to do business with us or what amount of business they would bring to us.
We Depend on Growth in both the Viatical and Life Settlement Market
We believe the viatical market has demonstrated sustainable growth and will continue to provide a stable
base for our operations. Large-scale growth, however, will likely depend on growth in the life settlement
market. The life settlement market is new and its growth uncertain. The life market may fail to grow
due to a variety of factors, including:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |  | the inability to locate sufficient numbers of life settlors;                    
| | - | --------------------------------------------------------------------------------
| |   |                                                                                 
| |  | the inability to convince potential sellers of the benefits of life settlements;
| |   |                                                                                 
| |  | the inability to attract institutional purchasers;                              
| |   |                                                                                 
| |  | competition from other life settlement companies;                               

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| |  | the occurrence of illegal or abusive business practices resulting in negative publicity about the market;
  and
| | - | ---------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                
| |  | the adoption of overly burdensome governmental regulation.                                                     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In addition, the life settlement market may evolve in ways we have not anticipated and we may be unable
to respond in a timely or cost-effective manner. If the life settlement market fails to grow, or
fails to grow as quickly as we have anticipated, our business, financial condition and results of
operations would be materially adversely affected as it relates to our large scale growth.
Our Purchasers Depend on Our Abilities to Predict Life Expectancies; If We Are Not Accurate, We Will
Lose Purchasers; We Must Purchase In Large Numbers
A purchasers investment return from a viatical or life settlement depends primarily on the demise
of the insured. We price settlements based on the anticipated life expectancy of an insured. For
viatical settlements, life expectancies are estimated based on a medical analysis of the insured.
For life settlements, life expectancies are estimated from medical and actuarial data based on the
historical experiences of similarly situated persons. The data is necessarily based on averages involving
mortality and morbidity statistics. The outcome of a single settlement may vary significantly from
the statistical average. It is impossible to predict any one insureds life expectancy exactly.
To mitigate the risk that an insured will outlive his or her predicted life expectancy, viatical
and life settlement purchasers must be able to bear a non-liquid investment for an indeterminate
period of time.
If we underestimate the average life expectancies, our purchasers will not realize the returns they
seek and will invest their funds elsewhere. In addition, amounts escrowed for premiums may be insufficient
to keep the policy in force. Our ability to accurately predict life expectancies is affected by a
number of factors, including:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |  | the accuracy of our life expectancy estimations, which must sufficiently account for factors including
  an insureds age, medical condition, life habits (such as smoking), and geographic location;                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                           
| |  | our ability to anticipate and adjust for trends, such as advances in medical treatments, that affect
  life expectancy data; and                                                                                                          
| |   |                                                                                                                                                                                                                                           
| |  | our ability to balance competing interests when pricing settlements, such as the amounts paid to viators
  or life settlors, the acquisition costs paid by purchasers, and the compensation paid to ourselves
  and our referral networks.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|To foster the integrity of our pricing systems, we use both in-house and outside experts, including
medical doctors and published actuarial data. We cannot assure you that, despite our experience in
settlement pricing, we will not err by underestimating average life expectancies or miscalculating
reserve amounts for future premiums. If we do so, we could lose purchasers and the loss of purchasers
could have a material adverse effect on our business, financial condition, and results of operations.
Government Regulation Could Negatively Impact Our Business
We are licensed and regulated by the Texas Department of Insurance as a viatical and life settlement
company. Texas law requires the licensing of viatical and life settlement providers and governs many
aspects of our conduct, operations, advertising and disclosures. In addition, some states and the
Securities and Exchange Commission have attempted to treat viatical settlements as securities under
federal or state securities laws and many have successfully done so

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|in circumstances in which the transactions were structured as securities. However, no state or federal
regulatory body has successfully asserted that our viatical and life settlements are securities.
Because of legal precedent relating to our transactions, we do not believe that the application of
securities laws will have a material adverse effect on our operations, but cannot assure you that
state regulators or private individuals will not file these types of actions in the future or that
the such actions would not have a material adverse effect on our business. In addition, changes in
laws or governmental regulation could affect our brokers or clients which could have a material adverse
effect on our business.
Our Chairman and Chief Executive Officer Beneficially Owns 54% of Our Common Stock and, as a Result,
Can Exercise Significant Influence over Our Company
Mr. Brian D. Pardo, our Chairman and Chief Executive Officer, is defined under SEC regulations as the
beneficial owner of approximately 54% of our common stock and exercises voting power by proxy from
The Pardo Family Trust over 56% of the common stock (since we cannot vote the 206,615 shares held
in our treasury). He will be able to control most matters requiring approval by our shareholders,
including the election of directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in control of Life Partners,
which in turn could have a material adverse effect on the market price of our common stock or prevent
our shareholders from realizing a premium over the market price for their shares of common stock.
Our Stock Is Thinly Traded and the Stock Price May Be Volatile
Our common stock is traded on the Nasdaq Small Cap market. Unlike the OTC Bulletin Board, the Nasdaq
Small Cap market requires numerous qualitative standards such as minimum price at initial listing,
minimum trading price for a 30-day period and adherence to numerous corporate governance requirements
such as an independent audit committee. Although our share price and average daily volume have increased
substantially since we began trading on the Nasdaq, our stock is still not widely traded and our
share prices may be volatile due to actual or anticipated variations in our quarterly operating results,
positive or negative developments concerning our business or about our industry or the general economy.
We cannot assure you that the market for our shares will be sufficient to permit you to sell our
shares when you want at the prices you want. However, by qualifying for the trading on the Nasdaq,
we have improved our visibility and enlarged our market presence increasing shareholder liquidity
in our stock and making our stock price less susceptible to volatile movements on low trading volume.
Our share price during the 90 days ended May 11, 2005, has averaged about $5.47 per share, giving
us a market capitalization of approximately $52 million. Our total share volume for April 2005 was
approximately 277,600 shares compared to 91,500 shares for the same period last year.
Item 2.  Description of Property
Our corporate offices are located at 204 Woodhew in Waco, Texas. We own 1.068 acres at this location
and our offices occupy the entire 12,012 square foot office building, which was built on the lot
in 1986.
Item 3.  Legal Proceedings
We are subject to legal proceedings in the ordinary course of business, none of which, either individually
or collectively, we believe are material to our business operations, financial condition, or results
of operations.
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|Item 4.  Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year covered by this Annual Report
to a vote of our security holders.
PART II
Item 5.  Market for Our Common Stock, Related Shareholder Matters and Our Purchases of Equity
Securities
Market Information. On May 17, 2005, there were approximately 127 shareholders of record of our Common Stock. Most of
our common stock is held beneficially by broker/dealers. We believe that there are approximately
1,294 beneficial owners of shares of our common stock who hold in street name through brokers.
The following table sets forth the high and low closing bid prices per share of our common stock for
each full quarterly period during the two most recent fiscal years, as reported by the Nasdaq OTC
Bulletin Board (until Oct. 2003) and the Nasdaq Small Cap Market. Bid prices for the Nasdaq OTC Bulletin
Board reflect inter-dealer prices, do not include retail mark-ups, mark-downs and commissions, and
do not necessarily reflect actual transactions.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                   | High |      | Low |   | Cash
      Dividends | 
|------------------ | ---- | ---- | --- | - | -------------------- | 
|
|Year Ended 2/29/04 |      |      |     |   |                      | 
|                  
|First Quarter      | $    | 3.90 |     | $ | 2.40                 | 
|Second Quarter     | $    | 5.60 |     | $ | 3.00                 | 
|Third Quarter      | $    | 6.50 |     | $ | 3.85                 | 
|Fourth Quarter     | $    | 7.80 |     | $ | 5.28                 | 
|                  
|Year Ended 2/28/05 |      |      |     |   |                      | 
|                  
|First Quarter      | $    | 6.84 |     | $ | 4.75                 | 
|Second Quarter     | $    | 5.80 |     | $ | 3.56                 | 
|Third Quarter      | $    | 6.60 |     | $ | 4.43                 | 
|Fourth Quarter     | $    | 8.65 |     | $ | 4.93                 | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|On May 11, 2005, the last reported sale price of our common stock on the Nasdaq was $4.18 per share.
Dividends. We paid common stock dividends of $0.13 per share in fiscal 2004 and $0.19 per share in fiscal 2005.
The dividend declared by the Board of Directors has been $0.05 per share in each quarter since August
17, 2004. In addition, we have traditionally paid a Christmas Bonus dividend of one cent
per share in the third fiscal quarter to shareholders of record as of November 30.
Recent Purchases and Sales of Our Common Stock. In fiscal 2005, in a private transaction with a single individual, we exchanged 20,000 shares for
the cancellation of a promissory note in the amount of $154,800.
Elimination of Share Reserve.In fiscal 2005, we cancelled 140,814 common shares, which were an estimate of shares needed for the

2000 share exchange with I.G.E. shareholders. Based on current information, we believe that no
further
unexchanged shares exist for tender and have eliminated the estimated reserve amount accordingly.

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|Item 6.  Managements Discussion and Analysis
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 for additional factors relating to such statements.
We provide the following discussion to assist in understanding of our financial position as of February
28, 2005, and results of operations for the years ended February 28, 2005 and February 29, 2004.
As you read this discussion, refer to our Consolidated Statements of Income and our Consolidated
Balance Sheet. We analyze and explain the differences between periods in the material line items
of these statements.
Critical Accounting Estimates, Assumptions and Policies
Our discussion and analysis of financial condition and results of operations are based on our 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. The making of estimates and assumptions when preparing financial
statements is unavoidable. Areas affected by our estimates and assumptions are identified below.
We recognize income at the time a settlement has been closed and the purchaser has obligated itself
to make the purchase. We defer $100 per settlement to cover minor monitoring services provided subsequent
to the settlement date and to amortize this deferred cost over the anticipated life expectancy of
the insureds.
In accordance with Financial Standards Board Technical Bulletin 85-4 Accounting for Purchases
of Life Insurance, we reduce our investment in life insurance policies to the cash surrender
value of such policies with any differences between cost and cash surrender value being charged to
expense.
We establish litigation and policy analysis loss reserves based on our best estimates as to the ultimate
outcome of contingent liabilities. Because of the high degree of judgment required in determining
these estimated reserve amounts, actual future litigation and policy analysis loss costs could differ
from our currently estimated amounts.
We must make estimates of the collectability of accounts and notes receivable and premium advances.
We must evaluate property and equipment for impairment whenever indicators of impairment exist. Accounting
standards require that if an impairment indicator is present, we must assess whether the carrying
amount of the asset is unrecoverable by estimating the sum of the future cash flows expected to result
form the asset, undiscounted and without interest charges. If the carrying amount is less than the
recoverable amount, an impairment charge must be recognized, based on the fair value of the asset.
As of February 28, 2005, we had recognized no impairment.
We must evaluate the useful lives of our property and equipment to assure that an adequate amount of
depreciation is being charged to operations.
We are required to estimate our income taxes. This process involves estimating our current tax exposure
together with assessing temporary differences resulting from differing
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|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 Financial
Statements.
New Accounting Pronouncements
On December 16, 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employeesand amends FASB Statement No. 95, Statement of Cash Flows. Statement 123(R) requires that all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair values. The provisions
of Statement 123(R) are effective prospectively as of March 1, 2006. The implementation of this statement
would have resulted in an additional $22,420 in expense in fiscal 2004 and $133,000 in fiscal 2005.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets-amendment of APB Opinion No. 29. Statement 153 eliminates the exception to fair value for exchanges of similar productive assets and

replaces it with a general exception for exchange transaction that do not have commercial substance,

defined as transaction that are not expected to result in significant changes in the cash flows
of
the reporting entity. This statement is effective for exchanges of nonmonetary assets occurring
after
June 15, 2005.
Management believes adoption of these new statements will not have any significant effect on our financial
condition or results of operations.
Life Partners
We are the oldest and one of the largest viatical and life settlement companies in the world. We are
also the only publicly held viatical and life settlement company in the world. Our revenues are primarily
derived from fees associated with facilitating viatical and life settlements.
Comparison of Years Ended February 28, 2005, and February 29, 2004
We had net income of $2,683,129 for the year ended February 28, 2005 as compared to net income of $2,478,431
for the year ended February 29, 2004. This increase in net income is attributable primarily to a
20% increase in revenues.
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|Revenues  - Revenues increased by $3,149,273 or 20% from $15,596,825 in 2004 to $18,746,098 in 2005. This
increase was due primarily to a 38% increase in the average revenue per settlement from $46,837 in
2004 to $64,865 in 2005.
The number of settlements we transacted this year decreased by 13% from last year. However, despite
this decrease in the number of transactions, our revenues and net income increased. This is because
our total business volume (measured in face amount of policies transacted during the period) increased
by 55% over last year and the demand for our services as well as less competition, especially for
viatical settlements, has supported a pricing structure that enabled us to increase our operating
margins.
We believe the increasing demand for our services results from investment trends toward diversifying
investment portfolios and avoiding economically sensitive investments. Returns on viatical and life
settlements are linked to the lives of the insureds. As such, the settlements function independently
from traditional equity and debt markets and commodity investments. As the oldest and one of the
largest providers of viatical and life settlements, we benefit from these trends in the investing
community. Although demand for our services emanates from both domestic and international purchasers,
we noted a substantial increase in revenue attributable to domestic clients. Approximately 81% of
our business for the year was from domestic purchasers while approximately 19% was from foreign purchasers
during fiscal 2005. In fiscal 2004, this ratio was 64% domestic business and 36% international. We
believe that during the next year, domestic demand will remain strong, especially with continued
economic uncertainty, stock market volatility and low yielding interest bearing investments, while
foreign investment will increase to a closer ratio. During the past year, interest from the Pacific
Rim and South America increased from our prior fiscal year, and we have experienced substantial interest
and purchasing from clients in Western Europe. We have expended funds in marketing to various foreign
countries and, during the coming fiscal year, we expect an increase in purchasing from clients in
Western Europe, the Caribbean, South America and the Pacific Rim.
Brokerage and Referral Fees  - Brokerage and referral fees increased 30% or $2,200,513 from $7,379,266 in 2004 to $9,579,779
in 2005. This increase is due primarily to a 20% increase in revenues. Brokerage and referral fees
generally increase or decrease with revenues 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 viators
and life settlors whom they represent. In some instances, several brokers may compete for representation
of the same seller, which will 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, individual agreements between clients and their referring financial planners.
No broker fees are paid when a viator or life settlor is not represented by a broker and presents
a policy to us directly.
Expenses   General and administrative expenses increased by 19% or $841,623 from $4,420,928 in 2004
to $5,262,551 in 2005. Depreciation expenses increased 90% or $76,656 from $85,244 in 2004 to $161,900
in 2005. This depreciation increase is primarily related to an extensive investment in the development
of proprietary software, which was placed into production during this fiscal year. Interest and other
income increased 84% or $178,685 from $213,346 in 2004 to $392,031 in 2005 and was augmented by a
92% decrease in interest expense of $353,599 from $385,106 in 2004 to $31,507 in 2005. This decrease
in interest expense was due to a settlement with the Internal Revenue Service last year and is considered
an extraordinary event. The decrease in interest expense resulted in a 246% increase in other income.
Income Taxes- Income tax expense increased by $399,240 from $941,260 in 2004 to $1,340,500 in 2005 due to a decrease
in our deferred tax benefit and, to a lesser extent, an
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|17
|--



|increase in income before taxes. The deferred tax benefit decreased by $415,000 due to the timing difference
in the allowance on premium advances.
Liquidity and Capital Resources
Operating Activities  - Net cash flows provided by operating activities for the year ended February 28, 2005, were
$2,037,356 compared with net cash flows provided by operating activities of $1,439,543 for the year
ended February 29, 2004. This increase in cash flows from operating activities was attributable primarily
to net income of $2,683,129. Our accounts receivable increased $510,404 in fiscal 2005 and $1,636,591
in fiscal 2004 while accounts payable increased $882,982 in fiscal 2005 and $762,703 in fiscal
2004. Our cash during fiscal 2005 decreased $2,071,868, which followed a decrease of $2,068,706 in
fiscal 2004. The decrease in cash was largely attributable to investments of cash in income funds
of $1,614,792 in fiscal 2005 and $1,929,292 in fiscal 2004 and the payment of dividends to shareholders
of $1,838,270 in fiscal 2005 and $1,324,865 in fiscal 2004.
We used additional cash for advances on policy premiums primarily to maintain certain older viatical
settlement transactions. The contracts, most of which were made before 1998, allegedly lacked sufficient
disclosure about the purchasers obligation to pay premiums in order to maintain an acquired
policy. While we have steadfastly denied any legal liability or contractual obligation to do so,
we have advanced premiums as an accommodation to some purchasers. Reimbursements for these premiums
come from either the purchasers or from the distribution of such purchasers proceeds paid when
the viator dies. Policy advances have been recorded as an expense at the time they are made with
collections being treated as a reduction in this expense. During fiscal 2005 and 2004, we made premium
advances of $827,583 and $459,789, respectively, and were reimbursed $137,289 and $106,307, respectively.
We are unable to estimate the amount of any future advances we may elect to make or the amount of
reimbursements we are likely to receive.
Our present business model does not require large cash amounts. While we are not planning significant
changes to the business model, future events could affect our cash needs. For example, the Financial
Accounting Standards Board is reviewing the accounting treatment for purchases of viatical and life
settlements. The treatment currently requires purchasers to charge as a loss the difference between
the purchase price and the cash surrender value of the policy, if any. The purchaser realizes gains
only when the policy matures. If treated as an investment asset, a purchaser would incur no charge
upon purchaser. Attention has been focused on this accounting issue with American International Groups
recent disclosure that it had improperly accounted for life settlements that it had purchased and
Berkshire Hathaways disclosures of accounting losses incurred as a result of purchasing life
settlements. The adoption of this more favorable accounting treatment, which management believes
more accurately reflects the nature of the transaction, might mean that we begin purchasing settlements
for our own account, which would alter our cash usage.
Our strategy is to increase cash flows generated from operations by increasing revenues while controlling
brokerage and general and administrative expenses. We believe that domestic and international demand
for both viatical and life settlements will continue to grow during the next year, especially as
the prospects for economic conditions remain uncertain. In response to the projected demand for qualified
viatical and life settlement policies, we are increasing our advertising and educational awareness
to potential sellers of policies and will continue to expand our marketing efforts to purchasers
of life settlements.
At February 28, 2005, we had working capital of $3,771,557. We believe future viatical and life settlement
operations will generate sufficient profits and cash flows to meet our
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|
|
|

|anticipated working capital needs. Services related to life settlements are currently marketed and
performed in a manner similar to viatical settlements, although primarily to institutional purchasers.
We will continue to explore pooled securitization arrangements for life settlements as well, but
do not expect any material adverse financial impact on our operations if a securitization fails to
develop.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet arrangements or transactions.
Contractual Obligations and Commitments
The following table reflects our outstanding contractual obligations and commitments as of February
28, 2005:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|Contractual Obligations |  | Total |         | Due in less
      than 1 year |   | Due in
      1 to 3 years |  | Due in
      4 to 5 years |         | Due after
      5 years |  
|----------------------- |  | ----- | ------- | ----------------------------- | - | ------------------------- |  | ------------------------- | ------- | ----------------------- | -
|                        |  |       |         |                               |   |                           |  |                           |         |                         |  
|Long-term debt          |  | $     | 702,110 |                               | $ | 148,234                   |  | $                         | 204,981 |                         | $
|Operating leases        |  |       | 99,021  |                               |   | 36,675                    |  |                           | 60,513  |                         |  
|                        |  |       |         |                               |   |                           |  |                           |         |                        
|Total obligations       |  | $     | 801,131 |                               | $ | 184,909                   |  | $                         | 265,494 |                         | $
|                        |  |       |         |                               |   |                           |  |                           |         |                        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 7.  Financial Statements
Our audited Consolidated Financial Statements, together with the report of auditors and the notes to
the Consolidated Financial Statements, begin on page 23 of this report.
Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 8A.  Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the filing date of this
report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. This evaluation was carried out under the supervision and with the participation
of our principal executive officer and our principal financial officer, who concluded that our disclosure
controls and procedures are effective. There have been no significant changes in our internal controls
or in other factors, which could significantly affect internal controls subsequent to the date we
carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted under the Securities Exchange
Act is recorded, processed, summarized and reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed
in our reports filed under the Exchange Act is accumulated and communicated to management, including
our principal executive officer and our principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Item 8B.  Other Information
None.

|19
|--



|PART III
Item 9.  Directors and Executive Officers
The information required in response to this Item is incorporated herein by reference to our proxy



statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A,

not

later than 120 days after the end of the fiscal year covered by this report.
Item 10.  Executive Compensation
The information required in response to this Item is incorporated herein by reference to our proxy



statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A,

not

later than 120 days after the end of the fiscal year covered by this report.
Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
The information required in response to this Item is incorporated herein by reference to our proxy



statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A,

not

later than 120 days after the end of the fiscal year covered by this report.
Item 12.  Certain Relationships and Related Transactions
The information required in response to this Item is incorporated herein by reference to our proxy



statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A,

not

later than 120 days after the end of the fiscal year covered by this report.
Item 13.  Exhibits
The exhibit list and accompanying footnote disclosures in the Index to Exhibits immediately following
the Notes to our Consolidated Financial Statements is incorporated herein by reference in response
to the requirements of this part of the report.
Item 14.  Principal Accountant Fees and Services
The information required in response to this Item is incorporated herein by reference to our proxy
statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year covered by this report.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|20
|--



|SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|             |                              |                                                           
|------------ | ---------------------------- | ----------------------------------------------------------
|May 26, 2005 | Life Partners Holdings, Inc.
|             |                              |                                                           
|             | By:                          | /s/ Brian D. Pardo                                        
|             |                              |                                                           
|             |                              | Brian D. Pardo 
     President and Chief Executive Officer

|                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
|                                                                                                                                                                             

|Name                 |  | Title                                               |              | Date         | 
|-------------------- |  | --------------------------------------------------- | ------------ | ------------ | 
|                     |  |                                                     |              |              | 
|                     |  |                                                     |              |              | 
|/s/ Brian D. Pardo   |  | President, Principal ExecutiveOfficer, and Director | May 26, 2005 |             
|                     | 
|Brian D. Pardo       | 
|                     |  |                                                     |              |              | 
|/s/ Nina Piper       |  | Treasurer                                           |              | May 26, 2005 | 
|                     | 
|Nina Piper           | 
|                     |  |                                                     |              |              | 
|/s/ R. Scott Peden   |  | Secretary, Director                                 |              | May 26, 2005 | 
|                     | 
|R. Scott Peden       | 
|                     |  |                                                     |              |              | 
|/s/Tad Ballantyne    |  | Director                                            |              | May 26, 2005 | 
|                     | 
|Tad Ballantyne       | 
|                     |  |                                                     |              |              | 
|/s/ Jacqueline Davis |  | Director                                            |              | May 26, 2005 | 
|                     | 
|Jacqueline Davis     | 
|                     |  |                                                     |              |              | 
|/s/ Fred Dewald      |  | Director                                            |              | May 26, 2005 | 
|                     | 
|Fred Dewald          | 

|21
|--



|LIFE PARTNERS HOLDINGS, INC.CONSOLIDATED FINANCIAL STATEMENTSFEBRUARY 28, 2005 AND FEBRUARY 29, 2004
Contents
|-------------------------------------------------------------------------------------------------------------
|                                                                                                             

|Report of Independent Registered Public Accounting Firm |  |  | 23 | 
|------------------------------------------------------- |  |  | -- | 
|Audited Consolidated Financial Statements:              |  |  |    | 
|Consolidated Balance Sheet                              |  |  | 24 | 
|Consolidated Statements of Income                       |  |  | 26 | 
|Consolidated Statements of Shareholders Equity         |  |  | 27 | 
|Consolidated Statements of Cash Flows                   |  |  | 28 | 
|Notes to Consolidated Financial Statements              |  |  | 29 | 
|                                                        | 
|                                                        | 

|22
|--



|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of DirectorsLife Partners Holdings, Inc.
We have audited the accompanying consolidated balance sheet of LIFE PARTNERS HOLDINGS, INC. and subsidiaries
as of February 28, 2005, and the related consolidated statements of income, shareholders equity,
and cash flows for the years ended February 28, 2005 and February 29, 2004. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first paragraph above present
fairly, in all material respects, the consolidated financial position of Life Partners Holdings,
Inc. and subsidiaries as of February 28, 2005, and the consolidated results of its operations and
cash flows for the years ended February 28, 2005 and February 29, 2004, in conformity with accounting
principles generally accepted in the United States of America.
MURRELL, HALL, MCINTOSH & CO., PLLP
Oklahoma City, Oklahoma
May 5, 2005
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|23
|--



|                            
|----------------------------
|LIFE PARTNERS HOLDINGS, INC.
|                            
|CONSOLIDATED BALANCE SHEET  
|                            
|FEBRUARY 28, 2005           
|                            
|Page 1 of 2                 
|                            

|                                                               
|---------------------------------------------------------------
|
|CURRENT ASSETS:                                                
|Cash                                                           
|Investment in securities                                       
|Accounts receivable - trade                                    
|Accounts receivable - employees and others                     
|Prepaid expenses                                               
|                                                               
|                                                               
|Total current assets                                           
|                                                               
|                                                               
|PROPERTY AND EQUIPMENT:                                        
|Land and building                                              
|Machinery and equipment                                        
|Transportation equipment                                       
|                                                               
|                                                               
|                                                               
|Accumulated depreciation                                       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|OTHER ASSETS:                                                  
|Premium advances net of reserve for uncollectible of $1,608,217
|Artifacts and other                                            
|Deferred income taxes                                          
|                                                               
|                                                               
|                                                               
|Total Assets                                                   
|                                                               

|                                                                                          
|------------------------------------------------------------------------------------------
|See the accompanying summary of accounting policies and notes to the financial statements.
|                                                                                          

|24
|--



|                            
|----------------------------
|LIFE PARTNERS HOLDINGS, INC.
|                            
|CONSOLIDATED BALANCE SHEET  
|                            
|FEBRUARY 28, 2005           
|                            
|Page 2 of 2                 
|                            

|                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------
|                                                                                                                            
|CURRENT LIABILITIES:                                                                                                        
|Accounts
      payable                                                                                                      
|Accrued
      liabilities - contingencies and other                                                                         
|Current
      portion of long-term debt                                                                                     
|Deferred
      revenue                                                                                                      
|Income
      taxes payable                                                                                                  
|                                                                                                                            
|                                                                                                                            
|Total
      current liabilities                                                                                             
|                                                                                                                            
|                                                                                                                            
|LONG-TERM
      DEBT, net of current portion shown above                                                                    
|                                                                                                                            
|                                                                                                                            
|SHAREHOLDERS
      EQUITY:                                                                                                 
|Common
      stock, $0.01 par value 10,000,000 shares
             authorized; 9,615,586 shares issued
      and outstanding
|Additional
      paid-in capital                                                                                            
|Accumulated
      deficit                                                                                                   
|Accumulated
      other comprehensive loss                                                                                  
|Less:
      Notes receivable issued for common stock                                                                        
|Less:
      Treasury stock - 206,615                                                                                        
|                                                                                                                            
|Total
      shareholders equity                                                                                            
|                                                                                                                            
|                                                                                                                            
|Total
      Liabilities and Shareholders Equity                                                                            
|                                                                                                                            

|
|
|

|See the accompanying summary of accounting policies and notes to the financial statements.
|------------------------------------------------------------------------------------------
|                                                                                          

|25
|--



|LIFE PARTNERS HOLDINGS, INC.CONSOLIDATED STATEMENTS OF INCOMEFOR THE YEARS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
|------------------------------------------------------------------------------------------------------------------------
|                                                                                                                        

|                                                                                                   | 2005 |            | 2004 |  
|-------------------------------------------------------------------------------------------------- | ---- | ---------- | ---- | -
|                                                                                                   |      |            |      |  
|REVENUES                                                                                           | $    | 18,746,098 |      | $
|BROKERAGE
      AND REFERRAL FEES                                                                  |      | 9,579,779  |      |  
|                                                                                                   |      |            |      |  
|REVENUES,
      NET OF BROKERAGE FEES                                                              |      | 9,166,319  |      |  
|                                                                                                   |      |            |      |  
|OPERATING
      AND ADMINISTRATIVE EXPENSES:                                                       |      |            |      |  
|General
      and administrative                                                                   |      | 5,262,551  |      |  
|Accrued
      contingency costs                                                                    |      |           |      |  
|Depreciation                                                                                       |      | 161,900    |      |  
|                                                                                                   |      |            |      |  
|                                                                                                   |      | 5,424,451  |      |  
|                                                                                                   |      |            |      |  
|INCOME FROM
      OPERATIONS                                                                       |      | 3,741,868  |      |  
|                                                                                                   |      |            |      |  
|OTHER INCOME
      (EXPENSES):                                                                     |      |            |      |  
|Interest
      and other income                                                                    |      | 392,031    |      |  
|Interest
      expense                                                                             |      | (31,507    | )    |  
|Realized
      loss on investments                                                                 |      | (78,763    | )    |  
|                                                                                                   |      |            |      |  
|                                                                                                   |      | 281,761    |      |  
|                                                                                                   |      |            |      |  
|INCOME BEFORE
      INCOME TAXES                                                                   |      | 4,023,629  |      |  
|                                                                                                   |      |            |      |  
|INCOME TAXES:                                                                                      |      |            |      |  
|Current
      tax expense                                                                          |      | 1,541,500  |      |  
|Deferred
      tax benefit                                                                         |      | (201,000   | )    |  
|                                                                                                   |      |            |      |  
|                                                                                                   |      | 1,340,500  |      |  
|                                                                                                   |      |            |      |  
|NET INCOME                                                                                         | $    | 2,683,129  |      | $
|                                                                                                   |      |            |      |  
|                                                                                                   |      |           
|EARNINGS
      PER SHARE:                                                                          |      |            |      |  
|Basic                                                                                              | $    | 0.28       |      | $
|                                                                                                   |      |            |      |  
|Diluted                                                                                            | $    | 0.28       |      | $
|                                                                                                   |      |            |      |  
|AVERAGE COMMON
      AND COMMON
            EQUIVALENT SHARES OUTSTANDING, Basic
      and Diluted |      | 9,443,865  |      |  
|                                                                                                   |      |            |      |  
|THE COMPONENTS
      OF COMPREHENSIVE INCOME:                                                      |      |            |      |  
|Net
      income                                                                                   | $    | 2,683,129  |      | $
|Unrealized
      gain (loss) on investment securities                                              |      | 10,262     |      |  
|                                                                                                   |      |            |      |  
|COMPREHENSIVE
      INCOME                                                                         | $    | 2,693,391  |      | $
|                                                                                                   |      |            |      |  
|BASIC
      AND DILUTED EARNINGS PER SHARE: Comprehensive income                                   | $    | 0.29       |      | $
|                                                                                                   |      |            |      |  

|
|

|See the accompanying summary of accounting policies and notes to the financial statements.
|------------------------------------------------------------------------------------------
|                                                                                          

|26
|--



|LIFE PARTNERS HOLDINGS, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYFOR THE YEARS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
|--------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                      

|                                                              |  | Common Stock |   | Treasury Stock |        |   |   |           
|------------------------------------------------------------- |  | ------------ | - | -------------- | ------ | - | - | ----------
|
|
|                                                              |  |              |   |                |        |   |   |           
|Balance,
        February 28, 2003                            |  | 9,711,400    |   | $              | 97,114 |   | $ | 10,286,988
|Treasury
      stock purchased                                |  |             |   |                |       |   |   |          
|Dividends
      declared                                      |  |             |   |                |       |   |   |          
|Options exercised                                             |  |             |   |                |       |   |   | 40,552    
|Other
      comprehensive loss                                |  |             |   |                |       |   |   |          
|Net income
      for the year ended
        February 29, 2004 |  |             |   |                |       |   |   |          
|                                                              |  |              |   |                |        |   |   |           
|Balance,
        February 29, 2004                            |  | 9,711,400    |   |                | 97,114 |   |   | 10,327,540
|Options exercised                                             |  | 65,000       |   |                | 650    |   |   | 359,050   
|Options issued                                                |  |             |   |                |       |   |   | 75,000    
|Shares returned
      to the Company                          |  | (160,814     | ) |                | (1,608 | ) |   | (153,192  
|Other comprehensive
      income                              |  |             |   |                |       |   |   |          
|Dividends
      declared                                      |  |             |   |                |       |   |   |          
|Net
      income for the year ended
        February 28, 2005 |  |             |   |                |       |   |   |          
|                                                              |  |              |   |                |        |   |   |           
|Balance,
        February 28, 2005                            |  | 9,615,586    |   | $              | 96,156 |   | $ | 10,608,398
|                                                              |  |              |   |                |        |   |   |           

|
|

|See the accompanying summary of accounting policies and notes to the financial statements.
|------------------------------------------------------------------------------------------
|                                                                                          

|27
|--



|LIFE PARTNERS HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
|----------------------------------------------------------------------------------------------------------------------------
|                                                                                                                            

|                                                                   | 2005 |            | 2004 |  
|------------------------------------------------------------------ | ---- | ---------- | ---- | -
|                                                                   |      |            |      |  
|CASH FLOWS
      FROM OPERATING ACTIVITIES:                        |      |            |      |  
|Net
      income                                                   | $    | 2,683,129  |      | $
|Adjustments
      to reconcile net income to operating activities- |      |            |      |  
|Depreciation                                                       |      | 161,901    |      |  
|Loss
      on disposal of property and equipment                   |      |           |      |  
|Stock
      options issued for services                            |      | 75,000     |      |  
|(Increase)
      decrease in operating assets:                     |      |            |      |  
|Accounts
      receivable                                          |      | (510,404   | )    |  
|Prepaid
      expenses                                             |      | 15,568     |      |  
|Deferred
      income taxes                                        |      | (201,000   | )    |  
|Increase
      (decrease) in operating liabilities:                |      |            |      |  
|Accounts
      payable                                             |      | 882,982    |      |  
|Accrued
      liabilities                                          |      | (598,075   | )    |  
|Income
      taxes payable                                         |      | (481,995   | )    |  
|Deferred
      revenue                                             |      | 10,250     |      |  
|                                                                   |      |            |      |  
|Net
      cash provided by operating activities                    |      | 2,037,356  |      |  
|                                                                   |      |            |      |  
|                                                                  
|CASH FLOWS
      FROM INVESTING ACTIVITIES:                        |      |            |      |  
|Note
      receivable                                              |      |           |      |  
|Investment
      in income funds                                   |      | (1,614,792 | )    |  
|Purchases
      of property and equipment                          |      | (553,992   | )    |  
|Purchases
      of artifacts                                       |      | (415,404   | )    |  
|                                                                   |      |            |      |  
|Net
      cash used in investing activities                        |      | (2,584,188 | )    |  
|                                                                   |      |            |      |  
|                                                                  
|CASH FLOWS
      FROM FINANCING ACTIVITIES:                        |      |            |      |  
|Payments
      on notes payable                                    |      | (96,466    | )    |  
|Proceeds
      from note payable                                   |      | 50,000     |      |  
|Treasury
      stock purchased                                     |      |           |      |  
|Stock
      options exercised                                      |      | 359,700    |      |  
|Dividends                                                          |      | (1,838,270 | )    |  
|                                                                   |      |            |      |  
|Net
      cash provided by financing activities                    |      | (1,525,036 | )    |  
|                                                                   |      |            |      |  
|                                                                  
|NET INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS         |      | (2,071,868 | )    |  
|                                                                  
|CASH AND
      CASH EQUIVALENTS, BEGINNING OF PERIOD               |      | 3,174,157  |      |  
|                                                                   |      |            |      |  
|                                                                  
|CASH AND
      CASH EQUIVALENTS, END OF PERIOD                     | $    | 1,102,289  |      | $
|                                                                   |      |            |      |  
|                                                                  
|SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:           |      |            |      |  
|Interest
      paid, net of capitalized amounts                    | $    | 31,507     |      | $
|                                                                   |      |            |      |  
|                                                                  
|Income
      taxes paid                                            | $    | 1,360,500  |      | $
|                                                                   |      |            |      |  

|                                                                       
|-----------------------------------------------------------------------
|SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                       

|
|

|See the accompanying summary of accounting policies and notes to the financial statements.
|------------------------------------------------------------------------------------------
|                                                                                          

|28
|--



|LIFE PARTNERS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFEBRUARY 28, 2005
|----------------------------------------------------------------------------------------
|                                                                                        

|(1) DESCRIPTION OF BUSINESS
Life Partners Holdings, Inc. (we or Life Partners) is a Texas corporation engaged
in facilitating viatical and life settlement transfers. We are the parent company of Life Partners,
Inc. (LPI), which is the oldest and one of the largest viatical settlement companies
in the United States. Viatical and life settlements 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by Life Partners:
Certain 2004 amounts have been reclassified to conform to current period presentation. These reclassifications
have no effect on previously reported net income.
Cash and Cash Equivalents - For purposes of the statement of cash flows, we consider all short-term
debt securities purchased with a maturity of three months or less to be cash equivalents. The average
balance of our general checking account balance is generally in excess of $100,000. The Federal Deposit
Insurance Corporation insures all bank accounts up to $100,000. Management believes its exposure
to loss is minimal considering only the amounts in excess of $100,000 are at risk and the depository
bank is a well established national bank and one of the nations largest financial institutions.
Premium advances  We follow the practice of fully reserving all premium advances at the time
such advances are made. When premium advances are repaid, the repayments are offset against the premium
expense. During the fiscal years ended February 28, 2005 and February 29, 2004 we advanced premiums
totaling $827,583 and $459,789 respectively and received repayments of advances of $137,289 and $
106,307 respectively.
Consolidation - The consolidated financial statements include the accounts of Life Partners and its
wholly owned subsidiaries, as described in Note 1 above. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Revenue Recognition -We recognize income at the time a settlement has been closed and the purchaser
has obligated itself to make the purchase. We defer $100 per settlement to cover minor monitoring
services provided subsequent to the settlement date and to amortize this deferred cost over the anticipated
life expectancy of the insureds.
Investment in Life Insurance Policies - In accordance with Financial Standards Board Technical Bulletin
85-4 Accounting for Purchases of Life Insurance, we reduce our investment in life insurance
policies to their cash surrender value with any differences between cost and cash surrender value
being charged to expense. At February 28, 2005, we held investments in eight life insurance policies
with face value amounts totaling $163,259, which have been reduced to the carrying value of $880.
Property and Equipment - Our property and equipment are depreciated over their useful lives using the
straight-line method. The useful lives of property and equipment for purposes of computing depreciation
are:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|29
|--



|LIFE PARTNERS HOLDINGS, INC.
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFEBRUARY 28, 2005
|------------------------------------------------------------------------------------------------
|                                                                                                

| | Building                 |  | 30 years     | 
| | ------------------------ |  | ------------ | 
| | Machinery and equipment  |  | 5 years      | 
| | Transportation equipment |  | 5 to 9 years | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Artifacts and Other  The artifacts and other assets are stated at cost. The Company has evaluated
these assets and believes there is no impairment in their value as of February 28, 2005.
Impairment of Long-lived Assets  We account for the impairment and disposition of long-lived
assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-lived Assets
to be Disposed of (FAS 121). In accordance with FAS 121, long-lived assets to be held are reviewed
for events or changes in circumstances, which indicate that their carrying value may not be recoverable.
As of February 28, 2005, no impairment has been indicated.
Income Taxes - Timing differences between the reporting of income and expenses for financial and income
tax reporting purposes are reported as deferred tax assets, net of valuation allowances, or as deferred
tax liabilities depending on the cumulative effect of all timing differences. See Note 7 for further
details.
Use of estimates - The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
and contingent assets and liabilities disclosed in the financial statements and accompanying notes.
Actual results inevitably will differ from those estimates and such differences may be material to
the financial statements.
Earnings Per Share - Basic earnings (loss) per share computations are calculated on the weighted-average
of common shares and common share equivalents outstanding during the year, reduced by the treasury
stock. Common stock options and warrants are considered to be common share equivalents and are used
to calculate diluted earnings per common and common share equivalents except when they are anti-dilutive.
Concentrations of Credit Risk and Major Customers  We had two brokers and licensees in 2005 whose
total fees were in excess of 10% of all broker and licensee fees.
(3) NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies certain derivative instruments embedded in other contracts,
and for hedging activities under SFAS 133. SFAS 149 is effective for certain contracts entered into
or modified by us after June 30, 2003. The adoption of SFAS 149 had no impact on our financial
position, results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Instruments with Characteristics of Both Debt and Equity (SFAS 150). Statement 150 requires liability classification for three types of instruments: (1) Mandatory
redeemable shares that obligate us to deliver cash or other assets to shareholders on fixed or determinable
dates; (2) Freestanding written put options and forward purchase contracts on a companys own
shares that obligate us to deliver cash or other assets, and (3) Contracts that obligate a company
to issue its own shares in amounts that are unrelated to, or inversely related to, the value of the
shares. The adoption of SFAS 150 had no impact on our financial position, results of operations,
or cash flows.
In November 2004, the FASB issued SFAS No. 151 Inventory Costs - an amendment of ARB No. 43, Chapter 4. Statement No. 151 requires that certain abnormal costs associated with the

|30
|--



|LIFE PARTNERS HOLDINGS, INC.
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFEBRUARY 28, 2005
|------------------------------------------------------------------------------------------------
|                                                                                                

|manufacturing, freight, and handling costs associated with inventory be charged to current operations
in the period in which they are incurred. The adoption of SFAS 151 had no impact on our financial
position, results of operations, or cash flows.
In December 2004, the FASB issued a revision of SFAS No. 123, Share-Based Payment. The statement establishes standards for the accounting for transactions in which an entity exchanges
its equity investments for goods and services. It also addresses transactions in which an entity
incurs liabilities in exchange for goods or services that are based on the fair value of the entitys
equity instruments or that may be settled by the issuance of those equity instruments. The statement
does not change the accounting guidance for share-based payments with parties other than employees.
The statement is effective for the quarter beginning March 1, 2006. The implementation of this statement
would have resulted in an additional $22,420 in expense in fiscal 2004 and $133,000 in fiscal 2005.
See Note 8.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets-amendment of APB Opinion No. 29. Statement 153 eliminates the exception to fair value for exchanges of similar productive assets and

replaces it with a general exception for exchange transaction that do not have commercial substance,

defined as transaction that are not expected to result in significant changes in the cash flows
of
the reporting entity. This statement is effective for exchanges of nonmonetary assets occurring
after
June 15, 2005.
Management believes adoption of these new statements will not have any significant effect on our financial
condition or results of operations.
(4) INVESTMENTS IN SECURITIES
Our securities investments that are bought and held principally for the purpose of selling them in
the near term are classified as trading securities. Trading securities are recorded at fair value
on the balance sheet in current assets, with the change in fair value during the period included
in earnings.
Securities investments that we have the positive intent and ability to hold to maturity are classified
as held-to-maturity securities and recorded at amortized cost in investments and other assets. Securities
investments not classified as either held-to-maturity or trading securities are classified as available-for-sale
securities. Available-for-sale securities are recorded at fair value in investments and other assets
on the balance sheet, with the change in fair value during the period excluded from earnings and
recorded net of tax as a component of other comprehensive income.
The cost and estimated market value of the investment securities classified as available-for-sale as
of February 28, 2005 are as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                    | Cost |           | Gross
      Unrealized
      Gains |   | Gross
      Unrealized
      (Losses) |  | Estimated
      Value |        
|------------------- | ---- | --------- | ---------------------------------- | - | ------------------------------------- |  | --------------------- | -------
|                    |      |           |                                    |   |                                       |  |                       |        
|Market Income Funds | $    | 3,393,460 |                                    | $ |                                      |  | $                     | (17,811
|Corporate Stocks    |      | 150,623   |                                    |   | 4,577                                 |  |                       |       
|                    |      |           |                                    |   |                                       |  |                       |        
|                    |      |           |                                    |   |                                       |  |                       |        
|                    | $    | 3,544,083 |                                    | $ | 4,577                                 |  | $                     | (17,811
|                    |      |           |                                    |   |                                       |  |                       |        

|                                                                                                                     
|---------------------------------------------------------------------------------------------------------------------
|(5) LEASES
  We lease various equipment under non-cancelable operating leases expiring in various years through 2009.
|                                                                                                                     

|31
|--



|LIFE PARTNERS HOLDINGS, INC.
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFEBRUARY 28, 2005
|------------------------------------------------------------------------------------------------
|                                                                                                

|Minimum future rental payments under non-cancelable operating leases having remaining terms in excess
of one year as of February 28, 2005 for each of the next five years and in the aggregate are:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                   

| | Twelve
      months ending February 28, | Amount                     |   |       
| | --------------------------------------- | -------------------------- | - | ------
|
| |                                         | 2006                       | $ | 36,675
| |                                         | 2007                       |   | 36,675
| |                                         | 2008                       |   | 23,838
| |                                         | 2009                       |   | 1,833 
| |                                         | 2010                       |   |      
| |                                         |                            |   |       
| |                                         | Total
      minimum future |   |       
| |                                         | rental
      payments      | $ | 99,021
| |                                         |                            |   |       

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Rental expense was $36,675 and $34,842 for the years ended February 28, 2005 and February 29, 2004,
respectively.
Certain operating leases provide for renewal and/or purchase options. Generally, purchase options are
at prices representing the expected fair market value of the property at the expiration of the lease
term. Renewal options are for periods of one year at the rental rate specified in the lease.
(6) LONG-TERM DEBT
As of February 28, 2005, we had the following long-term debt:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                                                                                                                                                      | Current |         | Long-Term |   |        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | ------- | --------- | - | -------
| |                                                                                                                                                                      |         |         |           |   |        
| | 5.625% note payable to a bank, due in
      installments of $6,270 through March 2013,
      secured by land and office building                                     | $       | 48,234  |           | $ | 453,876
| |                                                                                                                                                                      |         |         |           |   |        
| | Non-interest bearing note payable to an
      individual, due in semi-annual installments
      of $50,000 through December 2006,
      secured by Russian artifacts |         | 100,000 |           |   | 100,000
| |                                                                                                                                                                      |         |         |           |   |        
| |                                                                                                                                                                      |         |         |           |   |        
| |                                                                                                                                                                      | $       | 148,234 |           | $ | 553,876
| |                                                                                                                                                                      |         |         |           |   |        

|                                                                                           
|-------------------------------------------------------------------------------------------
|Maturities on long-term debt for each of the next five years and thereafter are as follows:
|                                                                                           

| | February 28, |  | Amount |         | 
| | ------------ |  | ------ | ------- | 
|
| | 2006         |  | $      | 148,234 | 
| | 2007         |  |        | 151,018 | 
| | 2008         |  |        | 53,963  | 
| | 2009         |  |        | 57,078  | 
| | 2010         |  |        | 60,373  | 
| | Thereafter   |  |        | 231,444 | 
| |              |  |       
| |              |  |       
| |              |  | $      | 702,110 | 
| |              |  |       

|32
|--



|LIFE PARTNERS HOLDINGS, INC.
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFEBRUARY 28, 2005
|------------------------------------------------------------------------------------------------
|                                                                                                

|(7) INCOME TAXES
Temporary timing differences between the reporting of income and expenses for financial and income
tax reporting purposes at February 28, 2005, result in an increase in the deferred tax asset of approximately
$201,000, which we believe to be fully realizable.
Following are the components of the deferred tax asset as of February 28, 2005:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                    

| | Excess tax over financial accounting -
  Depreciation | $ | (152,000 | ) | 
| | ----------------------------------------------------- | - | -------- | - | 
| | Excess financial accounting over tax                 |   |          |   | 
| | Accrued contingency costs                             |   | 180,000  |   | 
| | Reserve for premium advances                          |   | 619,000  |   | 
| | Acquired life insurance policies                      |   | 37,000   |   | 
| | IRS interest not deductible                           |   | 133,000  |   | 
| |                                                       |   |          |  
| |                                                       |   |          |   | 
| | Net deferred tax asset                                | $ | 817,000  |   | 
| |                                                       |   |          |  

|                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The difference between our effective income tax rate and the United States statutory rate and the State
of Texas franchise tax rate is reconciled below for the years ended February 28, 2005 and February
29, 2004:
|                                                                                                                                                                                                                    

| |                                                            | 2005 |   | 2004  |   | 
| | ---------------------------------------------------------- | ---- | - | ----- | - | 
| |                                                            |      |   |       |   | 
|
| | United States statutory rate                               | 34.0 | % | 34.0  | % | 
|
| | State of Texas statutory rate                              | 4.5  | % | 4.5   | % | 
| |                                                            |      |   |       |   | 
|
| | Expected combined rate                                     | 38.5 | % | 38.5  | % | 
|
| | Elimination of valuation
  allowance on deferred tax asset |     |   | (18.1 | ) | 
|
| | Additional taxes associated with IRS
  settlement          |     |   | 7.1   |   | 
|
| | Surtax and other                                           | (5.8 | ) |      |   | 
| |                                                            |      |   |       |   | 
|
| | Combined effective tax rate                                | 32.7 | % | 27.5  | % | 
| |                                                            |      |   |       |   | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(8) SHAREHOLDERS EQUITY, STOCK TRANSACTIONS AND COMMON STOCK OPTIONS
In fiscal 2005, in a private transaction with a single individual, we exchanged 20,000 shares for the
cancellation of a promissory note in the amount of $154,800.
In fiscal 2005, we cancelled 140,814 common shares, which were an estimate of shares needed for the

2000 share exchange with I.G.E. shareholders. Based on current information, we believe that no
further
unexchanged shares exist for tender and have eliminated the estimated reserve amount accordingly.
During the year ended February 29, 2004, we purchased 144,891 shares of its common stock for $632,723.

|33
|--



|LIFE PARTNERS HOLDINGS, INC.
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFEBRUARY 28, 2005
|------------------------------------------------------------------------------------------------
|                                                                                                

|We declared and paid dividends on a quarterly basis and in the amounts as set forth in the following
table:
|-----------------------------------------------------------------------------------------------------------
|                                                                                                           

| | **Date Declared** |  | **Date Paid** |  | **Dividend Amount** | 
| | ----------------- |  | ------------- |  | ------------------- | 
| |                   |  |               |  |                     | 
| | 05/31/03          |  | 06/15/03      |  | $0.03               | 
| | 08/31/03          |  | 09/15/03      |  | $0.03               | 
| | 11/30/03          |  | 12/15/03      |  | $0.03               | 
| | 02/29/04          |  | 03/15/04      |  | $0.04               | 
| | 05/10/04          |  | 06/15/04      |  | $0.04               | 
| | 08/17/04          |  | 09/15/04      |  | $0.05               | 
| | 11/15/04          |  | 12/15/04      |  | $0.06               | 
| | 02/14/05          |  | 03/15/05      |  | $0.05               | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|As of February 28, 2005 we had a stock-based compensation plan which is described below. We apply APB
25 and related interpretations in accounting for its plan. Compensation for services that a corporation
receives under APB 25 through stock-based compensation plans should be measured by the quoted market
price of the stock at the measurement date less the amount, if any, that the individual is required
to pay. We recognized compensation expense of $75,000 during the year ended February 28, 2005. No
compensation expense was recorded during the year ended February 29, 2004 related to our stock option
plan under APB 25. If we had elected to recognize compensation based on the fair value of the options
granted at the grant date as prescribed by Statement of Financial Accounting Standards No.
123, (SFAS 123) Accounting for Stock-Based Compensation, net earnings and net earnings
per share would have decreased to the pro forma amounts shown below for the years ending February
28, 2005 and February 29, 2004:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                              | **2005** |  | **2004** |          
|------------------------------------------------------------- | -------- |  | -------- | ---------
|                                                              |          |  |          |          
|                                                              |          |  |          |          
|Net income
      applicable to common shareholders            |          |  | $        | 2,683,129
|                                                             
|Less: Total
      stock based compensation expense determined |          |  |          |          
|under fair
      value based method for all awards, net of    |          |  |          |          
|related tax
      effect                                      |          |  |          | (133,000 
|                                                              |          |  |          |          
|                                                             
|Pro forma
      net earnings per common share                 |          |  | $        | 2,550,129
|                                                              |          |  |          |          
|Earnings per
      share:                                     |          |  |          |          
|Basic - as
      reported                                     |          |  | $        | 0.28     
|                                                              |          |  |          |          
|Basic - pro
      forma                                       |          |  | $        | 0.27     
|                                                              |          |  |          |          
|Diluted -
      as reported                                   |          |  | $        | 0.28     
|                                                              |          |  |          |          
|Diluted -
      pro forma                                     |          |  | $        | 0.27     
|                                                              |          |  |          |          

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants: weighted average risk free interest rate of 2.123% and 3.056% for 2004; volatility of 40%; and expected life less than three years. The fair values of the options were based on the difference between the present value of the exercise price of the option and the estimated fair value price of the common share.
        The intent of the Black-Scholes option valuation model is to provide estimates of fair values of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the use of highly subjective assumptions including expected stock price volatility. We utilize the Black-Scholes method to produce the pro forma disclosures required under SFAS 123.

|34
|--



|LIFE PARTNERS HOLDINGS, INC.
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFEBRUARY 28, 2005
|------------------------------------------------------------------------------------------------
|                                                                                                

|In managements opinion, existing valuation models do not necessarily provide a reliable single
measure of the fair value of its employee stock options because our employee stock options have significantly
different characteristics from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate. The effects of applying SFAS 123 in this
pro forma are not indicative of future amounts.

On April 8, 2004, as part of its consulting agreement with us, a consultant was granted an option to purchase 150,000 shares of our common stock at a
price of $6.00 per share. This option expires according to the following
schedule:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| | **Number of Shares 
      Expiring under Option** |  | **Expiration Date 
      of Option** |  | **Balance of Shares 
      Remaining Under Option** | 
| | ------------------------------------------------- |  | ------------------------------------ |  | --------------------------------------------------- | 
| |                                                   |  |                                      |  |                                                     | 
| | 50,000                                            |  | April 8, 2005                        |  | 100,000                                             | 
| | 50,000                                            |  | April 8, 2006                        |  | 50,000                                              | 
| | 50,000                                            |  | April 8, 2007                        |  | 0                                                   | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|This option may be exercised only upon notice of its exercise with full purchase price for the amount
of shares purchased. These shares, if the option is exercised, would be restricted from sale for
at least 1 year unless registered.
On November 4, 2004, pursuant to our Omnibus Equity Compensation Plan, a licensee was granted an option to purchase 100,000 shares of our common stock at a price of $6.06 per share. This option expires
on November 4, 2007. This option may be exercised only upon notice of its exercise with full purchase
price for the amount of shares purchased.
Information with respect to stock options and warrants outstanding to certain employees, directors
and service providers are as follows:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                                  |  |  | **2005**   |         |                                  
| | -------------------------------- |  |  | ---------- | ------- | ---------------------------------
| |                                  |  |  |            |         |                                  
| |                                  |  |  | **Shares** |         | **Average Exercise 
      Price**
| |                                  |  |  |            |         |                                  
| | Outstanding at beginning of year |  |  |            | 122,720 |                                  
| | Exercised                        |  |  |            | (95,000 | )                                
| | Issued                           |  |  |            | 250,000 |                                  
| | Expired                          |  |  |            | (27,720 | )                                
| |                                  |  |  |            |         |                                  
| | Outstanding at the end of year   |  |  |            | 250,000 |                                  
| |                                  |  |  |            |         |                                  

|
|
|

| |  | **Options Outstanding**                         |  |                                                  |  | **Options Exercisable**                  |      |                                             
| |  | ----------------------------------------------- |  | ------------------------------------------------ |  | ---------------------------------------- | ---- | --------------------------------------------
| |  |                                                 |  |                                                  |  |                                          |      |                                             
| |  | **Shares 
      Outstanding 
      At 2/29/05** |  | **Average 
      Remaining 
      Life (Years)** |  | **Average 
      Exercise 
      Price** |      | **Shares 
      Outstanding 
      2/29/05**
| |  |                                                 |  |                                                  |  |                                          |      |                                             
| |  | 150,000                                         |  | 2.11                                             |  | $                                        | 6.00 |                                             
| |  | 100,000                                         |  | 2.68                                             |  | $                                        | 6.06 |                                             
| |  |                                                 |  |                                                  |  |                                          |      |                                             
| |  | 250,000                                         |  | 2.40                                             |  | $                                        | 6.02 |                                             
| |  |                                                 |  |                                                  |  |                                          |      |                                             

|35
|--



|LIFE PARTNERS HOLDINGS, INC.
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFEBRUARY 28, 2005
|------------------------------------------------------------------------------------------------
|                                                                                                

|(9) RELATED PARTY TRANSACTIONS
We currently operate under an agreement with ESP Communications, Inc. (ESP), which is owned by the
wife of our president. Under the agreement, ESP performs specified administrative duties on behalf
of us. Either party may cancel the agreement with a thirty day written notice. We currently pay ESP
$7,500 on a semi-monthly basis for its services. We recorded management services expense concerning
this agreement with ESP of approximately $180,000 and $168,500 for the years ended February 28, 2005
and February 29, 2004, respectively.
(10) CONTINGENCIES
LPI is aware of certain instances wherein the insurance companies denied payment on policies in which
it arranged the settlement with purchasers. Most of these denials related to unforeseeable reductions
in face value. Face value of the policies in question total $467,918. During the fiscal year ended
February 28, 2005, we paid $459,125 to these purchasers and have accrued another $242,680 for future
claims that might arise on these policies.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|36
|--



|EXHIBIT INDEX         
|----------------------
|                      
|DESCRIPTION OF EXHIBIT
|                      

|**Number** |  | **Description** |                                                                                    | **Page** |   
|---------- |  | --------------- | ---------------------------------------------------------------------------------- | -------- | --
|           |  |                 |                                                                                    |          |   
|3.2        |  |                 | Amended Articles of Incorporation, dated February 19, 2003 (1)                     |          |   
|           |  |                 |                                                                                    |          |   
|3.2        |  |                 | Bylaws (2)                                                                         |          |   
|           |  |                 |                                                                                    |          |   
|4.1        |  |                 | Form of stock certificate for our common stock (2)                                 |          |   
|           |  |                 |                                                                                    |          |   
|10.1       |  |                 | LPHI Omnibus Equity Compensation Plan* (2)                                         |          |   
|           |  |                 |                                                                                    |          |   
|10.3       |  |                 | Consulting agreement with Newport Capital Holdings, Inc.
      dated April 8, 2004 |          | 38
|           |  |                 |                                                                                    |          |   
|14         |  |                 | Code of Ethics for Directors and Executive Officers (1)                            |          |   
|           |  |                 |                                                                                    |          |   
|21         |  |                 | Subsidiaries of the Issuer                                                         |          | 46
|           |  |                 |                                                                                    |          |   
|31         |  |                 | Rule 13a-14(a) Certifications                                                      |          | 47
|           |  |                 |                                                                                    |          |   
|32         |  |                 | Section 1350 Certification                                                         |          | 49

|   
|---
|   
|*  
|   
|(1)
|   
|(2)

|37
|--