**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-KSB**
 
 x
              Annual
                  Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
                  Act of
                  1934 (the “Exchange Act”)For
                  the fiscal year ended: February 28,
                  2007
  or
  o
              Transition
                  Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
                  Act of
                  1934
  Commission
        File Number: 0-7900
  **LIFE
        PARTNERS HOLDINGS, INC.**
 (Name
        of
        small business issuer in its charter)
 Texas
                (State
                  of incorporation)
              74-2962475
                (I.R.S.
                  Employer ID no.)204
                  Woodhew
                Waco,
                  Texas
                (Address
                  of Principal Executive Offices)
              76712
                (Zip
                  Code)
  Issuer’s
        telephone number, including area code: 254-751-7797
  Securities
        registered pursuant to Section 12(b) of the Exchange Act:
  **Common
        Stock (par value $0.01 per share)**
 (Title
        of
        Class)
  Securities
        registered pursuant to Section 12(g) of the Exchange Act: None
  Check
        whether the issuer is not required to file reports pursuant to Section 13
        or
        Section 15(d) of the Exchange Act.  o
  Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the issuer was required to file such reports), and (2) has been subject
        to
        such filing requirements for at least the past 90 days. Yes x No o
  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 the issuer’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
  Indicated
        by a check mark whether the issuer is a shell company (as defined in
        Section 12b-2 of the Exchange Act.
 Yes
o
        No x
  Revenues
        of issuer for year ended February 28, 2007: $29,795,323
  The
        aggregate market value of the Common Stock held by non-affiliates of the
        issuer
        was approximately $80,737,872 as of May 23, 2007, based on average bid and
        asked
        prices on the Nasdaq Stock Market **** reported
        for such date. Shares held by each officer and director and by each person
        who
        owns 5% **** or
        more
        of the outstanding Common Stock have been excluded in that such persons may
        be
        deemed to be affiliates. This standard for determining affiliate status is
        not
        necessarily the appropriate standard for other purposes.
  Shares
        of
        Common Stock, $.01 par value, outstanding as of May 23, 2007: 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.
  
  **LIFE
        PARTNERS HOLDINGS, INC.**
  **2007
        Form 10-KSB Annual Report**
 **Table
        of Contents**
 **Item**
                
                
                
                **Page
                      No.**Part
                    ISpecial
                    Note Regarding Forward-Looking Statements
                
                31.
                
                Description
                    of Business
                
                3Risk
                    Factors
                
                102.
                
                Description
                    of Property
                
                143.
                
                Legal
                    Proceedings
                
                144.
                
                Submission
                    of Matters to a Vote of Security Holders
                
                15Part
                    II5.
                
                Market
                    for Our Common Stock, Related Shareholder Mattersand Our Purchases of Equity Securities
                
                156.
                
                Management’s
                    Discussion and Analysis
                
                167.
                
                Financial
                    Statements
                
                228.
                
                Changes
                    in and Disagreements with Accountants on Accounting and Financial
                    Disclosures
                
                228A.
                
                Controls
                    and Procedures
                
                228B.
                
                Other
                    Information
                
                23Part
                    III9.
                
                Directors
                    and Executive Officers; Corporate Governance; Compliance with
                    Section
                    16(a) of the Exchange Act
                
                2310.
                
                Executive
                    Compensation
                
                2311.
                
                Security
                    Ownership of Certain Beneficial Owners and Management and Related
                    Shareholder Matters
                
                2312.
                
                Certain
                    Relationships and Related Transactions, and Director
                    Independence
                
                2313.
                
                Exhibits
                
                2414.
                
                Principal
                    Accountant Fees and Services
                
                24Signatures
                
                25Table
                    of Contents to Consolidated Financial Statements and Notes
                
                26Exhibit
                    Index
                
                41
  2
  **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, estimates as to size, growth in or
        projected revenues from the life settlement market, 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 involve
        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 a financial services
        company and the parent company of Life Partners, Inc. (“LPI”). LPI is the oldest
        and one of the most
        active companies in the United States engaged in the secondary market for
        life
        insurance known generally as “life settlements.” These financial transactions involve
        the purchase
        of the life insurance policies of terminally ill persons (viatical settlements)
        or elderly persons (life settlements) at a discount to their face value for
        investment purposes.
  *The
        Secondary Market for Life Insurance Policies* .
        LPI was
        incorporated in 1991 and has conducted business under the registered service
        mark “Life Partners” since 1992. Our operating revenues are derived from fees
        for facilitating viatical and life settlement transactions. Both viatical
        and
        life settlement transactions involve the sale of an existing life insurance
        policy to another party. By selling the policy, the policyholder receives
        an
        immediate cash payment to use as he or she wishes. The purchaser takes an
        ownership interest in the policy at a discount to its face value and receives
        the death benefit under the policy when the insured dies.
  Over
        the
        past few years, the distinction between viatical and life settlements has
        diminished and the markets have largely merged. State regulations govern
        both
        types of transactions in the same manner and the services we provide for
        both
        types of transactions are the same. Thus, we view both viatical and life
        settlements to be within the same line of business and do not distinguish
        between them for financial reporting purposes. Throughout this report, we
        refer
        to all of our transactions generally as “life settlements”.
  We
        are a
        financial services company, providing purchasing services for life settlements
        to our client base. We do this by matching life settlors with purchasers.
        We
        facilitate these transactions by identifying, examining, and purchasing the
        policies as agent for the purchasers. In order to meet market demand and
        maximize our value to our clients, we have made significant investment in
        proprietary software and processes that enable us to facilitate a higher
        volume
        of transactions while maintaining our quality controls. Since our inception,
        we
        have facilitated over 50,000 purchaser transactions associated with the purchase
        of over 5,600 policies. We believe our experience, infrastructure and
        intellectual capital gives us a unique market position and will enable us
        to
        maintain sustainable growth within the life settlement market.
  3
  We
        match
        life settlors with purchasers. We act as agent for settlement purchasers,
        for
        whom we identify and qualify policies. We locate potential 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 the
        policy sold, 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 life settlement brokers and believe that these
        brokers adhere to applicable regulatory requirements when conducting their
        business. In the fiscal year ended February 28, 2007, broker referrals accounted
        for 90% of the total face value of policies transacted, which is approximately
        the same compared to fiscal 2006. Policies presented from two brokers
        constituted 73% of the total face value of all completed transactions presented
        by brokers during fiscal 2007. This compares to a concentration of 68% of
        the
        total face value of all completed transactions from two brokers in fiscal
        2006.
  Purchasers
        of life settlements generally come to us through a network of financial
        planners, whom we call licensees. 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.
  To
        purchase a life settlement, a prospective purchaser typically submits a
        purchaser application containing 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 life 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 and to policies beyond their contestable period (generally
        two
        years or older). 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 10 years or more depending on the purchasing parameters
        of
        each client. As we identify and qualify policies fitting generally within
        the
        purchasing parameters of our clients, we distribute insurance and current
        medical status information on these policies (with the insured’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 making a life settlement purchase. 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 and submit a reservation form either electronically or by
        fax.
        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. 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 United
        Western Bancorp, Inc. (NasdaqGM: UWBK). 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). We send confirmation
        of the
        transaction to the purchaser as well as a copy of the assignment documents.
  4
  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. We
        strictly maintain the confidentiality of a life settlor’s personal information
        in accordance with regulations promulgated by the Texas Department of Insurance.
        A purchaser will receive evidence of the transfer of ownership of the policy
        (which identifies the insured), but will not receive contact information
        for the
        insured, which is available only to licensed life settlement companies like
        Life
        Partners. We monitor the insured’s health status and notify Sterling upon the
        insured’s 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 life settlement transactions totaling over
        $770
        million in face value.
  *The
        Life Settlement Market and Competition* .
        Life
        settlements provide a secondary market for existing life insurance policies
        that
        the owner no longer needs or wants and that insure a person whose life
        expectancy can be reasonably estimated. Over the past few years, the market
        for
        life settlements has grown substantially both from the demand and the supply
        sides of the transaction with an increase in the average face amount of policies
        presented for sale. The larger amount of capital required to meet the higher
        acquisition costs of the average life settlement has led us to develop
        relationships with institutional purchasers in addition to expanding our
        base of
        individual clients and increasing the minimum investment amount. We have
        devoted
        substantial marketing and client development resources to attracting both
        individual and institutional purchasers domestically and abroad, both directly
        and through their advisors. The number of individual purchasers and the amount
        of their average investment have increased substantially providing us with
        a
        significant market advantage by enabling us to reach the diversification
        goals
        of our clients as well as giving us greater flexibility in purchasing policies.
        We have also experienced success in attracting institutional clients and
        believe
        that we shall continue to attract institutional clients as we devote more
        time
        and resources into cultivating relationships with them.
  One
        disincentive for domestic institutional investment had been the accounting
        treatment applied to the purchase of life insurance policies, which generally
        required that settlements be recorded at the cash surrender values of such
        policies instead of their purchase prices. This treatment often resulted
        in
        substantial write-downs for financial reporting purposes. However, a 2006
        change
        by the Financial Accounting Standards Board in the preferred method of
        accounting for life settlement contracts held for investment significantly
        changes the prior accounting treatment. FASB Staff Position No.
        85-4-1 *Accounting for Life Settlement Contracts by Third-Party
        Investors* (FSP FTB
        85-4-1) states that an investor may elect to account for its investments
        in life
        settlement contracts based on the initial investment at the purchase price
        plus
        all initial direct costs. Continuing costs (policy premiums and direct external
        costs, if any) to keep the policy in force are capitalized. FSP FTB 85-4-1
        replaces FASB Technical Bulletin 85-4, which essentially required that a
        purchaser record the excess of the purchase price over the cash surrender
        value
        as expense when purchasing policies. We believe the adoption of this more
        favorable accounting treatment has spurred institutional investment, especially
        in the domestic market. This accounting change has also had a positive effect
        on
        policies that we own, and we expect to increase the amount of policies that
        we
        purchase for our own investment.
  5
  We
        believe that the total face value of life settlement transactions completed
        during 2006 was about $5 billion in face amount, which figure gives us a
        market
        share of approximately three percent. This estimate is only an approximation,
        since precise market data is not available publicly and thus our competition
        is
        difficult to quantify. We are the only publicly held company operating in
        this
        market. Some competitors file publicly available transaction activity with
        state
        insurance commissions. Not every company may report its transactions, however,
        and the accuracy of the information relies on the veracity of the filings
        made
        by each company. In 2005, Sanford C. Bernstein & Co., LLC, a research unit
        of AllianceBernstein L.P., estimated the market to be approximately $13 billion
        in face value of policies purchased from 1998 through 2005. Bernstein also
        notes
        the life settlement market has grown about eight times faster than
        non-traditional life insurance and that they expect this growth rate
        differential to continue and could expand over the next few decades with
        the
        increasing number of older Americans and an increase in market penetration.
        Our
        estimates of market activity are based in part on the Bernstein data and
        on
        known transaction volumes with allowance for unreported data and multiple
        reports of the same transaction.
  Assuming
        annual market activity of about $5 billion in policy face amount, we estimate
        that our largest industry competitor captured approximately 43% of the market
        in
        2005 and 35% in 2006. We believe, however, this historical market information
        does not fairly represent a true analysis of the market. In
        October 2006, the Attorney General for the State of New York filed a civil
        lawsuit against our largest competitor claiming it violated fraud and antitrust
        laws by making secret payments to brokers that stifled bidding and that were
        unknown to policy sellers. In May 2007, the State of Florida filed a show
        cause
        order against the same competitor alleging similar unfair business practices.
        While we cannot assess the merits of the allegations in either action, we
        believe that the filing of these actions will substantially affect this
        competitor’s prior market domination, will promote fair dealing in the market
        and underscores the fiduciary duty owed by brokers to sellers. These actions
        may
        have also increased our business volumes. After the filing of the New York
        Attorney General’s lawsuit, our total business volumes during the third and
        fourth fiscal quarters increased substantially. We cannot be certain whether
        these actions contributed directly to the increases, but we note the correlation
        in timing. We do not engage in the practices cited in these legal proceedings
        and, accordingly, believe that we will not face similar
        proceedings.
  We
        have
        also noted a trend in the presentation of policies with higher face values,
        and
        we have adjusted our business practices to remain competitive and have purchased
        more of these policies. During the past year we have noted that there appears
        to
        be more awareness of the secondary market for insurance policies among potential
        sellers and this increased awareness has resulted in an expansion of the
        supply
        of eligible policies to purchase. We believe the substantial increase in
        our
        business over the past two quarters is due to a combination of these factors
        and
        we believe these factors will enable us to experience sustainable growth
        over
        the next fiscal year.
  The
        remainder of the market is divided among other competitors, none of which
        is
        believed to have more than 10% of the market. Unlike some of our competitors,
        which have more restrictive purchasing parameters or a single provider of
        investment capital, 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
        diversified capital 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.
  6
  We
        believe the life settlement market in general will substantially increase
        during
        the next year due to a number of factors. First, market demand from purchasers
        remains strong for these transactions. 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. The favorable market demand is also due, in part, to
        a
        continued cautious attitude of purchasers and a desire for alpha returns
        (i.e.
        returns which are not correlated to market indices). We believe we have
        successfully educated many individual and institutional purchasers about
        the
        potential returns available from 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.
        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.
  Life
        settlements adversely affect the profitability of life insurance companies
        by
        keeping policies in force that would otherwise have lapsed. According to
        a
        December 2006 article in the *New
        York Times* ,
        insurance companies in 2005 reduced their financial exposure by $1.1 trillion when
        19.8 million policyholders stopped paying premiums, citing data from the
        Insurance Information Institute. In comparison, the industry paid death benefits
        on only 2.2 million policies. 1  Thus,
        the
        windfall profits from policies that lapse are readily apparent.
  Life
        insurance companies or industry associations have responded by publicly
        criticizing the life settlement industry and by adopting policy features
        that
        mimic the liquidity offered by life settlements. As an example, some policies
        offer pre-death,
        cash benefits (sometimes called accelerated death benefits), which offer
        some
        cash benefit to policyholders before death. We do not expect the availability
        of
        accelerated death benefits to affect the life settlement market significantly.
        In comparison to typical life settlements, the scope of the accelerated death
        benefit is narrower and the financial benefit is smaller. The life insurance
        industry’s adoption of truly competitive benefits is unlikely given the crucial
        role that policy lapse rates play in financial operations of life insurance
        companies.
  While
        the
        life settlement industry had been negatively affected by some companies using
        illegal or questionable business practices, we believe that state and federal
        regulators have effectively identified and curtailed or 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. To further curtail abuse, state legislatures and
        insurance regulators have passed laws and adopted regulations requiring the
        licensing of life settlement brokers and providers, mandated disclosures
        to
        sellers or purchasers or both, and instituting periodic reporting requirements,
        and setting forth prohibited business practices. While the risk of excessive
        regulation or misapplication always exists, we believe these laws and
        regulations have generally had a positive effect on the industry and on our
        ability to compete in the secondary life insurance market. 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://apps.tdi.state.tx.us/pcci/pcci_show_profile.jsp?tdiNum=8967842&companyName=Life%20Partners,%20Inc.&sysTypeCode=PA
 1 Duhigg,
          Charles, “Late in Life, Finding a Bonanza in Life Insurance”, *New* ** *York* ** *Times,* December
          17, 2006
  7
  Access
        to
        capital, the insurance industry’s addition of pre-death cash benefits, law
        enforcement pressure on companies operating illegally, and increasing government
        regulation have contributed to a stabilization in the number and sophistication
        of life settlement companies, both those purchasing for their own accounts
        and
        those, like us, who act as agents for our clients. We estimate the number
        of
        life settlement companies actively purchasing for their own account or as
        agents
        for purchasers to be fewer than 10 and the number of active brokers at about
        25.
        While we believe we are one of the largest life settlement companies (based
        on
        face value of policies settled), competition within the life settlement market
        is active among the few companies in this sector and we will continue to
        experience competition for qualified policies to purchase. This competition
        will
        have an effect on the prices we pay for policies, 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 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 life settlements will be approximately $200 million in
        face
        value for fiscal 2008, which is a 37% increase over our total business volume
        of
        $153 million in fiscal 2007. This amount is 65% greater than the $93 million
        in
        total business volume we estimated last year and represents a 76% increase
        over
        the $87 million of total business volume in fiscal 2006.
  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,
        2005, 2006 and 2007:
  
 **2005**
              
              **2006**
              
              **2007**Number
                  of settlements
              
              
              289
              
              
              259
              
              
              220Face
                  value of policies
              
              $
              65,082,000
              
              $
              87,275,000
              
              $
              151,397,400Average
                  revenue per settlement
              
              $
              64,865
              
              $
              77,543
              
              $
              135,433Total
                  net revenues derived(1)
              
              $
              9,166,000
              
              $
              8,485,000
              
              $
              12,231,200
  
 (1)
              The
                  revenues derived are exclusive of brokerage and referral
                  fees.
  **Industry
        Regulation and Taxation**
  *General* .
        When
        the life settlement market was first established, it was sparsely regulated.
        Due
        in part to abuses within the industry, which were well-publicized, the federal
        government and various states moved to regulate the market in the mid-1990’s.
        These regulations generally took two forms. One sought to apply consumer
        protection-type regulations to the market. This application was designed
        to
        protect policyholders 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 life settlement companies
        in
        some way. These laws generally require the licensing of providers and brokers,
        require the filing and approval of settlement agreements and disclosure
        statements, describe the content of disclosures that must be made to insureds
        and sellers, describe various periodic reporting requirements for settlement
        companies and prohibit certain business practices deemed to be abusive.
  8
  *Licensing
        in Texas* .
        We are
        licensed as a viatical and life settlement company 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 insureds and sellers,
        offer a 15-day right of rescission to the seller, file certain annual reports
        with the state, and abstain from unfair business practices. Because all of
        our
        transactions are completed in Texas, the Department of Insurance has
        jurisdiction to investigate complaints from any insured or seller, irrespective
        of the state in which that insured or seller lives.
  *Securities
        Regulations* .
        Some
        states and the Securities and Exchange Commission have attempted to treat
        life
        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 life settlement transactions 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 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
        life settlement company, we facilitate the transfer of ownership in life
        insurance policies, but do not participate in the issuance of policies. We
        do
        not engage in the business of insurance and are not required to be licensed
        as
        an insurance company or insurance broker. We do, 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. However, although
        proceeds from a life settlement transaction can be substantial, the amount
        of
        settlement often does not exceed the total amount of premiums paid over the
        years and thus many times the transaction does not result in a taxable event
        for
        the seller of the policy.
  9
  **Employees**
  As
        of
        February 28, 2007, we had 37 direct employees, none of whom are represented
        by a
        labor union, as well as almost 3,000 licensees who act as independent
        contractors and refer clients to us for the purchase of 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 .
        We make
        available without charge our annual report on Form 10-KSB, our quarterly
        reports
        on Form 10-QSB, current reports on Form 8-K, and amendments to these
        reports shortly after we file these reports with the SEC. Our informational
        website for insureds and policyholders is www.lifepartnersinc.com .
  **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 Evolving Markets that May Be Volatile**
  We
        are
        operating in the life settlement market, which is a relatively new market
        within
        the financial services sector. Although it has grown exponentially in the
        past
        few years, how and to what extent it will continue to develop is uncertain.
        Because we are the only publicly reporting company in this industry, measuring
        the market is difficult. In 2005, Sanford C. Bernstein & Co., LLC, a
        research unit of AllianceBernstein L.P., estimated the life settlement market
        to
        be approximately $13 billion in face value from 1998 through 2005. Based
        on our
        market experience and industry analysis, we do not dispute this figure as
        an
        estimate of the current market. As more insureds become aware of life
        settlements as a financial planning option, we expect the size of the market
        to
        grow substantially. While
        we
        have de monstrated
        our ability to originate, underwrite and place life settlements with our
        individual clients, any dramatic growth will depend heavily upon the entry
        of
        institutional purchasers and the increase in presentations of policies with
        face
        values in excess of $5 million. Whether we can maintain markets for such
        policies will depend on our ability to attract more institutional and accredited
        investors and 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 in addition to the
        demand from our individual clients, our financial performance during any
        period
        may be materially affected by the entry or departure of one or more of our
        institutional clients from the market.
  10
  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 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.**
  While
        our
        revenues have steadily grown over the past five years, our net operating
        results
        have fluctuated in the past and may fluctuate significantly in the future
        depending on purchaser demand for life settlements, brokerage and referral
        fees,
        unexpected increases in general and administrative expenses and competition
        for
        qualified policies. 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 sellers of policies to us and upon
        financial planners, known as licensees, to refer client 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 brokers and referring financial
        planners is relatively small, which can increase our reliance on our existing
        relationships and impair attempts to reduce brokerage fees. During fiscal
        2007,
        two brokers accounted for 73% of the total face amount of policies we purchased.
        This compares with 68% of policies being presented from the same two brokers
        last year. In recent years, we have increased our advertising and market
        presence to encourage sellers to present policies to us directly. These efforts
        have resulted in large increases in the number of policies submitted to us
        directly. During fiscal 2007, 69 of such policies were submitted to us directly
        compared to 145 policies that were submitted by brokers. Policies submitted
        directly tend to have much smaller face amounts, however, and such policies
        represented only 10% of the total face value of all policies closed in fiscal
        2007, which is approximately the same as the amount for fiscal 2006. We are
        also
        developing our own network of insurance and financial planning professionals,
        known as producers, to refer potential sellers to us, and 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.
  **We
        Depend on Growth in the Life Settlement Market**
  Growth
        of
        the life settlement market and our expansion within the market may be affected
        by 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 sufficient qualified
                  purchasers;
  ·
              competition
                  from other life settlement companies;
  11
  ·
              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 as quickly as or in the directions 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 Ability to Predict Life Expectancies and Set
        Appropriate Price; If Our Investment Returns Are Not Competitive We May Lose
        Purchasers; We Must Purchase In Large Numbers**
  A
        purchaser’s investment return from a life settlement depends on three factors:
        the policy face amount, the settlement purchase price and the demise of the
        insured. We price settlements based on the policy face amount and 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, we price life settlements to yield competitive returns even if
        this
        life expectancy prediction is exceeded. In addition, 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 and price our transactions too
        high,
        our purchasers will not realize the returns they seek, demand may fall, and
        purchasers may invest their funds elsewhere. In addition, amounts escrowed
        for
        premiums may be insufficient to keep the policy in force and it is the
        responsibility of the purchasers to pay these additional premiums. If we
        overestimate the average life expectancies, the settlement prices we offer
        will
        fall below market levels, supply will decrease, and sellers may engage in
        business with our competitors or pursue other alternatives. Our ability to
        accurately predict life expectancies and price accordingly 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 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 or overestimating average life expectancies or miscalculating
        reserve amounts for future premiums.  If
        we do
        so, we could lose purchasers or policy sellers, and those losses could have
        a
        material adverse effect on our business, financial condition, and results
        of
        operations.
  12
  **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. Our licensing in Texas, our transaction structure
        for the settlements, and our belief that the locus of the settlements is
        in the
        State of Texas generally provides an exemption from application of regulation
        in
        other states. Similar laws in other states can affect, however, our activities
        and those of brokers with whom we do business. For example, t he
        State
        of Virginia has claimed that we are subject to its insurance licensing and
        laws
        and must be licensed by Virginia to purchase policies from its residents.
        We
        disputed Virginia’s claims, but were unsuccessful in a hearing before the
        District Court in Virginia and in an appeal to the Fourth Circuit Court of
        Appeals. Application of regulations such as Virginia’s would increase our
        regulatory costs or result in a loss of business, if we chose to withdraw
        from
        the state rather than comply with the regulations. In either case, the
        regulatory application could materially affect our business. In
        addition, some states and the Securities and Exchange Commission treat life
        settlements as securities under state and federal securities laws. Because
        of
        legal precedent relating to the structure of 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 such actions would not have
        a
        material adverse effect on our business. Further, 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 52% 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 52% of our common stock,
        largely as the result of exercising voting power by proxy over shares held
        by
        The Pardo Family Trust. He will be able to control most matters requiring
        approval by our shareholders, including the election of directors and approval
        of significant corporate transactions. His voting control affects indirectly
        the
        process for nominating directors, since theoretically he could nominate and
        elect directors without board involvement. 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**
  Although
        our common stock was traded on the Nasdaq Capital Market (formerly the Nasdaq
        SmallCap) market during the period covered by this filing, our common stock
        has
        qualified for and traded on the Nasdaq Global Market since March 12, 2007.
        Both
        the Nasdaq Capital Market and the Nasdaq Global Market require 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. With an average daily
        volume of about 32,000 shares for the previous three months, our stock is
        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, our industry or the general economy.
  13
  **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**
  D u **r** ing
        the
        fiscal year ended February 28, 2007, we incurred settlement expenses of $415,312
        for the resolution of litigation or potential litigation.  A significant
        portion of this amount was related to the settlement of litigation involving
        an
        alleged breach of contract in order to avoid the costs of litigation. Most
        other
        settlements involve purchaser claims and relatively minor settlement
        amounts.  In some instances, we have repurchased some interests in policies
        to settle claims.  In these cases, only the excess (if any) of the
        settlement payment over the fair value of the repurchased policy is charged
        to
        settlement expense.  The balance is recorded on our balance sheet as
        an asset under “Investments in policies” and the cash expenditure is recorded on
        our cash flow statement under “ Purchase
        of policies for investment purposes and capitalized premiums.” For these types
        of settlements d uring
        the
        period, we recorded $181,437 of settlement expense and $72,820 for purchase
        of
        policies for investment purposes.
  On
        June
        9, 2006, a putative class action case entitled *Earl
        Parchia et al. v. Life Partners, Inc.,* Cause
        No.
        2006-2258-4 ** was
        filed
        against us in the 170 th District
        Court of McLennan County, Texas. Although this action purports to represent
        a
        class of persons similarly situated, the Court has not certified this case
        as a
        class action. This action alleges breach of contract in connection with advising
        purchasers of premiums that come due on policies in which the escrow for
        premiums has been exhausted. The case also alleges that we breached our contract
        with purchasers by selecting life insurance policies insuring the lives of
        individuals who were not actually terminally ill. Although we have filed
        a
        partial motion for summary judgment and discovery has been authorized, there
        has
        been no significant action in this matter during the past several months.
        We
        believe there are numerous and substantial legal and factual issues that
        will
        prevent this matter from being certified as a class action and that will
        not
        support the claims made in this case. We intend to vigorously defend this
        action, but we cannot predict or guarantee the outcome of the
        action.
  On
        May
        29, 2005, we filed an action in federal court against the Commonwealth of
        Virginia for a legal determination as to whether a state in which we have
        no
        presence can exercise regulatory control over us if a citizen of that state
        engages in interstate commerce with us. We initiated the action in response
        to
        an administrative claim threatened by the State Corporation Commission for
        conducting business without foreign qualification. On March 10, 2006, the
        court
        issued an order denying our motion for summary judgment and granting the
        state’s
        motion for summary judgment. Because of this adverse ruling, we filed an
        appeal
        in the U.S. Court of Appeals for the Fourth Circuit, but the Fourth Circuit
        affirmed the decision of the lower court. In response, we have requested
        an *en
        banc* hearing
        before all judges of the Fourth Circuit and we are currently awaiting a decision
        from the Court. We believe that substantial legal precedent on this issue
        supports our legal position and we intend to vigorously pursue this action,
        but
        we cannot predict or guarantee the outcome of the action. If the Commonwealth
        of
        Virginia ultimately prevails on this issue, we could be required to register
        as
        a viatical or life settlement company in Virginia and other states, in addition
        to our current registration in the State of Texas, or to cease settling policies
        with residents of Virginia and other states. While the number of policies
        presented to us from Virginia residents is not material to our operations,
        the
        adoption of similar legislation, which significantly impedes the ability
        of
        insureds to freely engage in interstate transactions with us, could have
        a
        material adverse effect on our operations.
  14
  On
        November 29, 2006, we served a declaratory judgment action seeking a judicial
        ruling that the Commissioner of the Utah Division of Securities applied the
        Utah
        Securities Act in an unconstitutional manner when he ordered an administrative
        show cause hearing to determine whether Life Partners and an independent
        financial planner violated the Utah Securities Act in connection with certain
        life settlements transacted through our subsidiary, Life Partners, Inc. The
        Division is seeking a cease and desist and fines of $500,000. The declaratory
        judgment action is styled *Life
        Partners, Inc. and Life Partners Holdings, Inc. v. R. Wayne Klein, in his
        official capacity as Director, Division of Securities, Department of Commerce
        of
        the State of Utah* ,
        U.S.
        Dist.Ct., W.D. Tex (Waco Div.), Case No. W06-CA-339. A motion for summary
        judgment in this case is currently pending before the court. If the Division
        were ultimately successful in asserting application of the Utah Securities
        Act,
        we would cease performing any services for any citizen of Utah. Such cessation
        would not materially affect our business operations, financial condition,
        or
        results of operations. We cannot give assurance, however, that other state
        securities regulators will not initiate similar proceedings in the future
        or
        that such actions would not have a material adverse effect on our business.
        Changes in the regulatory environment could also affect our brokers, licensees
        or clients, which could materially effect our business.
  We
        are
        also subject to other legal proceedings in the ordinary course of business.
        When
        we determine that an unfavorable outcome is probable and the amount of the
        loss
        can be reasonably estimated, we reserve for such losses. Except as discussed
        above *:* (i) management has not concluded that it is probable that a loss has been
        incurred in any of our pending litigation; (ii) management is unable to
        estimate the possible loss or range of loss that could result from an
        unfavorable outcome of any pending litigation; and (iii) accordingly,
        management has not provided any amounts in the consolidated financial statements
        for unfavorable outcomes, if any.
  It
        is
        possible that our consolidated results of operations, cash flows or financial
        position could be materially affected in a particular fiscal quarter or fiscal
        year by an unfavorable outcome or settlement of any pending litigation.
        Nevertheless, although litigation is subject to uncertainty, management believes
        and we have been so advised by counsel handling the respective cases, that
        we
        have a number of valid claims and defenses in all pending litigation to which
        we
        are a party, as well as valid bases for appeal of adverse verdicts against
        us.
        All such cases are, and will continue to be, vigorously defended and all
        valid
        counterclaims pursued. However, we may enter into settlement discussions
        in
        particular cases if we believe it is in the best interests of our shareholders
        to do so.
  **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
        21, 2007, there were approximately 118 shareholders of record of our Common
        Stock. Most of our common stock is held beneficially by broker/dealers. We
        believe that there are approximately 1,492 beneficial owners of shares of
        our
        common stock who hold in street name through brokers.
  15
  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 Stock Market.
  **High**
              
              **Low**
              
              **Cash**
                **Dividends****Year
                  Ended 2/28/06**First
                  Quarter
              
              $
              7.50
              
              $
              4.00
              
              $
              .05Second
                  Quarter
              
              $
              5.21
              
              $
              3.96
              
              $
              .05Third
                  Quarter
              
              $
              4.64
              
              $
              3.21
              
              $
              .05Fourth
                  Quarter
              
              $
              6.50
              
              $
              4.60
              
              $
              .05**Year
                  Ended 2/28/07**First
                  Quarter
              
              $
              6.10
              
              $
              5.31
              
              $
              .05Second
                  Quarter
              
              $
              5.85
              
              $
              4.05
              
              $
              .05Third
                  Quarter
              
              $
              9.92
              
              $
              5.05
              
              $
              .06Fourth
                  Quarter
              
              $
              12.00
              
              $
              9.60
              
              $
              .05
  On
        May
        23, 2007, the last reported sale price of our common stock on The Nasdaq
        Global
        Market was $18.68 per share. Our total share volume for April 2007 was
        approximately 584,200 shares compared to 176,200 shares for the same period
        last
        year.
  *Dividends* .
        We paid
        common stock dividends of $0.20 per share in fiscal 2006 and $0.21 per share
        in
        fiscal 2007. The dividend declared by the Board of Directors has been $0.05
        per
        share in each quarter since August 17, 2004 with an additional $0.01 “Christmas
        Bonus” dividend in the Third Quarter of fiscal year 2007.
  **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 our financial
        position as of February 28, 2007, and results of operations for the years
        ended
        February 28, 2007 and 2006. 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.
  16
  We
        recognize income at the time a settlement closes and the purchaser has obligated
        itself to make the purchase. We defer $100 per viatical settlement and $200
        per
        life settlement to cover minor monitoring services provided subsequent to
        the
        settlement date. We amortize this deferred cost over the anticipated life
        expectancy of the insureds.
  For
        life
        insurance policies purchased for our own account in fiscal year 2006 and
        before,
        we followed Financial Standards Board Technical Bulletin 85-4 *Accounting
        for Purchases of Life Insurance* (FTB
        85-4), which required that we reduce our investment in the policies to the
        cash
        surrender value of such policies with any differences between cost and cash
        surrender value being charged to expense.
  On
        March
        27, 2006, FASB Staff Position No. FTB 85-4-1 *Accounting
        for Life Settlement Contracts by Third-Party Investors* (FSP FTB
        85-4-1) was issued, which amends FTB 85-4. The FASB Staff Position states
        that
        an investor may elect to account for its investments in life settlement
        contracts using either the investment method or the fair value method. The
        election shall be made on an instrument-by instrument basis and is irrevocable.
        Under the investment method, an investor shall recognize the initial investment
        at the purchase price plus all initial direct costs. Continuing costs (policy
        premiums and direct external costs, if any) to keep the policy in force shall
        be
        capitalized. Under the fair value method, an investor shall recognize the
        initial investment at the purchase price. In subsequent periods, the investor
        shall remeasure the investment at fair value in its entirety at each reporting
        period and shall recognize change in fair value earnings (or other performance
        indicators for entities that do not report earnings) in the period in which
        the
        changes occur.  FSP
        FTB
        85-4-1 is required to be applied to fiscal years beginning after June 15,
        2006. We elected to adopt FSP FTB 85-4-1 as of March 1, 2006 (the beginning
        of
        fiscal 2007). We expect to value our investments in life settlement contracts
        using the investment method. As of February 28, 2007, our investments in
        life
        settlements held for our own account were valued at $552,989. This change
        in
        accounting principle resulted in an increase in the value of life settlements
        which we hold for our own account of $457,070.
  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 from the asset,
        undiscounted and without interest charges. If the carrying amount is more
        than
        the recoverable amount, an impairment charge must be recognized, based on
        the
        fair value of the asset. As of February 28, 2007, 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 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.
  17
  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**
  In
        December 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 Employees* and
        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, be recognized in the financial statements
        based on their fair values. While we were not required to comply with the
        provisions of FAS 123(R) until March 1, 2006 (the beginning of fiscal 2007),
        we
        have elected to apply the FAS 123(R) principles to stock options and other
        grants during fiscal 2006 and all subsequent fiscal years. Since no options
        were
        granted, modified or settled during fiscal 2006 or fiscal 2007, there was
        no
        stock-based compensation expense included in net income for the year ended
        February 28, 2006 or 2007.
  On
        March
        27, 2006, FASB Staff Position No. 85-4-1 *Accounting
        for Life Settlement Contracts by Third-Party Investors* (FSP FTB
        85-4-1) was issued. See “Critical Accounting Estimates, Assumptions and
        Policies” above.
  Other
        recent accounting pronouncements have been issued including FASB Statements
        No.
        155, 156, 157,158 and 159, FIN 48 and SAB 108. For a discussion of these
        pronouncements, refer to Footnote 3 to the Consolidated Financial Statements.
  **Life
        Partners**
  We
        are
        the world's oldest and only publicly traded company operating exclusively
        in the
        life settlement industry. Our revenues are primarily derived from fees
        associated with facilitating life settlement transactions.
  **Comparison
        of Years Ended February 28, 2007, and 2006**
  We
        had
        net income of $3,641,300 for the year ended February 28, 2007 (fiscal 2007),
        as
        compared to net income of $1,143,751 for the year ended February 28, 2006
        (fiscal 2006). This 218% increase in net income is attributable primarily
        to an
        almost 150% increase in income from operations, a 43% increase in interest
        income and a 537% increase in realized gains on investments. Legal costs
        for
        fiscal 2007 were $2,150,126 compared to $1,545,149 in fiscal 2006 and comprised
        the largest single general and administrative expense other than federal
        income
        tax. These costs were attributable primarily to our prosecution of lawsuits
        against the States of Virginia and Utah and in defending ourselves in the
        arbitration action against our former investment bankers. *See
        Item 3. Legal Proceedings.*
  18
  *Revenues* -
        Revenues increased by $9,711,670, or 48% from $20,083,653 in fiscal 2006
        to
        $29,795,323 in fiscal 2007. This increase was due primarily to a 73% increase
        in
        our total business volume as measured by the face value of all policy
        settlements transacted through us and a 75% increase in the average revenue
        per
        settlement from $77,543 in fiscal 2006 to $135,433 in fiscal 2007. The number
        of
        settlements we transacted this year decreased by 18% from last year continuing
        a
        trend toward fewer number of transactions, but with larger face amounts.
  During
        the period, demand for our services remained strong and the number of policies
        presented to us and meeting our purchasing qualifications remained steady.
        Growth in demand was especially strong for policies with higher face values
        among both institutional and non-institutional clients, and we anticipate
        this
        demand trend to continue for the foreseeable future. Most of our competitors
        have adopted a single or preferred client business model, which relies on
        a
        relatively narrow purchaser base. In contrast, we employ a broad based,
        multi-client business model and our purchaser base is much broader. During
        this
        period, one institutional purchaser accounted for more than ten percent of
        our
        revenues. While a single purchaser may account for a substantial share of
        revenues during a particular quarterly period, we do not intend to become
        reliant upon any single purchaser and expect that no single purchaser will
        account for a substantial share of revenues during the long-term. With our
        multi-client business model, we believe we can serve the demand for all our
        current and future clients. We believe this business model will permit us
        to
        achieve sustainable growth for the foreseeable future, without the risks
        associated with a single or limited number of clients.
  We
        believe the increasing demand for our services results primarily from two
        factors, one of which is an investment trend toward diversifying investment
        portfolios and avoiding economically sensitive investments. Returns on 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 life settlements,
        we benefit from these trends in the investing community. Demand for our services
        emanates from both domestic and international purchasers, and the ratio of
        domestic clients to international clients was relatively unchanged from last
        year. In fiscal 2007, approximately 81% of our business was from domestic
        purchasers while approximately 19% was from foreign purchasers. In fiscal
        2006,
        this ratio was 86% from domestic business and 14% from foreign business.
        We do
        not anticipate significant changes in the ratio between domestic and foreign
        business. During fiscal 2007, we advised and made purchases for a closed-end
        fund based in the Bahamas and we anticipate the launch of a third fund by
        the
        same fund managers during the 2008 fiscal year.
  A
        second
        factor contributing to increasing demand for our services was the institution
        of
        legal proceedings against the industry’s largest life settlement provider. In
        October 2006, the Attorney General for the State of New York filed a civil
        lawsuit against our principal competitor claiming it violated fraud and
        antitrust laws by making secret payments to brokers that stifled bidding
        and
        that were unknown to policy sellers. In May 2007, the State of Florida filed
        a
        show cause order against the same competitor alleging similar unfair business
        practices. While we cannot assess the merits of the allegations in these
        proceedings, our total business volume increased after the filing of the
        New
        York proceeding, and we believe we have sufficient empirical data to classify
        this increase as a trend. In addition to any direct effect on our financial
        condition, we believe these proceedings will have a profoundly positive effect
        on the life settlement market in general, promoting fair dealing in the market
        and underscoring the fiduciary duty owed by brokers to sellers. We do not
        engage
        in the practices cited in these legal proceedings and, accordingly, we do
        not
        believe we will face similar proceedings.
  *Brokerage
        and Referral Fees* -
        Brokerage and referral fees increased 51% or $5,965,512 from $11,598,610
        in
        fiscal 2006 to $17,564,122 in fiscal 2007. Brokerage and referral fees
        constituted 59% of revenues in fiscal 2007 compared to 58% in fiscal 2006. In
        fiscal
        2007, broker referrals accounted for 90% of the total face value of policies
        transacted, which is approximately the same compared to fiscal 2006. Policies
        presented from two brokers constituted 73% of the total face value of all
        completed transactions presented by brokers during fiscal 2007. This compares
        to
        a concentration of 68% of the total face value of all completed transactions
        from the same two brokers in fiscal 2006.
  19
  Brokerage
        and referral fees generally increase or decrease with revenues, face values
        of
        policies transacted and the volume of transactions, although the exact ratio
        may
        vary according to a number of factors. Brokers may adjust their fees with
        the
        individual policyholders whom they represent. In some instances, several
        brokers
        may compete for representation of the same seller, which 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.
  Some
        states are moving to license life settlement brokerage activity, which may
        result in the capping of fees or the disclosure of fees, either of which
        would
        tend to lower the fees. The New York Attorney General’s suit discussed above may
        further encourage the disclosure or regulation of brokerage compensation.
  Brokerage
        fees associated with the purchase of policies for our own investment are
        not
        included in this line item, but are included under the line item entitled
        “policy acquisition expense.”
  *Expenses* -
        General and administrative expenses increased by 14% or $850,857 from $5,971,248
        in fiscal 2006 to $6,822,105 in fiscal 2007.  Included in fiscal 2007
        general and administrative expenses are substantial non-recurring legal expenses
        of $1,545,149 associated with the prosecution of legal actions against the
        State
        of Virginia and the State of Utah and in defending ourselves in an arbitration
        action filed by our former investment bankers. *See
        Item 3. Legal Proceedings.* In
        unrelated legal actions, we experienced non-recurring settlement expenses
        of
        $415,312 in fiscal 2007 compared to $388,808 in fiscal 2006. During fiscal
        2007,
        we had legal expenses totaling $2,150,126 compared to $1,545,149 in fiscal
        2006.
  We
        made
        advances on policy premiums primarily to maintain certain older viatical
        settlement transactions. During fiscal 2007 and 2006, we made premium advances
        of $1,242,314 and $1,187,095 respectively, and were reimbursed $407,687 and
        $284,249 respectively. The settlements, 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 insured dies. Premium advances have been
        recorded as an expense at the time they are made with collections being treated
        as a reduction in this expense. 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. Because of our inability to estimate these amounts, we
        do not
        accrue amounts for future advances or reimbursements.
  *Interest
        Expense -* Interest
        expense increased $69,175 or 50% from $138,063 in fiscal 2006 to $207,238
        in
        fiscal 2007.
  *Income
        Taxes* -
        Income
        tax expense increased by $508,291 or 61% from $838,731 in fiscal 2006 to
        $1,347,022 in fiscal 2007 due to a 137% increase in income before taxes.
  20
  **Liquidity
        and Capital Resources**
  *Operating
        Activities* - Net
        cash flows provided by operating activities during fiscal 2007 increased
        by 197%
        or $2,338,078 to $3,522,803 compared with net cash flows provided by operating
        activities of $1,184,725 for fiscal 2006. This increase in cash flows from
        operating activities was attributable primarily to a 218% or $2,497,549 increase
        in net income from $1,143,571 in fiscal 2006 to $3,641,300 in fiscal 2007.
        The
        increase was also aided by (i) increases in accounts payable of $1,849,218,
        compared to an increase of $289,016 in fiscal 2006; (ii) increases in
        income taxes payable of $581,239, compared to $3,715 in fiscal 2006,
        (iii) a non-cash impairment charge of $663,344 of previously capitalized
        costs for an investment in a partnership. The increase in operating cash
        flows
        was diminished by (i) increases in our accounts receivable of $2,849,728,
        compared to a decrease of $288,033 in fiscal 2006, and (ii) a cumulative
        effect of accounting change of $457,070.
  We
        expensed costs of $663,344 in connection with the formation of a
        limited
        partnership arrangement with a large
        U.S.-based investment firm. When the limited partnership did not make any
        settlement purchases, we terminated the partnership without penalty according
        to
        the terms of the limited partnership agreement. When we terminated the
        arrangement, we were required to recognize those capitalized costs as an
        expense. Of these expensed costs, $550,000 were funds advanced to our investment
        banker, which we recovered in an arbitration action after the close of fiscal
        2007. The recovery resulted in a reduction to our impairment of investment
        in
        limited partnership by that amount. The increase in our accounts receivable
        stems largely from the increased amount of revenue attributable to policies
        for
        which a closing was imminent, but which had not been released from escrow
        by the
        end of the period. The increase in our accounts payable was largely the result
        of the increased brokerage and referral fees associated with transactions
        which
        had not been released from escrow by the end of the period.
  *Investing
        and Financing Activities* - In
        fiscal 2007, our sources of net cash were from two sources:
  ·
              Operations:
                  $3,522,803, and
  ·
              Proceeds
                  from stock options exercised:
                  $606,000.
  We
        used
        the cash to fund operations, including making advances on policy premiums,
        to
        fund investing activities and to pay dividends. We used cash of $241,500
        in
        investing activities in fiscal 2007. We placed $53,171 in income funds compared
        to $413,054 in fiscal 2006 and paid down $761,849 on our operating line of
        credit in fiscal 2007 compared with payments of $147,866 in fiscal 2006.
        The
        amounts invested in property and equipment in fiscal 2007, $98,554, was lower
        than the $145,006 invested in fiscal 2006. We used additional cash to pay
        dividends of approximately $2.0 million in fiscal 2007, which maintained
        the
        prior dividend level.
  *Working
        Capital and Capital Availability* - As of
        February 28, 2007, we had working capital of $4,158,237. Our cash during
        fiscal
        2007 increased by $1,733,782 compared with an increase of $684,950 in fiscal
        2006. To
        facilitate the purchase of policies for our own account and for short-term
        cash
        flow management and operating capital requirements, we maintain a credit
        line,
        although we did not draw down on this credit line during fiscal 2007.  The
        credit line is secured by our cash and securities on deposit.  As of
        February 28, 2007, the line of credit carried an interest rate at New York
        prime
        and had a borrowing base of $2.4 million. The balance outstanding at February
        28, 2007, was $1,679,837.
  We
        believe future income from operating activities will generate sufficient
        profits
        and cash flows to meet our anticipated working capital needs. In addition,
        we
        continue to explore the formation of strategic alliances for joint ventures
        and
        other types of financing opportunities, which will provide more capital for
        us
        to purchase more policies for our own investment.
  21
  Our
        financial 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 life
        settlements, especially from institutional investors, will continue to grow
        during the next year as the prospects for economic conditions remain uncertain,
        as the popularity of non-correlated assets continues to grow, and as we gain
        competitive advantage from the legal proceedings against our principal
        competitor. In addition to our traditional client base, we have expanded
        our
        services to accommodate the investment strategies and transaction structuring
        goals of institutional investors. We have already been retained as a fund
        advisor for two funds and anticipate expanding these services in combination
        with our current life settlement provider services. In addition to our
        compensation for our policy acquisition services, we anticipate receiving
        annual
        fees for management and advisory services and may participate in revenue
        sharing, equity or other compensation structures. Any equity participation
        by us
        in any of these funds would result in the accrual of an interest in policies
        held for investment purposes.
  **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, 2007:
  **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**Line
                  of Credit
              
              $
              1,679,837
              
              $
              1,679,837
              
              $
              -
              
              $
              -
              
              $
              -Long-term
                  debt
              
              
              403,577
              
              
              53,929
              
              
              117,376
              
              
              131,318
              
              
              100,954Operating
                  leases
              
              
              145,800
              
              
              32,400
              
              
              64,800
              
              
              48,600
              
              
              -Total
                  obligations
              
              $
              2,229,214
              
              $
              1,766,166
              
              $
              182,176
              
              $
              179,918
              
              $
              100,954
  **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 26
        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 (the “Exchange
        Act”), 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.
  22
  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 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.
  There
        were no changes in our internal control over financial reporting, as of the
        end
        of the period covered by this Annual Report, that materially affected, or
        are
        reasonably likely to materially affect our internal control over financial
        reporting.
  This
        Annual Report does not include an attestation report of our independent public
        accounting firm regarding internal control over financial reporting.
        Management’s report was not subject to attestation by our independent public
        accounting firm pursuant to temporary rules of the Securities and Exchange
        Commission that permit us to provide only management’s report in this Annual
        Report.
  **Item
        8B. Other Information**
  None.
  **PART
        III**
  **Item
        9. Directors and Executive Officers; Corporate Governance; Compliance with
        Section 16(a) of the Exchange Act.**
  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; and Director
        Independence**
  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.
  23
  **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.
  24
  **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
                  29, 2007
              Life
                  Partners Holdings, Inc.By:
              /s/
                Brian D. PardoBrian
                  D. PardoPresident
                  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
                Brian
                  D. Pardo
              
              President,
                  Principal Executive Officer, and Director
              
              May
                  29, 2007/s/
                  Nina
                  Piper
                Nina
                  Piper
              
              Treasurer
              
              May
                  29, 2007/s/
                  R. Scott
                  Peden
                R.
                  Scott Peden
              
              Secretary,
                  Director
              
              May
                  29, 2007/s/Tad
                  Ballantyne
                Tad
                  Ballantyne
              
              Director
              
              May
                  29, 2007/s/
                  Harold Rafuse
                Dr.
                  Harold Rafuse
              
              Director
              
              May
                  29, 2007/s/
                  Fred Dewald
                Fred
                  Dewald
              
              Director
              
              May
                  29, 2007
  25
  **LIFE
        PARTNERS HOLDINGS, INC.**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **FEBRUARY
        28, 2007 AND FEBRUARY 28, 2006**
  **Contents**Report
                    of Independent Registered Public Accounting Firm
                27Audited
                    Consolidated Financial Statements:Consolidated
                    Balance Sheet
                28Consolidated
                    Statements of Income
                30Consolidated
                    Statements of Shareholders’ Equity
                31Consolidated
                    Statements of Cash Flows
                32Notes
                    to Consolidated Financial Statements
                33
  26
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  To
        the
        Board of Directors
 Life
        Partners Holdings, Inc.
  We
        have
        audited the accompanying consolidated balance sheet of LIFE PARTNERS HOLDINGS,
        INC. and subsidiaries as of February 28, 2007, and the related consolidated
        statements of income, shareholders' equity, and cash flows for the years
        ended
        February 28, 2007 and 2006. 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, 2007, and the consolidated results of its operations and cash
        flows
        for the years ended February 28, 2007 and 2006, in conformity with accounting
        principles generally accepted in the United States of America.
  /s/
        MURRELL, HALL, MCINTOSH & CO., PLLP
  Oklahoma
        City, Oklahoma
 May
        25,
        2007
  27
 **LIFE
          PARTNERS HOLDINGS, INC.**
 **CONSOLIDATED
          BALANCE SHEET**
 **FEBRUARY
          28, 2007**
 **Page
          1 of 2**
 ASSETS
 CURRENT
                    ASSETS:Cash
                
                $
                3,521,021Investment
                    in securities
                
                
                3,977,383Accounts
                    receivable - trade
                
                
                4,451,299Accounts
                    receivable - employees
                
                
                90,424Accounts
                    receivable - others
                
                
                550,000Prepaid
                    expenses
                
                
                111,717Total
                    current assets
                
                
                12,701,844PROPERTY
                    AND EQUIPMENT:Land
                    and building
                
                
                954,103Proprietary
                    software
                
                
                421,187Machinery
                    and equipment
                
                
                669,147Transportation
                    equipment
                
                
                139,5002,183,937Accumulated
                    depreciation
                
                
                (881,109
                )1,302,828OTHER
                    ASSETS:Premium
                    advances net of reserve for uncollectible of $3,339,516
                
                
                -Investments
                    in policies
                
                
                552,989Other
                
                
                721,700Deferred
                    income taxes
                
                
                1,319,4172,594,106Total
                    Assets
                
                $
                16,598,778
  See
                    the accompanying summary of accounting policies and notes to
                    the financial
                    statements.
 28
 **LIFE
            PARTNERS HOLDINGS, INC.**
 **CONSOLIDATED
            BALANCE SHEET**
 **FEBRUARY
            28, 2007**
 **Page
            2 of 2**
  LIABILITIES
                      AND SHAREHOLDERS' EQUITY
 CURRENT
                      LIABILITIES:Accounts
                      payable
                  
                  $
                  4,712,708Accrued
                      liabilities - contingencies and other
                  
                  
                  1,142,535Current
                      portion of long-term debt
                  
                  
                  53,929Short-term
                      notes payable
                  
                  
                  1,679,837Deferred
                      revenue
                  
                  
                  256,400Income
                      taxes payable
                  
                  
                  698,198Total
                      current liabilities
                  
                  
                  8,543,607LONG-TERM
                      DEBT, net of current portion shown above
                  
                  
                  349,648SHAREHOLDERS'
                      EQUITY:Common
                      stock, $0.01 par value 10,000,000 shares authorized; 9,615,586
                      shares
                      issued and outstanding
                  
                  
                  96,156Additional
                      paid-in capital
                  
                  
                  11,214,398Accumulated
                      deficit
                  
                  
                  (3,199,964
                  )Accumulated
                      other comprehensive loss
                  
                  
                  (32,926
                  )Less:
                      Notes receivable issued for common stock
                  
                  
                  (372,141
                  )Less:
                      Treasury stock - 87,433 shares
                  
                  
                  -Total
                      shareholders' equity
                  
                  
                  7,705,523Total
                      Liabilities and Shareholders' Equity
                  
                  $
                  16,598,778See
                      the accompanying summary of accounting policies and notes to
                      the financial
                      statements.
  29
  **LIFE
        PARTNERS HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 **FOR
        THE YEARS ENDED FEBRUARY 28, 2007 AND 2006**
 **2007**
                
                **2006**REVENUES
                
                $
                29,795,323
                
                $
                20,083,653BROKERAGE
                    FEES
                
                
                17,564,122
                
                
                11,598,610REVENUES,
                    NET OF BROKERAGE FEES
                
                
                12,231,201
                
                
                8,485,043OPERATING
                    AND ADMINISTRATIVE EXPENSES:General
                    and administrative
                
                
                6,822,105
                
                
                5,971,248Settlement
                    costs
                
                
                415,312
                
                
                388,808Depreciation
                    and amortization
                
                
                234,136
                
                
                213,3827,471,553
                
                
                6,573,438INCOME
                    FROM OPERATIONS
                
                
                4,759,648
                
                
                1,911,605OTHER
                    INCOME (EXPENSES):Interest
                    and other income
                
                
                957,363
                
                
                671,152Interest
                    expense
                
                
                (207,238
                )
                
                (138,063
                )Impairment
                    of partnership
                
                
                (123,149
                )
                
                -Premium
                    advances, net
                
                
                (852,376
                )
                
                (902,845
                )Policy
                    acquisition expense
                
                
                -
                
                
                (620,764
                )Gain
                    on sale of policies for investment purposes
                
                
                -
                
                
                1,100,967Realized
                    gain (loss) on investments
                
                
                173,004
                
                
                (39,570
                )(52,396
                )
                
                70,877INCOME
                    BEFORE INCOME TAXES
                
                
                4,707,252
                
                
                1,982,482INCOME
                    TAXES:Current
                    tax expense
                
                
                1,677,439
                
                
                1,186,731Deferred
                    tax benefit
                
                
                (330,417
                )
                
                (348,000
                )1,347,022
                
                
                838,731NET
                    INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
                
                
                3,360,230
                
                
                1,143,751Cumulative
                    effect of accounting change, net of income tax of $176,000
                
                
                281,070
                
                
                -NET
                    INCOME
                
                $
                3,641,300
                
                $
                1,143,751EARNINGS:Per
                    share - Basic and Diluted
                
                $
                0.36
                
                $
                0.12Income
                    per share before cumulative effect of accounting change
                
                $
                0.03
                
                $
                -Cumulative
                    effect of accounting change
                
                $
                0.39
                
                $
                0.12AVERAGE
                    COMMON AND COMMON EQUIVALENT SHARES OUTSTANDINGBasic
                
                
                9,447,879
                
                
                9,409,102Diluted
                
                
                9,454,019
                
                
                9,409,102THE
                    COMPONENTS OF COMPREHENSIVE INCOME:Net
                    income
                
                $
                3,641,300
                
                $
                1,143,751Unrealized
                    gain (loss) on investment securities net of taxes
                
                
                208,534
                
                
                (228,226
                )COMPREHENSIVE
                    INCOME
                
                $
                3,849,834
                
                $
                915,525BASIC
                    AND DILUTED EARNINGS PER SHARE:Comprehensive
                    income
                
                $
                0.41
                
                $
                0.10See
                    the accompanying summary of accounting policies and notes to
                    the financial
                    statements.
  30
  **LIFE
        PARTNERS HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY**
 **FOR
        THE YEARS ENDED FEBRUARY 28, 2007 AND 2006**
 **Common
                      Stock**
                  
                  **Treasury
                      Stock****Number
                      of**
                    **Shares**
                  
                  **$0.01**
                    **par**
                    **Value**
                  
                  **Additional**
                    **Paid-In**
                    **Capital**
                  
                  **Accumulated**
                    **Deficit**
                  
                  **Accumulated**
                    **Other**
                    **Comprehensive**
                    **Gain
                      (Loss)**
                  
                  **Note**
                    **Receivable**
                  
                  **Number
                      of**
                    **Shares**
                  
                  **Amount**
                  
                  **Total**
                    **Shareholders’**
                    **Equity**Balance,
                    February
                      29, 2005
                  
                  
                  9,615,586
                  
                  $
                  96,156
                  
                  $
                  10,608,398
                  
                  $
                  (4,103,860
                  )
                  $
                  (13,234
                  )
                  $
                  (323,631
                  )
                  
                  206,615
                  
                  $
                  -
                  
                  $
                  6,263,829Dividends
                      declared
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,896,242
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,896,242
                  )Other
                      comprehensive loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (228,226
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (228,226
                  )Note
                      for stock - accrued interest
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (48,510
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (48,510
                  )Replacement
                      shares issued
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (18,182
                  )
                  
                  -
                  
                  
                  -Net
                      income for the year ended February 28, 2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,143,751
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,143,751Balance,
                    February
                      28, 2006
                  
                  
                  9,615,586
                  
                  $
                  96,156
                  
                  $
                  10,608,398
                  
                  $
                  (4,856,351
                  )
                  $
                  (241,460
                  )
                  $
                  (372,141
                  )
                  
                  188,433
                  
                  $
                  -
                  
                  $
                  5,234,602Dividends
                      declared
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,984,913
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,984,913
                  )Other
                      comprehensive gain
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  208,534
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  208,534Shares
                      issued to IGE shareholder
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,000
                  )
                  
                  -
                  
                  
                  -Options
                      exercised
                  
                  
                  -
                  
                  
                  -
                  
                  
                  606,000
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (100,000
                  )
                  
                  -
                  
                  
                  606,000Net
                      income for the year ended ended February 28, 2007
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,641,300
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,641,300Balance,
                    February
                      28, 2007
                  
                  
                  9,615,586
                  
                  $
                  96,156
                  
                  $
                  11,214,398
                  
                  $
                  (3,199,964
                  )
                  $
                  (32,926
                  )
                  $
                  (372,141
                  )
                  
                  87,433
                  
                  $
                  -
                  
                  $
                  7,705,523
  See
          the
          accompanying summary of accounting policies and notes to the financial
          statements.
  31
  **LIFE
        PARTNERS HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **FOR
        THE YEARS ENDED FEBRUARY 28, 2007 AND 2006**
 **2007**
                
                **2006**CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                $
                3,641,300
                
                $
                1,143,751Adjustments
                    to reconcile net income to operating activities:Depreciation
                
                
                234,136
                
                
                213,382Policy
                    acquisition expense
                
                
                -
                
                
                620,764Gain
                    on sale of policies for investment purposes
                
                
                -
                
                
                (1,100,967
                )Impairment
                    of investment in partnership
                
                
                663,344
                
                
                -Cumulative
                    effect of accounting change
                
                
                (457,070
                )
                
                -(Increase)
                    decrease in operating assets:Accounts
                    receivable
                
                
                (2,849,728
                )
                
                288,033Prepaid
                    expenses
                
                
                145,815
                
                
                (240,496
                )Deferred
                    income taxes
                
                
                (154,417
                )
                
                (348,000
                )Increase
                    (decrease) in operating liabilities:Accounts
                    payable
                
                
                1,849,218
                
                
                289,016Accrued
                    liabilities
                
                
                (142,434
                )
                
                249,177Income
                    taxes payable
                
                
                581,239
                
                
                3,715Deferred
                    revenue
                
                
                11,400
                
                
                66,350Net
                    cash provided by operating activities
                
                
                3,522,803
                
                
                1,184,725CASH
                    FLOWS FROM INVESTING ACTIVITIES:Investment
                    in income funds
                
                
                (53,171
                )
                
                (413,055
                )Purchases
                    of property and equipment
                
                
                (98,554
                )
                
                (145,006
                )Investment
                    in partnership
                
                
                -
                
                
                (663,344
                )Purchase
                    of policies for investment purposes and capitalized
                    premiums
                
                
                (89,775
                )
                
                (1,176,269
                )Proceeds
                    from sale of policies for investment purposes
                
                
                -
                
                
                1,651,208Purchases
                    of artifacts
                
                
                -
                
                
                (219
                )Net
                    cash used in investing activities
                
                
                (241,500
                )
                
                (746,685
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Payments
                    on notes payable
                
                
                (761,849
                )
                
                (147,866
                )Proceeds
                    from note payable
                
                
                -
                
                
                2,291,018Stock
                    options exercised
                
                
                606,000
                
                
                -Dividends
                
                
                (1,984,912
                )
                
                (1,896,242
                )Dividends
                    payable
                
                
                593,240
                
                
                -Net
                    cash provided by (used in) financing activities
                
                
                (1,547,521
                )
                
                246,910NET
                    INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                1,733,782
                
                
                684,950CASH
                    AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                1,787,239
                
                
                1,102,289CASH
                    AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                3,521,021
                
                $
                1,787,239SUPPLEMENTAL
                    DISCLOSURES OF CASH FLOW INFORMATION:Interest
                    paid, net of capitalized amounts
                
                $
                493,651
                
                $
                94,084Income
                    taxes paid
                
                $
                1,032,381
                
                $
                1,070,581SUPPLEMENTAL
                    DISCLOSURES OF NONCASH ITEMS:Unrealized
                    gain (loss) on marketable securities
                
                $
                208,534
                
                $
                (228,226
                )See
                    accompanying summary of accounting policies and notes to financial
                    statements.
  32




**(1)
      DESCRIPTION OF BUSINESS**




Life
      Partners Holdings, Inc. ("we” or “Life Partners”) is
      a
      financial services company and the parent company of Life Partners, Inc.
      (“LPI”). LPI is the oldest and one of the most
      active companies in the United States engaged in the secondary market for life
      insurance known generally as “life settlements.” These financial transactions involve
      the purchase
      of life insurance policies at a discount to their face value for investment
      purposes.




**(2)
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




The
      following is a summary of significant accounting policies followed by Life
      Partners:




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, 2007 and 2006 we advanced premiums totaling $1,242,314 and $1,187,095,
      respectively, and received repayments of advances of $407,687 and $284,249,
      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
      viatical settlement and $200 per life 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 - For fiscal 2006 and prior fiscal years, in
      accordance with Financial Standards Board Technical Bulletin 85-4 *Accounting
      for Purchases of Life Insurance* (FTB
      85-4), we reduced our investment in life insurance policies to their cash
      surrender value with any differences between cost and cash surrender value
      being
      charged to expense.




On
      March
      27, 2006, the FASB Staff Position No. FTB 85-4-1 *Accounting
      for Life Settlement Contracts by Third-Party Investors* (FSP FTB
      85-4-1) was issued, which amended FTB 85-4. FSP FTB 85-4-1 states that an
      investor may elect to account for its investments in life settlement contracts
      using either the investment method or the fair value method. The election shall
      be made on an instrument-by instrument basis and is irrevocable. Under the
      investment method, an investor shall recognize the initial investment at the
      purchase price plus all initial direct costs. Continuing costs (policy premiums
      and direct external costs, if any) to keep the policy in force shall be
      capitalized. Under the fair value method, an investor shall recognize the
      initial investment at the purchase price. In subsequent periods, the investor
      shall remeasure the investment at fair value in its entirety at each reporting
      period and shall recognize change in fair value earnings (or other performance
      indicators for entities that do not report earnings) in the period in which
      the
      changes occur.  We
      have
      elected to adopt FSP FTB 85-4-1 as of March 1, 2006 (the beginning of fiscal
      2007) and value our investments in life settlement contracts using the
      investment method. As of February 28, 2007, our investments in life settlements
      held for our own account were valued at $552,989. This change in accounting
      principle resulted in an increase in the value of life settlements which we
      hold
      for our own account of $457,070.




33




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:




Building
            30
                yearsMachinery
                and equipment
            5
                yearsTransportation
                equipment
            5
                to 9 years




Artifacts
      and Other - The artifacts and other assets are stated at cost. We have evaluated
      these assets and believe there is no impairment in their value as of February
      28, 2007.




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, 2007, 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 8 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 - In fiscal 2007, compensation to a single
      licensee organization comprised 37% of all brokerage and referral fees compared
      to compensation to two licensee organizations which constituted 39% of all
      brokerage and referral fees in fiscal 2006. Compensation to two brokers in
      fiscal 2007 comprised 27% of all brokerage and referral fees compared to
      compensation to a single broker which constituted 24% of all brokerage and
      referral fees in fiscal 2006.




**(3)
      NEW ACCOUNTING PRONOUNCEMENTS**




In
      December 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 Employees* and
      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, be recognized in the financial statements
      based on their fair values. While the provisions of FAS 123(R) were not required
      for us until March 1, 2006 (the beginning of our fiscal 2007), we elected to
      apply the FAS 123(R) principles to stock options and other grants during fiscal
      2006 and all subsequent fiscal years. Since no options were granted, modified
      or
      settled during fiscal 2006 or fiscal 2007, there was no stock-based compensation
      expense included in net income for the years ended February 28, 2006 or 2007.




34




On
      March
      27, 2006, the FASB Staff Position No. FTB 85-4-1 *Accounting
      for Life Settlement Contracts by Third-Party Investors* (FSP FTB
      85-4-1) was issued. The FASB Staff Position states that an investor may elect
      to
      account for its investments in life settlement contracts using either the
      investment method or the fair value method. The election shall be made on an
      instrument-by instrument basis and is irrevocable. Under the investment method,
      an investor shall recognize the initial investment at the purchase price plus
      all initial direct costs. Continuing costs (policy premiums and direct external
      costs, if any) to keep the policy in force shall be capitalized. Under the
      fair
      value method, an investor shall recognize the initial investment at the purchase
      price. In subsequent periods, the investor shall remeasure the investment at
      fair value in its entirety at each reporting period and shall recognize change
      in fair value earnings (or other performance indicators for entities that do
      not
      report earnings) in the period in which the changes occur.  FSP
      FTB
      85-4-1 is required to be applied to fiscal years beginning after June 15, 2006.
      The adoption of FSP FTB 85-4-1 is expected to have a material impact on future
      disclosures. We have elected to adopt FSP FTB 85-4-1 as of March 1, 2006 (the
      beginning of fiscal 2007) and value our investments in life settlement contracts
      using the investment method. As of February 28, 2007, our investments in life
      settlements held for our own account were valued at $552,989. This change in
      accounting principle resulted in an increase in the value of life settlements
      which we hold for our own account of $457,070.




In
      February 2006, the FASB issued Statement No. 155, *“Accounting
      for Certain Hybrid Financial Instruments”* (“SFAS No. 155”), which amends FASB Statements No. 133 and 140.
      This Statement permits fair value remeasurement for any hybrid financial
      instrument containing an embedded derivative that would otherwise require
      bifurcation, and broadens a Qualified Special Purpose Entity’s (“QSPE”)
      permitted holdings to include passive derivative financial instruments that
      pertain to other derivative financial instruments. This Statement is effective
      for all financial instruments acquired, issued or subject to a remeasurement
      event occurring after the beginning of an entity’s first fiscal year beginning
      after September 15, 2006. This Statement has no current applicability to
      the Company’s financial statements. Management plans to adopt this Statement on
      March 1, 2007 and it is anticipated that the initial adoption of this
      Statement will not have a material impact on the Company’s financial position,
      results of operations, or cash flows.




In
      March
      2006, the FASB issued Statement No. 156, *“Accounting
      for Servicing of Financial Assets - an amendment of FASB Statement No.
      140”* (“SFAS No. 156”). This Statement is effective for fiscal years
      beginning after September 15, 2006. This Statement requires that all
      separately recognized servicing assets and servicing liabilities be initially
      measured at fair value, if practicable. This Statement has no current
      applicability to the Company’s financial statements. Management plans to adopt
      this Statement on March 1, 2007 and it is anticipated that the initial adoption
      of this Statement will not have a material impact on the Company’s financial
      position, results of operations, or cash flows.




In
      June
      2006, the FASB issued Interpretation 48, *“Accounting
      for Uncertainty in Income Taxes”* (“FIN 48”), an interpretation of FASB Statement No. 109 *“Accounting
      for Income Taxes.”* FIN 48 clarifies the accounting and reporting for income taxes where
      interpretation of the law is uncertain. FIN 48 prescribes a comprehensive
      model for the financial statement recognition, measurement, presentation and
      disclosure of income tax uncertainties with respect to positions taken or
      expected to be taken in income tax returns. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. This Statement has no current
      applicability to the Company’s financial statements. Management plans to adopt
      this Statement on March 1, 2007 and it is anticipated that the initial
      adoption of FIN 48 will not have a material impact on the Company’s
      financial position, results of operations, or cash flows.




35




In
      September 2006, the FASB issued Statement No. 157, *“Fair
      Value Measurements”* (“SFAS No. 157”). SFAS No. 157 addresses how companies
      should measure fair value when they are required to use a fair value measure
      for
      recognition or disclosure purposes under GAAP. SFAS No. 157 defines
      fair value, establishes a framework for measuring fair value and expands
      disclosures about fair value measurements. SFAS No. 157 is effective
      for fiscal years beginning after November 15, 2007, with earlier adoption
      permitted. Management is assessing the impact of the adoption of this
      Statement.




In
      September 2006, the FASB issued Statement No. 158, *“Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans”* (“SFAS No. 158”), an amendment of FASB Statements No. 87, 88, 106
      and 132(R). SFAS No. 158 requires (a) recognition of the funded
      status (measured as the difference between the fair value of the plan assets
      and
      the benefit obligation) of a benefit plan as an asset or liability in the
      employer’s statement of financial position, (b) measurement of the funded
      status as of the employer’s fiscal year-end with limited exceptions, and
      (c) recognition of changes in the funded status in the year in which the
      changes occur through comprehensive income. The requirement to recognize the
      funded status of a benefit plan and the disclosure requirements are effective
      as
      of the end of the fiscal year ending after December 15, 2006. The
      requirement to measure the plan assets and benefit obligations as of the date
      of
      the employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. This Statement has no current
      applicability to the Company’s financial statements, and it is anticipated the
      adoption of SFAS No. 158 will not have a material impact to the
      Company’s financial position, results of operations, or cash
      flows.




In
      September 2006, the Securities Exchange Commission issued Staff Accounting
      Bulletin No. 108 (“SAB No. 108”). SAB No. 108
      addresses how the effects of prior year uncorrected misstatements should be
      considered when quantifying misstatements in current year financial statements.
      SAB No. 108 requires companies to quantify misstatements using a
      balance sheet and income statement approach and to evaluate whether either
      approach results in quantifying an error that is material in light of relevant
      quantitative and qualitative factors. When the effect of initial adoption is
      material, companies will record the effect as a cumulative effect adjustment
      to
      beginning of year retained earnings and disclose the nature and amount of each
      individual error being corrected in the cumulative adjustment.
      SAB No. 108 was effective beginning January 1, 2007 and the
      initial adoption of SAB No. 108 did not have a material impact on the
      Company’s financial position, results of operations, or cash flows.




In
      February 2007, the FASB issued Statement No. 159 “The Fair Value Option for
      Financial Assets and Financial Liabilities” (SFAS 159). This statement permits
      companies to choose to measure many financial assets and liabilities at fair
      value. Unrealized gains and losses on items for which the fair value option
      has
      been elected are reported in earnings. SFAS 159 is effective for fiscal years
      beginning after November 15, 2007. The Company is currently assessing the impact
      of SFAS 159 on its consolidated financial statements.




**(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.




36




The
      cost
      and estimated market value of the investment securities classified as
      available-for-sale as of February 28, 2007 are as follows:




**Gross**
            
            **Gross****Unrealized**
            
            **Unrealized**
            
            **Estimated****Cost**
            
            **Gains**
            
            **(Losses)**
            
            **Value**Market
                Income Funds
            
            $
            4,010,309
            
            $
            220
            
            $
            (33,146
            )
            $
            3,977,383




We
      incurred capitalized costs of $663,344 in connection with a
      limited
      partnership arrangement with a large
      U.S.-based investment firm. The limited
      partnership was designed to
      invest
      $50 million in life settlement contracts purchased through Life Partners during
      fiscal 2007, but the limited partnership did not make any purchases and was
      terminated by us without penalty according to the terms of the limited
      partnership agreement. Because the arrangement was terminated, we were required
      to recognize those capitalized costs as an expense during the third and fourth
      quarters of fiscal 2007 when the impairment to the limited partnership became
      evident. Of these expensed costs, $550,000 were funds advanced to our investment
      banker which were recovered in an arbitration action resulting in a reduction
      to
      our impairment of investment in limited partnership by that amount.




**(5)
      LEASES**




We
      lease
      various equipment under non-cancelable operating leases expiring in various
      years through 2012.




Minimum
      future rental payments under non-cancelable operating leases having remaining
      terms in excess of one year as of February 28, 2007 for each of the next five
      years and in the aggregate are:




**Twelve
                months ending February 28,**
            
            **Amount**2008
            
            $
            16,2002009
            
            
            32,4002010
            
            
            32,4002011
            
            
            32,4002012
            
            
            32,400Total
                minimum future rental payments
            
            $
            145,800




Rental
      expense was $36,675 and $36,675 for the years ended February 28, 2007 and 2006,
      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)
      NOTE PAYABLE**




We
      maintain a revolving credit line of $2,400,000 for the purchase of policies
      for
      our own account and for short-term cash flow management.  The credit line
      is secured by our cash and securities on deposit.  As of February 28, 2007,
      the line of credit carried an interest rate of New York prime and had an
      outstanding balance of $1,679,837.




37




**(7)
      LONG-TERM DEBT**




As
      of
      February 28, 2007, 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
            
            $
            53,929
            
            $
            349,648




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




**Amount**February
                28,2008
            
            $
            53,9292008
            
            
            57,0412010
            
            
            60,3442011
            
            
            63,8172012
            
            
            67,500Thereafter
            
            
            100,946$
            403,577




**(8)
      INCOME TAXES**




Temporary
      timing differences between the reporting of income and expenses for financial
      and income tax reporting purposes at February 28, 2007, result in an increase
      in
      the deferred tax asset of approximately $154,000, which we believe to be fully
      realizable.




Following
      are the components of the deferred tax asset as of February 28,
      2007:




Excess
                tax over financial accounting -Depreciation
            
            $
            (104,596
            )Effect
                of accounting change
            
            
            (176,000
            )Excess
                financial accounting over tax -Accrued
                contingency costs
            
            
            250,652Reserve
                for premium advances
            
            
            1,285,714Acquired
                life insurance policies
            
            
            63,647Net
                deferred tax asset
            
            $
            1,319,417




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, 2007 and 2006:




******2007**
            
            ******2006**United
                States statutory rate
            
            
            34.0
            %
            
            34.0
            %State
                of Texas statutory rate
            
            
            4.5
            %
            
            4.5
            %Expected
                combined rate
            
            
            38.5
            %
            
            38.5
            %Additional
                tax associated with expenses not deductible for tax
            
            
            24.3
            %
            
            21.4
            %Surtax
                and other
            
            
            (34.2
            )%
            
            (17.6
            )%Combined
                effective tax rate
            
            
            28.6
            %
            
            42.3
            %




38




**(9)
      SHAREHOLDERS’ EQUITY, STOCK TRANSACTIONS AND COMMON STOCK OPTIONS**




**Dividends** .
      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**02/14/05
            
            
            03/15/05
            
            
            $0.0505/17/05
            
            
            06/17/05
            
            
            $0.0508/17/05
            
            
            09/19/05
            
            
            $0.0511/18/05
            
            
            12/14/05
            
            
            $0.0502/21/06
            
            
            03/15/06
            
            
            $0.0505/18/06
            
            
            06/15/06
            
            
            $0.0509/01/06
            
            
            09/30/06
            
            
            $0.0511/21/06
            
            
            12/15/06
            
            
            $0.0602/19/07
            
            
            03/15/07
            
            
            $0.05




**Stock
      Options.** We
      account for share-based payments under the provisions of Statement of Financial
      Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS
      123(R)”), which requires the measurement and recognition of compensation expense
      for all share-based payment awards made to employees, directors and service
      providers based on estimated fair values.




SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service period (if any) in our financial statements.
      Stock-based compensation expense is recognized in the Consolidated Statements
      of
      Income for the years ended February 28, 2006 and 2007 based on awards ultimately
      expected to vest and it has been reduced for estimated forfeitures. SFAS 123(R)
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates.




For
      purposes of determining estimated fair value of share-based payment awards
      on
      the date of grant under SFAS 123(R), we use the Black-Scholes option-pricing
      model (“Black-Scholes Model”). The Black-Scholes Model requires the input of
      highly subjective assumptions. Because employee stock options may have
      characteristics significantly different from those of traded options, and
      because changes in the subjective input assumptions can materially affect the
      fair value estimate, in management’s opinion, the existing models may not
      provide a reliable single measure of the fair value of its employee stock
      options. In addition, management will continue to assess the assumptions and
      methodologies used to calculate estimated fair value of share-based
      compensation. Circumstances may change and additional data may become available
      over time, which result in changes to these assumptions and methodologies,
      which
      could materially impact our fair value determination. As no share based awards
      were granted, modified or settled for the years ended February 28, 2007 and
      2006
      and all previously issued awards had been fully vested, there was no share
      based
      compensation expense in either year.




39


Information
        with respect to stock options and warrants outstanding to certain employees,
        directors and service providers are as follows:


**2007****Shares**
            
            **Average
                Exercise Price**Outstanding
                at beginning of year
            
            
            200,000
            
            $
            6.02Exercised
            
            
            (100,000
            )
            $
            6.06Issued
            
            
            -
            
            
            -Expired
            
            
            (50,000
            )
            $
            6.00Outstanding
                at the end of year
            
            
            50,000
            
            $
            6.00




**Options
                Outstanding**
            
            
            
            **Options
                Exercisable****Shares**
              **Outstanding**
              **At
                2/28/07**
            
            **Average
                Remaining Life (Years)**
            
            **Average
                Exercise Price**
            
            **Shares
                Outstanding 2/28/07**
            
            **Average**
              **Exercise**
              **Price**50,000
            
            
            .17
            
            $
            6.00
            
            
            50,000
            
            $
            6.00




**(10)
      RELATED PARTY TRANSACTIONS**




We
      currently operate under an agreement with ESP Communications, Inc. (ESP), which
      is owned by the wife of our Chief Executive Officer. 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 for the
      years ended February 28, 2007 and 2006.




**(11)
      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 relate to policies settled before 1998 and involve technical legal
      issues that were not fully appreciated when the policies were initially
      reviewed. Face value of the policies in question total $526,045. During the
      fiscal year ended February 28, 2007, we paid $148,772 to these purchasers and
      have accrued another $119,400 for future claims that might arise on these
      policies.




We
      have
      elected to advance premiums on certain older polices on which the initial
      premium payment reserves have been fully utilized. We have no legal obligation
      to make these advances and do so only in cases when there is a risk of policy
      lapse due to the failure of a purchaser to pay the premiums. We initiated and
      continue to follow this practice as a goodwill gesture. On final settlement,
      we
      are usually reimbursed for these advances. We have elected to reserve advances
      when collection is not certain and, if collectible, the time to collection
      is
      not certain. We believe we cannot reasonably estimate the future cost of the
      advances because we cannot predict the rate at which investors might fail to
      make premium payments. During the fiscal years ended February 28, 2007 and
      2006,
      we advanced premiums totaling $1,242,314 and $1,187,095, respectively, and
      received repayments of advances of $389,938 and $284,249,
      respectively.




40




**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)14
            
            Code
                of Ethics for Directors and Executive Officers (1)21
            
            Subsidiaries
                of the Issuer
            
            4231
            
            Rule
                13a-14(a) Certifications
            
            4332
            
            Section
                1350 Certification
            
            45







*
            Denotes
                a management contract or compensatory plans or
                arrangements.




(1)
            These
                exhibits were filed with our Annual Report on Form 10-KSB for the
                year
                ended February 29, 2004, and are incorporated by reference
                herein.




(2)
            These
                exhibits were filed with our Annual Report on Form 10-KSB for the
                year
                ended February 29, 2000, and are incorporated by reference
                herein.





41