Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]

Life Exchange, Inc.

Form 10-KSB

Index

 

Page
Part I
Item 1.	Description of Business
Item 2.	Description of Property
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
Part II
Item 5.	Market for Common Equity and Related  Stockholder Matters and Small Business Issuer Purchases of Equity Securities
Item 6.	Management's Discussion and Analysis or Plan of Operation
Item 7.	Financial Statements
Item 8.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 8A.	Controls and Procedures
Part III
Item 9.	Directors, Executive Officers, Promoters and Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act
Item 10.	Executive Compensation
Item 11.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 12.	Certain Relationships and Related Transactions, and Director Independence
Item 13.	Exhibits
Item 14.	Principal Accountant Fees and Services

PART I

This annual report on Form 10-KSB contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the Company, us, our future performance, our beliefs and our Management's assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict or assess. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after the filing of this Form 10-KSB, whether as a result of new information, future events, changes in assumptions or otherwise.

Item 1.

Description of Business.

Overview and Corporate History

Life Exchange, Inc. (“we” “us” “Life Exchange” “LEI” or “Company”) was incorporated in Delaware in January 2005 to develop technology related to a computerized auction process that efficiently facilitates the business-to-business sale of life insurance policies in a secondary market (hereinafter referred to as “Life Settlement Transactions”).

Pursuant to that certain Agreement for the Exchange of Common Stock dated December 22, 2005 by and among: (a) Life Exchange, Inc. a Nevada corporation f/k/a Technology Enterprises, (the “Issuer”), (b) all of the shareholders of Life Exchange, Inc., a Delaware corporation (the “Shareholders”), and (c) the Vantage Group Ltd., a Delaware corporation (“Vantage”), the Issuer issued to the Shareholders 120 million shares of its common stock in exchange for 100% of the outstanding shares of common stock of Life Exchange, Inc. (Delaware) such that Life Exchange, Inc. (Delaware) became a wholly-owned subsidiary of Life Exchange, Inc. (Nevada Issuer).

Pursuant to that certain Stock Purchase Agreement dated March 8, 2006 between Life Exchange, Inc. (Nevada Parent) and Vantage, Vantage acquired approximately 25% of the capital stock of Life Exchange, Inc. (Nevada Parent) in exchange for $320,000.

Pursuant to the Nevada and Delaware short-form merger rules, on March 29, 2006 Life Exchange, Inc. (Delaware subsidiary) merged with and into Life Exchange, Inc. (Nevada Parent), the surviving corporation.

On March 31, 2006, founder David Dorr, assigned to Life Exchange, Inc. all his right title and interest to a Patent Application that had been filed with the U.S. Patent office on July 21, 2004, patent Application No. 10/895112.

On April 20, 2006, Life-Exchange launched version 1.0 of its web-based exchange platform to the public and as of July 1, 2006, clients of Life-Exchange had registered in excess of $500,000,000 in face value worth of life settlement policies onto Life-Exchange.

On July 7, 2006, Life Exchange entered into a note agreement with Vantage Group Ltd. to provide $300,000 of additional financing. The note: (a) is unsecured, (b) provides for 7% interest payable quarterly, (c) matures on June 1, 2008, and (d) is convertible into shares of the common stock of Life Exchange. The conversion option is triggered if Life Exchange attains revenue of no less than $250,000 for the month ended December 31, 2006. In such case, the Note may be converted into shares of the Company's common stock at a conversion price equal to the lesser of $1.50 (the “Conversion Price”) or (ii) two times the average of the three lowest closing prices of the Company's Common Stock on the Pink Sheets (or such other principal market or exchange where the Common Stock is listed or traded at the time of conversion) immediately preceding the date of conversion (the “Variable Conversion Price”).

If Life Exchange generates monthly revenue of no less than $500,000 for the month ended December 31, 2006, the Note shall be converted into shares of the Company's common stock at a conversion price equal to the lesser of (i) the Conversion Price, or (ii) three times the Variable Conversion Price.

On April 2, 2007, the Company entered into a note agreement with Vantage Group Ltd. to provide $150,000 of additional financing.  The terms of the note provide for 7% interest payable quarterly.  The note is unsecured and matures on April 30, 2008, which may be extended to April 30, 2009 at the option of the holder.  The requirement to make quarterly interest payments through August 31, 2007 was also waived to require interest accrued to be paid at maturity.  The note also provides Vantage with conversion rights based on the Company attaining certain performance criteria as follows.  The note may be converted into shares of the Company’s common stock at (i) $0.10 or (ii) fifty percent (50%) of the three lowest closing prices of the Company’s Common Stock on the Pink Sheets (or such other principal market or exchange where the Common Stock is listed or traded at the time of conversion) immediately preceding the date of conversion.

The Viatical and Life Settlement Industry

A Viatical and/or Life Settlement (herein referred to as a “Life Settlement”) is the sale to a third party of an existing life insurance policy for more than its cash surrender value but less than its net death benefit. The insurance industry generally uses the term Viatical Settlement to refer to a transaction involving the terminally or chronically ill insured and the term Life Settlement to refer to a transaction involving an insured who is not terminally or chronically ill, but generally over the age of sixty five (65).

The U.S. secondary market for life insurance policies has experienced phenomenal growth over the past several years. While some $50 million in policy face value was the subject of life settlements in 1990 ⁽¹⁾, according to some estimates that figure rose to approximately $3 billion in the late 1990's ⁽²⁾. According to public reports, we estimate that the total face value of viatical and life settlement transactions completed during 2005 was approximately $8.0 billion⁽³⁾. Public estimates for the face value of transactions to be conducted in 2006 range between $9 and $14 billion ⁽⁴⁾.

 

________________________________________

⁽¹⁾  Carrie Coolidge, Death Wish Investors in Insurance Policies for the Terminally Ill are Watching Their Capital Get Annihilated, FORBES (March 19, 2001).

⁽²⁾  Erich W. Sippel and Alan H. Buerger, A Free Market for Life Insurance Contingencies (Mar. 2002) (citing studies by Erich Sippel & Company and the Viatical Association of America).

⁽³⁾  Dafina Dunmore, Our Take On The Secondary Market For Life Insurance Consumers Get More Choice, and we Don’t Think Insurers Will Take a Big Hit, Morningstar (June 16, 2006) (citing studies by A.M. Best & Company).

⁽⁴⁾  Holman W. Jenkins Jr., Life Insurers Face The Future, Grudgingly, the Wall Street Journal (August 9, 2006) (citing studies by Sanford C. Bernstein & Co.).

 

 

While the dollar volume of the life settlement industry is significant, the number of industry participants is not. At present, there are approximately 35 institutional buyers and 50 major brokers representing sellers of life settlement policies in the U.S. Indeed, it is the unique size of this marketplace which makes it possible for Life-Exchange to potentially capture the majority of all transactions between buyers and sellers.

Life settlement buyers, also known as “providers”, purchase policies from policyholders for immediate cash settlement. Once a provider acquires a policy, the providers continue to pay the policy premiums until the death of the insured, at which time they collect the policy's proceeds. Some life settlement providers negotiate directly with policyholders, but the majority of Life Settlement transactions are conducted through a life settlement broker. Most states require providers to be licensed in the states in which they purchase policies. Many providers are well-financed by large institutional investors. Not only does this institutional backing provide a secure funding source for secondary market transactions, but it also provides the highest degree of consumer protection with regard to privacy and confidentiality.

Life settlement sellers, also known as “brokers”, act on behalf of the policyholders in order to secure the highest price from the sale of the policyholder's life insurance policy. Life settlement brokers work with the insured, the policy owner, their life insurance agents, and/or financial planners. In an attempt to secure the highest price for a policyholder, brokers will typically present a life insurance policy to multiple providers. Brokers are required to collect and prepare critical policy information and medical records on the insured for use in evaluating the value a policyholder's life insurance policy.

An important industry group is the Life Insurance Settlement Association (LISA). This industry association promotes self-regulation of the industry, and advises and recommends regulations to governing bodies. They also lobby for new laws and regulations to help protect the consumer and keep fraud out of the industry.

Our Products and Services

Life-Exchange is an Internet-based, business-to-business exchange for the life settlement industry. By providing a secure, feature rich, electronic trading platform specifically designed for life settlements, Life-Exchange addresses many of the inefficiencies and difficulties currently facing the industry.

Licensed brokers, on behalf of their clients, register and submit to Life-Exchange information and documentation on life insurance policies which they are seeking to sell. Life-Exchange provides brokers a means by which to shop their client's policies to the entire community of buyers and sell them to the highest bidder. Our automated listing and auction processes encourage bidding on policies as it allows more buyers into the marketplace, and thus, Life-Exchange helps to create greater value for policy owners.

On the buy side of the transaction process, licensed providers register and list the criteria that they use in evaluating the feasibility of purchasing life insurance policies through Life-Exchange. Life-Exchange allows providers to significantly cut their operating costs by providing a means to sort and filter through thousands of policies in minutes - not months; and thus focus their resources on just those policies most appropriate to their needs.

After a policy has been registered and submitted to auction on Life-Exchange, the policy enters a preview period which allows all potential buyers the opportunity to underwrite the policy. After this preview period, the policy enters a live auction period where providers are able to bid against each other for the right to purchase the life insurance policy in a real-time, online auction.

At such time that a provider locates and successfully bids on a life insurance policy, the provider then negotiates and enters into a contract with the broker. We do not participate in said negotiation.

Our electronic exchange became operational on April 20, 2006. Life-Exchange generated its first revenues in September, 2006 from its news distribution services, which revenue totaled $1,720. Life-Exchange generated its first revenues from the sale of a life settlement policy through its electronic exchange in December, 2006. For the yearr ending June 30, 2007 Life-Exchange generated net revenue in the amount of $172,206.

Fee Structure

The Life-Exchange business model is based on three primary revenue streams: (a) transaction fees, (b) listing fees, and (c) news distribution fees. The fee structure for each of these revenue streams is designed to provide both brokers (sellers) and providers (buyers) with a compelling cost justification to use Life-Exchange as their primary means to execute life settlement transactions.

Transaction Fees. We charge a non-commission based transaction fee to the provider (buyer) in accordance with the terms of the Provider Agreement. This Transaction fee is based on a percentage of the face amount of the life insurance policy purchased by the provider. This fee arrangement allows us to remain neutral and avoid being classified as a life settlement broker with a fiduciary responsibility to the policy owner. We do not represent or negotiate on behalf of the policy owners.

License and Listing Fees. In order to have access to the exchange, both brokers and providers are required to enter into a User Agreement and pay an annual license fee of $5,000.00. This license fee includes access for up to 10 users. Additional users can be granted access to the system at a charge of $500.00 per additional user. In addition, brokers are required to pay a listing fee of  $150.00 for every policy submitted to auction on Life-Exchange.

News Distribution Fees. The secondary life insurance market is a niche marketplace with a unique blend of participants. And while this marketplace is experiencing tremendous growth, it is still difficult to target the firms and individuals that are most active in it. To address this need, Life-Exchange maintains the industry's largest database of influential readers focused on life settlements. In order to monetize this subscriber base, Life-Exchange provides a news distribution service. For a fee, Life-Exchange will distribute press releases to its subscriber base. The news distribution fee ranges from $500 to $2,000 depending on the specific nature of the press release.

The Life-Exchange Automation

While the majority of the life settlement industry is backed by technologically sophisticated, Fortune 500 financial institutions, the technological sophistication of the life settlement industry itself is antiquated and highly inefficient. The majority of policy transactions are labor-intensive, cumbersome and disorganized undertakings. There is significant duplication of work, inappropriate policy transactions, miscommunication and poor follow through. All of these factors contribute to an un-productive and un-equitable marketplace.

Life-Exchange automates and modernizes the life settlement industry by introducing buyers to sellers (and vice versa) in a virtual, online marketplace. Our features and functionality are specifically designed to improve regulatory compliance, increase customer value, reduce transaction costs, create new revenue models, and add efficiency to an inefficient market.

With our web-based document management features and scalable database, Life-Exchange greatly assists clients by removing the confusion caused by different employees making changes to the same documents and not communicating the changes explicitly. Brokers and providers have access to the correct documents, and the ability to make and communicate changes, 24/7 from anywhere via secure internet connection. Each client's employee's responsibilities and completed work can be tracked using the audit feature built in to Life-Exchange, ensuring accountability.

Of particular importance to our industry, is the fact that the transfer of medical information requires adherence to HIPAA compliance procedures. In order to ensure compliance with the laws regulating the transmission of medical information, especially in electronic format, Life-Exchange offers all members a secure hosting center to store, retrieve, and exchange medical data in a manner that maintains compliance with HIPAA and state regulations.

In addition to the above factors, there is a significant influx of institutional capital entering the life settlement industry and the pressure to place this capital continues to increase. Automating the Life-Settlement transaction process and allowing more buyers and sellers to transact business through a single, highly efficient electronic exchange will greatly improve value for both buyer and seller by bringing greater liquidity to the life settlement marketplace. Life settlement brokers benefit by having equal and greater access to potential buyers, ensuring their clients receive the highest bids for their policies while maintaining compliance with stringent state-by-state regulations. Providers benefit by having access to more suitable investment opportunities, and are thus able to place their capital more rapidly and with greater efficiently, thus increasing their internal rate of return.

Intellectual Property and Patents

On March 31, 2006, David C. Dorr, our president, assigned his rights in a Patent pending application for Letters Patent of the United States filed July 21, 2004, U.S. Patent Application No. 10/895112. Said patent relates to our processes described herein.

The Life Settlement Market and Competition

The life settlement industry developed out of the viatical industry which began in the late 1980s as large numbers of AIDS patients found themselves coping with the catastrophic costs of a terminal illness. Many had life insurance policies that seemed to be limited or inaccessible prior to the death of the insured. A creative solution was to offer AIDS patients a lump sum payment of cash greater than their cash surrender value, in exchange for transferring the ownership and beneficiary of a policy. Viewing a life insurance policy as a financial asset, which could be transferred for value had begun and unfortunately, as with many new financial concepts, lack of regulation lead to several incidences of fraud and other improprieties.

Over the past several years the market has evolved into a multi-billion dollar industry, which is heavily regulated and institutionally backed. The demand driving the growth of this product has been the rapid increase in the senior population, constantly changing estate planning needs and most profoundly the awareness that these insurance policies can be sold on a secondary market as financial instruments to institutionally backed buyers.

Life-Exchange is currently the only operational, fully independent, and nonaligned business-to-business trading platform for life settlement brokers and providers to exchange information and transact business.

With respect to indirect competition, there exist two companies -- SIMEX (www.Simex.com) and Life-X (www.life-X.com) -- which claim to provide consumers with the ability to auction their life insurance policies. While at first glance these companies may appear as direct competitors, their success, their neutrality, and their business models are quite different than that of Life-Exchange.

·      These companies are owned and operated by current life settlement brokers. This fact makes it difficult for these operations to attract other life settlement brokers as they are direct competitors. Simply stated, these companies are asking their competitors, to place policies on their exchange and in the process, disclose the source of their deal flow.

·      Unlike the Life-Exchange business model -- which focuses on a business (broker) to business (provider) transaction process -- these operations are focused on a “business to consumer” transaction where individual insurance policy holders and their insurance agents can post policies available for sale.

As another form of indirect competition to life settlements, the life insurance industry has responded with policy features offering various pre-death, cash benefits (sometimes called accelerated death benefits). While in some cases accelerated death benefits may compete with life settlements, we do not expect the availability of accelerated death benefits to affect the life settlement market significantly at this time. The availability of accelerated death benefits is generally more restricted than life settlements. For example, policies often limit such benefits to persons who have a life expectancy of less than one year, in contrast to life settlements that are usually available to persons with life expectancies of two to 15 years. Life settlements generally offer sellers a greater dollar amount than they would receive under accelerated death benefit provisions.

Finally, 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 all contributed to a stabilization in the number and sophistication of life settlement companies, both those purchasing for their own accounts and those who act as agents for purchasers.

Government Regulation

Although our services do not require us to be licensed under federal or state law as a provider, broker or otherwise, we believe these laws and regulations have generally had a positive effect on the industry and on our ability to compete in the life settlement marketplace.

Currently the life settlement industry is regulated on a state-by-state basis, and at this time almost all states regulate life settlement transactions. Depending on the state, different licenses may be required for viatical and life settlements transactions, as well as for life settlement brokers and life settlement providers. Of those states that regulate the life settlement transactions, most require both the Viatical/Life Settlement Broker and the Viatical/Life Settlement Provider to be licensed.

The foundation for these regulations is based largely from the NAIC Viatical Settlements Model Act (the “Model Act”), which act encompasses a model law and regulations promulgated by the National Association of Insurance Commissioners (the “NAIC”). Most states have now adopted some version of this model law or another form of regulation governing in some way viatical or life settlement companies or both. 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 potential viators and/or life settlors, describe various periodic reporting requirements for settlement companies and prohibit certain business practices deemed to be abusive.

In December 2006, a committee of the NAIC approved amendments to the Model Act. The amended Model Act will be presented to the NAIC’s executive committee for final approval. The amended version of the Model Act is still being worked on.

In 1996, Congress passed the Health Insurance Portability & Accountability Act (“HIPAA”). The purpose of HIPAA is to prevent fraud in the health care industry and to protect confidential patient information. HIPPA standardizes and provides enforcement mechanisms for ROI rules and guidelines to protect personal healthcare information. HIPAA effects entities involved with electronic health care information - including health care providers, health plans, employers, public health authorities, life insurers, clearinghouses, billing agencies, information systems vendors, service organizations, universities, and even single-physician offices. The final version of the HIPAA Privacy regulations was issued in December 2000, and went into effect on April 14, 2001. A two-year "grace" period was included; enforcement of the HIPAA Privacy Rules began on April 14, 2003.

Licensing in Florida

Florida regulates both viatical and life settlements pursuant to the Florida Viatical Settlement Act set forth in Florida Statutes Sections 626.991--626.99295 (the “Florida Act”). The Florida Act makes no distinction between viatical and life settlements and refers to all settlements as viatical settlements.

The settlement process begins when the policy owner executes a viatical settlement application and provides authorization to the insured's attending physician and the issuing insurance company to disclose confidential information pertaining to the insured's health and insurance coverage. This information is necessary for a buyer to evaluate the policy for potential purchase. If the policy owner is not also the insured, both the viator and the insured typically will be required to review and sign the application. In addition to the policy owner's execution of the application documents, he or she is also required to provide some form of photo identification, a copy of the life insurance policy to be sold, and a copy of the application for the policy. As a general rule, policy owners are not required to submit to a medical examination as part of the application process.

A viator is the owner of a life insurance policy, who seeks to sell a policy. The insured may or may not have a catastrophic or life threatening condition.

A viatical settlement provider is a person or company who purchases a life insurance policy from a viator A viatical settlement provider must be licensed by the Florida Department of Financial Services (the “Department”).

A viatical settlement broker is a person who negotiates an agreement between a viator and a viatical settlement provider. The broker has a fiduciary responsibility to act according to the viator’s instructions and in the viator’s best interests and must be licensed by the Department. Brokers typically work closely with policy owners and collect their commissions from providers after the contract has been executed. After October 1, 2006, a person must be licensed with the Department as a life agent in order to act as a viatical broker.

An escrow agent or trustee is the party who holds the documents and the money until ownership rights of the policy have been transferred from the viator to the viatical settlement provider.  In some cases they retain investor’s funds until they have been placed on a life insurance policy and could be the party responsible for insuring payment to the investor.  Escrow agents or trustees are not licensed by the Department.

A viatical settlement investment, as of July 1, 2005, is subject to the Florida Securities and Investor Protection Act.  For an investor, this means full disclosure and access to company information.  In addition, a determination of the investment’s suitability for the investor would have to be made after considering the investor’s financial and tax status, and the investor’s investment objectives.  It also means that the viatical settlement investment must either be registered with the Department or exempt from registration.  In addition, the person offering or selling the viatical settlement investment must be licensed with the Department to sell these securities.

In order to make their medical records available to third parties in the viatical settlement process, insured's must authorize their physicians and other health care givers, in writing, to release their private medical records.

The medical release allows the viatical settlement broker to obtain current medical records from the insured's physician. At a minimum, two years of records are required. These records are then provided to a review company that specializes in viatical and life settlement mortality profiles for a determination of an estimated life expectancy. Once a medical underwriter has obtained all of the policy owner's medical records, it can generate a preliminary estimate of the insured's life expectancy and thereafter issue a final report. The report is then used by the viatical settlement provider to determine if the offered policy comes within its underwriting guidelines for purchase.

The evaluation of a viatical settlement focuses on the specific terminal illness with which the insured has been diagnosed. In the case of a life settlement, however, where there is no terminal illness, other factors must be examined in order to determine estimated life expectancy.

Once the parties agree on a price, they will enter into a viatical settlement contract and other related agreements necessary to close the transaction. The viatical settlement contract contains the price to be paid to the policy owner for the policy and other important terms and conditions of the sale, including those dealing with mandatory disclosures, the policy owner's right to rescind the contract, and post-closing contact with the insured for health status updates. Other related forms typically include an escrow agreement with the entity that will hold the funds payable to the policy owner, the forms from the issuing insurance company necessary to record the change in the policy ownership and beneficiary(ies), releases for execution by the existing policy beneficiary(ies), a power of attorney and funding instructions.

The Florida Act defines a viatical settlement contract as one in which the provider pays compensation or value to the policy owner in an amount less than the expected death benefit of the subject insurance policy, and the policy owner in return assigns, transfers, sells, devises, or bequeaths ownership of all or a portion of the subject insurance policy to the provider. The contract can also include a loan secured primarily by a life insurance policy, or a loan secured by the cash value of the policy, excepting loans made by life insurers to insured under the guidelines of the subject policy.

A viatical settlement contract and the related forms must be pre-approved by the State of Florida Office of Insurance Regulation. By statute, the department must reject any viatical settlement contract or related form that is unreasonable, contrary to the public interest, discriminatory, or misleading or unfair to the policy owner. As part of the form approval process, the department requires that each form have a unique number in the lower left hand corner. This approval requirement provides policy owners with a measure of protection in that the department has reviewed the provisions of the viatical settlement contract and related forms and has required the removal of any unfair provisions prior to use of the form.

A viatical settlement purchase agreement is defined as a contract between a purchaser and a party other than the policy owner to purchase an interest in a life insurance policy. This is usually the investment contract between the purchaser and the provider.

As a further condition to a sale, Florida law requires the policy owner to confirm or agree in writing the following:

1.

Consent to the viatical settlement contract;

 

2.

Represent that he or she has a full and complete understanding of the viatical settlement contract and the benefits of the life insurance policy;

 

3.

Release his or her medical records; and

 

4.

Acknowledge that he or she has entered into the viatical settlement contract freely and voluntarily.

 

Finally, in Florida, all viatical settlement contracts must close in escrow in order to assure that the policy owner is paid. The independent escrow agent's role in a viatical settlement transaction is to receive and hold the executed viatical settlement contract and related documents, including the insurance company forms executed by the policy owner to transfer the ownership of the policy, and to receive and hold the funds transferred from the viatical settlement provider in the amount of the agreed-upon purchase price for the policy. After expiration of the policy owner's fifteen day right of rescission, the viatical settlement provider or its agent begins tracking or monitoring the policy owner's health status.

Florida law requires viatical settlement providers or brokers to provide specific information to policy owners before entering into a viatical settlement contract. Nearly all jurisdictions that regulate viatical settlements require substantially similar disclosures, the purpose of which is to give a person who is contemplating the sale of a life insurance policy basic information that may be material to that decision. Florida requires the following information to be disclosed:

1.

That there are possible alternatives to viatical settlement contracts including, but not limited to, accelerated benefits available from the insurer that issued the policy.

 

2.

That proceeds of the viatical settlement could be taxable.

 

3.

That viatical settlement proceeds could be subject to the claims of creditors.

 

4.

That receipt of the viatical settlement proceeds could adversely affect the recipient's eligibility for Medicaid or other government benefits or entitlements.

 

5.

That all viatical settlement contracts must contain an unconditional rescission provision; and

 

6.

The name, business address, and telephone number of the independent third party escrow agent.

 

The basic regulatory mechanism of the act is licensure. Brokers, providers, and sales agents are expressly subject to specific licensure requirements. Brokers must submit fingerprints, organizational documents, and sworn biographical statements, and must undergo a background check before receiving a license. Providers also must submit fingerprints and organizational documents and must undergo a background check as a prerequisite to licensure. Additionally, providers must meet a minimum trust deposit requirement of $100,000 with the Department of Insurance. Sales agents must hold valid life insurance agent licenses as defined in §626.051 of the Florida Insurance Code.

The Act provides safeguards for the policy owners and purchasers who deal with brokers, providers, and sales agents. For example, brokers must disclose to policy owners the amount of the broker's compensation and the method used in determining compensation. In addition, providers may not enter into contracts with policy owners whose policies provide accelerated death benefits in amounts and with prerequisites equal to those offered by the provider, unless the policy owner's insurer denies a request to release the accelerated death benefit in writing, or does not respond to such a request within 30 days of receipt. Policy owners may also rescind a viatical settlement contract within 15 days after receipt of the settlement proceeds, contingent upon return of the proceeds.

The provider must inform the policy owner of the following: that there are alternatives to viatical settlements, including accelerated death benefits offered by the policy owner's insurer; that proceeds of the settlement may be taxable; that proceeds of the settlement could be subject to the claims of creditors; and that the policy owner's receipt of the settlement sum could adversely affect the policy owner's eligibility for Medicaid or other government benefits.

Moreover, the act provides for the use of independent escrow agents for the simultaneous delivery of contract documents and settlement funds. This last protection reduces much of the policy owner's transaction risk and results in orderly, real estate style settlement closings.

For purchasers, the act provides for the following mandatory disclosures to be made by providers, among others: that the represented return of the investment is directly tied to the lifespan of one or more insured; that the projected life span of the insured is tied to the return, if a return is represented; that the investor shall be responsible for the payment of insurance premiums on the policy, late fees, surrender fees, and other costs, if required by the terms of the viatical contract; that the life expectancy and rate of return are only estimates and cannot be guaranteed; and that the viatical investment should not be considered a liquid purchase, since it is impossible to predict the exact timing of its maturity and the funds may not be available until the death of the insured. Furthermore, providers and sales agents are expressly prohibited from misrepresenting the nature of the viatical transaction, the expected return, or that the return is guaranteed by any government authority, which it is not.

In June 2006, the Florida Office of Insurance Regulation concurred with our conclusions that we would not be required to be licensed as a life settlement provider as a result of our business operations.

In September 2006, the Florida Department of Financial Services concurred with our conclusions that we would not be required to be licensed as a Life Settlement Provider as a result of our business operations.

Research and Development Activities

Product and development costs consist of the costs to develop and operate the online exchange platform's web based application and transaction database and are expensed as incurred. Our electronic exchange platform became operational on April 20, 2006, consequently, we only expended $13,213 for the current fiscal year ended June 30, 2007 on research and development compared to $104,435 for the prior fiscal year end June 30, 2006See additional discussion of Research and Development in our Management Discussion and Analysis Section below.

Effect of Environmental Laws

Life Exchange is not affected by environmental laws.

Employees

As of June 30, 2007, we have 3 full time employees, none of whom are represented by a labor union. We consider our employee relations to be satisfactory.

Risk Factors

In addition to other information in this annual report on Form 10-KSB, the following risk factors should be carefully considered in evaluating us and our business because such factors significantly affect or could significantly affect our business, operating results or financial condition. Some of the statements contained herein discuss future expectations, contain projections of our plan of operation or financial condition or state other forward-looking information. In this annual report, forward-looking statements are generally identified by the words such as "anticipate", "plan", "believe", "expect", "estimate", and the like. Forward-looking statements involve future risks and uncertainties. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements.  Forward-looking information is based on various factors and is derived using numerous assumptions. A reader, whether investing in the Company's securities or not, should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Important factors that may cause actual results to differ from projections include, for example:

 

·

the success or failure of management's efforts to implement our plan of operation;

·

the ability to fund our operating expenses;

·

the ability to compete with other companies that have a similar plan of operation;

·

the effect of changing economic conditions impacting our plan of operation;

·

the ability to meet the other risks as may be described in future filings with the SEC.

Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof.  We believe the information contained in this Form 10-KSB to be accurate as of the date hereof.  Changes may occur after that date.  We will not update that information except as required by law in the normal course of its public disclosure practices.

We Are Operating in Markets that May Change Dramatically

We are operating in the viatical and life settlement markets. The viatical settlement market is approximately 15 years old. While the market saw tremendous growth in its initial years, the market growth in recent years has moderated somewhat. The life settlement market is less than a decade old. How and to what extent it will develop is uncertain. As more insureds become aware of life settlements as a financial planning option, we expect the size of the market to grow substantially. Any dramatic growth, however, will depend heavily upon the entry of institutional purchasers. Until a sufficient number of institutional purchasers commit to this industry and create a relatively stable demand, our financial performance during any period may be dramatically affected by the entry or departure from the market of one or more institutional providers.

Our prospects must be considered in light of the risks, expenses and difficulties encountered by those attempting to operate in rapidly evolving markets. We cannot assure you that we will be successful in addressing the risks we face. The failure to do so could have a material adverse effect on our business, financial condition, and results of future operations.

Because we have a short operating history under our current management, there is limited information upon which you can evaluate our business.

Our Company was formed in January 2005. As such, we have not engaged in a sufficient amount of consistent activity over a sustained period of time to establish an operating history in our current line of business. Since beginning operations in our current line of business, we have not been profitable, and we have limited financial results upon which you may judge our potential. As of June 30, 2007, our accumulated losses total $1,059,354.

You should consider our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies that are, like us, in their early stages of earning revenues and growing their businesses particularly companies in the rapidly evolving market of viatical and life settlements. Similarly, we will require additional capital in order to execute our current business plan. As a Company that recently emerged from the development-stage, we may in the future experience under-capitalization, shortages, setbacks and many of the problems, delays and expenses encountered by any early stage business. As a result of these factors, other factors described herein and unforeseen factors, we may not be able to successfully implement our business model.

Our Success Depends on Maintaining Relationships within our Referral Networks

In the viatical market, we rely primarily upon brokers to refer potential viators and life settlors to us and upon financial planners, known as licensees, to refer viatical and life settlement purchasers to us. These relationships are essential to our operations and we must maintain these relationships to be successful. We do not have fixed contractual arrangements with the brokers or financial planners and they are free to do business with our competitors. In addition, the pool of viatical brokers and referring financial planners is relatively small, which can increase our reliance on our existing relationships.

As we develop our own network of insurance and financial planning professionals, known as producers, to refer potential sellers to us, we expect referrals from this source to grow. As with brokers, our ability to build and maintain these relationships will depend upon our closing rates and the level of compensation we pay to the referring professional. The compensation paid to the referring professional will affect the offer price to the seller and the compensation we receive. We must balance these interests successfully to build our referring network and attain greater profitability.

We must Develop our Life Settlement Referral Network

An impediment to our expansion in the life settlement market could be the difficulty in identifying a large volume of potential sellers. These sellers are typically affluent persons over the age of 70 and not terminally or chronically ill. The target market is relatively narrow and advertising methods such as direct mailings or print media advertising are not likely to be cost effective. We believe the best way to reach this market is generally through life insurance professionals and, to a lesser extent, through professionals engaged in estate planning, such as attorneys, accountants, and financial planners. Settlement brokers will also reach this market. Our business plan utilizes both insurance professionals and brokers as sources of policies, as well as the development of a life settlement referral network.

We intend to rapidly expand our referring network of insurance professionals to educate potential life settlors on the options presented by life settlements. We are actively working to expand our network through direct solicitation, calls to managing general insurance agents, and by word-of-mouth contacts. To a lesser extent, we will also use advertising in financial planning trade publications and our Internet website. This is a new market and building our referral network will depend on our ability to educate insurance professionals about the benefits of senior life settlements to potential sellers and to the professionals themselves. While we believe we have been successful in publicizing the benefits of viatical settlements, we cannot assure you that our past successes will carry over into this new market. Our business, financial condition and results of operations could be materially adversely affected to the extent we fail to expand the referral network.

We Depend on Growth in both the Viatical and Life Settlement Market

While the existing markets for viatical and life settlements provide opportunity for growth, greater opportunity lies in the growth in the life settlement market. Growth of the life 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;

•