10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

Commission file number 0-22081

EPIQ SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Missouri	48-1056429
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
501 Kansas Avenue, Kansas City, Kansas	66105-1300
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code (913) 621-9500

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  o Accelerated Filer  x Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The aggregate market value of voting common stock held by non-affiliates of the registrant (based upon the last reported sale price on the Nasdaq National Market), as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2005) was approximately $293,000,000.

There were 19,264,871 shares of common stock of the registrant outstanding as of February 22, 2006.

Documents incorporated by reference:  The information required by Part III of Form 10-K is incorporated herein by reference to the registrant’s definitive Proxy Statement relating to its 2006 Annual Meeting of Shareholders, which will be filed with the Commission within 120 days after the end of the registrant’s fiscal year.

EPIQ SYSTEMS, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I
ITEM 1.	Business	1
ITEM 1A.	Risk Factors	6
ITEM 1B.	Unresolved Staff Comments	15
ITEM 2.	Properties	15
ITEM 3.	Legal Proceedings	15
ITEM 4.	Submission of Matters to a Vote of Security Holders	15
PART II
ITEM 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
ITEM 6.	Selected Financial Data	18
ITEM 7.	Management’s Discussion and Analysis of Financial Condition And Results of Operation	19
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	30
ITEM 8.	Financial Statements and Supplementary Data	31
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	32
ITEM 9A.	Controls and Procedures	32
ITEM 9B.	Other Information	36
PART III
ITEM 10.	Directors and Executive Officers of the Registrant	36
ITEM 11.	Executive Compensation	36
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	36
ITEM 13.	Certain Relationships and Related Transactions	36
ITEM 14.	Principal Accounting Fees and Services	36
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	36

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

In this report, in other filings with the SEC and in press releases and other public statements by our officers throughout the year, EPIQ Systems, Inc. makes or will make statements that plan for or anticipate the future. These forward-looking statements include statements about our future business plans and strategies, and other statements that are not historical in nature. These forward-looking statements are based on our current expectations. Many of these statements are found in the “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this report.

Forward-looking statements may be identified by words or phrases such as “believe,” “expect,” “anticipate,” “should,” “planned,” “may,” “estimated,” “potential,” “goal,” and “objective.”  Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, provide a “safe harbor” for forward-looking statements. In order to comply with the terms of the safe harbor, and because forward-looking statements involve future risks and uncertainties, listed in Item 1A, “Risk Factors,” of this report are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. We undertake no obligation to update any forward-looking statements contained herein or in future communications to reflect future events or developments.

PART I

ITEM 1.BUSINESS

General

EPIQ Systems is a provider of technology-based solutions for the legal and fiduciary services industries. Our products and services assist clients with the administration of complex legal proceedings, including electronic litigation discovery, bankruptcy administration and class action administration. Our clients include leading law firms, corporate legal departments, bankruptcy trustees, and other professional advisors who require sophisticated case administration and document management capabilities, extensive subject matter expertise and a high service capacity. We provide clients with an integrated offering of both proprietary technology and value-added services that comprehensively address their extensive business requirements.

We have acquired several companies as part of our strategic business plan. During 2005, we acquired nMatrix, Inc. to enter the market for electronic litigation discovery, Hilsoft, Inc. to enhance our capabilities in legal notification services, and Novare, Inc. to supplement our professional services for corporate restructuring client engagements. During 2004, we acquired Poorman-Douglas Corporation to enter the market for class action and mass tort administrative services. During 2003, we acquired Bankruptcy Services LLC (BSI) to enter the market for corporate restructuring bankruptcy reorganization administrative services.

In November 2003, we determined that our infrastructure software business, which operated in the automated data exchange software market, was no longer aligned with our long-term strategic objectives. On April 30, 2004, we completed the sale of this business.

We were incorporated in the State of Missouri on July 13, 1988, and on July 15, 1988 acquired all of the assets of an unrelated predecessor corporation, including the name, Electronic Processing, Inc. Our shareholders approved an amendment to our Articles of Incorporation on June 7, 2000 to change our name from Electronic Processing, Inc. to EPIQ Systems, Inc.

Our principal executive office is located at 501 Kansas Avenue, Kansas City, Kansas 66105. The telephone number at that address is (913) 621-9500, and our website address is www.epiqsystems.com. We make available free of charge through our internet website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed with or furnished to the SEC as soon as reasonably practicable after we electronically file those reports with or furnish them to the SEC. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this report. Further, our references to the URLs for these websites are intended to be inactive textual references only.

Industry Environment

Both our case management segment and our document management segment provide products and services primarily to the legal and fiduciary services industries. Segment information related to revenues from external customers, a measure of profit or loss, and total assets is contained in Note 15 of the Notes to Consolidated Financial Statements. Our clients include leading law firms, corporate legal departments, bankruptcy trustees, case administrators and other professional advisors, who use our products and services for the administration of legal proceedings such as electronic litigation discovery, bankruptcy administration and class action administration.

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Electronic Litigation Discovery

The substantial increase of electronic documents in the business community has changed the dynamics of how attorney’s support discovery in complex litigation matters. According to the 2005 Socha-Gelbmann Electronic Discovery Survey, the 2004 domestic commercial electronic discovery revenues were estimated at $832 million, an approximate 94% increase from 2003. According to this same source, the market is expected to continue to grow at a substantial rate from 2005 to 2007, with expected increases of 50% to 60% each year. Due to the increasing complexity of cases, the increasing volume of data that are maintained electronically, and the increasing volume of documents (both paper and electronic) that are produced in all types of litigation, law firms are increasingly reliant on electronic evidence management systems to organize and manage the litigation discovery process.

Bankruptcy

Bankruptcy is an integral part of the United States’ economy, and bankruptcy filings have remained near record levels for the past several years. As reported by the Administrative Office of the U.S. Courts for the government fiscal years ended September 30, 2003, 2004, and 2005, there were approximately 1.66 million, 1.62 million, and 1.78 million new bankruptcy filings, respectively.

There are five chapters of the U.S. Bankruptcy Code that serve different purposes and require various types of services and information. Our products and services are designed for cases filed under the following three chapters:

·Chapter 7 is a liquidation bankruptcy for individuals or businesses that, as measured by the number of new cases filed in 2005, accounted for approximately 75% of all bankruptcy filings. In a Chapter 7 case, the debtor’s assets are liquidated and the resulting cash proceeds are used by the Chapter 7 bankruptcy trustee to pay creditors. Chapter 7 cases typically last several years.

·Chapter 11 is a reorganization model of bankruptcy for corporations that, as measured by the number of new cases filed in fiscal 2005, accounted for approximately 1% of all bankruptcy filings. Chapter 11 generally allows a company to continue operating under a plan of reorganization to restructure its business and to modify payment terms of both secured and unsecured obligations. Chapter 11 cases may last several years.

·Chapter 13 is a reorganization model of bankruptcy for individuals that, as measured by the number of new cases filed in 2005, accounted for approximately 24% of all bankruptcy filings. In a Chapter 13 case, debtors make periodic cash payments into a reorganization plan and a Chapter 13 bankruptcy trustee uses these cash payments to make monthly distributions to creditors. Chapter 13 cases typically last between three and five years.

The participants in a bankruptcy proceeding include the debtor, the debtor’s counsel, the creditors, and the bankruptcy judge. Chapter 7 and Chapter 13 cases also have a professional bankruptcy trustee who is responsible for administering the bankruptcy case. For Chapter 7 and 13 bankruptcy products and services, our customers are professional bankruptcy trustees. For Chapter 11 bankruptcy products and services, our customers are the debtor companies that file a plan of reorganization, often referred to as a debtor-in-possession.

Class Action

Class action and mass tort litigation have become a discrete component within the United States’ economy. Class action and mass tort refer to litigation in which class representatives bring a lawsuit against a defendant company or other persons on behalf of a large group of similarly affected persons (the class). Mass action or mass tort refers to class action cases that are particularly large or prominent.

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The class action and mass tort marketplace is significant, with estimated annual tort claim costs in excess of $250 billion according to an update study issued in 2004 by Towers Perrin. Administrative costs, which include costs, other than defense costs, incurred by either the insurance company or self-insured entity in the administration of claims, comprise approximately 20% of this total. Key participants in this marketplace include law firms that specialize in representing class action and mass tort plaintiffs and other law firms that specialize in representing defendants. Class action and mass tort litigation is often complicated and the cases, including administration of any settlement, may last several years.

Products and Services

Case Management Segment

Case management support for client engagements generally lasts several years and has a revenue profile that typically includes a recurring component. Our case management segment generates revenue primarily through the following integrated technology-based products and services.

·An integrated solution of a proprietary technology platform and related professional services that facilitates case administration of class action, mass tort and corporate restructuring client engagements.

·Professional and support services, including case management, claims processing, specialty bankruptcy consulting, claims reconciliation, and customized programming and technology services.

·Data hosting fees, volume based fees, and professional services fees related to the management of large volumes of electronic documents in support of a legal proceeding.

·Proprietary electronic discovery software that sorts, cleanses, organizes and performs searches on large volumes of electronic documents in support of a legal proceeding.

·Software installed in bankruptcy trustee offices and provided over the internet that facilitates the administration of Chapter 7 and Chapter 13 bankruptcy cases.

·Database conversions, maintenance and processing.

·Call center support.

Document Management Segment

Document management revenue is generally non-recurring due to the unpredictable nature of the frequency, timing and magnitude of the clients’ business requirements. Our document management segment generates revenue primarily through the following services.

·Legal noticing services to parties of interest in bankruptcy and class action matters.

·Reimbursement for costs incurred related to postage on mailing services.

·Media campaign and advertising management.

·Document custody services.

Customers

Our clients include law firms, corporate legal departments, bankruptcy trustees and other professional advisors. Frequently, law firms act as referral sources for our products and services, which are ultimately consumed and paid for by a corporate client involved in a bankruptcy proceeding, class action settlement or other complex litigation. While a corporate client may sometimes be involved in only a single engagement with us, our relationship with the law firm is longer and normally spans multiple client engagements. Accordingly, we rely extensively on our network of law firm relationships and expend considerable resources to develop and extend those relationships.

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Electronic Litigation Discovery

For electronic litigation discovery, our customers are typically large corporations that use our products and services cooperatively with their legal counsel or other professional advisors to manage the electronic litigation discovery process.

Bankruptcy

For our Chapter 7 and Chapter 13 bankruptcy trustee products, our end-user customers are professional bankruptcy trustees. The Executive Office for United States Trustees, a division of the U.S. Department of Justice, appoints all bankruptcy trustees. A United States Trustee is appointed in most federal court districts and generally has responsibility for overseeing the integrity of the bankruptcy system. The bankruptcy trustee’s primary responsibilities include liquidating the debtor’s assets (Chapter 7) or collecting funds from the debtor (Chapter 13), distributing the collected funds to creditors pursuant to the orders of the bankruptcy court and preparing regular status reports for the Executive Office for United States Trustees and for the bankruptcy court. Trustees typically manage an entire caseload of bankruptcy cases simultaneously.

The application of Chapter 7 bankruptcy regulations has the practical effect of discouraging trustee customers from incurring direct administrative costs for computer system expenses. As a result, we provide our Chapter 7 products and services to trustee customers at no direct charge, and our trustee customers agree to maintain deposit accounts for bankruptcy cases under their administration at a designated banking institution. We have marketing arrangements with various banks under which we provide Chapter 7 trustee case management software and related services and the bank provides the Chapter 7 bankruptcy trustee with deposit-related banking services. Under these Chapter 7 deposit relationships, we receive revenues based on factors such as the aggregate amount of trustee deposits maintained at the bank, the number of customers using our product, software upgrades, and ancillary professional services. Prior to April 1, 2004, we had an exclusive marketing arrangement with Bank of America for Chapter 7 trustee products and services. Effective April 1, 2004, this relationship became a non-exclusive marketing arrangement. During February 2006, the parties agreed to extend the arrangement indefinitely. Either party may, with appropriate notice, wind down the arrangement over a period, including the notice period, of three years. Since April 1, 2004, we have established new deposit relationships with additional financial institutions. During the year ended December 31, 2005, approximately 21% of our consolidated revenues were from our marketing relationship with Bank of America (see Note 9 of the Notes to Consolidated Financial Statements) and a substantial majority of our Chapter 7 deposits were maintained at Bank of America.

Our customers for corporate restructuring bankruptcy solutions are debtor corporations or businesses that file a plan of reorganization. Law firms representing these companies are a key conduit through which both we and our competitors gain access to the debtor companies prior to their filing for bankruptcy. Debtor’s counsel often uses our services and products directly on behalf of their client, and we have developed relationships with the bankruptcy departments at various law firms.

Class Action

Our customers for class action and mass tort solutions are primarily large corporations that are administering the settlement or resolution of class action or mass tort cases. We sell our services directly to those customers; however, our relationships with other interested parties, including plaintiff and defense law firms, often provide access to these customers.

Sales and Marketing

Our sales department markets our case management and document management products and services directly to prospective customers and referral law firms through on-site sales calls. We focus on attracting and retaining customers by providing integrated technology solutions with leading edge features

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and by providing exceptional customer service. Our account executives, case managers and relationship managers are responsible for providing ongoing support services for existing customers. Various relationship managers, case managers and sales representatives attend industry trade shows. We also conduct direct mail campaigns and advertise in trade journals.

Competition

There are a variety of companies competing, primarily on the basis of quality of service, technology innovations, and price, for the finite number of available client engagements that become available each year. Competitors include BMC Group, Inc., Bankruptcy Management Solutions, Inc., Electronic Evidence Discovery, Inc., Fios, Inc., The Garden City Group Inc., Kroll Ontrack, Inc., Rust Consulting Inc., The Trumbull Group, Zantaz, Lexis Nexis Applied Discovery and others. Additionally, certain law firms, accounting firms, management consultant firms, turnaround specialists and crisis management firms offer certain products and services that compete with ours.

Government Regulation

Our products and services are not directly regulated by the government. Our bankruptcy trustee customers and corporate restructuring debtor customers are, however, subject to significant regulation under the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and local rules and procedures established by bankruptcy courts. The Executive Office for United States Trustees, a division of the United States Department of Justice, oversees the bankruptcy industry and establishes administrative rules governing our clients’ activities. Our class action and mass tort cases are subject to various federal and state laws as well as rules and procedures established by the courts.

In February 2005, new federal class action and tort reform legislation was passed and signed by President Bush. The primary impact of the new federal legislation is to require that certain types of class action lawsuits be brought in federal court rather than state courts. We believe the new federal legislation will likely result in fewer class action lawsuits in state courts. The slower processing of class action lawsuits in federal courts could delay the ultimate settlement of those cases, which could adversely affect the timing of services we provide in those cases. Similar to this recent federal legislation, there have been various efforts at the state level to modify and reform the laws and procedures related to class action and mass tort. We cannot predict the effect, if any, that state legislative action would have on the number or size of class action and mass tort lawsuits filed or on the claims administration process.

In April 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed and signed by President Bush. The intent of this legislation, which became effective October 2005, is to move certain individual bankruptcy filings from Chapter 7, which liquidates most of the debtor’s assets and discharges most of the debtor’s liabilities, to Chapter 13 which does not liquidate the debtor’s assets but which requires a debtor to pay disposable income to their creditors. The legislation also affects Chapter 11 bankruptcy filings, in part by placing more strict limits on the period of time in which the debtor has an exclusive right to propose a reorganization plan, accelerating the time frame in which a debtor must determine whether to reject a lease or other executory contract, and potentially increasing certain priority claims. The legislation appears to have had the effect of increasing bankruptcy filings prior to the effective date of the legislation. It is unclear what impact, if any, the legislation will have on bankruptcy filings after the legislation’s October 2005 effective date. As a result, we cannot predict the effect, if any, that this legislation will have on our business.

Employees

As of December 31, 2005, we employed approximately 500 full-time employees, none of whom is covered by a collective bargaining agreement. We believe the relationship with our employees is good.

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ITEM 1A.   RISK FACTORS

This report, other reports to be filed by us with the SEC, press releases made by us and other public statements by our officers, oral and written, contain or will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including those relating to the possible or assumed future results of operations and financial condition. Because those statements are subject to a number of uncertainties and risks, actual results may differ materially from those expressed or implied by the forward-looking statements. Listed below are risks associated with an investment in our securities that could cause actual results to differ from those expressed or implied.

A significant reduction in the amount of Chapter 7 liquidated asset proceeds on deposit by our Chapter 7 bankruptcy trustee customers or in the number of pending bankruptcy cases would cause our revenues and earnings to drop significantly.

Our bankruptcy deposit based fees are highly dependent on the amount of liquidated asset proceeds deposited by Chapter 7 bankruptcy trustees and the number of bankruptcy filings in the United States. Consumer and business debt combined with economic fluctuations in the United States affect the number of bankruptcy filings and the dollar volume flowing through the federal bankruptcy system. A significant reduction in Chapter 7 liquidated asset proceeds on deposit by our bankruptcy trustee customers with our Chapter 7 depository banks would likely have a material adverse effect on our results of operations.

Substantially all of our Chapter 7 revenues are collected through a single financial institution, and the termination of that marketing arrangement could cause uncertainty and adversely affect our future Chapter 7 revenue and earnings.

The application of Chapter 7 bankruptcy regulations discourages Chapter 7 trustees from incurring direct administrative costs for computer system expenses. As a result, we provide our products and services to Chapter 7 trustee customers at no direct charge, and our Chapter 7 trustee customers agree to deposit the cash proceeds from liquidations of debtors’ assets with a designated financial institution with which we have a Chapter 7 marketing arrangement. We have arrangements with several financial institutions under which our Chapter 7 trustees deposit the Chapter 7 liquidated assets at one of those financial institutions. Under these arrangements:

·we license our proprietary software to the trustee and furnish hardware, conversion services, training and customer support, all at no cost to the trustee;

·the financial institution provides certain banking services to the joint trustee customers; and

·we collect from the financial institution monthly revenues based primarily upon a percentage of the total liquidated assets on deposit at that financial institution.

Previously, we promoted our Chapter 7 product exclusively through a marketing arrangement established with Bank of America in November 1993. Substantially all of our Chapter 7 revenues are collected through this relationship. On April 1, 2004, this exclusive marketing arrangement became a non-exclusive arrangement. During February 2006, the parties agreed to extend the non-exclusive arrangement indefinitely. Either party may, with appropriate notice, wind down the arrangement over a period of three years, including the notice period. If either party were to give notice of termination of this arrangement, we could experience uncertainty relating to the transfer of Chapter 7 trustee deposits to other financial institutions, and we could experience a decline in revenues and earnings as those deposits were transferred during the wind-down period.

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We have established new arrangements with additional financial institutions, and changes in or terminations of those marketing arrangements could cause uncertainty and adversely affect our future Chapter 7 revenue and earnings.

We also have marketing arrangements with several other financial institutions under which our Chapter 7 trustees may deposit the Chapter 7 liquidated assets. Additionally, we may seek to establish additional Chapter 7 depository bank relationships in the future. Changes in the terms of one or more of those marketing arrangements or the termination of any of those marketing arrangements could create uncertainty with current and prospective trustee customers or operational difficulties for trustees, which could adversely affect our relationships with those joint customers and our Chapter 7 revenues and earnings.

Some of our pricing models for Chapter 7 trustee clients have or are scheduled to have a component of pricing tied to prevailing interest rates, and a significant decline in interest rates would adversely affect our revenues and earnings.

Under the Chapter 7 marketing arrangements we have with each depository financial institution, certain fees we earn for deposits placed with those financial institution could have, within certain limits, variability based on fluctuations in short-term interest rates. A significant decline in short-term interest rates would adversely affect our Chapter 7 revenues and earnings.

If a financial institution with which we have a marketing arrangement for Chapter 7 products and services is perceived negatively by current or prospective trustee clients, our case management revenue and earnings could be adversely affected.

The Chapter 7 depository banks, with which we have joint marketing arrangements, provide banking products and services directly to our trustee clients. If the financial institution provides ineffective banking products or services to the joint customers or has errors or omissions in its processing, we could experience collateral damage to our reputation. We cannot control the quality of products and services provided by the Chapter 7 depository banks to the joint customers. Additionally, if a depository bank arrangement is discontinued, it could disrupt the effective delivery of banking services to trustees. If the migration to a successor depository bank is not completed smoothly or if we were unable to move the trustee customer’s deposits to a different banking arrangement prior to the expiration, we could lose trustee customers, which could adversely affect our case management revenues and our results of operations.

Bankruptcy reform legislation could alter the market for our products and services, which could cause a reduction in our revenues and earnings.

In April 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed and signed by President Bush. The intent of this legislation, which became effective October 2005, is to move certain individual bankruptcy filings from Chapter 7, which liquidates most of the debtor’s assets and discharges most of the debtor’s liabilities, to Chapter 13 bankruptcy filings, which do not liquidate the debtor’s assets but which requires a debtor to pay disposable income to their creditors. The legislation also affects corporate restructuring bankruptcy filings, in part by placing more strict limits on the period of time in which the debtor has an exclusive right to propose a reorganization plan, accelerating the time frame in which a debtor must determine whether to reject a lease, and potentially increasing certain priority claims. The legislation appears to have had the effect of increasing bankruptcy filings prior to the effective date of the legislation. It is unclear what impact, if any, the legislation will have on bankruptcy filings after the legislation’s October 2005 effective date. As a result, we cannot predict the effect, if any, that this legislation will have on our business.

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Tort reform legislation could reduce the number and scope of class action and mass action cases, thus reducing our business prospects in the class action market.

In February 2005, new federal class action and tort reform legislation was passed and signed by President Bush. The primary impact of the new federal legislation is to require that certain types of class action lawsuits be brought in federal court rather than state courts. We believe the new federal legislation will likely result in fewer class action lawsuits in state courts, which are generally perceived as faster and more plaintiff-friendly than federal courts. The slower processing of class action lawsuits in federal courts could delay the ultimate settlement of those cases, which could adversely affect the timing of services we provide in those cases. Likewise, the new federal legislation could have the effect of lowering the overall number of class action cases, whether filed in federal or state courts. Similar to this recent federal experience, there have been various efforts at the state level to modify and reform the laws and procedures related to class action and mass tort. The goal of certain state tort reform proposals has been to reduce the number and scope of class action and mass action cases. While we cannot predict whether any tort reform legislation will pass at the state levels or the substance of any future changes, any legislative efforts that are successful in reducing the number or scope of class action or mass action cases would likely have an adverse effect on our results of operations.

We have a limited number of bankruptcy trustee clients and a limited number of significant referral sources for corporate restructuring and class action and mass tort engagements. The loss of even a limited number of our trustee customers or referral sources could result in a loss of revenue and earnings.

There is a limited number of Chapter 7 and Chapter 13 bankruptcy trustees to whom we can market our bankruptcy products and services. Additionally, we rely heavily on a limited number of corporate restructuring and class action referral sources to earn new business engagements. Our future financial performance will depend on our ability to maintain existing trustee customer accounts, to attract business from trustees that are currently using a competitor’s software product, to maintain our existing referral relationships, and to develop new referral relationships. The loss of even a limited number of trustee customers or a reduction in referral sources could result in a material loss of revenue and earnings.

We encounter competition for our products and services from other third party providers and we could lose existing customers and fail to attract new business.

The markets for case and document management products and services are competitive, continually evolving and subject to technological change. We believe that the principal competitive factors in the markets we serve include the breadth and quality of system and software solution offerings, the stability of the information systems provider, the features and capabilities of the product and service offerings, and the potential for enhancements. Our success will depend upon our ability to keep pace with technological change and to introduce, on a timely and cost-effective basis, new and enhanced software solutions and services that satisfy changing client requirements and achieve market acceptance.

The fluctuations in quarterly projects for clients have affected and may affect in the future the timing of our quarterly revenues and earnings and are likely to affect our future quarterly results.

The initiation or termination of a large corporate restructuring, class action or mass tort engagement can directly affect our revenues and earnings for a particular quarter, and the levels of services, particularly services related to document management required for an ongoing corporate restructuring or class action engagement can fluctuate quarter to quarter during the time that the debtor is in Chapter 11 corporate restructuring or the class action lawsuit is active.

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Our quarterly results have fluctuated in the past and may fluctuate in the future. If they do, our operating results may not meet the expectations of securities analysts or investors. This could cause fluctuations in the market price of our common stock.

Our quarterly results have fluctuated during the last year and may fluctuate in the future. As a result, our quarterly revenues and operating results are increasingly difficult to forecast. It is possible that our future quarterly results from operations from time to time will not meet the expectations of securities analysts or investors. This could cause a material drop in the market price of our common stock.

Our business will continue to be affected by a number of factors, any one of which could substantially affect our results of operations for a particular fiscal quarter. Specifically, our quarterly results from operations can vary due to:

·fluctuations in bankruptcy trustees’ deposit balances or caseloads;

·unanticipated expenses related to software maintenance or customer service;

·the timing, size, cancellation or rescheduling of customer orders; and

·the timing and market acceptance of new software versions or support services.

Our stock price may be volatile even if our quarterly results do not fluctuate significantly.

If our quarterly results fluctuate, the market price for our common stock may fluctuate as well and those fluctuations may be significant. Even if we report stable or increased earnings, the market price of our common stock may be volatile. There are a number of factors, beyond earnings fluctuations, that can affect the market price of our common stock, including the following:

·a decrease in market demand for our stock;

·downward revisions in securities analysts’ estimates;

·announcements of technological innovations or new products developed by us or our competitors;

·the degree of customer acceptance of new products or enhancements offered by us;

·general market conditions and other economic factors; and

·actual or perceived improvements in the national economy and the corresponding assumption that our bankruptcy business will decline as the economy improves.

In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of stocks of technology companies and that have often been unrelated to the operating performance of particular companies. The market price of our common stock has been volatile and this is likely to continue.

If corporate restructuring cases on which we are retained convert to Chapter 7, we may not be paid for the products and services we have provided.

In corporate restructuring engagements we provide services directly to the debtor and we are paid directly by the debtor. If a debtor’s corporate restructuring case converts to Chapter 7 liquidation, we might not be paid for products and services previously provided and we would most likely lose all future revenue from the case. We have had corporate restructuring cases convert to Chapter 7 cases in the past. The conversion of a major corporate restructuring case to Chapter 7 could have a material adverse effect on our results of operations.

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If the bankruptcy court reduces or eliminates our fees in major corporate restructuring cases, our results of operations could be impaired.

In corporate restructuring cases, the bankruptcy court may reduce or eliminate fees paid for administrative services such as those we provide. If the court reduced or eliminated fees due to us in a major corporate restructuring case, our results of operations could be materially affected.

If we are unable to develop new technologies, we could lose existing customers and fail to attract new business.

We regularly undertake new projects and initiatives in order to meet the changing needs of our customers. In doing so, we invest substantial resources with no assurance of the ultimate success of the project or initiative. We believe our future success will depend, in part, upon our ability to:

·enhance our existing products;

·design and introduce new solutions that address the increasingly sophisticated and varied needs of our current and prospective customers;

·maintain our technology skills; and

·respond to technological advances and emerging industry standards on a timely and cost-effective basis.

We may not be able to incorporate future technological advances into our business, and future advances in technology may not be beneficial to or compatible with our business. In addition, keeping abreast of technological advances in our business may require substantial expenditures and lead-time. We may not be successful in using new technologies, adapting our solutions to emerging industry standards, or developing, introducing and marketing new products or enhancements. Furthermore, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these products. If we incur increased costs or are unable, for technical or other reasons, to develop and introduce new products or enhancements in a timely manner in response to changing market conditions or customer requirements, we could lose existing customers and fail to attract new business.

New releases of our software products may have undetected errors, which could cause litigation claims against us or damage to our reputation.

We intend to continue to issue new releases of our software products periodically. Complex software products, such as those we offer, can contain undetected errors when first introduced or as new versions are released. Any introduction of new products and future releases has a risk of undetected errors. These undetected errors may be discovered only after a product has been installed and used by our customers. Likewise, the software products we acquire in business acquisitions have a risk of undetected errors.

Errors may be found in our software products in the future. Any undetected errors, as well as any difficulties in installing and maintaining our new software and releases or difficulties training customers and their staffs on the utilization of new products and releases, may result in a delay or loss of revenue, diversion of development resources, damage to our reputation, increased service costs, increased expense for litigation and impaired market acceptance of our products.

Security problems with, or product liability claims arising from, our software products and business processes could cause increased expense for litigation, increased service costs and damage to our reputation.

We have included security features in our products that are intended to protect the privacy and integrity of data. Security for our products is critical given the highly confidential nature of the information

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our software processes. Our software products and the servers on which the products are used may not be impervious to intentional break-ins (“hacking”) or other disruptive problems caused by the internet or by other users. Hacking or other disruptive problems could result in the diversion of development resources, damage to our reputation, increased service costs or impaired market acceptance of our products, any of which could result in higher expenses or lower revenues. Additionally, we could be exposed to potential liability related to hacking or other disruptive problems. Defending these liability claims could result in increased expenses for litigation and a significant diversion of our management’s attention.

Furthermore, we administer claims for third parties. Errors or fraud related to the processing or payment of these claims could result in the diversion of management resources, damage to our reputation, increased service costs or impaired market acceptance of our services, any of which could result in higher expenses and/or lower revenues. Additionally, such errors or fraud related to the processing or payment of claims could result in lawsuits alleging damages. Defending such claims could result in increased expenses for litigation and a significant diversion of our management’s attention.

Interruptions or delays in service from our third-party Web hosting facility could impair the delivery of our service and harm our business.

We provide certain of our services through computer hardware that is currently located in a third-party Web hosting facility operated by a third party vendor. We do not control the operation of this facility, and it is subject to damage or interruption from earthquakes, floods, fires, power loss, terrorist attacks, telecommunications failures and similar events. It is also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. The occurrence of a natural disaster, a decision to close the facility without adequate notice or other unanticipated problems at the facility could result in lengthy interruptions in our service. In addition, the failure by our vendor to provide our required data communications capacity could result in interruptions in our service. Any damage to, or failure of, our systems could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their agreements with us and adversely affect our ability to secure business in the future. Our business will be harmed if our customers and potential customers believe our service is unreliable.

If our security measures are breached and unauthorized access is obtained to a customer’s data, our service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant liabilities.

Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to one of our customers’ data, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers.

We may be sued by third parties for alleged infringement of their proprietary rights.

The software and internet industries are characterized by the existence of a large number of patents, trademarks, and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have received in the past, and may receive in the future, communications from third parties claiming that we have infringed on the intellectual property rights of others. Our technologies may not be able to withstand any third-party claims or rights against their use.

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Any intellectual property claims, with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing our business plan, and could require us to pay monetary damages or enter into royalty or licensing agreements. In addition, certain customer agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim. An adverse determination could also prevent us from offering our service to others.

We rely on third-party hardware and software that may be difficult to replace or which could cause errors or failures of our service.

We rely on hardware purchased or leased and software licensed from third parties in order to offer certain services. This hardware and software may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our service until equivalent technology is either developed by us or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in third-party hardware or software could result in errors or a failure of our service which could harm our business.

Our intellectual property is not protected through patents or formal copyright registration. Therefore, we do not have the full benefit of patent or copyright laws to prevent others from replicating our software.

Our intellectual property rights are not protected through patents or formal copyright registration. We may not be able to protect our trade secrets or prevent others from independently developing substantially equivalent proprietary information and techniques or from otherwise gaining access to our trade secrets. In addition, foreign intellectual property laws may not protect our intellectual property rights. Moreover, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringements. Litigation of this nature could result in substantial expense for us and diversion of management and other resources, which could result in a loss of revenue and profits.

Our failure to develop and maintain products and services that assist our customers in complying with significant government regulation could result in decreased demand for our products and services.

Our products and services are not directly regulated by the government. Our bankruptcy customers are, however, subject to significant regulation, including the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and local rules and procedures established by bankruptcy courts. The Executive Office for United States Trustees, a division of the United States Department of Justice, oversees bankruptcy trustees and establishes administrative rules governing trustees’ activities. Additionally, the process of administering the settlement of class action or mass tort cases is subject to court supervision and review by opposing plaintiffs’ and defendants’ counsel. The success of our business has been, and will continue to be, partly dependent on our ability to develop and maintain products and provide services that allow clients to perform their duties within applicable regulatory and judicial rules and procedures and that allow corporate restructuring debtors to make filings and send required notices on a timely and accurate basis. Future regulation and court practices or procedures may limit or eliminate the ability of clients to utilize the types of products and services that we currently provide. Our failure to adapt our products and services to changes in the Bankruptcy Code and applicable legislative and judicial rules and procedures could cause us to lose existing customers or fail to attract new customers.

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The integration of acquired businesses is time consuming, may distract our management from our other operations, and can be expensive, all of which could reduce or eliminate our expected earnings.

In November 2005, we acquired nMatrix for approximately $126 million in cash and stock. In January 2004, we acquired Poorman-Douglas for approximately $116 million in cash. In addition to these acquisitions, during the five years ended December 31, 2005, we acquired five other businesses at a combined cost of approximately $90 million. We may consider additional opportunities to acquire other companies, assets or product lines that complement or expand our business. If we are unsuccessful in integrating these companies or product lines with our existing operations, or if integration is more difficult than anticipated, we may experience disruptions to our operations. A difficult or unsuccessful integration of an acquired business would likely have a material adverse effect on our results of operations.

Some of the risks that may affect our ability to integrate or realize any anticipated benefits from companies we acquire include those associated with:

·unexpected losses of key employees or customers of the acquired company;

·conforming the acquired company’s standards, processes, procedures and controls with our operations;

·increasing the scope, geographic diversity and complexity of our operations;

·difficulties in transferring processes and know-how;

·difficulties in the assimilation of acquired operations, technologies or products;

·diversion of management’s attention from other business concerns;

·adverse effects on existing business relationships with customers; and

·the challenges of operating internationally after the nMatrix acquisition.

Our business and results of operations may be adversely affected if we are unable to manage our growth effectively.

Certain businesses we have acquired, including most recently the nMatrix business, have experienced substantial growth immediately prior to the time we acquired the business. The success of those types of acquisitions is dependent upon a number of factors, including the ability to hire, train and retain an adequate number of experienced managers and employees for those rapidly growing businesses, the establishment of policies, procedures and internal controls to allow us to monitor the growth of those businesses, and other factors that are beyond our control. Expansion internationally will increase demands on management and divert their attention, which could have an adverse impact on our business and financial results. The challenges of managing the growth of an acquired business may distract our management from their normal duties associated with our historical core businesses.

We have non-U.S. operations which are subject to certain inherent risks.

As a result of our recent acquisition of nMatrix, we now maintain small offices in the United Kingdom and Australia. We anticipate that we will seek to expand our currently limited global operations and may enter new global markets. Our foreign business is transacted in the local functional currency, but we do not currently have any material exposure to foreign currency transaction gains or losses. All other business transactions are in U.S. dollars. To date, we have not entered into any derivative financial instruments to manage our foreign currency risk. Our current and proposed international activities are subject to certain inherent risks, including specific country economic conditions, exchange rate fluctuation, changes in regulatory requirements, reduced protection of intellectual property rights, potential adverse tax consequences, different or additional product functionality requirements, and cultural differences.

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The use of our common stock to fund acquisitions or to refinance debt incurred for acquisitions could dilute existing shares.

We have used our common stock to refinance debt incurred for several prior acquisitions. During June 2004, we issued $50 million of convertible notes, which are convertible into approximately 2.9 million shares of common stock, to refinance a portion of the purchase price for the January 2004 Poorman-Douglas acquisition. During November 2005, we issued approximately 1.2 million shares of common stock and incurred approximately $101 million of bank indebtedness in connection with our nMatrix acquisition. We may consider issuing additional common shares and using the proceeds to pay part or all of this additional indebtedness.

We may consider further opportunities to acquire companies, assets or product lines that complement or expand our business. We expect that future acquisitions, if any, could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and shares. If the consideration for an acquisition is paid in common stock, existing shareholders’ investments could be diluted. Furthermore, we may decide to issue convertible debt or additional shares of common stock and use part or all of the proceeds to finance or refinance the costs of any past or future acquisitions.

We depend upon our key personnel and we may not be able to retain them or to attract, assimilate and retain highly qualified employees in the future.

Our future success will depend in significant part upon the continued service of our senior management and certain of our key technical personnel and our continuing ability to attract, assimilate and retain highly qualified technical, managerial, and sales and marketing personnel. We do not have employment agreements with our Chief Executive Officer, President, or Chief Financial Officer. We do have employment agreements with our Chief Executive Officer—Poorman-Douglas Corporation, our President—Bankruptcy Services LLC., and key executives of nMatrix. We maintain key-man life insurance policies on our Chief Executive Officer and our President. The loss of the services of any of these executives or other key personnel or the inability to hire or retain qualified personnel in the future could have a material adverse impact on our results of operations.

We do not pay cash dividends on our common stock and our common stock may not appreciate in value or even maintain the price at which you purchased your shares.

We presently do not intend to pay any cash dividends on our common stock. Subject to any financial covenants in current or future financing agreements that directly or indirectly restrict the payment of dividends, the payment of dividends is within the discretion of our board of directors and will depend upon our future earnings, if any, our capital requirements, our financial condition and any other factors that the board of directors may consider. In addition, certain terms of our convertible notes and certain provisions in our credit agreement may restrict our ability to pay dividends in the future. We currently intend to retain all earnings to reduce our debt and for use in the operation and expansion of our business. As a result, the success of your investment in our common stock will depend entirely upon its future appreciation. Our common stock may not appreciate in value or even maintain the price at which you purchased your shares.

Our articles of incorporation contain a provision that could be used by us, without shareholder approval, to discourage or prevent a takeover of our company.

Some provisions of our articles of incorporation could make it more difficult for a third party to acquire control of our company, even if the change of control would be beneficial to certain shareholders. In the event of a change in control of our company, vesting of previously issued equity awards could be automatically accelerated.

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Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Compliance with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, and Nasdaq National Market rules, are time consuming and expensive. Since 2002, we have spent substantial amounts of management time and have incurred substantial legal and accounting expense in complying with the Sarbanes-Oxley Act and regulatory initiatives resulting from that Act. Complying with these new laws and regulations also creates uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity. As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ certification of that assessment have required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources.

SEC rules implementing Section 404 of Sarbanes-Oxley require disclosure of the remediation of significant deficiencies or material weaknesses in internal controls over financial reporting and the existence, at year-end, of material weaknesses related to our internal control over financial reporting. If we are required to make any of these types of disclosures in the future, these disclosures could adversely affect the price of our common stock.

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

Our corporate offices are located in a 49,000-square-foot facility in Kansas City, Kansas. This owned property serves as collateral under our credit facility. Significant leased properties include:

·approximately 16,000 square feet of office space in New York, New York, through August, 2013;

·approximately 23,000 square feet of office space in New York, New York through January 2006 (as of February 2006, we have relocated to a new leased location with approximately 42,000 square feet of office space in New York, New York through April 2015); and

·approximately 88,000 square feet of office and document processing space in Beaverton, Oregon, through September, 2015.

ITEM 3.LEGAL PROCEEDINGS

We occasionally become involved in litigation arising in the normal course of business. There is no currently pending or, to the knowledge of management, threatened material litigation against us.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted in the fourth quarter of 2005 to a vote of security holders.

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PART II

ITEM 5.MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded under the symbol “EPIQ” on the Nasdaq National Market. The following table shows the reported high and low sales prices for the common stock for the calendar quarters of 2005 and 2004 as reported by Nasdaq:

	2005				2004
	High		Low		High		Low
First Quarter	$	15.00	$	12.05	$	20.90	$	15.50
Second Quarter	16.97		12.90		17.80		13.24
Third Quarter	22.22		16.13		16.65		12.63
Fourth Quarter	22.44		17.21		17.03		13.81

Holders

As of February 17, 2006, there were approximately 100 owners of record of our common stock and approximately 4,200 beneficial owners of our common stock.

Dividends

At this time, we intend to retain our earnings to reduce our debt and for use in the operation and expansion of our business. Accordingly, we do not expect to declare or pay any cash dividends in the foreseeable future. The payment of dividends is within the discretion of our board of directors and will depend upon various factors, including future earnings, capital requirements, financial condition, the terms of our credit agreement, the terms of our convertible notes, and other factors deemed relevant by the board of directors. Various financial covenants in our credit agreement and our outstanding convertible notes may have the effect of limiting the ability of our board of directors to declare and pay cash dividends on our common stock. There is no restriction on the ability of our subsidiaries to transfer funds to EPIQ in the form of cash dividends, loans or advances.

Equity Compensation Plan Information

The following table sets forth as of December 31, 2005 (a) the number of securities to be issued upon exercise of outstanding options, warrants and rights, (b) the weighted average exercise price of outstanding options, warrants and rights and (c) the number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)).

	(a)		(b)			(c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		4,119,000		$	13.77		986,000
Equity compensation plans not approved by security holders		650,000		$	19.03		0
Total		4,769,000		$	14.49		986,000

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As of December 31, 2005, equity compensation plans approved by security holders consist of our 1995 Stock Option Plan and our 2004 Equity Incentive Plan. Securities remaining available for future issuance under equity compensation plans approved by security holders consist solely of shares available under the 2004 Equity Incentive Plan. Securities remaining available for future issuance under our 2004 Equity Incentive Plan may be issued, in any combination, as incentive stock options, non-qualified stock options, stock appreciation rights or restricted stock.

As of December 31, 2005, equity compensation plans not approved by security shareholders consist solely of stock options issued in conjunction with our acquisitions of BSI, Poorman-Douglas, and nMatrix. The stock options issued to key employees of BSI, Poorman-Douglas, and nMatrix were inducement stock options issued in conjunction with the execution of employment agreements with each of those key employees to become employees of our newly acquired subsidiaries. In accordance with the Nasdaq corporate governance rules, shareholder approval of these inducement stock option grants was not required.

The stock options granted under equity compensation plans not approved by security holders were granted at an option exercise price equal to fair market value of the common stock on the date of grant, are non-qualified options, are exercisable for up to 10 years from the date of grant, and otherwise have terms substantially identical to the material terms of the 1995 Stock Option Plan and the 2004 Equity Incentive Plan. Stock options granted in conjunction with the acquisition of BSI vested 20% on January 31, 2003, the grant date thereof, and continue to vest 20% per year on each anniversary of the grant date until fully vested on January 31, 2007. Stock options granted in conjunction with the acquisition of Poorman-Douglas vest 20% per year, with the initial vesting having occurred January 31, 2005, over five years. Stock options granted in conjunction with the acquisition of nMatrix vest 25% per year, with the initial vesting to occur November 15, 2007, over five years.

Recent Sales of Unregistered Securities

On November 15, 2005, we issued 1,228,501 shares of restricted common stock to the sole owner of nMatrix as payment of a portion of the nMatrix purchase price. We issued the common stock in reliance on the exemption from registration in Section 4(2) of the Securities Act of 1933, as amended.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

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ITEM 6.SELECTED FINANCIAL DATA

	Years Ended December 31,
	2005		2004		2003			2002			2001
	(In Thousands, Except Per Share Data)
INCOME STATEMENT DATA:
Revenues from continuing operations	$	130,796	$	125,420	$	67,936		$	36,256		$	28,149
Income from continuing operations	10,948		9,063		14,525			9,766			6,253
Income (loss) from discontinued operations	—		667		(5,818		)	(1,533		)	(1,311		)
Net income	10,948		9,730		8,707			8,233			4,942
Income (loss) per share—Diluted
from continuing operations	$	0.56	$	0.49	$	0.80		$	0.64		$	0.44
from discontinued operations	$	—	$	0.03	$	(0.32	)	$	(0.10	)	$	(0.09	)
Net income per share—Diluted	$	0.56	$	0.52	$	0.48		$	0.54		$	0.35
BALANCE SHEET DATA:
Working capital related to continuing  operations	$	10,983	$	22,979	$	38,856		$	63,503		$	27,286
Total assets	394,870		240,088		141,927			108,037			70,648
Long-term debt	145,906		74,499		3,066			289			594
Stockholders’ equity	176,541		139,883		129,255			102,375			65,144

During June 2001, we completed a follow-on offering of 1,537,500 shares of common stock and received net proceeds of $22.7 million.

During October 2001, we acquired certain assets from ROC Technologies. The acquisition was accounted for using the purchase method of accounting with the operating results of ROC Technologies included in our statements of income since the date of acquisition.

During July 2002, we acquired the Chapter 7 trustee business of CPT Group, Inc. The acquisition was accounted for using the purchase method of accounting with the operating results of CPT Group included in our statements of income since the date of acquisition.

During November 2002, we completed a private placement of 2,000,000 shares of common stock and received net proceeds of $28.1 million.

During January 2003, we acquired the member interests of BSI. The acquisition was accounted for using the purchase method of accounting with the operating results of BSI included in our statements of income since the date of acquisition. See Note 13 of the Notes to Consolidated Financial Statements.

During November 2003, the decision was made to dispose of our infrastructure software business and the business was sold in April 2004. Accordingly, all revenues, cost of sales, operating expenses, assets and liabilities related to infrastructure software have been reclassified as discontinued operations for all periods presented. See Note 14 of the Notes to Consolidated Financial Statements.

During January 2004, we acquired the equity of P-D Holding Corp. and its wholly-owned operating subsidiary, Poorman-Douglas Company (Poorman-Douglas). The acquisition was accounted for using the purchase method of accounting with the operating results of Poorman-Douglas included in our statement of income since the date of acquisition. See Note 13 of the Notes to Consolidated Financial Statements.

During October 2005, we acquired the equity of Hilsoft, Inc. (Hilsoft). The acquisition was accounted for using the purchase method of accounting with the operating results of Hilsoft included in our statement of income since the date of acquisition. See Note 13 of the Notes to Consolidated Financial Statements.

During November 2005, we acquired the equity of nMatrix, Inc. and nMatrix Australia Pty. Ltd. (collectively, nMatrix). The acquisition was accounted for using the purchase method of accounting with the operating results of nMatrix included in our statement of income since the date of acquisition. See Note 13 of the Notes to Consolidated Financial Statements.

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Management’s Overview

We are a provider of technology-based solutions for the legal and fiduciary services industries. Our products and services assist clients with the administration of complex legal proceedings, including electronic litigation discovery, bankruptcy administration and class action administration. We have two operating segments: case management and document management.

Our case management segment generates revenue primarily through integrated technology-based products and services that support client engagements for electronic litigation discovery, class action and mass tort, and bankruptcy proceedings that can last several years and has a revenue profile that typically includes a recurring component. Our document management segment generates revenue primarily through legal noticing services, reimbursement for costs incurred related to postage on mailing services, media campaign and advertising management and document custody services. Document management revenue is generally less recurring due to the unpredictable nature of the frequency, timing, and magnitude of the clients’ business requirements.

The number of new bankruptcy filings each year may vary based on the level of consumer and business debt, the general economy, interest rate levels and other factors. For the government fiscal years ended September 30, 2003, 2004, and 2005, the Administrative Office of the U.S. Courts reported approximately 1.66 million, 1.62 million, and 1.78 million new bankruptcy filings, respectively. We believe an important indicator of future bankruptcy filings is the level of consumer and business debt outstanding. The most recent available Federal Reserve Flow of Funds Accounts of the United States, dated December 8, 2005, reported increases in both consumer and business debt outstanding as compared with the same period of the prior year.

During 2003, we determined that our infrastructure software segment was no longer aligned with our long-term strategic objectives and we developed a plan to sell this segment within a year. Accordingly, our infrastructure software results for 2004 and 2003, including our gain on disposition of the infrastructure software business, are included entirely within the discontinued operations section of our income statement.

We have acquired a number of businesses during the past several years. In January 2003, we acquired BSI to expand our offerings to include an integrated solution of a proprietary technology platform and professional services for corporate restructurings. In January 2004, we acquired Poorman-Douglas and expanded our product and service offerings to include class action, mass tort, and other similar legal proceedings. In October 2005, we acquired Hilsoft to enhance our ability to provide specialized media placement services related to class action, mass tort and bankruptcy noticing. In November 2005, we acquired nMatrix to expand our product and service offerings to include electronic litigation discovery.

In conjunction with our acquisition of nMatrix, we had notable changes to our capital structure. As partial purchase price consideration, we issued approximately 1.2 million shares of our common stock. To provide us with increased financial flexibility, we also restructured our credit facility. Our amended credit facility now consists of a $25 million senior term loan, due September 2006, and a $100 million senior revolving loan, due November 2008. During the term of the loan we have the right, subject to compliance with our covenants, to increase the senior revolving loan to $175 million.

Critical Accounting Policies

We consider our accounting policies related to revenue recognition, business combinations, goodwill, and identifiable intangible assets to be critical policies in understanding our historical and future performance.

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Revenue recognition.   We have agreements with customers obligating us to deliver various products and services each month. Case management fees earned are contingent upon the month-to-month delivery of the products and services defined by the contracts and are related primarily to the size and complexity of the ongoing engagement. The formula-based fees earned each month become fixed and determinable on a monthly basis as a result of our completion of all contractually required performance obligations related to products delivered and services rendered by us during the month. Our case management business also provides hosting access; revenue related to hosting access is recognized over the period that service is provided. Document management revenues are recognized in the period the services are provided. Payments received in advance of satisfaction of the related revenue recognition criteria are recognized as a deferred revenue liability until all revenue recognition criteria have been satisfied. Significant sources of revenue include:

·a monthly fee from financial institutions based on a percentage of total liquidated assets on deposit and on the number of trustees;

·fees for database conversions, database hosting, processing, storage, maintenance and software upgrades;

·monthly revenue based on the number of cases in a database;

·fees based on the number of claims in a case;

·fees for media placement; and

·fees for services, including technology services, claims reconciliation, document printing, noticing, balloting, voting tabulation and other professional services.

Business combination accounting.We have acquired a number of businesses during the last several years, and we may acquire additional businesses in the future. Business combination accounting, often referred to as purchase accounting, requires us to determine the fair value of all assets acquired, including identifiable intangible assets, and liabilities assumed. The cost of the acquisition is allocated to the assets acquired and liabilities assumed in amounts equal to the fair value of each asset and liability, and any remaining acquisition cost is classified as goodwill. This allocation process requires extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets. Certain identifiable intangible assets, such as customer lists and covenants not to compete, are amortized on a straight-line basis over the intangible asset’s estimated useful life. The estimated useful life of amortizable identifiable intangible assets range from one to 14 years. Goodwill and certain other identifiable intangible assets are not amortized. Accordingly, the acquisition cost allocation has had, and will continue to have, a significant impact on our current operating results.

Goodwill.We assess goodwill, which is not subject to amortization, for impairment as of each July 31 and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value. This assessment is performed at a reporting unit level. A reporting unit is a component of a segment that constitutes a business, for which discrete financial information is available, and for which the operating results are regularly reviewed by management.

A change in events or circumstances, including a decision to hold an asset or group of assets for sale, a change in strategic direction, or a change in the competitive environment could adversely affect the fair value of one or more reporting units. During November 2003, we determined that our infrastructure software segment was no longer aligned with our long-term strategic objectives and we developed a plan to sell this segment within a year. As a result, we recognized a pre-tax impairment charge of approximately $3.8 million related to goodwill during the year ended December 31, 2003.

The estimate of fair value is highly subjective and requires significant judgment. If we determine that the fair value of any reporting unit is less than the reporting unit’s carrying value, then we will recognize an

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impairment charge. If goodwill on our balance sheet becomes impaired during a future period, the resulting impairment charge could have a material impact on our results of operations and financial condition. Our unimpaired, recognized goodwill totaled $249.4 million as of December 31, 2005.

Identifiable intangible assets.Each period we evaluate whether events and circumstances warrant a revision to the remaining estimated useful life of each identifiable intangible asset. If events and circumstances warrant a change to the estimate of an identifiable intangible asset’s remaining useful life, then the remaining carrying amount of the identifiable intangible asset would be amortized prospectively over that revised remaining useful life. Furthermore, information developed during our annual assessment, or other events and circumstances, may indicate that the carrying value of one or more identifiable intangible assets is not recoverable and its fair value is less than the identifiable intangible asset’s carrying value and would result in recognition of an impairment charge. During November 2003, we determined that our infrastructure software segment was no longer aligned with our long-term strategic objectives and we developed a plan to sell this segment within a year. As a result, we recognized a pre-tax impairment charge of approximately $0.9 million related to identifiable intangible assets during the year ended December 31, 2003.

A change in the estimate of the remaining life of one or more identifiable intangible assets or the impairment of one or more identifiable intangible assets could have a material impact on our results of operations and financial condition. Our identifiable intangible assets’ carrying value, net of amortization, was $53.4 million as of December 31, 2005.

Results of Operations for the Year Ended December 31, 2005 Compared with the Year Ended December 31, 2004

Consolidated Results

Revenue

Total revenue of $130.8 million for the year ended December 31, 2005 represents an approximate 4% increase compared with $125.4 million of revenue for the prior year. Total revenue includes revenue from reimbursed expenses, which are presented as a separate line item on our Consolidated Statements of Income. While revenues from reimbursed expenses may fluctuate significantly from period to period, these fluctuations have a minimal effect on our operating income as we realize little or no margin from this revenue. Revenue exclusive of revenue related to reimbursed expenses, which we refer to as operating revenue, increased $2.1 million, or approximately 2%, to $107.2 million for the year ended December 31, 2005 compared with $105.1 million for the same period in the prior year. All revenue is directly related to a segment and changes in revenue by segment are discussed below.

Operating Expenses

Direct costs, general and administrative expenses, and depreciation and software amortization increased $3.4 million, or approximately 4%, to $96.2 million for the year ended December 31, 2005 compared with $92.8 million for the prior year. Changes in direct costs, general and administrative expenses, and depreciation and software amortization are directly related to a segment and are discussed below.

Corporate administrative costs not attributable to segment operations increased by $3.9 million, or 17%, to $27.0 million for the year ended December 31, 2005 compared with $23.1 million for the prior year. This increase primarily results from the increase in the scope and complexity of our business, and is primarily the result of increases in compensation and related expenses, travel, professional services and software amortization expense.

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Amortization of identifiable intangible assets decreased $1.0 million to $6.8 million for the year ended December 31, 2005 compared with $7.8 million for the prior year. All identifiable intangible assets are directly related to a segment and changes in amortization of identifiable intangible assets by segment are discussed below.

Acquisition related expenses of $3.0 million for the year ended December 31, 2005 and $2.2 million for the prior year result from non-capitalized expenses for executive bonuses, legal, accounting and valuation services, and travel incurred in connection with potential and completed transactions.

Expenses Related to Financing

Net expenses related to financing decreased $0.5 million, to $6.7 million for the year ended December 31, 2005 compared with $7.2 million of net expenses related to financing for the prior year. This decrease related to various financing components.

·Variable interest expense related to our credit facilities and fixed interest expense related to our convertible debt increased $0.7 million to $4.5 million during the year ended December 31, 2005 compared to $3.8 million for the prior year primarily as a result of an increase in our variable interest rate, partly offset by a decrease in weighted average borrowings outstanding during the year.

·Amortization of loan fees related to our credit facilities and our convertible debt offering decreased $1.0 million to $1.1 million during the year ended December 31, 2005 compared to $2.1 million for the prior year. This decrease is primarily a result of amortization related to a short-term subordinated borrowing under the credit facility used to finance the acquisition of Poorman-Douglas in January 2004. All fees related to this subordinated borrowing were amortized during 2004.

·During 2004, we replaced the senior portion of the credit facility used to finance the Poorman-Douglas transaction with our KeyBank credit facility. As a result, during the year ended December 31, 2004, we recognized a $1.0 million charge for the write-off of loan fees related to the terminated credit facility.

·Our convertible debt facility includes a provision allowing the convertible debt holders to extend the debt maturity from three years to six years. Under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, this provision is accounted for as an embedded option. At inception, the embedded option was valued at $1.2 million and the convertible debt balance was reduced by the same amount. The convertible debt accretes approximately $0.1 million each quarter such that, at the end of three years, the convertible debt balance will total $50.0 million. The embedded option must be revalued at each period end based on the probability weighted discounted cash flows related to the additional 4% interest rate payments which would be made if the convertible debt maturity is extended an additional three years. While the changes in fair value of the embedded option and carrying value of the convertible debt do not affect our current cash flow, the aggregate of these changes in value is accounted for as a current income or expense item and is included on our accompanying Consolidated Statements of Income as a component of interest expense. During the year ended December 31, 2005, we recognized expense related to the convertible debt accretion and change in value of the embedded option of $1.0 million, compared with $0.3 million of such expense in the prior year. If the embedded option is eventually exercised, the value assigned to the embedded option will be amortized to income as a reduction to our 4% convertible debt interest expense over the periods payments are made. If the option is not exercised by some or all convertible debt holders, any remaining related value assigned to the embedded option will be recognized as a gain during that period.

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Effective Tax Rate

Our effective tax rate related to income from continuing operations decreased from 41.3% for the year ended December 31, 2004 to 39.9% for the year ended December 31, 2005. The decrease in our 2005 effective tax rate compared to the prior year is the result of discrete events, and we anticipate that our future tax rate will increase. Our tax rate is higher than the statutory federal rate of 35% primarily due to state taxes. Two of our subsidiaries, BSI and the recently acquired nMatrix, operate primarily in New York City and are subject to state and local New York tax rates, which are higher than the tax rates assessed by other jurisdictions where we operate.

Business Segments

Revenue

Case management operating revenue increased $10.8 million, or approximately 16%, to $79.3 million for the year ended December 31, 2005 compared with $68.5 million for the year ended December 31, 2004. nMatrix, which was acquired on November 15, 2005, accounted for approximately $3.7 million of the increase in operating revenue. Operating revenue exclusive of nMatrix increased $7.1 million, or approximately 10%. This increase is primarily attributable to an increase in class action operating revenues resulting from the timing of several large cases and the expansion of our corporate restructuring professional service offerings, partly offset by a decrease in our trustee professional services.

During February 2006, we entered into a new pricing arrangement with our primary Chapter 7 depository financial institution. This new pricing arrangement will be effective beginning October 2006. Chapter 7 depository fees are included entirely within our case management segment. Under this arrangement, the fees we earn for deposits placed with this financial institution could have, within certain limits, variability based on fluctuations in short-term interest rates. Based on the terms of the pricing arrangement and the current interest rate environment, we do not anticipate that this new pricing arrangement will have a material impact on our 2006 revenues or earnings.

Document management operating revenue decreased $8.8 million, or approximately 24%, to $27.9 million for the year ended December 31, 2005 compared with $36.5 million for the prior year. This decrease is primarily attributable to a decline in advertising services. Our advertising services are primarily connected with class action and bankruptcy customers for whom we provide case administration services. Advertising services provided varies significantly depending on the characteristics of the case. Hilsoft, which we acquired in October 2005, provides advertising services independent of case management. As a result, we believe that the level of advertising services will increase in future periods from the level of advertising services provided during the year ended December 31, 2005. Document management revenue for reimbursed expenses of $20.5 million for the year ended December 31, 2005 increased approximately 15% compared with the same period in the prior year. Revenue for reimbursed expenses have little or no margin and, accordingly, this increase in revenue for reimbursed expenses did not have a material effect on our income from operations. Document management revenues, including revenues related to advertising services, can fluctuate materially from period to period based on clients’ business requirements.

Operating Expenses

Case management direct costs, general and administrative expenses, and depreciation and software amortization increased $3.5 million, or approximately 12%, to $32.6 million for the year ended December 31, 2005 compared with $29.1 million for the same period in the prior year. nMatrix, which was acquired on November 15, 2005, accounted for approximately $1.4 million of the increase in direct costs, general and administrative expenses, and depreciation and software amortization. Exclusive of nMatrix, direct and administrative expenses, including depreciation and software amortization, increased by $2.1 million, or approximately 7%. This increase is primarily attributable to an increase in reimbursed expenses

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and expenses related to the expansion of our bankruptcy service offerings. Our case management cost structure is relatively stable and generally does not fluctuate materially with changes in operating revenues.

Document management direct costs, general and administrative expenses, and depreciation and software amortization decreased $4.0 million, or 10%, to $36.6 million for the year ended December 31, 2005 compared with $40.6 million for the prior year. This decrease primarily results from a decrease in cost of advertising, related to the decline in advertising service revenue discussed above, partly offset by an increase in reimbursed expenses, the inclusion of Hilsoft operating expenses, and an increase in expenses paid to third parties for production services. Our document management cost structure is more variable than case management and will fluctuate based on document management business requirements delivered.

Both the case management and document management segments have identifiable intangible assets. Amortization of case management’s identifiable intangible assets decreased $0.2 million to $5.0 million for the year ended December 31, 2005 compared with $5.2 million for the prior year. This decrease is primarily attributable to certain intangible assets acquired in the BSI acquisition that became fully amortized during 2005, largely offset by an increase in amortization related to intangible assets acquired in the nMatrix acquisition. Amortization of document management’s identifiable intangible assets decreased $0.8 million to $1.7 million for the year ended December 31, 2005 compared with $2.5 million for the prior year. This decrease is primarily attributable to certain intangible assets acquired in the BSI acquisition that became fully amortized during 2005, partly offset by an increase in amortization related to intangible assets acquired in the Hilsoft acquisition. Note 4 of the Notes to the Consolidated Financial Statements provides a summary of the total identified intangible assets, the scheduled amortization expense and the scheduled amortization periods for intangible assets acquired through the nMatrix, Hilsoft, Poorman-Douglas and BSI acquisitions.

Results of Operations for the Year Ended December 31, 2004 Compared with the Year Ended December 31, 2003

Consolidated Results

Revenue

Total revenue of $125.4 million for the year ended December 31, 2004 represents an approximate 85% increase compared with $67.9 million of revenue for the same period in the prior year. With our acquisition of Poorman-Douglas in January 2004, revenue related to reimbursed expenses, such as postage pertaining to document management services, increased significantly. We reflect the revenue from these reimbursed expenses as a separate line item on our Consolidated Statements of Income. While revenues from reimbursed expenses may fluctuate significantly from period to period, these fluctuations have a minimal effect on our operating income as we realize little or no margin from this revenue. Revenue exclusive of revenue related to reimbursed expenses, which we refer to as operating revenue, increased $42.7 million, or approximately 68%, to $105.1 million for the year ended December 31, 2004 compared with $62.4 million for the same period in the prior year. All revenue is directly related to a segment and changes in revenue by segment are discussed below.

Operating Expenses

Direct costs, general and administrative expenses, and depreciation and software amortization increased $54.9 million, or approximately 145%, to $92.8 million for the year ended December 31, 2004 compared with $37.9 million for the same period in the prior year. This increase primarily results from the inclusion of Poorman-Douglas’ expenses subsequent to the acquisition date. As a result of the Poorman-Douglas acquisition, we realized a higher ratio of document management revenue relative to case management revenue than during the same period in the prior year, which resulted in an increase in

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reimbursed expenses. In addition, corporate administrative costs not attributable to segment operations increased primarily due to significant increased expenses related to compliance with regulations and standards imposed by Section 404 of the Sarbanes-Oxley Act of 2002, increased amortization expense primarily resulting from our acquisition of additional operating software licenses, increased travel expense primarily related to additional locations, and increased insurance coverage due to business expansion.

Amortization of identifiable intangible assets increased $4.2 million to $7.8 million for the year ended December 31, 2004 compared with $3.6 million for the same period in the prior year. All identifiable intangible assets are directly related to a segment and changes in amortization of identifiable intangible assets by segment are discussed below.

Acquisition related expenses of $2.2 million for the year ended December 31, 2004 and $1.8 million for the year ended December 31, 2003 result from non-capitalized expenses for executive bonuses, legal, accounting and valuation services, and travel incurred in connection with potential and completed transactions.

Expenses Related to Financing

Expenses related to financing totaled $7.2 million during the year ended December 31, 2004 compared with $0.1 million of interest income during the same period in the prior year. This increase related to various financing components. During the year ended December 31, 2004, we recognized a $1.0 million charge for the write-off of loan fees related to a credit facility we terminated. Variable interest expense related to our credit facilities, fixed interest expense related to our convertible debt, and interest accreted on debt with no stated interest rate totaled $3.8 million during the year ended December 31, 2004. Amortization of loan fees related to our credit facilities and related to our convertible debt offering totaled $2.1 million during the year ended December 31, 2004. Our convertible debt facility includes a provision allowing the convertible debt holders to extend the debt maturity from three years to six years. Under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, this provision is accounted for as an embedded option. At inception, the embedded option was valued at $1.2 million and the convertible debt balance was reduced by the same amount. The convertible debt accretes approximately $0.1 million each quarter such that, at the end of three years, the convertible debt balance will total $50.0 million. The embedded option must be revalued at each period end based on the probability weighted discounted cash flows related to the additional 4% interest rate payments which would be made if the convertible debt maturity is extended an additional three years. While the changes in fair value of the embedded option and carrying value of the convertible debt do not affect our current cash flow, the aggregate of these changes in value, totaling $0.3 million of expense for the year ended December 31, 2004, is accounted for as a current income or expense item and is included on our accompanying Consolidated Statements of Income as a component of interest expense. If the embedded option is eventually exercised, the value assigned to the embedded option will be amortized to income as a reduction to our 4% convertible debt interest expense over the periods payments are made. If the option is not exercised by some or all convertible debt holders, any remaining related value assigned to the embedded option will be recognized as a gain during that period.

Effective Tax Rate

Our effective tax rate related to income from continuing operations increased slightly from 41.2% for the year ended December 31, 2003 to 41.3% for the year ended December 31, 2004. Our tax rate is higher than the statutory federal rate of 35% primarily due to state taxes. Our corporate restructuring subsidiary, BSI, operates primarily in New York City and is subject to state and local New York tax rates, which are higher than the tax rates assessed by other jurisdictions where we operate.

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Discontinued Operations

Our infrastructure software results are included entirely within the discontinued operations section of our income statement. Pre-tax income from discontinued operations of $1.1 million for the year ended December 31, 2004 resulted primarily from our gain on sale of the business, partly offset by operating losses through the date of sale, which was April 30, 2004. Pre-tax loss from discontinued operations of $9.6 million for the year ended December 31, 2003 was primarily the result of a $7.6 million impairment charge to reduce goodwill, other intangible assets, software and other long-lived assets to their estimated fair value.

Business Segments

Revenue

Case management operating revenue increased $18.8 million, or approximately 38%, to $68.5 million for the year ended December 31, 2004 compared with $49.7 million for the year ended December 31, 2003. This increase is a result of the inclusion of operating revenue related to the Poorman-Douglas acquisition subsequent to the acquisition date. Exclusive of Poorman-Douglas operating revenue, operating revenue declined by $3.5 million due primarily to a decrease in non-recurring bankruptcy case management professional service revenue, partly offset by an increase in bankruptcy deposit based revenue.

Document management operating revenue increased $23.8 million, or approximately 187%, to $36.5 million for the year ended December 31, 2004 compared with $12.7 million for the year ended December 31, 2003. Document management revenue for reimbursed expenses of $17.9 million for the year ended December 31, 2004 increased approximately 243% compared with the same period in the prior year. The increases in both operating revenue and reimbursed revenue for the document management segment were primarily the result of the acquisition of Poorman-Douglas. Exclusive of Poorman-Douglas revenue, our document management operating revenue declined $3.4 million due primarily to a decrease in bankruptcy noticing services. Document management revenues can fluctuate materially from period to period based on clients’ business requirements.

Operating Expenses

Case management direct costs, general and administrative expenses, and depreciation and software amortization increased $16.0 million, or approximately 122%, to $29.1 million for the year ended December 31, 2004 compared with $13.1 million for the same period in the prior year. This increase primarily results from the inclusion of Poorman-Douglas’ expenses subsequent to the acquisition date. Exclusive of Poorman-Douglas expenses, case management’s direct and administrative expenses, including depreciation and software amortization, increased $0.9 million due primarily to increases in operating software amortization and wage related expense. Our case management cost structure is relatively stable and generally does not fluctuate materially with changes in operating revenues.

Document management direct costs, general and administrative expenses, and depreciation and software amortization increased $30.9 million to $40.6 million for the year ended December 31, 2004 compared with $9.7 million for the prior year. This increase primarily results from the inclusion of Poorman-Douglas’ expenses, including reimbursed expenses, subsequent to the acquisition date. Exclusive of Poorman-Douglas’ expenses, our document management expenses declined $2.4 million due primarily to a decline in postage and print expense related to a decrease in noticing services. Our document management cost structure is more variable than case management and will fluctuate based on document management business requirements delivered.

Both the case management and document management segments have identifiable intangible assets. Amortization of case management’s identifiable intangible assets increased $3.1 million to $5.2 million for

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the year ended December 31, 2004 compared with $2.1 million for the prior year. Amortization of document management’s identifiable intangible assets increased $1.0 million to $2.5 million for the year ended December 31, 2004 compared with $1.5 million for the prior year. For both segments, this increase is due primarily to the amortization expense related to the acquired intangible assets resulting from the Poorman-Douglas transaction and the February 2004 commencement of amortization related to the BSI trade name.

Liquidity and Capital Resources

Operating Activities

During the year ended December 31, 2005, our operating activities provided net cash of $27.2 million. The primary sources of cash from operating activities were net income of $10.9 million and adjustments for non-cash charges and credits, primarily depreciation and amortization, of $17.0 million.

Changes in operating assets and liabilities as a direct result of assets acquired or liabilities assumed have been excluded from our Consolidated Statements of Cash Flows. However, subsequent to acquisition, cash flows related to these acquired assets and assumed liabilities are reflected in our Consolidated Statements of Cash Flows. For example, accounts receivable and accounts payable acquired or assumed as a part of the transaction are not reflected, respectively, as a use or source of cash. However, the subsequent collection or payment, respectively, of accounts receivable and accounts payable acquired or assumed as a part of the transaction are reflected as an operating source or use of cash, respectively.

Investing Activities

Our most significant use of cash for investing activities was to expand our business through acquisitions. Total cash used in 2005 to acquire businesses, net of $0.9 million cash acquired in the acquisitions, was approximately $110.5 million. During the year ended December 31, 2005, we used cash of approximately $4.6 million to purchase property and equipment. Enhancements to our existing software and development of new software is essential to our continued growth and, during the year ended December 31, 2005, we used cash of approximately $2.3 million to fund internal costs related to development of software for which technological feasibility has been established. We believe the nature of nMatrix’s operations will cause our property, equipment and software spending to increase during 2006 compared with 2005. We anticipate that cash generated from operations will be adequate to fund our anticipated property, equipment and software spending in 2006.

Financing Activities

In conjunction with our acquisition of nMatrix, during November 2005 we amended our credit facility. Based on the terms of our amended credit facility, we increased our senior term loan borrowings from $17.2 million to $25.0 million. The amended credit facility eliminated the requirement for quarterly amortizing payments on the senior term loan, but shortened the maturity of the senior term loan from June 2008 to August 2006. The amended credit facility also increased our senior revolving loan from $75.0 million to $100.0 million. The maturity of the senior revolving loan was extended from June 2008 to November 2008. During the term of the loan, we have the right, subject to compliance with our covenants, to increase the senior revolving loan to $175.0 million.

During November 2005, under the amended credit facility we borrowed an additional $7.8 million under the senior term loan and $93.0 million under the senior revolving loan to finance the cash portion of our acquisition of nMatrix.

As of December 31, 2005, our borrowings consisted of $51.3 million from the contingent convertible subordinated notes (including the fair value of the embedded option), $25.0 million under the credit

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facility’s senior term loan, $93.0 million under the credit facility’s senior revolving loan, and approximately $4.2 million of obligations related to capitalized leases and deferred acquisition price.

We believe that the funds generated from operations plus amounts available under our credit facility’s senior revolving loan ($7.0 million at December 31, 2005) will be sufficient over the next year to finance currently anticipated working capital requirements, software expenditures, property and equipment expenditures, payments for contractual obligations, and interest payments due on our outstanding borrowings. The $25.0 million term loan under our credit facility matures in August 2006. In addition to current sources of liquidity discussed above, we may also consider an equity offering of our common shares to generate additional cash for payment of this term loan at maturity.

Subject to compliance with certain covenants under the amended credit facility, we have the right to increase the senior revolving loan to $175.0 million. We believe that funds generated from operations combined with the flexibility to increase our borrowings under our credit facility provide the liquidity to satisfy our foreseeable operational cash requirements.

We may pursue acquisitions in the future. If the acquisition price exceeds our then available cash and unused borrowing capacity, we may decide to issue equity, restructure our credit facility, partly finance the acquisition with a note payable, or some combination of the preceding. Covenants contained in our credit facility may limit our ability to consummate an acquisition.

Off-balance Sheet Arrangements

Although we generally do not utilize off-balance sheet arrangements in our operations, we enter into operating leases in the normal course of business. Our operating lease obligations are disclosed below under “Contractual Obligations” and also in Note 6 of the Notes to Consolidated Financial Statements.

Contractual Obligations

The following table sets forth a summary of our contractual obligations and commitments, excluding periodic interest payments, as of December 31, 2005.

	Payments Due By Period (In Thousands)
	Total		Less than 1 Year			1 - 3 Years		3 - 5 Years			More Than 5 Years
Contractual Obligation
Long-term debt and future accretion(1)	$	172,389		$	27,654	$	144,735		$	—		$	—
Employment agreements(2)	10,812			4,943		4,345			1,524			—
Capital lease obligations	972			950		22			—			—
Operating leases	19,201			3,019		4,941			3,581			7,660
Total	$	203,374		$	36,566	$	154,043		$	5,105		$	7,660

(1)A portion of the BSI and Hilsoft purchase price were paid in the form of a non-interest bearing notes, which were discounted using an imputed rate of 5% and 8%, respectively, per annum. The discounts are accreted over the life of the note and each period’s accretion is added to the principal of the respective note. The amount in the above contractual obligation table includes both the notes’ principal, as reflected on our December 31, 2005 Consolidated Balance Sheet, and all future accretion. If certain revenue objectives are satisfied, we will make additional payments, not to exceed $3.0 million, over the next five years to the former owners of Hilsoft. Such payments, if any, are not included in the above contractual obligation table. Convertible debt is included at stated value of the principal redemption and excludes adjustments related to the embedded option, which will not be paid in cash. Any conversion to our common stock of part or all of the convertible debt will reduce our cash obligation related to the convertible debt.

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(2)In conjunction with acquisitions, we have entered into employment agreements with certain key employees of the acquired companies.

Recent Accounting Pronouncements

In September 2005, the Emerging Issues Task Force (EITF) issued EITF 05-07, Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues. EITF 05-07 requires that, when a modification of a convertible debt instrument results in a change in the fair value of an embedded conversion option, the change in fair value of the embedded conversion option be included in the analysis of whether there has been a substantial change in the terms of the convertible debt instrument for purposes of determining whether the debt has been extinguishment. EITF 05-07 also requires subsequent recognition of interest expense for any change in the fair value of the embedded conversion option resulting from a modification of a convertible debt instrument. EITF 05-07 is effective beginning in the first interim or annual reporting period beginning after December 15, 2005. We do not anticipate that the adoption of EITF 05-07 will have a material impact on our consolidated financial statements.

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application for reporting a change in accounting principle unless such application is impracticable or unless transition requirements specific to a newly adopted accounting principle require otherwise. SFAS No. 154 also requires the reporting of a correction of an error by restating previously issued financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123R is effective for EPIQ beginning January 1, 2006. Accordingly, we will adopt SFAS No. 123R, likely using the modified version of prospective application, beginning with our quarter ending March 31, 2006. Under the modified version of prospective application, compensation costs related to share-based compensation will be recognized in our financial statements for all periods beginning after December 31, 2005. For comparative periods ended on or before December 31, 2005, which are presented in our 2006 and subsequent financial statements, share-based compensation costs will continue to be excluded from our consolidated statements of income, but we will disclose these share-based compensation costs on a pro forma basis in a note to the consolidated financial statements. During February 2005, our compensation committee approved acceleration of the vesting of certain unvested options for employees, including an executive officer, and non-employee directors. The decision to accelerate the vesting of these options and eliminate future compensation expense was based primarily on a review of our long-term incentive programs considering the effect on our financial statements of changes in accounting rules that we must adopt in 2006. This action, which had an immaterial effect on our financial statements for the year ended December 31, 2005, will reduce the impact of adoption of SFAS No. 123R on our future consolidated financial statements. Adoption of SFAS No. 123R will materially increase our recognized compensation expense and will have a material impact on our consolidated income statement and balance sheet. We are working with independent valuation experts to document and validate key valuation variables, such as forfeiture rate, expected term, segmentation of employee population, expected term suboptimal exercise price, and expected volatility. Until this work is completed,

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we are unable to estimate the impact of adoption of this statement on our consolidated financial statements. However, if subsequent to December 31, 2005 no new awards were issued and no existing awards were forfeited, we estimate that adoption of SFAS No. 123R would decrease our net income for the year ending December 31, 2006 by approximately $1.4 million. We do not anticipate that adoption of SFAS No. 123R will have a material impact on our consolidated statement of cash flows.

In August 2005, the FASB issued FASB Staff Position (FSP) No. FAS 123(R)-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R), to defer the requirement of SFAS No. 123R that a freestanding financial instrument originally subject to SFAS No. 123R becomes subject to the recognition and measurement requirements of other applicable generally accepted accounting principles when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. The guidance in this FSP is effective upon initial adoption of SFAS No. 123R. We do not anticipate that adoption of FSP No. FAS 123(R)-1 will have a material impact on our consolidated financial statements.

In October 2005, the FASB issued FSP No. FAS 123(R)-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R). This FSP states that, in determining the grant date of an award subject to SFAS No. 123R, a mutual understanding of the key terms and conditions of an award to an individual employee shall be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements if both of the following conditions are met:  a) the award is a unilateral grant and, therefore, the recipient does not have the ability to negotiate the key terms and conditions of the award with the employer; and b) the key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period from the date of approval. The guidance in this FSP is effective upon initial adoption of SFAS No. 123R. We do not anticipate that adoption of FSP No. FAS 123(R)-2 will have a material impact on our consolidated financial statements.

In November 2005, the FASB issued FSP No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP provides a simplified method for calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123R. We have until December 31, 2006, to determine whether to make a one-time election to adopt the transition method described in this FSP. At this time, management is uncertain whether we will make the election to adopt the transition method described in this FSP and we are unable to estimate the impact, if any, on our consolidated financial statements if we elect to use the transition method described in this FSP.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. Our convertible debt and credit facility borrowings create market risks for us. We do not actively manage these market risks.

During 2004, we issued $50.0 million of convertible notes with a 4% fixed interest rate. While we do not have cash flow risk related to this instrument, the instrument does contain an embedded option related to the right of security holders to extend the maturity of the convertible notes which creates an earnings risk. A 10% increase in our stock value would result in a $0.2 million increase in the fair value of the embedded option and a corresponding decrease in pre-tax earnings. A 10% decrease in our stock value would result in a $0.2 million decrease in the fair value of the embedded option and a corresponding increase in pre-tax earnings. The estimated changes in fair value were calculated using a pricing model that incorporates assumptions regarding future volatility, interest rates and credit risk.

30

At December 31, 2005, we have borrowings outstanding under a credit facility. Interest on borrowings under our credit facility is computed at a variable rate based on the LIBOR rate and the prime rate and results in a market risk related to interest rates. A 1% increase or decrease in the LIBOR rate and the prime rate would increase or decrease, respectively, our annual pre-tax interest expense on variable rate borrowings outstanding as of December 31, 2005 by approximately $1.2 million.

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements appear following Item 15 of this Report.

Supplementary Data - Quarterly Financial Information

The following table sets forth quarterly unaudited financial data for the quarters of the years ended December 31, 2005 and 2004 (in thousands, except per share data):

	Quarters
	1st			2nd		3rd			4th
Year ended December 31, 2005
Revenues from continuing operations	$	31,461		$	31,635	$	32,016		$	35,684
Net income	3,250			2,904		3,087			1,707
Net income per share—Diluted(1)	$	0.17		$	0.15	$	0.16		$	0.09
Year ended December 31, 2004
Revenues from continuing operations	$	26,012		$	34,908	$	35,694		$	28,806
Income from continuing operations	2,001			2,983		2,161			1,918
Income (loss) from discontinued operations(2)	(264		)	1,008		(77		)	—
Net income	1,737			3,991		2,084			1,918
Net income per share—Diluted(1)	$	0.10		$	0.22	$	0.11		$	0.10

(1)The sum of the quarters may not equal the total of the respective year’s net income per share on a diluted basis due to changes in the weighted average shares outstanding throughout the year.

(2)Discontinued operations relates entirely to the sale of our infrastructure business. See Note 14 of the Notes to Consolidated Financial Statements.

31

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on their evaluation as of December 31, 2005, the end of the period covered by this Annual Report on 10-K, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, including this Annual Report, were recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and was accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

(a)   Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

·Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

·Provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, our management used the criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.

32

Based on our assessment, management believes that, as of December 31, 2005, EPIQ’s internal control over financial reporting is effective based on those criteria.

(b)   Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears on page 34.

Management has excluded Hilsoft, Inc., nMatrix, Inc., nMatrix Australia Pty. Ltd., and nMatrix Ltd. from our assessment of internal control over financial reporting as of December 31, 2005 because we completed the acquisition of these entities during 2005. Hilsoft, Inc., nMatrix, Inc., nMatrix Australia Pty. Ltd., and nMatrix Ltd. are wholly-owned subsidiaries all of which were acquired during the fourth quarter of the year ended December 31, 2005 and whose financial statements, exclusive of goodwill, certain identifiable intangible assets, consisting of customer relationships, covenants not to compete, and trade names, and intercompany amounts (all of which are subject to corporate level controls), constitute 10% and 6% of net and total assets, respectively, 3% of revenues and 8% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2005. Our conclusion in this Annual Report on Form 10-K regarding the effectiveness of our internal control over financial reporting as of December 31, 2005 does not include the internal control over financial reporting of Hilsoft, Inc., nMatrix, Inc., nMatrix Australia Pty. Ltd., and nMatrix Ltd.

(c)   There have been no changes in our internal controls over financial reporting during our fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
EPIQ Systems, Inc.
Kansas City, Kansas

We have audited management’s assessment, included as section (a) in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A of this Annual Report on Form 10-K, that EPIQ Systems, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from their assessment the internal control over financial reporting at Hilsoft, Inc., nMatrix, Inc., nMatrix Australia Pty. Ltd., and nMatrix Ltd., all of which were acquired during the fourth quarter of the year ended December 31, 2005, and whose financial statements, exclusive of goodwill, certain identifiable assets, consisting of customer relationships, covenants not to compete, and trade names, and intercompany amounts (all of which are subject to corporate level controls), constitute 10% and 6% of net and total assets, respectively, 3% of revenues and 8% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2005. Accordingly, our audit did not include the internal control over financial reporting at Hilsoft, Inc., nMatrix, Inc., nMatrix Australia Pty. Ltd., and nMatrix Ltd. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of

34

effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the COSO. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and consolidated financial statement schedule as of and for the year ended December 31, 2005 of the Company and our report dated March 7, 2006 expressed an unqualified opinion on those consolidated financial statements and the consolidated financial statement schedule.

DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 7, 2006

35

ITEM 9B.OTHER INFORMATION

None.

PART III

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference to our Proxy Statement for our 2006 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended December 31, 2005.

ITEM 11.EXECUTIVE COMPENSATION

Incorporated by reference to our Proxy Statement for our 2006 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended December 31, 2005.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

Incorporated by reference to our Proxy Statement for our 2006 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended December 31, 2005.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to our Proxy Statement for our 2006 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended December 31, 2005.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference to our Proxy Statement for our 2006 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended December 31, 2005.

PART IV

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as a part of this report:

(1)Financial Statements.The following consolidated financial statements, contained on pages F-1 through F-29 of this report, are filed as part of this report under Item 8 “Financial Statements and Supplementary Data.”

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets—December 31, 2005 and 2004

Consolidated Statements of Income—Years Ended December 31, 2005, 2004 and 2003

Consolidated Statements of Changes in Stockholders’ Equity—Years Ended December 31, 2005, 2004 and 2003

Consolidated Statements of Cash Flows—Years Ended December 31, 2005, 2004 and 2003

36

Notes to Consolidated Financial Statements

(2)Financial Statement Schedules. EPIQ Systems, Inc. and subsidiaries for each of the years in the three-year period ended December 31, 2005.

Schedule II—Valuation and qualifying accounts

(3)Exhibits. Exhibits are listed on the Exhibit Index at the end of this report.

37

SIGNATURES

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

Dated: March 8, 2006	EPIQ SYSTEMS, INC.
	By:	/s/ TOM W. OLOFSON
		Tom W. Olofson
		Chairman of the Board, Chief Executive Officer and Director

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 indicated on the dates indicated.

	Signature		Name and Title		Date
/s/   TOM W. OLOFSON		Tom W. Olofson		March 8, 2006
		Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)
/s/   CHRISTOPHER E. OLOFSON		Christopher E. Olofson		March 8, 2006
		President, Chief Operating Officer and Director
/s/   ELIZABETH M. BRAHAM		Elizabeth M. Braham		March 8, 2006
		Executive Vice President, Chief Financial Officer (Principal Financial Officer)
/s/   DOUGLAS W. FLEMING		Douglas W. Fleming		March 8, 2006
		Director of Finance, Chief Accounting Officer (Principal Accounting Officer)
/s/   W. BRYAN SATTERLEE		W. Bryan Satterlee		March 8, 2006
		Director
/s/   EDWARD M. CONNOLLY, JR.		Edward M. Connolly, Jr.		March 8, 2006
		Director
/s/   JAMES A. BYRNES		James A. Byrnes		March 8, 2006
		Director
/s/   JOEL PELOFSKY		Joel Pelofsky		March 8, 2006
		Director

38

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
EPIQ Systems, Inc.Kansas City, Kansas

We have audited the accompanying consolidated balance sheets of EPIQ Systems, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the schedule of valuation and qualifying accounts listed in the Index at Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, such consolidated financial statements present fairly, in all material respects, the financial position of EPIQ Systems, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

DELOITTE & TOUCHE LLP

Kansas City, Missouri
March 7, 2006

F-1

EPIQ SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)

	As of December 31,
	2005		2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	13,563	$	13,330
Trade accounts receivable, less allowance for doubtful accounts of $3,481 and $1,069, respectively	33,504		18,690
Prepaid expenses	2,818		2,052
Income taxes refundable	4,643		3,477
Deferred income taxes	1,978		754
Other current assets	85		736
Total Current Assets	56,591		39,039
LONG-TERM ASSETS:
Property, equipment and leasehold improvements, net	23,751		20,431
Software development costs, net	8,848		5,838
Goodwill	249,427		147,728
Other intangibles, net of accumulated amortization of $13,758 and $11,707, respectively	53,399		24,057
Other	2,854		2,995
Total Long-term Assets, net	338,279		201,049
Total Assets	$	394,870	$	240,088
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	7,954	$	4,263
Customer deposits	2,196		2,375
Accrued compensation	3,944		873
Other accrued expenses	3,872		899
Current maturities of long-term obligations	27,642		7,650
Total Current Liabilities	45,608		16,060
LONG-TERM LIABILITIES:
Deferred income taxes	26,815		9,696
Long-term obligations (excluding current maturities)	145,906		74,499
Total Long-term Liabilities	172,721		84,195
STOCKHOLDERS’ EQUITY:
Preferred stock—$1 par value; 2,000,000 shares authorized; none issued and outstanding	—		—
Common stock—$0.01 par value; 50,000,000 shares authorized; issued and outstanding—19,253,466 and 17,883,917 shares at 2005 and 2004, respectively	193		179
Additional paid-in capital	128,484		102,738
Retained earnings	47,864		36,916
Total Stockholders’ Equity	176,541		139,833
Total Liabilities and Stockholders’ Equity	$	394,870	$	240,088

See accompanying notes to consolidated financial statements.

F-2

EPIQ SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)

	Years Ended December 31,
	2005			2004			2003
REVENUE:
Case management	$	79,279		$	68,526		$	49,688
Document management	27,874			36,549			12,730
Operating revenue	107,153			105,075			62,418
Reimbursed expenses	23,643			20,345			5,518
Total Revenue	130,796			125,420			67,936
OPERATING EXPENSES:
Direct costs	57,790			60,384			16,490
General and administrative	31,072			25,886			16,868
Depreciation and software amortization	7,288			6,527			4,568
Amortization of intangibles	6,751			7,767			3,610
Acquisition related	2,984			2,197			1,793
Total Operating Expenses	105,885			102,761			43,329
INCOME FROM OPERATIONS	24,911			22,659			24,607
EXPENSES (INCOME) RELATED TO FINANCING:
Interest expense	6,809			6,343			201
Interest income	(122		)	(128		)	(284		)
Debt extinguishment	—			995			—
Net Expenses (Income) Related to Financing	6,687			7,210			(83		)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	18,224			15,449			24,690
PROVISION FOR INCOME TAXES	7,276			6,386			10,165
INCOME FROM CONTINUING OPERATIONS	10,948			9,063			14,525
DISCONTINUED OPERATIONS:
Income (loss) from operations of discontinued infrastructure segment (including gain on disposal of  $1,616 during the year ended December 31, 2004)	—			1,104			(9,562		)
Income tax (expense) benefit from operations of discontinued infrastructure segment	—			(437		)	3,744
TOTAL DISCONTINUED OPERATIONS	—			667			(5,818		)
NET INCOME	$	10,948		$	9,730		$	8,707
NET INCOME PER SHARE INFORMATION:
Income per share—Basic
Income from continuing operations	$	0.61		$	0.51		$	0.82
Income (loss) from discontinued operations	—			0.04			(0.33		)
Net income per share—Basic	$	0.61		$	0.55		$	0.49
Income per share—Diluted
Income from continuing operations	$	0.56		$	0.49		$	0.80
Income (loss) from discontinued operations	—			0.03			(0.32		)
Net income per share—Diluted	$	0.56		$	0.52		$	0.48
WEIGHTED AVERAGE COMMON SHARESOUTSTANDING:
Basic	18,092			17,848			17,619
Diluted	21,551			19,828			18,104

See accompanying notes to consolidated financial statements.

F-3

EPIQ SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands)

	As of December 31,
	2005		2004		2003
PREFERRED SHARES (2,000 authorized)	—		—		—
COMMON SHARES (50,000 authorized):
Shares, beginning of year	17,884		17,781		16,538
Shares issued upon exercise of options	140		103		189
Shares issued in acquisition of business	1,229		—		1,054
Shares, end of year	19,253		17,884		17,781
COMMON STOCK—PAR VALUE $0.01 PER SHARE:
Balance, beginning of year	$	179	$	178	$	165
Proceeds from exercise of options	2		1		2
Shares issued in acquisition of business	12		—		11
Balance, end of year	193		179		178
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year	102,738		101,891		83,731
Proceeds from exercise of options	1,029		595		1,039
Tax benefit from exercise of options	496		252		746
Net proceeds from (expenses for)  private placement of stock	—		—		(114		)
Shares issued in acquisition of business	24,221		—		16,489
Balance, end of year	128,484		102,738		101,891
RETAINED EARNINGS:
Balance, beginning of year	36,916		27,186		18,479
Net income	10,948		9,730		8,707
Balance, end of year	47,864		36,916		27,186
TOTAL STOCKHOLDERS’ EQUITY	$	176,541	$	139,833	$	129,255

See accompanying notes to consolidated financial statements.

F-4

EPIQ SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

	Years Ended December 31,
	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	10,948		$	9,730		$	8,707
Adjustments to reconcile net income to net cash from operating activities:
Provision (benefit) for deferred income taxes	(188		)	8,208			(1,855		)
Depreciation and software amortization	7,288			6,527			5,796
Loan fee amortization and debt extinguishment	1,147			3,115			—
Change in valuation of embedded option and  convertible debt	1,034			292			—
Amortization of intangible assets	6,751			7,767			3,745
Asset impairment charges	—			—			7,615
Gain on sale of discontinued operation	—			(1,616		)	—
Other, net	1,015			370			234
Changes in operating assets and liabilities, net of effects  from business acquisitions:
Trade accounts receivable	(3,141		)	7,951			(5,948		)
Prepaid expenses and other assets	(330		)	1,187			(981		)
Accounts payable and other liabilities	3,402			(10,762		)	2,607
Income taxes, including tax benefit from exercise  of stock options	(688		)	(1,180		)	731
Net cash provided by operating activities	27,238			31,589			20,651
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(4,555		)	(5,424		)	(3,772		)
Software development costs	(2,269		)	(1,670		)	(2,753		)
Cash paid for acquisition of businesses, net of cash acquired	(110,533		)	(113,111		)	(43,263		)
Proceeds from sale of infrastructure business	489			1,111			—
Purchase of short-term investments	6,000			—			—
Sale of short-term investments	(6,000		)	—			—
Other investing activities, net	38			65			(209		)
Net cash used in investing activities	(116,830		)	(119,029		)	(49,997		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings	106,841			193,500			—
Debt issuance costs	(938		)	(5,931		)	—
Payments under long-term debt and capital  lease obligations	(17,109		)	(118,455		)	(347		)
Expenses for stock issuance	—			—			(114		)
Proceeds from exercise of stock options	1,031			595			1,041
Net cash provided by financing activities	89,825			69,709			580
NET INCREASE (DECREASE) IN CASH AND  CASH EQUIVALENTS	233			(17,731		)	(28,766		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	13,330			30,347			59,827
(Increase) decrease in cash classified as held for sale	—			714			(714		)
CASH AND CASH EQUIVALENTS, END OF YEAR	$	13,563		$	13,330		$	30,347

See accompanying notes to consolidated financial statements.

F-5

EPIQ SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003

NOTE 1:NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of EPIQ Systems, Inc. (“EPIQ”) and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Nature of Operations

EPIQ is a national provider of technology-based solutions for the legal and fiduciary services industries. Our products and services assist clients with the administration of complex legal proceedings, including electronic litigation discovery, bankruptcy administration and class action administration. Our clients include leading law firms, corporate legal departments, bankruptcy trustees, and other professional advisors who require sophisticated case administration and document management capabilities, extensive subject matter expertise and a high service capacity. We provide clients with an integrated offering of both proprietary technology and value-added services that comprehensively address their extensive business requirements.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in banks and all liquid investments with original maturities of three months or less at the time of purchase.

Software Development Costs

Certain internal software development costs incurred in the creation of computer software products are capitalized once technological feasibility has been established. Capitalized costs are amortized based on the ratio of current revenue to current and estimated future revenue for each product with minimum annual amortization equal to the straight-line amortization over the remaining estimated economic life of the product.

Goodwill and Identifiable Intangible Assets

Goodwill is not amortized but is assigned to a reporting unit and tested for impairment at least annually and between annual tests if events or changes in circumstances have indicated that the assets might be impaired. Our annual impairment test, performed in July 2005 and using a discounted cash flow analysis to determine the fair value of each reporting unit, indicated that there were no impairments.

Identifiable intangible assets, resulting from various business acquisitions, consist primarily of customer relationships, trade names and agreements not to compete. Customer relationships, trade names and agreements not to compete are being amortized on a straight-line basis over their estimated economic benefit period, generally from one to 14 years. Identifiable intangibles assets are reviewed for impairment whenever events or changes in circumstances have indicated that the carrying amount of these assets might not be recoverable.

F-6

NOTE 1:NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impairment of Long-lived Assets

Long-lived assets are reviewed for impairment, using our best estimates of operating cash flows based on reasonable and supportable assumptions and projections, whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable.

Deferred Loan Fees

Incremental, third party costs related to establishing credit facilities and issuing convertible debt are capitalized and amortized based on the amortization schedule of the related debt. The unamortized costs are included as a component of other long-term assets on our Consolidated Balance Sheets. Amortization costs are included as a component of interest expense on our Consolidated Statements of Income. Unamortized costs related to debt extinguished prior to maturity due to refinancing were expensed and comprise debt extinguishment on our Consolidated Statements of Income.

Stock-Based Compensation

Stock compensation awards are accounted for under the intrinsic method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Opinion No. 25 requires compensation cost to be recognized based on the excess, if any, between the quoted market price at the date of grant and the amount an employee must pay to acquire stock. Stock options awarded by us are granted with an exercise price equal to the fair market value on the date of the grant. As required by Statement of Financial Accounting Standard (“SFAS”) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123, following is a reconciliation of reported net income and net income per share to pro forma net income and pro forma net income per share had the compensation cost been determined based on the fair value at the grant dates using SFAS No. 123, Accounting for Stock-Based Compensation, for the years ended December 31, 2005, 2004 and 2003 (in thousands, except per share data):

		Years Ended December 31,
		2005			2004			2003
Net income, as reported		$	10,948		$	9,730		$	8,707
Add: stock-based employee compensation included in reported net earnings, net of tax		—			—			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all options, net of tax		(6,605		)	(2,975		)	(2,195		)
Net income, pro forma		$	4,343		$	6,755		$	6,512
Net income per share—Basic	As reported	$	0.61		$	0.55		$	0.49
	Pro forma	$	0.24		$	0.38		$	0.37
Net income per share—Diluted	As reported	$	0.56		$	0.52		$	0.48
	Pro forma	$	0.23		$	0.34		$	0.36

Pro forma amounts presented above are based on actual earnings and consider only the effects of estimated fair values of stock options. For the year ended December 31, 2005, we did not assume conversion of the convertible notes as the effect was antidilutive. The convertible notes, if converted, would result in issuance of 2,857,000 shares of our common stock.

F-7

NOTE 1:NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The fair value of stock options is estimated using the Black-Scholes option-pricing model with the following key assumptions:

	2005	2004	2003
Expected life (years)	5.0 - 5.3	5.3 - 5.4	5.5 - 6.2
Expected volatility	40%	30% - 48%	50% - 55%
Risk-free interest rate	4.0% - 4.3%	2.9% - 3.9%	2.2% - 3.1%
Dividend yield	0%	0%	0%

Income Taxes

A liability or asset is recognized for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when, in the opinion of management, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Revenue Recognition

We have agreements with customers obligating us to deliver various products and services each month. Case management fees earned are contingent upon the month-to-month delivery of the products and services defined by the contracts and are related primarily to the size and complexity of the ongoing engagement. The formula-based fees earned each month become fixed and determinable and are recognized as revenue on a monthly basis as a result of our completion of all contractually required performance obligations related to products delivered and services rendered by us during the month. Our case management business also provides hosting access; revenue related to hosting access is recognized over the period that service is provided. Document management revenues become fixed and determinable and are recognized in the period the services are provided. For both case management and document management, payments received in advance of satisfaction of the related revenue recognition criteria are recognized as a deferred revenue liability until all revenue recognition criteria have been satisfied. Revenue or deferred revenue is recognized only if collectibility is reasonably assured.

We receive expense reimbursements, primarily for postage, from customers. Based on guidance provided by the Financial Accounting Standard’s Board’s (the “FASB”) Emerging Issues Task Force (the “EITF”), reimbursements received are reported as revenue on an accrual basis. The expense related to the reimbursement is recorded as a component of direct costs on our accompanying Consolidated Statements of Income.

Derivative Financial Instrument

The holders of our contingently convertible subordinated notes have the right to extend the maturity of these notes for a period not to exceed three years. Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the right to extend the maturity of the notes represents an embedded option and is accounted for as a derivative financial instrument. The fair value of our obligation related to the embedded option has been included as a component of our long-term obligations on our accompanying Consolidated Balance Sheets. Changes in the fair value of the embedded option are recorded each period as a component of interest expense on our accompanying Consolidated Statements of Income. Changes in the fair value of the embedded option do not affect our cash flows and, accordingly,

F-8

NOTE 1:NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

are reflected as an adjustment to reconcile net income to net cash from operating activities on our accompanying Consolidated Statements of Cash Flows.

Comprehensive Income

We do not have any components of other comprehensive income; therefore comprehensive income equals net income for each of the three years ended December 31, 2005, 2004 and 2003.

Income Per Share

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income available to common shareholders, increased by the amount of interest expense, net of tax, related to outstanding convertible debt by the weighted average number of outstanding common shares and shares that may be issued in future periods relating to outstanding stock options and convertible debt, if dilutive.

Segment Information

In determining our reportable segments, we consider how we organize our business internally for making operating decisions and assessing business performance. Substantially all our revenues are derived from sources within the United States of America and substantially all of our long-lived assets are located in the United States of America.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In September 2005, the EITF issued EITF 05-07, Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues. EITF 05-07 requires that, when a modification of a convertible debt instrument results in a change in the fair value of an embedded conversion option, the change in fair value of the embedded conversion option be included in the analysis of whether there has been a substantial change in the terms of the convertible debt instrument for purposes of determining whether the debt has been extinguished. EITF 05-07 also requires subsequent recognition of interest expense for any change in the fair value of the embedded conversion option resulting from a modification of a convertible debt instrument. EITF 05-07 is effective beginning in the first interim or annual reporting period beginning after December 15, 2005. We do not anticipate that the adoption of EITF 05-07 will have a material impact on our consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application for reporting a change in accounting principle unless such application is impracticable or unless transition requirements specific to a newly adopted accounting principle require otherwise. SFAS No. 154 also requires the reporting of a correction of an error by restating previously issued financial statements.

F-9

NOTE 1:NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123R is effective for EPIQ beginning January 1, 2006. Accordingly, we will adopt SFAS No. 123R, likely using the modified version of prospective application, beginning with our quarter ending March 31, 2006. Under the modified version of prospective application, compensation costs related to share-based compensation will be recognized in our financial statements for all periods beginning after December 31, 2005. For comparative periods ended on or before December 31, 2005, which are presented in our 2006 and subsequent financial statements, share-based compensation costs will continue to be excluded from our consolidated statements of income, but we will disclose these share-based compensation costs on a pro forma basis in a note to the consolidated financial statements. During February 2005, our compensation committee approved acceleration of the vesting of certain unvested options for employees, including an executive officer, and non-employee directors. The decision to accelerate the vesting of these options and eliminate future compensation expense was based primarily on a review of our long-term incentive programs considering the effect on our financial statements of changes in accounting rules that we must adopt in 2006. This action, which had an immaterial effect on our financial statements for the year ended December 31, 2005, will reduce the impact of adoption of SFAS No. 123R on our future consolidated financial statements. Adoption of SFAS No. 123R will materially increase our recognized compensation expense and will have a material impact on our consolidated income statement and balance sheet. We are working with independent valuation experts to document and validate key valuation variables, such as forfeiture rate, expected term, segmentation of employee population, expected term suboptimal exercise price, and expected volatility. Until this work is completed, we are unable to estimate the impact of adoption of this statement on our consolidated financial statements. However, if subsequent to December 31, 2005 no new awards were issued and no existing awards were forfeited, we estimate that adoption of SFAS No. 123R would decrease our net income for the year ending December 31, 2006 by approximately $1.4 million. We do not anticipate that adoption of SFAS No. 123R will have a material impact on our consolidated statement of cash flows.

In August 2005, the FASB issued FASB Staff Position (FSP) No. FAS 123(R)-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R), to defer the requirement of SFAS No. 123R that a freestanding financial instrument originally subject to SFAS No. 123R becomes subject to the recognition and measurement requirements of other applicable generally accepted accounting principles when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. The guidance in this FSP is effective upon initial adoption of SFAS No. 123R. We do not anticipate that adoption of FSP No. FAS 123(R)-1 will have a material impact on our consolidated financial statements.

In October 2005, the FASB issued FSP No. FAS 123(R)-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R). This FSP states that, in determining the grant date of an award subject to SFAS No. 123R, a mutual understanding of the key terms and conditions of an award to an individual employee shall be presumed to exist at the date the award is approved in

F-10

NOTE 1:NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

accordance with the relevant corporate governance requirements if both of the following conditions are met:  a) the award is a unilateral grant and, therefore, the recipient does not have the ability to negotiate the key terms and conditions of the award with the employer; and b) the key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period from the date of approval. The guidance in this FSP is effective upon initial adoption of SFAS No. 123R. We do not anticipate that adoption of FSP No. FAS 123(R)-2 will have a material impact on our consolidated financial statements.

In November 2005, the FASB issued FSP No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP provides a simplified method for calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123R. We have until December 31, 2006, to determine whether to make a one-time election to adopt the transition method described in this FSP. At this time, management is uncertain whether we will make the election to adopt the transition method described in this FSP and we are unable to estimate the impact, if any, on our consolidated financial statements if we elect to use the transition method described in this FSP.

NOTE 2:PROPERTY AND EQUIPMENT

Property, equipment and leasehold improvements are stated at cost and depreciated or amortized on a straight-line basis over the estimated useful life of each asset. The classification of property, equipment and leasehold improvements and their estimated useful lives is as follows (in thousands):

	December 31,						Estimated
	2005			2004			Useful Life
Land	$	192		$	192
Building and building and leasehold improvements	8,947			8,912			5 - 30 years
Furniture and fixtures	2,061			2,035			5 - 10 years
Computer and office equipment	23,044			17,379			2 - 5 years
Mailroom equipment	858			832			3 - 5 years
Transportation equipment	6,396			4,855			3 - 5 years
	41,498			34,205
Less accumulated depreciationand amortization	(17,747		)	(13,774		)
Property, equipment and leasehold improvements, net	$	23,751		$	20,431

Computer and office equipment includes property acquired under capital leases. As of December 31, 2005 and 2004, assets acquired under capital lease had a historical cost basis of $2.9 million and $2.7 million, respectively, and accumulated amortization of $1.4 million and $0.5 million, respectively. Amortization expense related to these assets has been included as a component of “Depreciation and software amortization” in the accompanying Consolidated Statements of Income.

F-11

NOTE 3:SOFTWARE DEVELOPMENT COSTS

The following is a summary of software development costs capitalized (in thousands):

	Year Ended December 31,
	2005			2004
Amounts capitalized, beginning of year	$	11,838		$	7,212
Development costs capitalized	2,269			1,670
Acquisitions	2,869			2,956
Amounts capitalized, end of year	16,976			11,838
Accumulated amortization, end of year	(8,128		)	(6,000		)
Software development costs, net	$	8,848		$	5,838

Included in the above are capitalized software development costs for unreleased products of $1.0 million and $1.3 million at December 31, 2005 and 2004, respectively. During the years ended December 31, 2005, 2004 and 2003, we recognized amortization expense related to capitalized software development costs of $2.1 million, $1.8 million, and $1.9 million, respectively.

NOTE 4:GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amounts of goodwill by segment are as follows (in thousands):

	Year Ended December 31, 2005								Year Ended December 31, 2004
	Case Management			Document Management			Total		Case Management			Document Management			Total
Balance, beginning of period		$	106,371		$	41,357	$	147,728		$	43,716		$	20,472	$	64,188
Goodwill acquired during the period		94,565			7,134		101,699			62,655			20,885		83,540
Balance, end of period		$	200,936		$	48,491	$	249,427		$	106,371		$	41,357	$	147,728

Other intangible assets as of December 31, 2005 and 2004 consisted of the following (in thousands):

	December 31,						Estimated
	2005			2004			Useful Life
Amortized Identifiable Intangible Assets:
Customer relationships	$	37,313		$	16,560		2 - 14 years
Accumulated amortization	(6,170		)	(7,656		)
Customer relationships, net	31,143			8,904
Trade names	2,319			1,574			1 - 2 years
Accumulated amortization	(1,578		)	(721		)
Trade names, net	741			853
Non-compete agreements	27,525			17,630			5 - 10 years
Accumulated amortization	(6,010		)	(3,330		)
Non-compete agreements, net	21,515			14,300
Total amortized intangible assets, net	$	53,399		$	24,057

F-12

NOTE 4:    GOODWILL AND INTANGIBLE ASSETS (Continued)

The weighted average life for identifiable intangibles acquired during 2005 are as follows:

Customer relationships	7.9 years
Trade names	1.4 years
Non-compete agreements	5.0 years
All identifiable intangibles	7.0 years

Amortization expense for each year in the three year period ended December 31, 2005 and estimated amortization expense for each of the next five years is as follows (in thousands):

	For the Year Ending December 31,
Aggregate amortization expense included in continuing operations:
2003		$	3,610
2004		7,767
2005		6,751
Estimated amortization expense:
2006		10,853
2007		8,384
2008		7,964
2009		6,882
2010		6,492

During November 2003 (the “Measurement Date”), a decision was made to dispose of our infrastructure software business. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets classified as held for sale were measured at the lower of their carrying amounts or fair value less cost to sell. Accordingly, as of the Measurement Date, we performed an impairment analysis based on estimated proceeds from the sale less selling costs. Based on this analysis, the carrying amount of goodwill and identified intangible assets related to the infrastructure software segment, with an aggregate balance of $4.8 million as of January 1, 2003, was entirely impaired. The related impairment charge is included as a component of discontinued operations on our Consolidated Statements of Income for the year ended December 31, 2003.

NOTE 5:INDEBTEDNESS

The following is a summary of indebtedness outstanding (in thousands):

	Year Ended December 31,
	2005		2004
Senior term loan	$	25,000	$	21,875
Senior revolving loan	93,028		5,000
Convertible subordinated debt, including embedded option	51,326		50,292
Capital leases	972		1,773
Deferred acquisition price	3,222		3,209
Total indebtedness	$	173,548	$	82,149

F-13

NOTE 5:INDEBTEDNESS (Continued)

Credit Facilities

As of December 31, 2004, we had a credit facility, with KeyBank National Association as administrative agent, which consisted of a $25.0 million senior term loan, with amortizing quarterly principal payments of $1.6 million, and a $50.0 million senior revolving loan.

In conjunction with our acquisition of the nMatrix companies, during November 2005 we amended our credit facility. Based on the terms of our amended credit facility, we increased our senior term loan borrowings from $17.2 million to $25.0 million. The amended credit facility eliminated the requirement for quarterly amortizing payments on the senior term loan, but also shortened the maturity of the senior term loan from June 2008 to August 2006. The amended credit facility also increased our senior revolving loan from $75.0 million to $100.0 million. The maturity of the senior revolving loan was extended from June 2008 to November 2008. During the term of the loan, we have the right, subject to compliance with our covenants, to increase the senior revolving loan to $175.0 million.

During November 2005, under the amended credit facility we borrowed an additional $7.8 million under the senior term loan and $93.0 million under the senior revolving loan to finance the cash portion of our acquisition of nMatrix.

The credit facility is secured by liens on our real property and a significant portion of our personal property and contains financial covenants related to earnings before interest, provision for income taxes, depreciation and amortization (“EBITDA”), total debt, senior debt, fixed charges and working capital. We were in compliance with all financial covenants as of December 31, 2005. As calculated at December 31, 2005, additional availability under this facility was approximately $7.0 million. As of December 31, 2005, our borrowings under the new credit facility totaled $118.0 million, consisting of $25.0 million borrowed under the senior term loan and $93.0 million borrowed under the senior revolving loan. Interest on the credit facility is generally based on a spread, which as of December 31, 2005 was 300 basis points, over the LIBOR rate. As of December 31, 2005, the interest rate charged on outstanding borrowings under the credit facility ranged from 7.4% to 7.6%.

Convertible Subordinated Debt

During June 2004, we issued $50.0 million of contingent convertible subordinated notes. Net proceeds of $47.4 million were used to repay and terminate an outstanding subordinated term loan and to pay in full our then outstanding revolving loan balance. The contingency has been satisfied and the notes may, at the option of the holders, be converted into shares of our common stock at any time. These convertible subordinated notes:

·bear interest at a fixed rate of 4%, payable quarterly;

·are convertible into shares of our common stock at a price of $17.50 per share; and

·mature on June 15, 2007, subject to extension of maturity to June 15, 2010 at the option of the note holders.

If all shares were converted, the notes would convert into approximately 2.9 million shares of our common stock. If we change our capital structure (for example, through a stock dividend or stock split) while the notes are outstanding, the conversion price will be adjusted on a consistent basis and, accordingly, the number of shares of common stock we would issue on conversion would be adjusted.

The holders of the notes have the right to extend the maturity of the notes for a period not to exceed three years. Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the right to extend the maturity of the notes represents an embedded option subject to bifurcation. The embedded option was initially valued at $1.2 million and the convertible debt balance was reduced by the same amount. The convertible debt is accreted approximately $0.1 million each quarter such that, at the end of

F-14

NOTE 5:INDEBTEDNESS (Continued)

three years, the convertible debt balance will total $50.0 million. On our accompanying Consolidated Statements of Income, this accretion is a component of interest expense. The embedded option must be revalued at each period end based on the probability weighted discounted cash flows related to the additional 4% interest rate payments that will be made if the convertible debt maturity is extended an additional three years. Under this methodology, the embedded option has a current value of approximately $1.9 million. On our accompanying Consolidated Balance Sheets, our obligation related to the embedded option has been included as a component of the convertible note payable. During the year ended December 31, 2005, the value of the embedded option increased by approximately $0.6 million and this increase is included as a component of interest expense on our accompanying Consolidated Statements of Income for the year ended December 31, 2005. The changes in carrying value of the convertible debt and fair value of the embedded option do not affect our cash flow and, if the embedded option is exercised, the value assigned to the embedded option will be amortized as a reduction to our 4% convertible debt interest expense over the periods payments are made. If the option is not exercised by some or all convertible debt holders, any remaining related value assigned to the embedded option will be recognized as a gain during that period.

The notes evidencing the contingent subordinated convertible debt contains financial covenants related to EBITDA, total debt, and senior debt. We were in compliance with all financial covenants as of December 31, 2005.

Capital Lease

At December 31, 2005, our debt obligation related to capital leases, classified as a current liability, was approximately $1.0 million.

Deferred Acquisition Price

On January 31, 2003, we acquired 100% of the membership interests of Bankruptcy Services LLC (“BSI”), a provider of technology-based case management, consulting and administrative services for corporate restructurings,. A portion of the purchase price, $4.0 million, was deferred. This deferred purchase price, which is payable in five annual installments through January 2008, was discounted using an imputed interest rate of 5% per annum. At December 31, 2005, the discounted value of the remaining note payments was approximately $2.8 million of which approximately $1.7 million was classified as a current liability.

On October 20, 2005, we acquired 100% of the equity of Hilsoft, Inc. (“Hilsoft”), a specialty provider of legal notification services, primarily for class action engagements. A portion of the purchase price, $0.5 million, was deferred. This deferred payment, which is non-interest bearing and is payable on October 20, 2007, was discounted using an imputed interest rate of 8% per annum. At December 31, 2005, the discounted value of this deferred payment was approximately $0.4 million and is classified entirely as a noncurrent liability.

F-15

NOTE 5:INDEBTEDNESS (Continued)

Scheduled Principal Payments

Our long-term obligations, including credit facility debt outstanding as of December 31, 2005, convertible debt (including embedded option), deferred acquisition costs, and capitalized leases, mature as follows for years ending December 31 (in thousands):

2006	$	27,642
2007	52,342
2008	93,564
Total	$	173,548

NOTE 6:OPERATING LEASES

We have non-cancelable operating leases for office space at various locations expiring at various times through 2015. Each of the leases requires us to pay all executory costs (property taxes, maintenance and insurance). Additionally, we have non-cancelable operating leases for office equipment and automobiles expiring through 2009.

Future minimum lease payments during the years ending December 31 are as follows (in thousands):

2006	$	3,019
2007	2,670
2008	2,271
2009	1,995
2010	1,586
Thereafter	7,660
Total minimum lease payments	$	19,201

Expense related to operating leases was approximately $2.6 million, $2.5 million, and $1.0 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Subsequent to year-end, we entered into a lease for new office space for our electronic litigation discovery operations. This lease extends through 2015 and has total minimum lease of approximately $17.9 million.

NOTE 7:STOCKHOLDERS’ EQUITY

On November 15, 2005, we issued approximately 1.2 million shares of restricted common stock, valued at approximately $24.2 million, as a part of the transaction to purchase nMatrix. Under the terms of a registration rights agreement executed concurrent with the acquisition agreement, we have agreed to prepare and file with the SEC a registration statement, and to use our best efforts to cause the registration statement to become effective as soon as reasonably practicable thereafter, to enable the resale of these shares on a delayed or continuous basis under Rule 415 of the Securities Act of 1933, as amended.

On January 31, 2003, we issued approximately 1.1 million shares of restricted common stock, valued at approximately $16.5 million, as a part of the transaction to purchase the membership interests of BSI. Half of the restricted shares could not be sold, transferred or encumbered for a period of one year from the date of issue, and the other half of the restricted shares could not be sold, transferred or encumbered for a period of two years from the date of issue. All shares of our common stock issued in connection with the BSI acquisition are now unrestricted.

F-16

NOTE 7:STOCKHOLDERS’ EQUITY (Continued)

At this time we intend to retain our earnings to reduce our debt and for use in the operation and expansion of our business and, accordingly, do not expect to declare or pay any cash dividends during the foreseeable future. The payment of dividends is within the discretion of our board of directors and will depend upon various factors, including future earnings, capital requirements, financial condition, the terms of our credit agreement, the terms of our convertible notes, and other factors deemed relevant by the board of directors. There is no restriction on the ability of our subsidiaries to transfer funds to EPIQ in the form of cash dividends, loans or advances.

NOTE 8:EMPLOYEE BENEFIT PLANS

Stock Purchase Plan

We have an employee stock purchase plan that provides an opportunity for employees to purchase shares of our common stock through payroll deduction. The purchase prices for all employee participants are based on the closing bid price on the last business day of the month.

Defined Contribution Plan

We have defined contribution 401(k) plans covering substantially all employees. For EPIQ and BSI employees, we match 60% of the first 10% of employee contributions and also have the option of making discretionary contributions. For Poorman-Douglas employees, the percent match is based on years of service. After three years of service, we match 100% of the first 6% of employee contributions. Our contributions under both plans were approximately $0.8 million, $0.8 million, and $0.4 million for the years ended December 31, 2005, 2004, and 2003, respectively.

NOTE 9:FINANCIAL INSTRUMENTS AND CONCENTRATIONS

Fair Value of Financial Instruments

Estimates of fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could affect the estimates.

As of December 31, 2005, the carrying value of cash, cash equivalents, and trade receivables approximate fair value. Borrowings under our credit facility are repriced frequently at market rates and approximate fair value. Our notes related to the BSI and Hilsoft deferred acquisition price are discounted at an imputed interest rate of 5% and 8%, respectively, and their combined carrying value of $3.2 million approximates fair value as of December 31, 2005. As of December 31, 2005, our convertible notes, which have a fixed interest rate of 4%, have a carrying value of $51.3 million and a fair value of $50.3 million. The fair value was calculated using a pricing model that incorporates assumptions regarding future volatility, interest rates and credit risk.

Significant Customer and Concentration of Credit Risk

On April 1, 2004, our exclusive national marketing arrangement with Bank of America became a non-exclusive arrangement with pricing established through September 30, 2006. During February 2006, the parties agreed to extend the arrangement indefinitely. Either party may, with appropriate notice, wind down the agreement over a period, including the notice period, of three years. We currently promote our Chapter 7 TCMSâ software related products and services through marketing arrangements with various financial institutions. Bank of America has been, and continues to be, a significant partner for these marketing arrangements. Revenues recognized by us from Bank of America, all related to our case management segment, were approximately 21%, 24% and 51% of our total revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Additionally, Bank of America represented approximately

F-17

NOTE 9:FINANCIAL INSTRUMENTS AND CONCENTRATIONS (Continued)

13% and 12% of our accounts receivable balance as of December 31, 2005 and 2004, respectively. In addition, a customer related to our newly acquired electronic litigation discovery business represented approximately 13% of our accounts receivable balance as of December 31, 2005.

NOTE 10:INCOME TAXES

The following table presents the income from operations before income taxes and the provision for (benefit from) income taxes (in thousands):

	Years Ended December 31,
	2005			2004			2003
Income from continuing operations before income taxes	$	18,224		$	15,449		$	24,690
Provision for income taxes from continuing operations:
Currently payable (receivable) income taxes
Federal	$	6,996		$	(16	)	$	7,245
State	468			83			2,886
Total	7,464			67			10,131
Deferred income taxes
Federal	(597		)	5,843			28
State	409			476			6
Total	(188		)	6,319			34
Provision for income taxes from continuing operations	7,276			6,386			10,165
Provision (benefit) for income taxes from discontinued operations:
Current income taxes	—			(1,452		)	(1,855		)
Deferred income taxes	—			1,889			(1,889		)
Provisions (benefit) for income taxes from discontinued operations	—			437			(3,744		)
Consolidated income tax provision	$	7,276		$	6,823		$	6,421

A reconciliation of the provision for income taxes from continuing operations at the statutory rate of 35% to the provision for income taxes from continuing operations at our effective rate is shown below (in thousands):

	Years Ended December 31,
	2005		2004		2003
Computed at the statutory rate	$	6,378	$	5,407	$	8,641
Change in taxes resulting from:
State income taxes, net of federal tax effect	840		717		1,372
Other	58		262		152
Provision for income taxes from continuing operations	$	7,276	$	6,386	$	10,165

Tax benefits related to acquisitions of $0.3 million and $0.5 million were recorded as a reduction to goodwill for the years ended December 31, 2005 and 2004, respectively.

F-18

NOTE 10:INCOME TAXES (Continued)

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities on the accompanying Consolidated Balance Sheets are as follows (in thousands):

	December 31,
	2005			2004
Deferred tax assets:
Allowance for doubtful accounts	$	1,567		$	467
Convertible debt	567			115
Intangible assets	532			127
Accrued liabilities	906			—
State net operating loss carryforwards	572			781
Total deferred tax assets	4,144			1,490
Deferred tax liabilities:
Prepaid expenses	868			494
Intangible assets	22,958			6,396
Property and equipment and software development costs	4,873			3,542
Other	282			—
Total deferred tax liabilities	28,981			10,432
Net deferred tax liability	$	(24,837	)	$	(8,942	)

As of December 31, 2005, we have aggregate state operating loss carryforwards, primarily related to our acquisitions of Poorman-Douglas and nMatrix, of $9.9 million. These carryforwards expire as follows:  $7.5 million in 2019 and $2.4 million in 2025. Management believes that it is more likely than not that we will be able to utilize these carryforwards and, therefore, no valuation allowance is necessary.

The above net deferred tax liability is presented on the Consolidated Balance Sheets as follows (in thousands):

	December 31,
	2005			2004
Current deferred income tax assets	$	1,978		$	754
Long-term deferred income tax liabilities	(26,815		)	(9,696		)
	$	(24,837	)	$	(8,942	)

F-19

NOTE 11:NET INCOME PER SHARE

The details of the calculation of basic and diluted net income per share from continuing operations are as follows (in thousands, except per share data):

	Year Ended December 31,
	2005							2004								2003
	Net Income		Weighted Average Shares Outstanding		Per Share Amount			Net Income			Weighted Average Shares Outstanding		Per Share Amount			Net Income		Weighted Average Shares Outstanding		Per Share Amount
Basic income per share from continuing operations	$	10,948		18,092		$	0.61		$	9,063		17,848		$	0.51	$	14,525		17,619		$	0.82
Effect of dilutive securities:
Stock options				602								411							485
Convertible debt	$	1,178		2,857					$	647		1,569							—
Diluted income per share from continuing operations	$	12,126		21,551		$	0.56		$	9,710		19,828		$	0.49	$	14,525		18,104		$	0.80

For the years ended December 31, 2005, 2004, and 2003, weighted-average outstanding stock options totaling approximately 1.3 million, 1.5 million and 0.1 million shares of common stock, respectively, were antidilutive and therefore not included in the computation of diluted earnings per share.

NOTE 12:STOCK OPTIONS

During June 2004, our 2004 Equity Incentive Plan (the “2004 Plan”) was approved by our shareholders and replaced our 1995 Stock Option Plan, as amended (the “1995 Plan”). The 2004 Plan limits the combined grant of options to acquire shares of common stock, stock appreciation rights, and restricted stock to 3,000,000 shares. Any grant under the 2004 Plan that expires or terminates unexercised, becomes unexercisable or is forfeited will be available for further grants unless, in the case of options granted, related stock appreciation rights are exercised. At December 31, 2005, there were approximately 986,000 options available for future grants under the 2004 Plan. Under the 2004 Plan, the option price may not be less than 100% of the fair market value of the common stock on the date of grant for a non-qualified stock option or an incentive stock option (“ISO”). In the case of an ISO granted to an employee owning more than 10% of the voting stock of EPIQ, the option price may not be less than 110% of the fair market value of the common stock on the date of grant.

The Compensation Committee of the Board of Directors administers the 2004 Plan and has discretion to determine the term of an option, which may not be exercised more than 10 years after the date of grant. In the case of an ISO granted to an employee owning more than 10% of the voting stock of EPIQ, the term may not exceed five years from the date of grant. Options may not be transferred by an optionee except by will or the laws of descent and distribution or to a family member by gift or qualified domestic relations order and are exercisable during the lifetime of an optionee only by the optionee or the optionee’s guardian or legal representatives. Assuming the option is otherwise still exercisable, options must be exercised within one year after termination of employment due to death or disability and within three months of any other termination of employment.

The Board of Directors may require in its discretion that any option granted becomes exercisable only in installments or after some minimum period of time, or both. The vesting schedule for outstanding options ranges from immediate to five years.

F-20

NOTE 12:STOCK OPTIONS (Continued)

During November 2005, as part of the nMatrix acquisition, inducement stock options were granted, outside the 2004 Plan, to key employees to acquire up to 370,000 shares of common stock. The options were granted at an option exercise price equal to fair market value of the common stock on the date of grant, were non-qualified options, were exercisable for up to 10 years from the date of grant and vested 25% on the second anniversary of the grant date and continue to vest 25% per year on each anniversary of the grant date until fully vested.

During February 2005, our compensation committee approved acceleration of the vesting of certain unvested options for employees, including an executive officer, and non-employee directors. The decision to accelerate the vesting of these options and eliminate future compensation expense was based primarily on a review of our long-term incentive programs considering the effect on our financial statements of changes in accounting rules that we must adopt in 2006. This action, which had an immaterial effect on our financial statements for the year ended December 31, 2005, will reduce the impact of adoption of SFAS No. 123R on our future consolidated financial statements.

During the year ended December 31, 2004, as part of the Poorman-Douglas acquisition, inducement stock options were granted, outside the 1995 Plan and 2004 Plan, to key executives to acquire up to 300,000 shares of common stock. The options were granted at an option exercise price equal to fair market value of the common stock on the date of grant, were non-qualified options, were exercisable for up to 10 years from the date of grant and vested 20% on the first anniversary of the grant date and continue to vest 20% per year on each anniversary of the grant date until fully vested. During the year, one of the executives transitioned from full-time employee status to a consulting role and his option to purchase 100,000 shares of common stock was terminated.

During the year ended December 31, 2003, as part of the BSI acquisition, inducement stock options were granted, outside the 1995 Plan and 2004 Plan, to a key executive to acquire up to 100,000 shares of common stock. The option was granted at an option exercise price equal to fair market value of the common stock on the date of grant, were non-qualified options, were exercisable for up to ten years from the date of grant and vested 20% on the grant date and continues to vest 20% per year on each anniversary of the grant date until fully vested. During the year ended December 31, 2003, the vested portion of the option was exercised to purchase 20,000 shares of common stock.

Following is a summary of our stock options outstanding as of each year ended December 31 (in thousands, except price data):

	2005						2004						2003
	Shares			Weighted- Average Exercise Price			Shares			Weighted- Average Exercise Price			Shares			Weighted- Average Exercise Price
Outstanding, beginning of year	3,230				$	13.65	2,192				$	12.38	1,744				$	6.87
Granted	1,750				15.43		1,370				15.48		727				16.42
Forfeited	(70		)		14.08		(232		)		15.83		(87		)		10.08
Exercised	(141		)		7.25		(100		)		5.75		(192		)		5.36
Outstanding, end of year	4,769				14.49		3,230				13.65		2,192				12.38
Options exercisable, end of year	3,323						1,783						1,225
Weighted-average fair value of options granted during the year	$	6.46					$	7.04					$	8.34

F-21

NOTE 12:STOCK OPTIONS (Continued)

The following table summarizes information about stock options outstanding as of December 31, 2005 (in thousands, except life and price data):

		Options Outstanding							Options Exercisable
	Range of Exercise Prices	Number Outstanding		Weighted- Average Remaining Contractual Life		Weighted Average Exercise Price			Number Exercisable		Weighted Average Exercise Price
$1.56 to $11.99			597		4.18 years		$	6.48		597		$	6.48
$12.00 to $13.99			1,221		8.77 years		12.45			1,009		12.37
$14.00 to $15.99			1,141		8.32 years		15.18			836		15.34
$16.00 to $17.99			761		7.33 years		16.61			566		16.62
$18.00 and over			1,049		9.19 years		19.11			315		18.66
			4,769		7.95 years		14.49			3,323		13.38

NOTE 13:BUSINESS ACQUISITIONS

nMatrix

On November 15, 2005, EPIQ, acting through a wholly-owned subsidiary, acquired all the issued and outstanding shares of capital stock of nMatrix, Inc., nMatrix Australia Ptd. Ltd., and nMatrix Ltd. (collectively, “nMatrix”) for approximately $126.2 million, including capitalized acquisition costs. We believe this acquisition provides complementary diversification to our existing legal services business as nMatrix provides electronic litigation discovery services to law firms and in-house counsel. The purchase price consisted of cash of $100.0 million and approximately 1.2 million shares of our common stock. The fair value of our common stock issued, calculated based upon the five-day average of the closing price of the common stock two days before and two days after the acquisition was agreed to and publicly announced, was approximately $24.2 million. nMatrix, which will be included within our case management segment, will be operated from its current locations in New York, the United Kingdom, and Australia. Based on our preliminary valuation, the purchase price has been allocated as follows (in thousands):

Accounts receivable	$	11,844
Other current assets	2,926
Property and software	7,323
Trade names	474
Customer relationships	25,040
Non-compete agreements	6,675
Current liabilities	(6,426		)
Deferred tax liability	(16,301		)
Goodwill	94,602
Total purchase price	$	126,157

Trade names, customer relationships, and the non-compete agreements are amortized using the straight-line method over one year, eight years, and five years, respectively. The excess purchase price of $94.6 million was allocated to goodwill and is not amortized but will be reviewed for impairment annually and between annual tests if events or changes in circumstances indicate that the asset might be impaired. The purchase price in excess of the tax basis of the assets, primarily allocated to identifiable intangible assets and goodwill, is not expected to be deductible for tax purposes. Of our common shares issued as consideration, approximately 246,000 are held in escrow. On submission of properly approved indemnification claims, the escrow trustee will liquidate sufficient shares to pay the indemnification claim. As of December 31, 2005, we have not submitted any claims related to this escrow. The escrow

F-22

NOTE 13:BUSINESS ACQUISITIONS (Continued)

arrangement terminates May 14, 2007, at which time any of our common shares that have not been liquidated to pay claims will be distributed to the seller. Also, $4.0 million of the cash consideration is held in escrow pending collection of certain pre-acquisition receivables. Each month, a portion of the escrow is released to the seller based on the prior month’s collection of these pre-acquisition receivables. As of December 31, 2005, $2.6 million remained in this escrow account. This escrow arrangement terminates following the payment for collections made during September 2006 of these pre-acquisition receivables, at which time any amount that remains in escrow will be distributed to us.

The acquisition was accounted for using the purchase method of accounting with the operating results included in the accompanying consolidated financial statements from the date of acquisition.

Hilsoft, Inc.

On October 20, 2005, we acquired for cash all the issued and outstanding shares of capital stock of Hilsoft Inc. We believe this acquisition provides complementary diversification to our existing class action business as Hilsoft is a specialty provider of legal notification services, primarily for class action engagements. The total value of the transaction, including capitalized transaction costs, was $9.3 million. If certain revenue objectives are satisfied, we may be required to make additional payments of up to $3.0 million to the former owners of Hilsoft. Hilsoft, which will be included entirely within our document management segment, will be operated from its current location in Pennsylvania. Based on our preliminary valuation, the purchase price has been allocated as follows (in thousands):

Tangible assets	$	418
Trade name	271
Customer backlog	323
Non-compete agreements	2,680
Current liabilities	(291		)
Deferred taxes, net	(1,341		)
Goodwill	7,233
Total purchase price	$	9,293

Customer backlog and the trade name are amortized using the straight-line method over two years. The non-compete agreements are amortized using the straight-line method over five years. The excess purchase price of $7.2 million was allocated to goodwill and is not amortized but will be reviewed for impairment annually and between annual tests if events or changes in circumstances indicate that the asset might be impaired. The purchase price in excess of the tax basis of the assets, primarily allocated to identifiable intangible assets and goodwill, is not expected to be deductible for tax purposes.

The acquisition was accounted for using the purchase method of accounting with the operating results included in the accompanying consolidated financial statements from the date of acquisition.

F-23

NOTE 13:BUSINESS ACQUISITIONS (Continued)

P-D Holding Corp.

On January 30, 2004, we acquired for cash 100% of the equity of P-D Holding Corp. and its wholly-owned subsidiary, Poorman-Douglas Corporation (collectively, “Poorman-Douglas”). We believe this acquisition provides complementary diversification to our existing legal services business as Poorman-Douglas is a provider of technology-based products and services for class action, mass tort and bankruptcy case administration. The total value of the transaction, including capitalized acquisition costs, was approximately $115.7 million. Based on our valuation, the purchase price has been allocated as follows (in thousands):

Current assets	$	21,986
Deferred tax assets	6,044
Property and software	8,391
Trade names	1,100
Customer backlog	6,200
Customer relationships	2,300
Non-compete agreements	5,900
Goodwill	83,141
Current liabilities	(12,920		)
Deferred tax liabilities	(6,476		)
Total purchase price	$	115,666

All acquired identifiable intangible assets are amortized on a straight-line basis as follows:  the trade names over two years, the customer backlog over three years, the customer relationships over twelve years, and the non-compete agreements over five years. The excess purchase price of $83.1 million was allocated to goodwill and is not amortized but will be reviewed for impairment annually and between annual tests if events or changes in circumstances indicate that the asset might be impaired. The purchase price in excess of the tax basis of the assets, primarily allocated to identifiable intangible assets and goodwill, is not expected to be deductible for tax purposes. The acquisition was accounted for using the purchase method of accounting with the operating results included in the accompanying consolidated financial statements from the date of acquisition.

Bankruptcy Services LLC

On January 31, 2003, we acquired 100% of the membership interests of Bankruptcy Services LLC (“BSI”), a provider of technology-based case management, consulting and administrative services for corporate restructuring cases. The total value of the transaction, including capitalized transaction costs, was $67.0 million of which $45.5 million was paid in cash, $16.5 million (approximately 1.1 million shares) was paid in our common stock, $3.4 million was deferred in the form of a non-interest bearing note with a face value of $4.0 million discounted using an imputed interest rate of 5% per annum, $1.3 million of liabilities were assumed, and $0.3 million was paid in acquisition costs. The purchase price was allocated as follows (in thousands):

Current assets	$	2,616
Property and software	755
Trade names	474
Customer backlog	4,700
Non-compete agreements	11,730
Goodwill	46,739
Total purchase price	$	67,014

F-24

NOTE 13:BUSINESS ACQUISITIONS (Continued)

Customer backlog and the non-compete agreements are amortized using the straight-line method over, respectively, two years and ten years. Initially, the trade name was not amortized as it had an indefinite life. In conjunction with our acquisition of Poorman-Douglas we reassessed our use of all trade names. Accordingly, in February 2004 we commenced amortizing the BSI trade name on a straight-line basis over two years. The excess purchase price of $46.7 million was allocated to goodwill and is not amortized but will be reviewed for impairment annually and between annual tests if events or changes in circumstances indicate that the asset might be impaired. The purchase price in excess of the tax basis of the assets, primarily allocated to identifiable intangible assets and goodwill, has been determined to be deductible for tax purposes.

The acquisition was accounted for using the purchase method of accounting with the operating results included in the accompanying consolidated financial statements from the date of acquisition.

Pro Forma Information

Unaudited pro forma operations, assuming each purchase acquisition was made at the beginning of the year preceding the acquisition, are shown below (in thousands, except per share data):

	For the Years Ended December 31,
	2005		2004		2003
Total revenues	$	158,084	$	146,927	$	133,532
Income from continuing operations	$	10,668	$	3,929	$	15,438
Discontinued operations	—		667		(5,818		)
Net income	$	10,668	$	4,596	$	9,620
Net income per share:
Income per share—Basic
Income from continuing operations	$	0.59	$	0.22	$	0.88
Loss from discontinued operations	—		0.04		(0.33		)
Net income per share—Basic	$	0.59	$	0.26	$	0.55
Income per share—Diluted
Income from continuing operations	$	0.52	$	0.20	$	0.85
Loss from discontinued operations	—		0.03		(0.32		)
Net income per share—Diluted	$	0.52	$	0.23	$	0.53

Pro forma data reflects the difference in amortization expense between EPIQ and the acquired companies as well as other adjustments, including income taxes and management compensation. The pro forma information is not necessarily indicative of what would have occurred if the acquisition had been completed on that date nor is it necessarily indicative of future operating results.

F-25

NOTE 14:DISCONTINUED OPERATIONS

During November 2003, we determined that the infrastructure software business was no longer aligned with our long-term strategic objectives. Accordingly, we developed a plan to sell, within one year, our infrastructure software business. At the time, we determined that this business should be classified as a discontinued operation and that the related long-lived assets should be measured at the lower of their carrying amounts or fair value less cost to sell. Our estimated proceeds from the sale of our infrastructure software business, net of estimated selling costs, was less than the carrying amount of this business. As a result, for the year ended December 31, 2003, we reduced the carrying value of these assets, consisting of property and equipment, goodwill and other intangible assets, and recorded a pre-tax impairment charge, included in Discontinued Operations in the accompanying Consolidated Statements of Income, of approximately $7.6 million. The tax benefit related to this impairment charge, also included in Discontinued Operations in the accompanying Consolidated Statements of Income, was approximately $3.0 million.

On April 30, 2004, we sold our infrastructure software business to a private company with expertise in file transfer technology for consideration consisting of cash and a note receivable. As of December 31, 2005, we had collected all amounts due related to the note receivable. During the year ended December 31, 2004, we recognized a gain related to this sale, included in discontinued operations in the accompanying Consolidated Statements of Income, of approximately $1.0 million, net of tax.

As of December 31, 2004 and 2005, we did not hold any assets or liabilities related to this discontinued business. Revenues, cost of sales, and operating expenses related to this discontinued business have been classified as “Discontinued Operations” in the accompanying Consolidated Statements of Income for all periods presented. Following is summary financial information for discontinued operations (in thousands):

Net revenue and pre-tax income (loss) from discontinued operations:

	Years Ended December 31,
	2005			2004		2003
Net revenue from discontinued operations		$	—	$	661	$	1,988
Pre-tax income (loss) from discontinued operations		$	—	$	1,104	$	(9,562	)

NOTE 15:SEGMENT REPORTING

During the quarter ended March 31, 2004, we changed the structure of our operating segments as a result of changes in our business operations. These changes included our decision, during November 2003, to hold for sale our infrastructure business and our acquisition, in January 2004, of Poorman-Douglas, a provider of technology-based products and services for class action, mass tort and bankruptcy case administration.

With these changes, performance is now assessed for our case management and document management operating segments. Case management solutions provide clients with integrated technology-based products and services for the automation of various administrative tasks. Document management solutions include proprietary technology and production services to ensure timely, accurate and complete execution of the many documents associated with multi-faceted legal cases and communications applications.

Each segment’s performance is assessed based on segment revenues less costs directly attributable to that segment. In management’s evaluation of performance certain costs, such as shared services, administrative staff, and executive management, are not allocated by segment and, accordingly, the following operating segment results do not include those unallocated costs. Assets reported within a

F-26

NOTE 15:SEGMENT REPORTING (Continued)

segment are those assets used by the segment in its operations and consist of property and equipment, software, identifiable intangible assets and goodwill. All other assets are classified as unallocated.

Information concerning operations of our reportable segments is as follows (in thousands):

	Year Ended December 31, 2005
	Case			Document
	Management			Management			Unallocated				Consolidated
Revenue:
Operating revenue		$	79,279		$	27,874		$	—			$	107,153
Reimbursed expenses		3,138			20,505			—				23,643
Total revenue		82,417			48,379			—				130,796
Costs and expenses:
Direct and administrative costs and depreciation and software amortization		32,580			36,581			26,989				96,150
Amortization of identifiable intangible assets		5,027			1,724			—				6,751
Acquisition related		—			—			2,984				2,984
Total operating expenses		37,607			38,305			29,973				105,885
Operating income		$	44,810		$	10,074		$	(29,973	)		24,911
Net expenses related to financing												(6,687		)
Income from continuing operations before income taxes												18,224
Provision for income taxes												7,276
Net income from continuing operations												$	10,948
Total assets		$	260,831		$	59,581		$	74,458			$	394,870
Provisions for depreciation and amortization		$	9,681		$	2,155		$	2,203			$	14,039
Capital expenditures		$	4,961		$	38		$	1,825			$	6,824

F-27

NOTE 15:SEGMENT REPORTING (Continued)

	Year Ended December 31, 2004
	Case			Document
	Management			Management			Unallocated				Consolidated
Revenue:
Operating revenue		$	68,526		$	36,549		$	—			$	105,075
Reimbursed expenses		2,465			17,880			—				20,345
Total revenue		70,991			54,429			—				125,420
Costs and expenses:
Direct and administrative costs and depreciation and software amortization		29,107			40,604			23,086				92,797
Amortization of identifiable intangible assets		5,243			2,524			—				7,767
Acquisition related		—			—			2,197				2,197
Total operating expenses		34,350			43,128			25,283				102,761
Operating income		$	36,641		$	11,301		$	(25,283	)		22,659
Net expenses related to financing												(7,210		)
Income from continuing operations before income taxes												15,449
Provision for income taxes												6,386
Net income from continuing operations												$	9,063
Total assets		$	131,233		$	51,264		$	57,591			$	240,088
Provisions for depreciation and amortization		$	9,505		$	2,998		$	1,791			$	14,294
Capital expenditures, including capital leases		$	5,326		$	36		$	4,464			$	9,826

	Year Ended December 31, 2003
	Case			Document
	Management			Management			Unallocated				Consolidated
Revenue:
Operating revenue		$	49,688		$	12,730		$	—			$	62,418
Reimbursed expenses		311			5,207			—				5,518
Total revenue		49,999			17,937			—				67,936
Costs and expenses:
Direct and administrative costs and depreciation and software amortization		13,118			9,658			15,150				37,926
Amortization of identifiable intangible assets		2,102			1,508			—				3,610
Acquisition related		—			—			1,793				1,793
Total operating expenses		15,220			11,166			16,943				43,329
Operating income		$	34,779		$	6,771		$	(16,943	)		24,607
Net income related to financing												83
Income from continuing operations before income taxes												24,690
Provision for income taxes												10,165
Net income from continuing operations												$	14,525
Total assets		$	59,518		$	26,806		$	55,603			$	141,927
Provisions for depreciation and amortization		$	5,881		$	1,516		$	781			$	8,178
Capital expenditures		$	3,609		$	—		$	2,916			$	6,525

F-28

NOTE 16:SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is as follows (in thousands):

	Year Ended December 31,
	2005		2004			2003
Cash paid (received) for:
Interest	$	3,376	$	3,877		$	53
Income taxes	8,499		(207		)	7,518
Non-cash investing and financing transactions:
Capitalized lease obligations incurred	—		2,733			—
Issuance of common shares in purchase transactions	24,233		—			16,500
Obligation incurred in purchase transactions	463		—			3,445

F-29

EPIQ SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

				Additions
Description	Balance at beginning of year			Charged to costs and expenses			Charged to other accounts				Deductions from reserves				Balance at end of year
Allowance for doubtful  receivables from continuing operations
For the year ended  December 31, 2005		$	1,069		$	1,119		$	2,008	(1)		$	(715	)		$	3,481
For the year ended  December 31, 2004		340			1,099			—				(370		)		1,069
For the year ended  December 31, 2003		5			347			—				(12		)		340

(1)Consists primarily of allowance related to acquired receivables.

EXHIBIT INDEX

The following exhibits are filed with this Form 10-K or are incorporated herein by reference:

Exhibit Number	Description
3.1	Articles of Incorporation, as amended through June 2, 2004.*
3.2	Bylaws, as amended and restated. Incorporated by reference and previously filed as an exhibit to the quarterly report on Form 10-Q for the quarter ended March 31, 2001, filed with the Securities and Exchange Commission on May 11, 2001.
4.1	Reference is made to exhibits 3.1 and 3.2.
4.2	Securities Purchase Agreement dated as of June 10, 2004, among EPIQ Systems, Inc. and the Buyers listed on Exhibit A thereto. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on June 14, 2004.
4.3	Amendment No. 1 to Securities Purchase Agreement among EPIQ Systems, Inc. and the Holders, dated as of December 15, 2005. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2005.
4.4	Registration Rights Agreement dated as of June 10, 2004, among EPIQ Systems, Inc. and the Buyers listed on the Schedule of Buyers attached thereto. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on June 14, 2004.
4.5	Form of Contingent Convertible Subordinated Note, as amended.*
10.1	1995 Stock Option Plan, as amended. Incorporated by reference and previously filed as an exhibit to the registration statement on Form SB-2 filed with the Securities and Exchange Commission (File No. 333-51525) on May 1, 1998.
10.2	2004 Equity Incentive Plan. Incorporated by reference and previously filed as an exhibit to the Definitive Proxy Statement filed with the Securities and Exchange Commission on April 28, 2004.
10.3	Securities Purchase Agreement dated as of November 7, 2002, among EPIQ Systems, Inc. and the Purchasers named therein. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on November 15, 2002.
10.4	Membership Interest Purchase Agreement dated as of January 31, 2003, among Jay D. Chazanoff, Stephen R. Simms, Ron L. Jacobs, Kathleen Gerber, Bankruptcy Services LLC, EPIQ Systems Acquisition, Inc. and EPIQ Systems, Inc. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on February 10, 2003.
10.5	Employment Agreement dated as of January 31, 2003, among Bankruptcy Services LLC, EPIQ Systems, Inc. and Ron Jacobs.Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on February 10, 2003.
10.6	Employment Agreement dated as of January 31, 2003, among Bankruptcy Services LLC, EPIQ Systems, Inc. and Kathleen Gerber. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on February 10, 2003.
10.7	Stock Option Agreement among EPIQ Systems, Inc., Bankruptcy Services LLC and Ron Jacobs dated as of January 31, 2003. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on February 10, 2003.

10.8	Agreement and Plan of Merger among P-D Holding Corp., EPIQ Systems, Inc., PD Merger Corp., and Endeavour Capital Fund III, L.P., in its capacity as Shareholders’ Representative, dated as of January 30, 2004. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2004.
10.9	Agreement Related to Merger Agreement among EPIQ Systems, Inc., P-D Holding Corp., certain shareholders of P-D Holding Corp. and Endeavour Capital Fund III, L.P., in its capacity as Shareholders’ Representative, dated as of January 30, 2004. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2004.
10.10	Employment and Non-Competition Agreement between Poorman-Douglas Corporation and Jeffrey B. Baker dated as of January 30, 2004. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2004.
10.11	Stock Option Agreement between EPIQ Systems, Inc. and Jeffrey B. Baker dated as of January 30, 2004. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2004.
10.12	Stock Purchase Agreement between EPIQ Systems Acquisition, Inc. and Ajuta International Pty. Ltd., as trustee of Hypatia Trust, dated as of November 15, 2005. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2005.
10.13	Amended and Restated Credit and Security Agreement dated November 15, 2005, among EPIQ Systems, Inc., the Lenders named therein, and KeyBank, National Association, as Lead Arranger, Sole Book Runner, and Administrative Agent. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2005.
10.14	Registration Rights Agreement between EPIQ Systems, Inc. and Ajuta International Pty. Ltd., as trustee of Hypatia Trust, dated as of November 15, 2005. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2005.
10.15	Form of Nonqualified Stock Option Agreement under 2004 Equity Incentive Plan.*
12.1	Statement regarding computation of earnings to fixed charges.*
21.1	List of Subsidiaries.*
23.1	Consent of Deloitte & Touche LLP, Independent Registered Public Accountants.*
31.1	Certifications of Chief Executive Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certifications of Chief Financial Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350.*

*Filed herewith.

EX-3.1

Exhibit 3.1

STATE OF MISSOURI . . . Office of Secretary of State

AMENDMENT OF ARTICLES OF INCORPORATION

(To be submitted in duplicate by an attorney)

SECRETARY OF STATE
STATE OF MISSOURI
P. O. BOX 778
JEFFERSON CITY, MO  65102

Pursuant to the provisions of The General and Business Corporation Law of Missouri, the undersigned Corporation certifies the following:

1.The present name of the Corporation is EPIQ Systems, Inc.

The name under which it was originally organized was NEWCO RGLG I, Inc.

2.An Amendment to the Corporation’s Restated Articles of Incorporation was adopted by the shareholders on June 2, 2004.

3.A new ARTICLE TWELFTH was added to the end of the Corporation’s Restated Articles of Incorporation to read as follows:

TWELFTH: To the fullest extent permitted by The General and Business Law of Missouri, as the same exists or may hereafter be amended, a director of this corporation shall not be liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director; provided that this Article shall not eliminate or limit the liability of a director (a) for any breach of the director’s duty of loyalty to the corporation or its shareholders, (b) for acts or omissions not in subjective good faith or which involve intentional misconduct or a knowing violation of law, (c) pursuant to section 351.345 of The General and Business Law of Missouri, or (d) for any transaction from which the director derived an improper personal benefit.

4.Of the 17,827,627 shares outstanding, 17,827,627 of such shares were entitled to vote on such amendment.

The number of outstanding shares of any class entitled to vote thereon as a class were as follows:

Class	Number of Outstanding Shares
Common	17,827,627

5.The number of shares voted for and against the addition to ARTICLE TWELFTH of the Corporation’s Restated Articles of Incorporation were as follows:

Class	No. Voted For	No. Voted Against
Common	15,671,574	160,588

If the amendments changed the number of par value of authorized shares having a par value, the amount in dollars of authorized shares having a par value as changed is:

N/A

If the amendments changed the number of authorized shares without par value, the authorized number of shares without par value as changed and the consideration proposed to be received for such increased authorized shares without par value as are to be presently issued are:

N/A

If the amendments provide for an exchange, reclassification, or cancellation of issued shares, or a reduction of the number of authorized shares of any class below the number of issued shares of that class, the following is a statement of the manner in which such reduction shall be effected:

N/A

2

IN WITNESS WHEREOF, the undersigned, Christopher E. Olofson, President, has executed this instrument and Elizabeth Braham, its Secretary has affixed its corporate seal hereto and attested said seal on the 2^nd day of June, 2004.

PLACE CORPORATE
	SEAL HERE
			EPIQ SYSTEMS, INC.
		“NONE”
			By:		/s/ Christopher E. Olofson
				Christopher E. Olofson, President

ATTEST:
By:		/s/ Elizabeth Braham
	Elizabeth Braham, Secretary

STATE OF MISSOURI	)
	) ss
COUNTY OF JACKSON	)

I, the undersigned, a Notary Public, do hereby certify that on this 2^nd day of June, 2004, Christopher E. Olofson personally appeared before me who, being by me first duly sworn, declared that he is the President of EPIQ Systems, Inc., that he signed the foregoing document as President of the corporation, and that the statements therein contained are true.

NOTARIAL SEAL		/s/ Janey M. Larkin
	Notary Public
My commission expires: 11/13/2005

3

Office of the Secretary of State/Corporations Division

Restated

For Profit Articles of Incorporation

FIRST.  The name of the corporation is: EPIQ Systems, Inc.

SECOND.  The address of the corporation’s registered office in the State of Missouri is 2800 Commerce Tower, 911 Main, Kansas City, Missouri 64105, and the name of its initial registered agent at such address is Seigfreid, Bingham, Levy, Selzer & Gee, P.C.

THIRD.  The total number of shares of all classes of stock which the corporation shall have the authority to issue is Fifty-Two Million (52,000,000) consisting of Fifty Million (50,000,000) shares of Common Stock $0.01 par value per share, and Two Million (2,000,000) shares of Preferred Stock, $1.00 par value per share.

A.COMMON STOCK

1.General.  The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of the Preferred Stock of any series.

2.Voting.  The holders of the Common Stock are entitled to one vote for each share held at all meetings of shareholders (and written actions in lieu of meetings). There shall be no cumulative voting.

3.Dividends.  Dividends may be declared and paid on the Common Stock from funds lawfully available therefore as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding series of Preferred Stock.

4.Liquidation.  Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its shareholders, subject to any rights of any then outstanding series of Preferred Stock.

B.PREFERRED STOCK.

Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers and such designations, preferences and relative,

4

participating, optional or other special rights, and qualifications, limitations and restrictions thereof, including without limitation, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General and Business Corporation Law of Missouri. Without limiting the generality of the foregoing, except as otherwise provided in the resolutions providing for the issuance of any series of Preferred Stock, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to the Preferred Stock of any other series to the extent permitted by law. Except as otherwise provided in the resolutions providing for the issuance of any series of Preferred Stock, no vote of the holders of the Preferred Stock or Common Stock shall be a prerequisite to the issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of these Articles of Incorporation.

C.GENERAL.

No shareholder shall be entitled as a matter of right to subscribe for, purchase or receive any part of any new or additional issue of stock of any class, whether now or hereafter authorized, or of any bonds, debentures or other securities convertible into stock of any class, and all such additional shares of stock, bonds, debentures or other securities convertible into stock may be issued by the Board of Directors to such person or persons, on such terms and for such consideration as the Board of Directors, in their discretion, may determine.

FOURTH.  The name and place of residence of the incorporator are as follows:

Name	Residence
Marvin L. Rich	6632 Wenoga Road Mission, Kansas 66208

FIFTH.  The number of directors to constitute the first board of directors of the corporation is five (5). Thereafter the number of directors shall be fixed by, or in the manner provided in, the bylaws of the corporation. Any change in the number of directors shall be reported to the Secretary of State within thirty (30) calendar days of such change. Directors need not be shareholders unless the bylaws require them to be shareholders.

The persons to constitute the board of directors, each of whom shall hold office until the next annual meeting of the shareholders or until his successor shall have been elected and qualified, are as follows:

Tom W. Olofson
Christopher E. Olofson
Robert C. Levy
W. Bryan Satterlee
Edward M. Connolly, Jr.

5

SIXTH.  The duration of the corporation is perpetual.

SEVENTH.  This corporation is formed for the following purposes:

(a)  To engage in every aspect of data processing, creation of data bases, communication and other computer related activities.

(b)  To buy, lease, rent or otherwise acquire, own, hold, use, divide, partition, develop, improve, operate and sell, lease, mortgage or otherwise dispose of, deal in and turn to account real estate, leaseholds and any and all interests or estates therein or appertaining thereto; and to construct, manage, operate, improve, maintain and otherwise deal with buildings, structures and improvements situated or to be situated on any real estate or leasehold.

(c)  To engage in any mining, manufacturing, chemical, metallurgical, processing or related business, and to buy, lease, construct or otherwise acquire, own, hold, use, sell, lease, mortgage or otherwise dispose of, plants, works, facilities and equipment therefore.

(d)  To buy, utilize, lease, rent, import, export, manufacture, produce, design, prepare, assemble, fabricate, improve, develop, sell, lease, mortgage, pledge, hypothecate, distribute and otherwise deal in at wholesale, retail or otherwise, and as principal, agent or otherwise, all commodities, goods, wares, merchandise, machinery, tools, devices, apparatus, equipment and all other personal property, whether tangible or intangible, of every kind without limitation as to description, location or amount.

(e)  To apply for, obtain, purchase, lease, take licenses in respect of or otherwise acquire, and to hold, own, use, operate, enjoy, turn to account, grant licenses in respect of, manufacture under, introduce, sell, assign, mortgage, pledge or otherwise dispose of:

1.Any and all inventions, devices, processes and formulae and any improvements and modifications thereof;

2.Any and all letters patent of the United States or of any other country, state or locality, and all rights connected therewith or appertaining thereto.

3.Any and all copyrights granted by the United States or any other country, state or locality;

4.Any and all trademarks, trade names, trade symbols and other indications of origin and ownership granted by or recognized under the laws of the United States or of any other country, state or locality; and to conduct and carry on its business in any or all of its various branches under any trade name or trade names.

(f)  To engage in, carry on and conduct research, experiments, investigations, analyses, studies and laboratory work, for the purpose of discovering new products or to improve products, articles and things, and to buy, construct or otherwise acquire, own, operate, maintain, lease, sell, mortgage or otherwise dispose of, laboratories and similar facilities, plants and any and all other establishments, and to procure, construct, own, use, hold and dispose of all necessary equipment in respect thereof, for the purposes aforesaid.

6

(g)  To enter into any lawful contract or contracts with persons, firms, corporations, other entities, governments or any agencies or subdivisions thereof, including guaranteeing the performance of any contract or any obligation of any person, firm, corporation or other entity.

(h)  To purchase and acquire, as a going concern or otherwise, and to carry on, maintain and operate all or any part of the property or business of any corporation, firm, association, entity, syndicate or person whatsoever, deemed to be of benefit to the corporation, or of use in any manner in connection with any of its purposes; and to dispose thereof upon such terms as may seem advisable to the corporation.

(i)  To purchase or otherwise acquire, hold, sell, pledge, reissue, transfer or otherwise deal in, shares of the corporation’s own stock provided that it shall not use its funds or property for the purchase of its own shares of stock when such use would be prohibited by law, by the articles of incorporation or by the bylaws of the corporation; and, provided further, that shares of its own stock belonging to it shall not be voted upon directly or indirectly.

(j)  To invest, lend and deal with moneys of the corporation in any lawful manner, and to acquire by purchase, by the exchange of stock or other securities of the corporation, by subscription or otherwise, and to invest in, to hold for investment or for any other purpose, and to use, sell, pledge or otherwise dispose of, and in general to deal in any interest concerning or enter into any transaction with respect to (including “long” and “short” sales of) any stocks, bonds, notes, debentures, certificates, receipts and other securities and obligations of any government, state, municipality, corporation, association or other entity, including individuals and partnerships and, while owner thereof, to exercise all of the rights, powers and privileges of ownership, including, among other things, the right to vote thereon for any and all purposes and to give consents with respect thereto.

(k)  To borrow or raise money for any purpose of the corporation and to secure any loan, indebtedness or obligation of the corporation and the interest accruing thereon, and for that or any other purpose to mortgage, pledge, hypothecate or charge all or any part of the present or hereafter acquired property, rights and franchises of the corporation, real, personal, mixed or of any character whatever, subject only to limitations specifically imposed by law.

(I)  To do any or all of the things hereinabove enumerated alone for its own account, or for the account of others, or as the agent for others, or in association with others or by or through others, and to enter into all lawful contracts and undertakings in respect thereof.

(m)  To have one or more offices, to conduct its business, carry on its operations and promote its objects within and without the State of Missouri and anywhere in the world, without restriction as to place, manner or amount, but subject to the laws applicable thereto; and to do any or all of the things herein set forth to the same extent as a natural person might or could do and in any part of the world, either alone or in the company with others.

(n)  In general, to carry on any other business in connection with each and all of the foregoing or incidental thereto, and to carry on, transact and engage in any and every lawful business or other lawful thing calculated to be of gain, profit or benefit to the corporation as fully and freely as a natural person might do, to the extent and in the manner,

7

and anywhere within and without the State of Missouri, as it may from time to time determine; and to have and exercise each and all of the powers and privileges, either direct or incidental, which are given and provided by or are available under the laws of the State of Missouri in respect of general and business corporations organized for profit thereunder; provided, however, that the corporation shall not engage in any activity for which a corporation may not be formed under the laws of the State of Missouri.

None of the purposes and powers specified in any other paragraphs of this Article SEVENTH shall be in any way limited or restricted by reference to or inference from the terms of any other paragraph, and the purposes and powers specified in each of the paragraphs of this Article SEVENTH shall be regarded as independent purposes and powers. The enumeration of specific purposes and powers in this Article SEVENTH shall not be construed to restrict in any manner the general purposes and powers of this corporation, nor shall the expression of one thing be deemed to exclude another, although it be of like nature. The enumeration of purposes or powers herein shall not be deemed to exclude or in any way limit by inference any purposes of powers which this corporation has power to exercise, whether expressly by the laws of the State of Missouri, now or hereafter in effect, or impliedly by any reasonable construction of such laws.

EIGHTH.  (a)  Except as may be otherwise specifically provided by statute, or the articles of incorporation or the bylaws of the corporation, as from time to time amended, all powers of management, direction and control of the corporation shall be, and hereby are, vested in the board of directors.

(b)The bylaws of the corporation may from time to time be altered, amended, suspended or repealed, or new bylaws may be adopted, in any of the following ways: (i) by the affirmative vote, at any annual or special meeting of the shareholders, of the holders of a majority of the outstanding shares of stock of the corporation entitled to vote; or (ii) by resolution adopted by a majority of the full board of directors at a meeting thereof, or adopted by a majority of the full board of directors at a meeting thereof, or (iii) by unanimous written consent of all the shareholders or all the directors in lieu of a meeting; provided, however, that the power of the directors to alter, amend, suspend or repeal the bylaws or any portion thereof may be denied as to any bylaws or portion thereof enacted by the shareholders if at the time of such enactment the shareholders shall so expressly provide.

(c)The corporation may agree to the terms and conditions upon which any director, officer, employee or agent accepts his office or position and in its bylaws or otherwise may agree to indemnify and protect any director, officer, employee or agent to the extent permitted by the laws of Missouri.

NINTH.  Insofar as it is permitted under the laws of Missouri and except as maybe otherwise provide by the bylaws of the corporation, no contract or other transaction between this corporation and any other firm or corporation shall be affected or invalidated solely by reason of the fact that any director or officer of this corporation is interested in, or is a member, shareholder, director or officer of such other firm or corporation; and any director or officer of this corporation, individually or jointly with one or more other directors or officers of this corporation, may be a party to, or may be interested in, any contract or transaction of this corporation or in which this corporation is interested, and no such contract or transaction shall be invalidated thereby.

8

TENTH.  The directors shall have power to hold their meetings and to keep the books (except any books required to be kept in the State of Missouri, pursuant to the laws thereof) at any place within or without the State of Missouri.

ELEVENTH.  The corporation shall be entitled to treat the registered holder of any shares of the corporation as the owner of such shares and of all rights derived from such shares for all purposes. The corporation shall not be obligated to recognize any equitable or other claim to or interest in such shares or rights on the part of any other person, including, but without limiting the generality of the term “person”, a purchaser, pledgee, assignee or transferee of such shares or rights, unless and until such person becomes the registered holder of such shares, and the foregoing shall apply whether or not the corporation shall have either actual or constructive notice of the interest of such person.

The foregoing Restated Articles of Incorporation correctly set forth without change the corresponding provisions of the corporation’s Articles of Incorporation as heretofore amended and supersede the original Articles of Incorporation and all amendments thereto.

IN WITNESS WHEREOF, the undersigned, Christopher E. Olofson, President/COO, has executed this instrument and Janice Katterhenry, its Secretary, has affixed its corporate seal hereto and attested said seal on the 23^rd day of October, 2001

			EPIQ Systems, Inc.
			By:	/s/ Christopher E. Olofson
				Christoper E. Olofson, President/COO
ATTEST:
By:	/s/ Janice Katterhenry
		Janice Katterhenry, Secretary

9

STATE OF KANSAS	)
	) ss.
COUNTY OF WYANDOTTE	)

I, the undersigned, a Notary Public, do hereby certify that on this 23^rd day of October, 2001, Christopher E. Olofson personally appeared before me who, being by me first duly sworn, declared that he is President and Chief Operating Officer of the corporation, and that the statements therein contained are true.

(SEAL)

		/s/   Judy E. Schuberger
	Notary Public
My Commission Expires: 5/14/05

10

EX-4.5

Exhibit 4.5

Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation (“DTC”), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

CONTINGENT CONVERTIBLE SUBORDINATED NOTE

Date: December 15, 2005 Principal: Up to an Aggregate Amount of U.S. $50,000,000

CUSIP: 26882D AB 5

FOR VALUE RECEIVED, EPIQ SYSTEMS, INC., a Missouri corporation (the “Company”), hereby promises to pay to the order of CEDE & CO. or registered assigns (“Holder”) the amount set out above as the Principal (as reduced pursuant to the terms hereof pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether upon the

1

Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding Principal at the rate of 4.00% per annum, subject to periodic adjustment pursuant to Section 2 (the “Interest Rate”), from the date set out above as the Issuance Date (the “Issuance Date”) until the same becomes due and payable, whether upon an Interest Date (as defined below), the Maturity Date, acceleration, conversion, redemption or otherwise (in each case in accordance with the terms hereof). This Contingent Convertible Subordinated Note (including all Contingent Convertible Subordinated Notes issued in exchange, transfer or replacement hereof, this “Note”) is one of an issue of Contingent Convertible Subordinated Notes (collectively, the “Notes” and such other Contingent Convertible Subordinated Notes, the “Other Notes”) issued on the Issuance Date pursuant to the Securities Purchase Agreement (as defined below). Certain capitalized terms are defined in Section 29.

(1)           MATURITY. On the Maturity Date, the Holder shall surrender this Note to the Company and the Company shall pay to the Holder an amount in cash representing all outstanding Principal, accrued and unpaid Interest and accrued and unpaid Late Charges, if any. The “Original Maturity Date” shall be June 15, 2007, as may be extended in accordance with Section 8 hereof or as extended at the option of the Holder (i) in the event that, and for so long as, an Event of Default (as defined in Section 4(a)) shall have occurred and be continuing or any event shall have occurred and be continuing which with the passage of time and the failure to cure would result in an Event of Default and (ii) through the date that is ten days after the consummation of a Change of Control (as defined in Section 5(a)) in the event that a Change of Control is publicly announced or a Change of Control Notice (as defined in Section 5(a)) is delivered prior to the Maturity Date (as may be extended, the “Maturity Date”).

(2)           INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on the Issuance Date and shall be computed on the basis of a 365-day year and actual days elapsed and shall be payable in arrears on the first day of each Calendar Quarter and on the Maturity Date during the period beginning on the Issuance Date and ending on, and including, the Maturity Date (each, an “Interest Date”) with the first Interest Date being July 1, 2004. Interest shall be payable on each Interest Date in cash. From and after the occurrence of an Event of Default, the Interest Rate shall be increased to 11%. In the event that such Event of Default is subsequently cured, the adjustment referred to in the preceding sentence shall cease to be effective as of the date of such cure; provided that the Interest as calculated at such increased rate during the continuance of such Event of Default shall continue to apply to the extent relating to the days after the occurrence of such Event of Default through and including the date of cure of such Event of Default.

(3)           CONVERSION OF NOTES. This Note shall be convertible into shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), on the terms and conditions set forth in this Section 3.

(a)           Conversion Right. (i)  Subject to the provisions of Section 3(d), at any time or times on or after the Issuance Date, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount (as defined below) in increments of at least $100,000 of Principal (or such lesser amount if such amount represents the remaining

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Principal amount) into fully paid and nonassessable shares of Common Stock in accordance with Section 3(c), at the Conversion Rate (as defined below). The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up to the nearest whole share. The Company shall pay any and all transfer, stamp or similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon conversion of any Conversion Amount.

(b)           Conversion Rate. The number of shares of Common Stock issuable upon conversion of any Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x) such Conversion Amount by (y) the Conversion Price (as defined below) (the “Conversion Rate”).

(i)            “Conversion Amount” means the portion of the Principal to be converted, redeemed or otherwise with respect to which this determination is being made.

(ii)           “Conversion Price” means, as of any Conversion Date (as defined below) or other date of determination, and subject to adjustment as provided herein, $17.50.

(c)           Mechanics of Conversion.

(i)            Optional Conversion. To convert any Conversion Amount into shares of Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 4:59 p.m., New York Time, on such date, a copy of a duly executed and completed notice of conversion in good order in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if required by Section 3(c)(iii), surrender this Note to a common carrier for delivery to the Company as soon as practicable on or following such date (or an indemnification undertaking in form and substance reasonably acceptable to the Company with respect to this Note in the case of its loss, theft or destruction). On or before the first Business Day following the date of receipt of a Conversion Notice, the Company shall transmit by facsimile a confirmation of receipt of such Conversion Notice to the Holder and the Company’s transfer agent (the “Transfer Agent”). On or before the third Business Day following the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall (X) credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with Depository Trust Company (“DTC”) through its Deposit Withdrawal Agent Commission system or (Y) if the Transfer Agent is not participating in DTC Fast Automated Securities Transfer Program, issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled. If this Note is physically surrendered for conversion as required by Section 3(c)(iii) and the outstanding Principal of this Note is greater than the Principal portion of the Conversion Amount being converted, then the Company shall as soon as practicable and in no event later than three Business Days after receipt of this Note and at its own expense, issue and deliver to the holder a new Note (in accordance with Section 19(d)) representing the outstanding

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Principal not converted. The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

(ii)           Company’s Failure to Timely Convert. If the Company shall fail to issue a certificate to the Holder or credit the Holder’s balance account with DTC for the number of shares of Common Stock to which the Holder is entitled upon conversion of any Conversion Amount on or prior to the date which is three Trading Days after the Conversion Date, and if after such third Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the shares of Common Stock that the Holder anticipated receiving from the Company pursuant hereto (a “Buy-In”), then the Company shall, within three Trading Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Sale Price on the date of the event giving rise to the Company’s obligation to deliver such certificate. If the Company shall fail to issue a certificate to the Holder or credit the Holder’s balance account with DTC for the number of shares of Common Stock to which the Holder is entitled upon conversion of any Conversion Amount on or prior to the date which is five Business Days after the Conversion Date (a “Conversion Failure”), then (A) the Company shall pay damages to the Holder for each date of such Conversion Failure in an amount equal to 1.0%of the product of (I) the sum of the number of shares of Common Stock not issued to the Holder on or prior to the Share Delivery Date and to which the Holder is entitled, and (II) the Closing Sale Price of the Common Stock on the Share Delivery Date and (B) the Holder, upon written notice to the Company, may void its Conversion Notice with respect to, and retain or have returned, as the case may be, any portion of this Note that has not been converted pursuant to such Conversion Notice; provided that the voiding of a Conversion Notice shall not affect the Company’s obligations to make any payments which have accrued prior to the date of such notice pursuant to this Section 3(c)(ii) or otherwise.

(iii)          Book-Entry. Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless (A) the full Conversion Amount represented by this Note is being converted or (B) the Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting physical surrender and reissue of this Note. The Holder and the Company shall maintain records showing the Principal, Interest and Late Charges converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Note upon conversion.

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(iv)          Pro Rata Conversion; Disputes. In the event that the Company receives a Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company can convert some, but not all, of such portions of the Notes submitted for conversion, the Company, subject to Section 3(d), shall convert from each holder of Notes electing to have Notes converted on such date a pro rata amount of such holder’s portion of its Notes submitted for conversion based on the principal amount of Notes submitted for conversion on such date by such holder relative to the aggregate principal amount of all Notes submitted for conversion on such date. In the event of a dispute as to the number of shares of Common Stock issuable to the Holder in connection with a conversion of this Note, the Company shall issue to the Holder the number of shares of Common Stock not in dispute and resolve such dispute in accordance with Section 24.

(d)           Limitations on Conversions.

(i)            Beneficial Ownership. The Company shall not effect any conversion of this Note, and the Holder of this Note shall not have the right to convert any portion of this Note pursuant to Section 3(a), to the extent that after giving effect to such conversion, the Holder (together with the Holder’s affiliates) would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted portion of this Note beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any Other Notes or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(d)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes of this Section 3(d)(i), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. For any reason at any time, upon the written or oral request of the Holder, the Company shall within one Business Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported.

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(ii)           Principal Market Regulation. The Company shall not be obligated to issue any shares of Common Stock upon conversion of this Note if the issuance of such shares of Common Stock would exceed that number of shares of Common Stock which the Company may issue upon conversion of the Notes without breaching the Company’s obligations under the rules or regulations of the Principal Market (the “Exchange Cap”), except that such limitation shall not apply in the event that the Company (A) obtains the approval of its stockholders as required by the applicable rules of the Principal Market for issuances of Common Stock in excess of such amount or (B) obtains a written opinion from outside counsel to the Company that such approval is not required, which opinion shall be reasonably satisfactory to the holders of the Notes representing at least a majority of the principal amounts of the Notes then outstanding. Until such approval or written opinion is obtained, no purchaser of the Notes pursuant to the Securities Purchase Agreement (the “Purchasers”) shall be issued, upon conversion of Notes, shares of Common Stock in an amount greater than the product of the Exchange Cap multiplied by a fraction, the numerator of which is the principal amount of Notes issued to such Purchaser pursuant to the Securities Purchase Agreement on the Issuance Date and the denominator of which is the aggregate principal amount of all Notes issued to the Purchasers pursuant to the Securities Purchase Agreement on the Issuance Date (with respect to each Purchaser, the “Exchange Cap Allocation”). In the event that any Purchaser shall sell or otherwise transfer any of such Purchaser’s Notes, the transferee shall be allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion of the Exchange Cap Allocation allocated to such transferee. In the event that any holder of Notes shall convert all of such holder’s Notes into a number of shares of Common Stock which, in the aggregate, is less than such holder’s Exchange Cap Allocation, then the difference between such holder’s Exchange Cap Allocation and the number of shares of Common Stock actually issued to such holder shall be allocated to the respective Exchange Cap Allocations of the remaining holders of Notes on a pro rata basis in proportion to the aggregate principal amount of the Notes then held by each such holder.

(iii)          Contingent Convertibility. Notwithstanding the foregoing, this Note shall only be convertible: (v) during the period commencing on the Issuance Date and terminating on January 14, 2005, at any time after the arithmetic average of the Weighted Average Price of the Common Stock equals or exceeds 110% of the then applicable Conversion Price for ten (10) consecutive Trading Days; (w) from and after January 15, 2005, if the Weighted Average Price of the Common Stock equals or exceeds 110% of the then applicable Conversion Price on any five (5) consecutive Trading Days during any calendar year; (x) from and after the Issuance Date, if the Weighted Average Price of the Common Stock is less than $10.75 (the “Minimum Price”) (subject to adjustment as provided herein) on any five (5) consecutive Trading Days; (y) if there shall have occurred (A) the public announcement of a pending, proposed or intended Change of Control that has not been abandoned, terminated or consummated, (B) an Event of Default or (C) an event that with the passage of time or giving of notice, and assuming it were not cured, would constitute an Event of Default; or (z) upon receipt of a Mandatory Conversion Notice.

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(4)           RIGHTS UPON EVENT OF DEFAULT.

(a)           Event of Default. Each of the following events shall constitute an “Event of Default”:

(i)            the failure of the applicable Registration Statement required to be filed pursuant to the Registration Rights Agreement to be declared effective by the SEC on or prior to the date that is 60 days after the applicable Effectiveness Deadline (as defined in the Registration Rights Agreement), or, while the applicable Registration Statement is required to be maintained effective pursuant to the terms of the Registration Rights Agreement, the effectiveness of the applicable Registration Statement lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to any holder of the Notes for sale of all of such holder’s Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of 10 consecutive Trading Days or for more than an aggregate of 30 Trading Days in any 365-day period (other than days during an Allowable Grace Period (as defined in the Registration Rights Agreement));

(ii)           the suspension from trading or failure of the Common Stock to be listed on the Principal Market or The New York Stock Exchange, Inc. for a period of five consecutive Trading Days or for more than an aggregate of seven Trading Days in any 365-day period;

(iii)          the Company’s (A) failure to cure a Conversion Failure by delivery of the required number of shares of Common Stock within ten (10) Business Days after the applicable Conversion Date or (B) notice, written or oral, to any holder of the Notes, including by way of public announcement or through any of its agents, at any time, of its intention not to comply with a request for conversion of any Notes into shares of Common Stock that is tendered in accordance with the provisions of the Notes;

(iv)          at any time following the tenth consecutive Business Day that the Holder’s Authorized Share Allocation is less than the number of shares of Common Stock that the Holder would be entitled to receive upon a conversion of the full Conversion Amount of this Note (without regard to any limitations on conversion set forth in Section 3(d) or otherwise);

(v)           the Company’s failure to pay to the Holder any amount of Principal, Interest, Late Charges or other amounts when and as due under this Note, the Securities Purchase Agreement, the Registration Rights Agreement or any other agreement, document, certificate or other instrument delivered in connection with the transactions contemplated hereby and thereby to which the Holder is a party, except, in the case of a failure to pay Interest, Late Charges or amount other than Principal when and as due, in which case only if such failure continues for a period of at least five Business Days;

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(vi)          any default under or acceleration prior to maturity of any Indebtedness (as defined below) of the Company or any of its Subsidiaries (as defined in Section 3(a) of the Securities Purchase Agreement) with an unpaid principal amount in excess of $1,000,000 at the time of such acceleration other than with respect to any Other Notes; provided that in the case of a payment default of such Indebtedness, such default is not cured within applicable cure periods; further provided that in the case of a non-payment default of such Indebtedness that has not resulted in an acceleration of such Indebtedness prior to its maturity, only upon acceleration  of such Indebtedness;

(vii)         the Company or any of its Subsidiaries, pursuant to or within the meaning of Title 11, U.S. Code, or any similar Federal or state law for the relief of debtors (collectively, “Bankruptcy Law”), (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official (a “Custodian”),  (D) makes a general assignment for the benefit of its creditors or (E) admits in writing that it is generally unable to pay its debts as they become due;

(viii)        a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for relief against the Company or any of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or any of its Subsidiaries or (C) orders the liquidation of the Company or any of its Subsidiaries;

(ix)           a final judgment or judgments for the payment of money aggregating in excess of $1,000,000 are rendered against the Company or any of its Subsidiaries and which judgments are not, within 60 days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; provided, however, that any judgment which is covered by insurance or an indemnity from a credit worthy party shall not be included in calculating the $1,000,000 amount set forth above so long as the Company provides the Holder a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the Holder) to the effect that such judgment is covered by insurance or an indemnity and the Company will receive the proceeds of such insurance or indemnity within 30 days of the issuance of such judgment;

(x)            the Company materially breaches any representation, warranty, covenant or other term or condition of the Securities Purchase Agreement, the Registration Rights Agreement, this Note, the Other Notes, or any other agreement, document, certificate or other instrument delivered in connection with the transactions contemplated thereby and hereby to which the Holder is a party, except, in the case of a breach of a covenant or other term or condition which is curable, only if such breach continues for a period of at least ten (10) consecutive Business Days;

(xi)           any breach or failure in any respect to comply with Section 15 of this Note;

(xii)          any Event of Default (as defined in the Other Notes) occurs with respect to any Other Notes; or

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(xiii)         either of (x) the Total Debt to Total Capitalization Ratio shall exceed .60:1.00 or (y) the Total Debt to EBITDA Ratio shall exceed 4.00:1.00.

(b)           Redemption Right. Promptly after the occurrence of an Event of Default with respect to this Note or any Other Note, the Company shall deliver written notice thereof via facsimile and overnight courier (an “Event of Default Notice”) to the Holder. At any time after the earlier of the Holder’s receipt of an Event of Default Notice and the Holder becoming aware of an Event of Default, the Holder may require the Company to redeem all or any portion of this Note by delivering written notice thereof (the “Event of Default Redemption Notice”) to the Company, which Event of Default Redemption Notice shall indicate the portion of this Note the Holder is electing to redeem. Each portion of this Note subject to redemption by the Company pursuant to this Section 4(b) shall be redeemed by the Company at a price equal to the greater of (i) the product of (x) the Conversion Amount to be redeemed and (y) the Redemption Premium and (ii) the product of (A) the Conversion Rate with respect to such Conversion Amount in effect at such time as the Holder delivers an Event of Default Redemption Notice and (B) the Closing Sale Price of the Common Stock on the date immediately preceding such Event of Default (the “Event of Default Redemption Price”). Redemptions required by this Section 4(b) shall be made in accordance with the provisions of Section 12.

(5)           RIGHTS UPON CHANGE OF CONTROL.

(a)           Change of Control. Each of the following events shall constitute a “Change of Control”:

(i)            the consolidation, merger or other business combination (including, without limitation, a reorganization or recapitalization) of the Company with or into another Person (other than (A) a consolidation, merger, stock transaction or other business combination (including, without limitation, reorganization or recapitalization) in which holders of the Company’s voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, or (B) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company (any of the foregoing (A) and (B), a “Surviving Change”));

(ii)           the sale or transfer of all or substantially all of the Company’s assets; or

(iii)          a purchase, tender or exchange offer made to and accepted by the holders of more than the 50% of the outstanding shares of Common Stock.

No sooner than 15 days nor later than 10 days prior to the consummation of a Change of Control, but not prior to the public announcement of such Change of Control, the Company shall deliver

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written notice thereof via facsimile and overnight courier to the Holder (a “Change of Control Notice”).

(b)           Assumption. Prior to the consummation of any Change of Control, the Company will secure from any Person purchasing the Company’s assets or Common Stock or any successor resulting from such Change of Control (in each case, an “Acquiring Entity”) a written agreement (in form and substance satisfactory to the holders of Notes representing at least a majority of the aggregate principal amount of the Notes then outstanding) to deliver to each holder of Notes in exchange for such Notes, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to the Notes, including, without limitation, having a principal amount and interest rate equal to the principal amounts and the interest rates of the Notes held by such holder, and satisfactory to the holders of Notes representing at least a majority of the principal amount of the Notes then outstanding. In the event that an Acquiring Entity is directly or indirectly controlled by a company or entity whose common stock or similar equity interest is listed, designated or quoted on a securities exchange or trading market, the holders of Notes representing at least a majority of the aggregate principal amount of the Notes then outstanding may elect to treat such Person as the Acquiring Entity for purposes of this Section 5(b). In the event of a Surviving Change, the entity resulting from or succeeding to the Company in such Surviving Change shall assume the obligations under the Notes on the same terms and conditions as the Notes and having a principal amount and interest rate equal to the principal amounts and the interest rates of the Notes.

(c)           Redemption Right. At any time during the period beginning after the Holder’s receipt of a Change of Control Notice and ending on the date of the consummation of such Change of Control (or, in the event a Change of Control Notice is not delivered at least 10 days prior to a Change of Control, at any time on or after the date which is 10 days prior to a Change of Control and ending 10 days after the consummation of such Change of Control), the Holder may require the Company to redeem all or any portion of this Note by delivering written notice thereof (“Change of Control Redemption Notice”) to the Company, which Change of Control Redemption Notice shall indicate the Conversion Amount the Holder is electing to redeem; provided, however, that the Company shall not be under any obligation to redeem all or any portion of this Note or to deliver the applicable Change of Control Redemption Price unless and until the applicable Change of Control is consummated. The portion of this Note subject to redemption pursuant to this Section 5(c) shall be redeemed by the Company at a price equal to the greater of (i) the product of (x) the Conversion Amount being redeemed and (y) the quotient determined by dividing (A) the Closing Sale Price of the Common Stock immediately following the public announcement of such proposed Change of Control by (B) the Conversion Price and (ii) 110% of the Conversion Amount being redeemed (the “Change of Control Redemption Price”). Redemptions required by this Section 5(c) shall be made in accordance with the provisions of Section 12 and shall have priority to payments to stockholders in connection with a Change of Control.

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(6)           RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

(a)           Purchase Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the all or substantially all record holders of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without taking into account any limitations or restrictions on the convertibility of this Note) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

(b)           Other Corporate Events. Prior to the consummation of any recapitalization, reorganization, consolidation, merger, spin-off or other business combination (other than a Change of Control) pursuant to which all or substantially all holders of Common Stock are entitled to receive securities or other assets with respect to or in exchange for Common Stock (a “Corporate Event”), the Company shall make appropriate provision to insure that the Holder will thereafter have the right to receive upon a conversion of this Note, (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which the Holder would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event or (ii) in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of Common Stock in connection with the consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had this Note initially been issued with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the Conversion Rate. Provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to the holders of Notes representing at least a majority of the aggregate principal amount of the Notes then outstanding.

(7)           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

(a)           Adjustment of Conversion Price and Minimum Price upon Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price and Minimum Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price and Minimum Price in effect immediately prior to such combination will be proportionately increased.

(b)           Other Events. If any event occurs of the type contemplated by the provisions of this Section 7 but not expressly provided for by such provisions (including, without

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limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s Board of Directors will make an appropriate adjustment in the Conversion Price and Minimum Price so as to protect the rights of the Holder under this Note; provided that no such adjustment will increase the Conversion Price or Minimum Price as otherwise determined pursuant to this Section 7.

(8)           EXTENSION OF MATURITY DATE AT HOLDER’S OPTION. The holders of Notes representing at least a majority of the aggregate principal amount of the Notes then outstanding shall have the right, in their sole discretion, to require that the Original Maturity Date of all then outstanding Notes be extended for a period not to exceed three years from the Original Maturity Date, without the action of any other Person, by delivering written notice thereof (a “Holder Maturity Date Extension Notice”) to the Company at any time prior to the Original Maturity Date, which Holder Maturity Date Extension Notice shall indicate the Maturity Date, as so extended, of this Note. Within two Business Days of receipt of a Holder Maturity Date Extension Notice, the Company shall inform all other holders of Notes that such a notice has been received by the Company.

(9)           COMPANY’S RIGHT OF MANDATORY CONVERSION AND OPTIONAL REDEMPTION. (a) Mandatory Conversion. If at any time from and after June 10, 2007, the Weighted Average Price of the Common Stock exceeds 200% of the Conversion Price as of the Issuance Date (subject to appropriate adjustments for stock splits, stock dividends, stock combinations and other similar transactions after the Issuance Date) for each of any 20 consecutive Trading Days (the “Mandatory Conversion Measuring Period”) and the Conditions to Mandatory Conversion (as set forth in Section 9(c)) are satisfied or waived in writing by the Holder, the Company shall have the right to require the Holder to convert all or any such portion of the Conversion Amount of this Note designated in the Mandatory Conversion Notice into fully paid, validly issued and nonassessable shares of Common Stock in accordance with Section 3(c) hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined below) (a “Mandatory Conversion”). The Company may exercise its right to require conversion under this Section 9(a) by delivering within not more than two Trading Days following the end of such Mandatory Conversion Measuring Period a written notice thereof by facsimile and overnight courier to all, but not less than all, of the holders of Notes and the Transfer Agent (the “Mandatory Conversion Notice” and the date all of the holders received such notice (or are deemed to have received such notice in accordance with Section 9(f) of the Securities Purchase Agreement) is referred to as the “Mandatory Conversion Notice Date”). The Mandatory Conversion Notice shall be irrevocable.

(b)           Pro Rata Conversion Requirement. If the Company elects to cause a conversion of all or any portion of the Conversion Amount of this Note pursuant to Section 9(a), then it must simultaneously take the same action with respect to the Other Notes. If the Company elects to cause the conversion of this Note pursuant to Section 9(a) (or similar provisions under the Other Notes) with respect to less than all of the Conversion Amounts of the Notes then outstanding, then the Company shall require conversion of a Conversion Amount from each of the holders of the Notes equal to the product of (I) the aggregate Conversion Amount of Notes which the Company has elected to cause to be converted pursuant to Section 9(a), multiplied by (II) the fraction, the numerator of which is the sum of the aggregate principal

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amount of the Notes purchased by such holder pursuant to the Securities Purchase Agreement and the denominator of which is the sum of the aggregate principal amount of the Notes and purchased by all holders pursuant to the Securities Purchase Agreement (such fraction with respect to each holder is referred to as its “Allocation Percentage,” and such amount with respect to each holder is referred to as its “Pro Rata Conversion Amount”). In the event that the initial holder of any Notes shall sell or otherwise transfer any of such holder’s Notes, the transferee shall be allocated a pro rata portion of such holder’s Allocation Percentage. The Mandatory Conversion Notice shall state (i) the Trading Day selected for the Mandatory Conversion in accordance with Section 9(a), which Trading Day shall be at least 15 Business Days but not more than 60 Business Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (ii) the aggregate Conversion Amount of the Notes which the Company has elected to be subject to mandatory conversion from all of the holders of the Notes pursuant to this Section 9 (and analogous provisions under the Other Notes), (iii) each holder’s Pro Rata Conversion Amount of the Conversion Amount of the Notes the Company has elected to cause to be converted pursuant to this Section 9 (and analogous provisions under the Other Notes) and (iv) the number of shares of Common Stock to be issued to such Holder as of the Mandatory Conversion Date. All Conversion Amounts converted by the Holder after the Mandatory Conversion Notice Date shall reduce the Conversion Amount of this Note required to be converted on the Mandatory Conversion Date. If the Company has elected a Mandatory Conversion, the mechanics of conversion set forth in Section 3(c) shall apply, to the extent applicable, as if the Company and the Transfer Agent had received from the Holder on the Mandatory Conversion Date a Conversion Notice with respect to the Conversion Amount being converted pursuant to the Mandatory Conversion.

(c)           Conditions to Mandatory Conversion. For purposes of this Section 9, “Conditions to Mandatory Conversion” meansthe following conditions: (i) during the period beginning on the date that is three months prior to the Mandatory Conversion Date and ending on and including the Mandatory Conversion Date, the Company shall have delivered shares of Common Stock upon any conversion of Conversion Amounts on a timely basis as set forth in Section 3(c)(i); provided, however, that the Company shall be deemed to have satisfied the conditions set forth in this clause (i) if on not more than two occasions prior to the delivery of the Company’s Mandatory Conversion Notice the Company has failed to meet the requirements set forth in Section 3(c)(i) hereof by no more than three days; (ii) on each day during the period beginning on the date that is six months prior to the Mandatory Conversion Date and ending on and including the Mandatory Conversion Date (the “Notice Measuring Period”), the Common Stock shall be listed on the Principal Market or The New York Stock Exchange, Inc. and delisting or suspension by such market or exchange shall not have been threatened either (A) in writing by such market or exchange or (B) by falling below the minimum listing maintenance requirements of such market or exchange; (iii) during the period beginning on the first Trading Day of the Notice Measuring Period and ending on and including the Mandatory Conversion Date, there shall not have occurred (x) the public announcement of a pending, proposed or intended Change of Control which has not been abandoned, terminated or consummated, (y) an Event of Default or (z) an event that with the passage of time or giving of notice, and assuming it were not cured, would constitute an Event of Default if such event has not been cured prior to the Mandatory Conversion Notice Date; (iv) on each day of the period beginning on the date of delivery of the Mandatory Conversion Notice and ending on the Mandatory Conversion Date

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either (x) the Registration Statement or Registration Statements required pursuant to the Registration Rights Agreement shall be effective and available for the sale for all of the Registrable Securities in accordance with the terms of the Registration Rights Agreement or (y) all shares of Common Stock issuable upon conversion of the Notes shall be eligible for sale without restriction and without the need for registration under any applicable federal or state securities laws; and (v) on each day of the period beginning on the Mandatory Conversion Date and ending thirty (30) Trading Days thereafter either (x) the Registration Statements required pursuant to the Registration Rights Agreement shall be expected to be effective and available for the sale of at least all of the Registrable Securities in accordance with the terms of the Registration Rights Agreement or (y) all shares of Common Stock issuable upon conversion of the Notes shall be eligible for sale without restriction and without the need for registration under any applicable federal or state securities laws.

(d)           Limitations. If the Company is unable to deliver Conversion Shares pursuant to a Mandatory Conversion under this Section 9 (such undeliverable Conversion Shares, the “Blocked Shares”) as a result of the provisions of Section 3(d)(i) hereof, then notwithstanding the provisions of Section 3(d)(i) hereof Company shall be entitled to deliver the Blocked Shares (without being subject to any conditions hereunder including the Conditions to Mandatory Conversion and the provisions of Section 3(d)(i) hereof) ninety (90) days after the Mandatory Conversion Date. The Holder shall inform the Company of the number of Blocked Shares applicable to such Holder within one Business Day after the Mandatory Conversion Notice Date. If the Company receives no written notice from the Holder of the number of Blocked Shares applicable to such Holder by the end of the Business Day after the Mandatory Conversion Notice Date, the Company may conclusively conclude that there are no Blocked Shares for such Holder.

(e)           Company Optional Redemption Right.

(i)            Company Optional Redemption. If at any time from and after the aggregate Principal amount of the then outstanding Notes is equal to or less than $6,000,000, the Conditions to Company Redemption (as set forth below) are satisfied or waived in writing by the Holder, the Company shall have the right to redeem all but not less than all Notes then outstanding (a “Company Optional Redemption”). The Company may exercise its right of redemption under this Section 9(e)(i) by delivering a written notice thereof by facsimile and overnight courier to all of the holders of Notes and the Transfer Agent (the “Company Optional Redemption Notice”). The Company Optional Redemption Notice shall be irrevocable. This Note shall be redeemed by the Company pursuant to this Section 9(e)(i) at a price equal to 110% of the Conversion Amount (the “Company Optional Redemption Price”). Notwithstanding the foregoing, the Holder may continue to convert this Note into Common Stock pursuant to Section 3(a) on or prior to the date immediately preceding the Company Optional Redemption Date. Redemptions required by this Section 9(e) shall be made in accordance with the provisions of Section 12.

(ii)           Company Optional Redemption Notice. If the Company elects to cause a redemption of all of the Conversion Amount of this Note pursuant to Section 9(e)(i), then it must simultaneously take the similar action with respect to the Other Notes. The

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Company Optional Redemption Notice shall state (A) the Trading Day selected for the Company Optional Redemption in accordance with Section 9(e)(i), which Trading Day shall be at least 20 Business Days but not more than 60 Business Days following the Company Optional Redemption Notice Date (the “Company Optional Redemption Date”), (B) that all outstanding Notes have been called for optional redemption pursuant to this Section 9(e) (and analogous provisions under the Other Notes), and (C) the Company Optional Redemption Price to be paid to such Holder as of the Company Optional Redemption Date. All Conversion Amounts converted by the Holder after delivery of the Company Optional Redemption Notice Date shall reduce the Conversion Amount of this Note required to be redeemed on the Company Optional Redemption Date.

(iii)          Conditions to Company Redemption. For purposes of this Section 9(e), “Conditions to Company Redemption” means the Conditions to Mandatory Conversion with the term “Mandatory Conversion Notice” being replaced by “Company Optional Redemption Notice” and the term “Mandatory Conversion Date” being replaced by “Company Optional Redemption Date”.

(10)         NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all of the provisions of this Note and take all action as may be required to protect the rights of the Holder of this Note.

(11)         RESERVATION OF AUTHORIZED SHARES.

(a)           Reservation. The Company shall initially reserve out of its authorized and unissued Common Stock a number of shares of Common Stock for each of the Notes equal to 100% of the Conversion Rate with respect to the Conversion Amount of each such Note as of the Issuance Date. Thereafter, the Company, so long as any of the Notes are outstanding, shall take all action necessary to reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Notes, 100% of the number of shares of Common Stock as shall from time to time be necessary to effect the conversion of all of the Notes then outstanding; provided that at no time shall the number of shares of Common Stock so reserved be less than the number of shares required to be reserved by the previous sentence (without regard to any limitations on conversions) (the “Required Reserve Amount”). The initial number of shares of Common Stock reserved for conversions of the Notes and each increase in the number of shares so reserved shall be allocated pro rata among the holders of the Notes based on the principal amount of the Notes held by each holder at the time of Issuance Date or increase in the number of reserved shares, as the case may be (the “Authorized Share Allocation”). In the event that a holder shall sell or otherwise transfer any of such holder’s Notes, each transferee shall be allocated a pro rata portion of such holder’s Authorized Share Allocation. Any shares of Common Stock reserved and allocated to any Person which ceases to hold any Notes shall be allocated to the remaining holders of Notes, pro rata based on the principal amount of the Notes then held by such holders.

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(b)           Insufficient Authorized Shares. If at any time while any of the Notes remain outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Notes at least a number of shares of Common Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then the Company shall as soon as practicable take all action reasonably necessary to increase the Company’s authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the Required Reserve Amount for the Notes then outstanding. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than 60 days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the approval of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders’ approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such proposal.

(12)         HOLDER’S REDEMPTIONS.

(a)           Mechanics. In the event that the Holder has sent an Event of Default Redemption Notice or a Change of Control Redemption Notice to the Company pursuant to Section 4(b) or Section 5(c), or has received a Company Optional Redemption Notice pursuant to Section 9(b), then the Holder shall promptly after receipt of the applicable Redemption Price submit this Note to the Company (each, a “Redemption Notice”). The Company shall deliver the applicable Event of Default Redemption Price to the Holder within five Business Days after the Company’s receipt of the Holder’s Event of Default Redemption Notice. If the Holder has submitted a Change of Control Redemption Notice in accordance with Section 5(c), the Company shall deliver the applicable Change of Control Redemption Price to the Holder concurrently with the consummation of such Change of Control if such notice is received prior to the consummation of such Change of Control and within five Business Days after the Company’s receipt of such notice otherwise. The Company shall deliver the Company Optional Redemption Amount to the Holder on the Company Optional Redemption Date. In the event of a redemption of less than all of the Conversion Amount of this Note, the Company shall promptly cause to be issued and delivered to the Holder a new Note (in accordance with Section 19(d)) representing the outstanding Principal which has not been redeemed. In the event that the Company does not pay the Event of Default Redemption Price, the Change of Control Redemption Price or the Company Optional Redemption Price (each, the “Redemption Price”), as applicable, to the Holder (or deliver any Common Stock to be issued pursuant to a Redemption Notice) within the time period required, at any time thereafter and until the Company pays such unpaid Redemption Price (and issues any Common Stock required pursuant to a Redemption Notice) in full, the Holder shall have the option, in lieu of redemption, to require the Company to promptly return to the Holder all or any portion of this Note representing the Conversion Amount that was submitted for redemption and for which the applicable Redemption Price (or any Common Stock required to be issued pursuant to a Redemption Notice) (together with any Late Charges thereon) has not been paid. Upon the Company’s receipt of such notice, (x) the Redemption Notice shall be null and void with respect to such Conversion Amount, (y) the Company shall immediately return this Note, or issue a new Note

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(in accordance with Section 19(d)) to the Holder representing such Conversion Amount and (z) the Conversion Price of this Note or such new Notes shall be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the Redemption Notice is voided and (B) the lowest Closing Bid Price during the period beginning on and including the date on which the Redemption Notice is delivered to the Company and ending on and including the date on which the Redemption Notice is voided. The Holder’s delivery of a notice voiding a Redemption Notice and exercise of its rights following such notice shall not affect the Company’s obligations to make any payments of Late Charges which have accrued prior to the date of such notice with respect to the Conversion Amount subject to such notice.

(b)           Redemption by Other Holders. Upon the Company’s receipt of notice from any of the holders of the Other Notes for redemption or repayment as a result of an event or occurrence substantially similar to the events or occurrences described in Section 4(b) or Section 5(c) or the Company’s delivery of a Company Optional Redemption Notice pursuant to Section 9(e) (each, an “Other Redemption Notice”), the Company shall immediately forward to the Holder by facsimile a copy of such notice. If the Company receives a Redemption Notice and one or more Other Redemption Notices during the seven Business Day period beginning on and including the date which is three Business Days prior to the Company’s receipt of the Holder’s Redemption Notice and ending on and including the date which is three Business Days after the Company’s receipt of the Holder’s Redemption Notice and the Company is unable to redeem all principal, interest and other amounts designated in such Redemption Notice and such Other Redemption Notices received during such seven Business Day period, then the Company shall redeem a pro rata amount from each holder of the Notes (including the Holder) based on the principal amount of the Notes submitted for redemption pursuant to such Redemption Notice and such Other Redemption Notices received by the Company during such seven Business Day period.

(13)         SUBORDINATION TO SENIOR INDEBTEDNESS.

(a)           Subordination. The indebtedness represented by this Note and the payment of the principal amount and interest and Late Charges thereon, any redemption amount, liquidated damages, fees, expenses or any other amounts in respect of this Note are hereby expressly made subordinate and junior and subject in right of payment (to the extent expressly set forth in clause (b) below) to the prior payment in full in cash of all Senior Indebtedness of the Company now outstanding or hereinafter incurred.

(b)           Payment upon Dissolution, Etc. In the event of any bankruptcy, insolvency, reorganization, receivership, composition, assignment for benefit of creditors or other similar proceeding initiated by or against the Company or any dissolution or winding up or total or partial liquidation or reorganization of the Company (being hereinafter referred to as a “Proceeding”), all principal and interest due upon any Senior Indebtedness shall first be paid in full before the Holder shall be entitled to receive or, if received, to retain any payment or distribution on account of this Note, and upon any such Proceeding, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holder would be entitled except for the provisions of this Section 13 shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person

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making such payment or distribution, or by the Holder who shall have received such payment or distribution, directly to the holders of the Senior Indebtedness (pro rata to each such holder on the basis of the respective amounts of such Senior Indebtedness held by such holder) or their representatives to the extent necessary to pay all such Senior Indebtedness in full after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Holder or any holders of the Notes; provided, however, that notwithstanding anything to the contrary, in any event the Holder shall be entitled to receive and retain all Junior Securities (as defined below).

(c)           Certain Rights. Nothing contained in this Section 13 or elsewhere in this Note is intended to or shall impair, as among the Company, its creditors including the holders of Senior Indebtedness and the Holder, the right, which is absolute and unconditional, of the Holder to convert this Note in accordance herewith.

(d)           Rights of Holders Unimpaired. The provisions of this Section 13 are and are intended solely for the purposes of defining the relative rights of the Holder and the holders of Senior Indebtedness and nothing in this Section 13 shall impair, as between the Company and the Holder, the obligation of the Company, which is unconditional and absolute, to pay to the Holder the principal thereof (and premium, if any) and interest thereon, in accordance with the terms of this Note.

(e)           Junior Securities. As used herein, “Junior Securities” means debt or equity securities of the Company as reorganized or readjusted, or debt or equity securities of the Company or any other Person provided for by a plan of reorganization or readjustment authorized by an order or decree of a court of competent jurisdiction in a Proceeding under any applicable law, so long as in the case of debt securities, such Junior Securities are subordinated in right of payment to all Senior Indebtedness and to whatever is issued to the holders of the Senior Indebtedness on account of the Senior Indebtedness, to the same extent as, or to a greater extent than, the Subordinated Indebtedness is so subordinated as provided for herein.

(14)         VOTING RIGHTS; RESTRICTION ON DIVIDENDS. The Holder shall have no voting rights as the holder of this Note, except as required by law, including but not limited to the General and Business Corporation Law of Missouri, and as expressly provided in this Note. Until the Dividend Eligibility Date, the Company shall not, directly or indirectly, declare or pay any dividend or distribution on its capital stock, other than stock dividends in accordance with Section 7(a).

(15)         RANK; ADDITIONAL INDEBTEDNESS; LIENS.

(a)           Rank. All payments due under this Note (a) shall rank pari passu with all Other Notes and (b) shall be senior to all other Indebtedness of the Company and its Subsidiaries, other than Permitted Indebtedness (as defined below).

(b)           Incurrence of Indebtedness. So long as this Note is outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness, other than (i) the Indebtedness evidenced by this Note and the Other Notes and (ii) Permitted Indebtedness. As

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used herein, “Permitted Indebtedness” means (A) Senior Indebtedness; and (B) Permitted Subordinated Indebtedness.

(c)           Existence of Liens. So long as this Note is outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by the Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens. As used herein, “Permitted Liens” means (i) Liens incurred to secure Senior Indebtedness, (ii) Liens on fixed or capital assets acquired, constructed or improved by the Company or any Subsidiary, to the extent of Indebtedness incurred within thirty days for such acquisition, construction or improvement and incurred within thirty days of such acquisition, construction or improvement, (iii) purchase money Liens, (iv) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other similar Liens imposed by law, so long as payment on such Lines is not more than 30 days past due, or (v) other Liens permitted by the Company’s senior credit agreement in existence on the date hereof as filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on February 13, 2004, and without giving effect to future amendments to or the termination of the credit agreement.

(d)           Restricted Payments. The Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Indebtedness, other than Senior Indebtedness or Pari Passu Indebtedness, whether by way of payment in respect of principal of (or premium, if any) or interest on, such Indebtedness if at the time such payment is due or is otherwise made or, after giving effect to such payment, an event constituting, or that with the passage of time and without being cured would constitute, an Event of Default has occurred and is continuing.

(16)         PARTICIPATION. Until the Dividend Eligibility Date, the Holder shall have no right to participate in any dividends paid or distributions made to the holders of Common Stock. From and after the Dividend Eligibility Date, the Holder, as the holder of this Note, shall be entitled to such dividends paid and distributions made to the holders of Common Stock to the same extent as if the Holder had converted this Note into Common Stock (without regard to any limitations on conversion herein or elsewhere) and had held such shares of Common Stock on the record date for such dividends and distributions. Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of Common Stock.

(17)         VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting, of the holders of Notes representing not less than a majority of the aggregate principal amount of the then outstanding Notes, shall be required for any change or amendment to this Note or the Other Notes provided such change or amendment is consented to by the Company, which such consent may be granted in the sole discretion of the Company. Any change or amendment to this Note or the Other Notes so approved upon written notice by the Company of such change or amendment shall be binding upon the Holder and holders, present and future, of

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this Note and the Other Notes without regard to whether the terms of such change or amendment are reflected in this Note or the Other Notes.

(18)         TRANSFER. This Note may be offered, sold, assigned or transferred by the Holder without the consent of the Company, subject only to the provisions of Section 2(c) of the Securities Purchase Agreement, provided that this Note may be offered, sold, assigned or transferred only in Principal amounts of $5,000,000 (or the entire remaining Principal amount if less) or increments of $100,000 in excess thereof.

(19)         REISSUANCE OF THIS NOTE.

(a)           Transfer. If this Note is to be transferred, the Holder shall surrender this Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Note (in accordance with Section 19(d)), registered as the Holder may request, representing the outstanding Principal being transferred by the Holder and, if less then the entire outstanding Principal is being transferred, a new Note (in accordance with Section 19(d)) to the Holder representing the outstanding Principal not being transferred. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of Section 3(c)(iii) and this Section 19(a), following conversion or redemption of any portion of this Note, the outstanding Principal represented by this Note may be less than the Principal stated on the face of this Note.

(b)           Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with Section 19(d)) representing the outstanding Principal.

(c)           Note Exchangeable for Different Denominations. This Note is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes (in accordance with Section 19(d) and in principal amounts of at least $100,000) representing in the aggregate the outstanding Principal of this Note, and each such new Note will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.

(d)           Issuance of New Notes. Whenever the Company is required to issue a new Note pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii) shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or in the case of a new Note being issued pursuant to Section 19(a) or Section 19(c), the Principal designated by the Holder which, when added to the principal represented by the other new Notes issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv) shall have the same rights and conditions as this Note, and (v)

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shall represent accrued Interest and Late Charges on the Principal and Interest of this Note, from the Issuance Date.

(20)         REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note, the Securities Purchase Agreement and the Registration Rights Agreement, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

(21)         PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors’ rights and involving a claim under this Note, then the Company shall pay the costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, attorneys’ fees and disbursements.

(22)         CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the Company and all the Purchasers and shall not be construed against any person as the drafter hereof. The headings of this Note are for convenience of reference and shall not form part of, or affect the interpretation of, this Note.

(23)         FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

(24)         DISPUTE RESOLUTION. In the case of a dispute as to the determination of the Redemption Price or the arithmetic calculation of the Conversion Rate or the Redemption Price, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within one Business Day of receipt of the Conversion Notice or Redemption Notice or other event giving rise to such dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon such determination or calculation within one Business Day of such disputed determination or arithmetic calculation being submitted to the Holder, then the

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Company shall, within one Business Day submit via facsimile (a) the disputed determination of the Closing Bid Price or the Closing Sale Price to an independent, reputable investment bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Conversion Rate or the Redemption Price to the Company’s independent, outside accountant. The Company, at the Company’s expense, shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than five Business Days from the time it receives the disputed determinations or calculations. Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.

(25)         NOTICES; PAYMENTS.

(a)           Notices. Whenever notice is required to be given under this Note, unless otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Note, including in reasonable detail a description of such action and the reason therefore. Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least twenty (20) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Change of Control, dissolution or liquidation, provided in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder. Notwithstanding the foregoing, Section 4(i) of the Securities Purchase Agreement shall apply to all notices given pursuant to this Note.

(b)           Payments. Whenever any payment of cash is to be made by the Company to any Person pursuant to this Note, such payment shall be made in lawful money of the United States of America by a check drawn on the account of the Company and sent via overnight courier service to such Person at such address as previously provided to the Company in writing (which address, in the case of each of the Purchasers, shall initially be as set forth on the Schedule of Buyers attached to the Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash via wire transfer to a U.S. bank or the domestic branch of a foreign bank of immediately available funds by providing the Company with prior written notice setting out such request and the Holder’s wire transfer instructions. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day and, in the case of any Interest Date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of Interest due on such date. Any amount of Principal or other amounts due under the Transaction Documents (as defined in the Securities Purchase Agreement) which is not paid when due shall result in a late charge being incurred and payable by the Company in an amount equal to interest

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on such amount at the rate of 15% per annum from the date such amount was due until the same is paid in full (“Late Charge”).

(26)         CANCELLATION. After all Principal, accrued Interest and other amounts at any time owed on this Note has been paid in full, this Note shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued.

(27)         WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Securities Purchase Agreement.

(28)         GOVERNING LAW. This Note shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Note shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.

(29)         CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have the following meanings:

(a)           “Approved Stock Plan” means any employee benefit, option or incentive plan which has been approved by the Board of Directors of the Company, pursuant to which the Company’s securities may be issued to any employee, consultant, officer or director for services provided to the Company.

(b)           “Bloomberg” means Bloomberg Financial Markets.

(c)           “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

(d)           “Calendar Quarter” means each of: the period beginning on and including January 1 and ending on and including March 31; the period beginning on and including April 1 and ending on and including June 30; the period beginning on and including July 1 and ending on and including September 30; and the period beginning on and including October 1 and ending on and including December 31.

(e)           “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the last closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price, as the case may be, then the last bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities

23

exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 24. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.

(f)            “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.

(g)           “Convertible Securities” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.

(h)           “Dividend Eligibility Date” means the later of (x) January 1, 2006, or (y) the date specified in a written notice delivered no later than December 1, 2005, to the Holder by the Company.

(i)            “EBITDA” means, for any four Calendar Quarter period for any Person, the net income (or net loss) of such Person and its consolidated Subsidiaries, determined in accordance with GAAP, plus (i) any provision for (or less any benefit from) income taxes, (ii) any deduction for interest expense, net of interest income (iii) depreciation and amortization expense, (iv) the non-cash portion of compensation expense related to the grant of stock options, restricted stock, and stock appreciation rights, (v) any other components of net income (or net loss) which are non-cash and will not convert to cash prior to the final maturity of this Note, and (vi) costs, fees and expenses incurred in connection with any acquisition transaction, and as adjusted for the following items (to the extent that they are reflected in net income or net loss): elimination of: (v) any net income (or net loss) from discontinued operations as determined in accordance with GAAP (w) all extraordinary gains and losses determined in accordance with GAAP, (x) gains and losses from sales or dispositions of property and equipment or other fixed assets, (y) all non-recurring income and expense items not incurred in the ordinary course of business to the extent included in the determination of net income for the relevant determination period and (z) foreign currency transaction gains and losses, to the extent included in the determination of net income for the relevant determination period; provided, however, that if,

24

during the four Calendar Quarter period for which the EBITDA of a Person is being calculated, such Person has completed an acquisition of an on-going business (a “Target”), the EBITDA of such Person shall be recalculated to include the EBITDA of such Target as if such acquisition (including any acquisition completed prior to the date of this Note but within the applicable period for which EBITDA is being calculated) had been completed on the first day of the relevant measuring period. To the extent applicable, all determinations of the components of EBITDA shall be derived from the Company’s then most recently filed Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as applicable.

(j)            “Excluded Securities” means any shares of Common Stock issued or issuable: (i) in connection with any Approved Stock Plan; (ii) upon conversion of the Notes and the Other Notes; and (iii) upon conversion of any Options or Convertible Securities which are outstanding on the day immediately preceding the Issuance Date, provided that the terms of such Options or Convertible Securities are not amended, modified or changed on or after the Issuance Date.

(k)           “GAAP” means United States generally accepted accounting principles, consistently applied.

(l)            “Indebtedness” of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with generally accepted accounting principles, consistently applied for the periods covered thereby, is classified as a capital lease, (G) off-balance sheet liabilities retained in connection with asset securitization programs, synthetic leases, sale and leaseback transactions or other similar obligations arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the consolidated balance sheet of such Person and its subsidiaries, and (H) all indebtedness referred to in clauses (A) through (G) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (I) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (H) above.

(m)          “Issuance Date” means June 10, 2004.

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(n)           “Options” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

(o)           “Permitted Subordinated Indebtedness” means Indebtedness that (x) is made expressly subordinate in right of payment to the Indebtedness evidenced by this Note and the Other Notes on terms reasonably satisfactory to the holders of Notes representing not less than a majority of the aggregate principal amount of the then outstanding Notes and (y) does not provide at any time for the payment, prepayment, repayment, repurchase or defeasance, directly or indirectly, of any principal or premium, if any, thereon until at least 91 days after the Maturity Date.

(p)           “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity  and a government or any department or agency thereof.

(q)           “Principal Market” means the Nasdaq National Market.

(r)            “Redemption Premium” means (i) in the case of the Events of Default described in Section 4(a)(i) - (vi) and (ix) - (xiii), 120% or (ii) in the case of the Events of Default described in Section 4(a)(vii) - (viii), 100%.

(s)           “Registration Rights Agreement” means that certain registration rights agreement between the Company and the initial holders of the Notes relating to the registration of the resale of the shares of Common Stock issuable upon conversion of the Notes.

(t)            “SEC” means the United States Securities and Exchange Commission.

(u)           “Securities Purchase Agreement” means that certain securities purchase agreement between the Company and the initial holders of the Notes pursuant to which the Company issued the Notes.

(v)           “Senior Indebtedness” means the principal of (and premium, if any), interest on, and all fees and other amounts (including, without limitation, any reasonable costs, enforcement expenses (including reasonable legal fees and disbursements), collateral protection expenses and other reimbursement or indemnity obligations relating thereto) payable under the agreements or instruments evidencing, any unaffiliated, third-party Indebtedness of the Company and its Subsidiaries, whether now existing or hereafter arising (together with any renewals, refundings, refinancings or other extensions thereof), which is not made expressly subordinate in right of payment to the Indebtedness evidenced by this Note and the Other Notes, provided that the aggregate amount of such Senior Indebtedness (taking into account the maximum amounts which may be advanced under the loan documents evidencing such Senior Indebtedness) does not as of the date on which such Senior Indebtedness is incurred exceed the product of (i) 3.0 and (ii) EBITDA (the “Senior Indebtedness Cap”). Without limitation of the generality of the foregoing and subject to the Senior Indebtedness Cap, Senior Indebtedness shall include the obligations of the Company to its current senior secured lender, LaSalle Bank, N.A. and any participants with LaSalle Bank, N.A. in such Indebtedness (the “Senior Bank Obligations”), and the Senior Bank Obligations are designated as Senior Indebtedness. The Company may

26

from time to time designate by written notice to the Holder the obligations, in addition to the Senior Bank Obligations, which constitute Senior Indebtedness, and, provided that, at the time that the Senior Indebtedness is incurred (or a commitment to lend any Senior Indebtedness is made), the aggregate Senior Indebtedness of the Company does not exceed the Senior Indebtedness Cap, Senior Indebtedness so designated shall continue to be Senior Indebtedness notwithstanding any subsequent decline in the Company’s EBITDA.

(w)          “Total Capitalization” means, at any time, the sum of (i) the sum of all amounts (without duplication) which, in accordance with GAAP, would be included in the Company’s stockholders’ equity (excluding unrealized gains or losses pursuant to GAAP) as required to be reported in the Company’s then most recent consolidated balance sheet, (ii) Total Debt and (iii) the cumulative (subsequent to issuance of this Note) non-cash portion of compensation expense related to the grant of stock options, restricted stock, and stock appreciation rights.

(x)            “Total Debt” means, on any date, the outstanding principal amount of all Indebtedness of the Company and its Subsidiaries of the type referred to in clauses (A), (C), (D), (F) and (G) of the definition of “Indebtedness” along with any Contingent Obligation in respect of any of the foregoing.

(y)           “Total Debt to EBITDA Ratio” means, as of the last day of any Calendar Quarter, the ratio of (i) Total Debt outstanding on such day to (ii) EBITDA on such day.

(z)            “Total Debt to Total Capitalization Ratio” means, as of the last day of any Calendar Quarter, the ratio of (i) Total Debt outstanding on such day to (ii) Total Capitalization on such day.

(aa)         “Trading Day” means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded; provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).

(bb)         “Weighted Average Price” means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market during the period beginning at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by Bloomberg through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or such other time as such market publicly announces is the official open of

27

trading), and ending at 4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 24. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.

[Signature Page Follows]

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the Issuance Date set out above.

EPIQ SYSTEMS, INC.
By:
	Name:	Elizabeth M. Braham
	Title:	Executive Vice President and Chief
		Financial Officer

Dated:
Countersigned:
Wells Fargo Bank, National Association,
as Transfer Agent
By:
	Authorized Signatory

29

EXHIBIT I

EPIQ SYSTEMS, INC.
CONVERSION NOTICE

Reference is made to the Contingent Convertible Subordinated Note (the “Note”) issued to the undersigned by EPIQ Systems, Inc. (the “Company”). In accordance with and pursuant to the Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of the Note indicated below into shares Common Stock, par value $0.01 per share, of the Company (the “Common Stock”) as of the date specified below.

Date of Conversion:

Aggregate Conversion Amount to be converted:

The undersigned hereby certifies to the Company that the Company’s conversion of the amount set forth above in accordance with Section 3(a) of the Note will not directly result in the undersigned (together with the undersigned’s affiliates) beneficially owning in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion, calculated in accordance with Section 3(d)(i) of the Note.

Please confirm the following information:

Conversion Price:

Number of shares of Common Stock to be issued:

Please issue the Common Stock into which the Note is being converted in the following name and to the following address:

Name/Address for Issuance:

U.S. Tax Identification Number, if applicable:

Broker/Dealer Information for DWAC:

Brokerage Name & DTC Participant #

Settlement Date                         Broker Contact                                  Phone #                       

Facsimile Number:

30

Authorization:

By:

Title:

Dated:

Account Number:

(if electronic DWAC/book entry transfer)

Transaction Code Number:

(if electronic DWAC/book entry transfer)

31

CONVERSION ACKNOWLEDGMENT

&

TRANSFER AGENT INSTRUCTION

The Company hereby acknowledges this Conversion Notice and hereby directs Wells Fargo Bank, N.A. to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated June 10, 2004 from the Company and acknowledged and agreed to by Wells Fargo Bank, N.A.

EPIQ SYSTEMS, INC.
By:
	Name:
	Title:

32

EX-10.15

Exhibit 10.15

EPIQ SYSTEMS, INC.

NONQUALIFIED STOCK OPTION AGREEMENT

2004 EQUITY INCENTIVE PLAN

THIS STOCK OPTION AGREEMENT (“Agreement”) is made as of this                 day of                                 , 20      , by and between EPIQ SYSTEMS, INC., a Missouri corporation (the “Company”), and                                                (the “Participant”).

WITNESSETH:

WHEREAS, on June 2, 2004, the Board of Directors of the Company and the Company’s shareholders adopted the EPIQ Systems, Inc. 2004 Equity Incentive Plan (the “Plan”); and

WHEREAS, the Plan provides for granting of nonqualified stock options (“NSOs”) to those directors (including Non-Employee Directors), officers (including non-employee officers) and employees of, and other individuals performing services for, or to whom an offer of employment has been extended by, the Company and its Subsidiaries to purchase shares of Company Common Stock (the “Stock”); and

WHEREAS, the Company has designated the Participant as a participant of the Plan who is eligible for a grant of a NSO under the Plan and desires to grant to the Participant a NSO in accordance with purposes and provisions of the Plan and the terms and conditions of this Agreement as set forth herein;

WHEREAS, the Participant desires to accept the NSO in accordance with the provisions of the Plan and the terms and conditions of this Agreement as set forth herein;

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties agree as follows:

SECTION 1. GRANT OF OPTION

The Company hereby grants to the Participant the right and option (the “Option”) to purchase all or any part of an aggregate of                      (                ) shares of the Stock of the Company (the “Option Shares”) (such number being subject to adjustment as provided in Section 11 hereof) on the terms and conditions set forth herein. This Option is a nonqualified stock option.

SECTION 2. PURCHASE PRICE

The purchase or exercise price of the Option Shares shall be (                  ) per share, which price represents not less than one hundred percent (100%) of the Fair Market Value (as defined in Section 14 hereof) of a share of Stock as of the date of grant of the Option as determined by the Compensation Committee of the Board of Directors of the Company (“Committee”). The purchase price is subject to adjustment as provided in Section 11 hereof.

SECTION 3. MEDIUM OF PAYMENT

The parties agree that full payment of the purchase price for the Option Shares shall be payable either:  (i) in cash (including check, bank draft, money order or wire transfer of immediately available funds), (ii) by delivery of outstanding mature shares of Stock with a Fair Market Value on the date of exercise equal to the aggregate exercise price payable with respect to the Options exercised, (iii) by simultaneous sale through a broker reasonably acceptable to the Committee of shares of Stock acquired on exercise, as permitted under Regulation T of the Federal Reserve Board, (iv) by authorizing the Company to withhold from issuance a number of mature shares of Stock issuable upon exercise of the options which, when multiplied by the Fair Market Value of a share of Stock on the date of exercise, is equal to the aggregate exercise price payable with respect to the options so exercised or (v) by any combination of the foregoing. Such shares of Stock shall be valued at their fair market value on the date the Option is exercised in accordance with the terms of this Agreement.

For purposes of clause (i) and (iv) above, “mature shares” shall mean those shares of Stock tendered or withheld, as the case may be, in payment of the exercise price (provided that such tendered/withheld shares of Stock have not been subject to any substantial risk of forfeiture) that have been owned by Participant for at least six months prior to the date of exercise.

SECTION 4. OPTION TERM AND TERMINATION

(a)No part of the Option shall be exercised after ten (10) years from the date hereof.

(b)All rights to exercise the Option hereunder shall be either terminated or forfeited in accordance with the following provisions:

(i)Death or Disability. If Participant ceases to be a director, officer or employee of the Company and any Subsidiary due to death or Disability (as defined under the Plan), (A) all of the Participant’s Option Shares that were exercisable on the date of death or Disability shall remain exercisable for, and shall otherwise terminate at the end of, a period of one year from the date of such death or Disability, but in no event after the expiration date of the Option Shares; provided that, in the case of Disability, the participant does not engage in Competition (as defined under the Plan) during such one year period unless he or she received written consent to do so from the Board of Directors or the Committee, and (B) all of the Participant’s Option Shares that were not exercisable on the date of death or Disability shall be forfeited immediately upon such death or Disability; provided, however, that such Option Shares may become fully vested and exercisable in the discretion of the Committee.

(ii)Retirement. If a Participant ceases to be a director, officer or employee ofthe Company and any Subsidiary upon the occurrence of his or her Retirement (as defined under the Plan), (A) all of the Participant’s Option Shares that were exercisable on the date of Retirement shall remain exercisable for, and shall otherwise terminate at the end of, a period of 90 days after the date of Retirement, but in no event after the expiration date of the Option Shares; provided that the Participant does not engage in Competition during such 90-day period unless he or she receives written consent to do so from the Board of Directors or the Committee, and (B) all of the Participant’s Option Shares that were not exercisable on the date of Retirement shall be forfeited immediately upon such Retirement; provided, however, that such Option Shares may become fully vested and exercisable in the discretion of the Committee.

2

(iii)Discharge for Cause. If a Participant ceases to be a director, officer or employee of, or to perform other services for, the Company or a Subsidiary due to Cause (as defined under the Plan), or if a Participant does not become a director, officer or employee of, or does not begin performing other services for, the Company or a Subsidiary for any reason, all of the Participant’s Option Shares shall expire and be forfeited immediately upon such cessation or non-commencement, whether or not then exercisable.

(iv)Other Termination. Unless otherwise determined by the Committee, if a Participant ceases to be a director, officer or employee of the Company or a Subsidiary for any reason other than death, Disability, Retirement or Cause, (A) all of the Participant’s Option Shares that were exercisable on the date of such cessation shall remain exercisable for, and shall otherwise terminate at the end of, a period of 30 days after the date of such cessation, but in no event after the expiration date of the Option Shares; provided that the Participant does not engage in Competition during such 30-day period unless he or she receives written consent to do so from the Board of Directors or the Committee, and (B) all of the Participant’s Option Shares that were not exercisable on the date of such cessation shall be forfeited immediately upon such cessation.

SECTION 5. TIME OF EXERCISE

(a)[Insert vesting schedule]

(b)The Option or any installment of the Option, as described in (a) above, which has become exercisable, may be exercised at any time from time to time (so long as the term of the Option or such installment thereof has not expired), as to all or any part thereof; provided, that the Option may not be exercised for a fractional share of Stock.

(c)Notwithstanding anything to the contrary set forth in Section 5(a) above, if there is a Change in Control of the Company (as defined under the Plan), all of the Participant’s Option Shares shall become fully vested and exercisable upon such Change in Control and shall remain so until the expiration date of the Option Shares, whether or not the Participant is subsequently terminated.

SECTION 6. METHOD OF EXERCISE AND ISSUANCE OF SHARES

(a)Each exercise of the Option, or all or any portion of an installment thereof, shall be by written notice of exercise delivered to the President or Chief Financial Officer of the Company at the Company’s principal place of business specifying the number of shares of Stock to be purchased and accompanied by payment in the manner elected in Section 3 hereof.

(b)As soon as practicable after any such exercise in accordance with the foregoing provisions, the Company shall deliver certificate(s) to the Participant representing the Stock which relates to such exercise.

SECTION 7. NONTRANSFERABILITY

The Option, and all rights and privileges hereunder, shall be nonassignable and nontransferable by the Participant, either voluntarily or by operation of law (except (i) by will, (ii) by operation of the laws of descent and distribution, or (iii) to a Participant’s Family Member (as defined under the Plan) by gift or a qualified domestic relations order, nor shall they be pledged or hypothecated in any way, and

3

shall be exercisable only by the Participant (or his/her permissible assigns as defined hereunder) during his lifetime.

SECTION 8. SHARE AUTHORIZATIONS, CONSENTS, ETC.

The Company, during the term of the Option, will have a sufficient number of shares of Stock authorized to satisfy this Option. The Company will seek to obtain from each regulatory commission or agency having jurisdiction, such authority as may be required to issue and sell Stock to satisfy the Option. The inability of the Company to obtain from any such regulatory commission or agency authority, which counsel for the Company deems necessary for the lawful issuance and sale of the Stock to satisfy the Option, shall relieve the Company from any liability for failure to issue and sell stock to satisfy the Option until such time as such authority is obtained.

SECTION 9. INVESTMENT REPRESENTATIONS

The Participant may be required, if it is deemed necessary in the opinion of counsel of the Company, to represent to the Company at the time of exercise that it is his intention to acquire the Stock for his private investment only and not for resale or distribution to the public. The Company may stamp any certificate representing such Stock with a legend to the effect that such Stock has not been registered under the Securities Act of 1933 and that it may not be sold or transferred until so registered, or until an opinion of counsel satisfactory to the Company is received to the effect that such registration is not necessary. In the event any Stock issued pursuant to this Plan is registered under the Securities Act of 1933, as amended, then the investment representations and restrictions imposed pursuant to federal securities law shall automatically be inoperative with respect to such Stock. Nothing herein shall be deemed to obligate the Company to so register any of such Stock.

SECTION 10. RIGHTS AS STOCKHOLDER

The Participant shall have no rights as a stockholder with respect to any Stock issuable pursuant to this Option until the certificate(s) representing such Stock shall have been issued and delivered to him. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such Stock certificate(s) is delivered to the Participant.

SECTION 11. CHANGES IN CAPITAL STRUCTURE

(a)The Option granted hereunder shall be subject to adjustment by the Committee as to the number and price of shares subject to such Option in the event of changes in the outstanding shares of Stock by reason of stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the date of grant of the Option. In the event of any such change in the outstanding shares of Stock, the aggregate number of Option Shares, which remain outstanding, and the exercise price thereof, under this Agreement shall be approximately adjusted by the Committee, whose determination shall be conclusive.

(b)Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with a direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or exercise price of the shares of Stock then subject to Option granted hereunder.

4

(c)Without limiting the generality of the foregoing, the Option granted hereunder shall not affect in any manner the right or power of the Company to make, authorize or consummate (i) any or all adjustments, recapitalizations, reorganizations or other changes in the Company’s capital structure or its business; (ii) any merger or consolidation of the Company; (iii) any issue by the Company of debt securities, or preferred or preference stock that would rank above the shares of Stock subject to Option; (iv) the dissolution or liquidation of the Company; (v) any sale, transfer or assignment of all or any part of the assets or business of the Company; or (vi) any other corporate act or proceedings, whether of a similar character or otherwise.

SECTION 12. CONTINUATION OF EMPLOYMENT

Nothing herein shall confer upon the Participant any right to continued employment, if applicable, or interfere with the right of the Company or a Subsidiary to terminate his/her employment at any time, for any reason.

SECTION 13. TAX TREATMENT AND WITHHOLDING TAXES

The Company intends that the Option will be considered a nonstatutory stock option under the Internal Revenue Code of 1986, as amended. The Company has the right to require the Participant or Participant’s permitted successor in interest to pay to the Company the amount of any taxes which the Company may be required to withhold with respect to such Option Shares.

The foregoing is not intended as tax advice to the Participant. The Participant should consult his own tax advisor.

SECTION 14. FAIR MARKET VALUE

As used herein, the Fair Market Value shall be the officially quoted closing selling price of the stock (or if no selling price is quoted, the bid price) on the principal securities exchange on which the Stock is then listed for trading (including for this purpose the Nasdaq National Market) (the “Market”) for the applicable trading day or, if the Stock is not then listed or quoted in the Market, the Fair Market Value shall be the fair value of the Stock determined in good faith by the Committee; provided, however, that when shares received upon exercise of an Option are immediately sold in the open market, the net sale price received may be used to determine the Fair Market Value of any shares used to pay the exercise price or applicable withholding taxes and to compute the withholding taxes.

SECTION 15. GOVERNING LAW

This Agreement shall be subject to, and governed by, the Laws of the State of Delaware irrespective of the fact that one or more of the parties now is, or may become, a resident of a different state.

SECTION 16. CONSTRUCTION

In the event any parts of this Agreement are found to be void, the remaining provisions of this Agreement shall nevertheless be binding with the same effect as though the void parts were deleted. Capitalized terms not defined herein shall have those meanings assigned to them in the Plan.

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SECTION 17. BINDING EFFECT

This Agreement shall inure to the benefit of and be binding on the parties hereto and their respective heirs, executors, administrators, successors and assigns.

SECTION 18. THE PLAN

The Option is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan as the same shall be amended from time to time in accordance with the terms thereof, but, unless otherwise provided by the Plan, no such amendment shall adversely affect the Participant’s rights under the Option, without his consent. Pursuant to the Plan, the Board or the Committee, as the case may be, has final authority to construe and interpret the provisions of the Plan and the Option. A copy of the Plan in its present form is available for inspection by the Participant during business hours at the principal office of the Company.

IN WITNESS WHEREOF, the Company has caused this Stock Option Agreement to be duly executed by its duly authorized officers, and the Participant has executed this instrument, all as of the day and year first above written.

EPIQ SYSTEMS, INC.
“Company”	“Participant”
By:
Name:
Title:

6

EX-12.1

Exhibit 12.1

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EPIQ SYSTEMS, INC.
(In Thousands, except for Ratio)

	Year Ended December 31,
Earnings	2005		2004		2003
income from continuing operations	$	10,948	$	9,063	$	14,525
tax related to continuing operations	7,276		6,386		10,165
pre-tax earnings	18,224		15,449		24,690
Plus
fixed charges	7,676		7,176		550
amortization of capitalized interest	0		0		0
distributed income—equity investees	0		0		0
share of pre-tax losses of equity investees	0		0		0
Less
capitalized interest	0		0		0
preference dividends of consolidated subs	0		0		0
minority interest in subs pre-tax income	0		0		0
Total Earnings	25,900		22,625		25,240
Fixed Charges
Interest expensed	5,662		4,223		201
Interest capitalized	0		0		0
amortized deferred loan charges	1,147		2,120		0
estimated interest expense in leases	867		833		349
preference dividends of consolidated subs	0		0		0
Total Fixed Charges	7,676		7,176		550
Ratio of earnings to fixed charges	3.4		3.2		45.9

EX-21.1

Exhibit 21.1

EPIQ SYSTEMS, INC.

List of Subsidiaries

Subsidiary	State or Other Jurisdiction of Organization	Doing Business As
EPIQ Systems Acquisition, Inc.(1)	New York
Bankruptcy Services LLC(2)	New York	BSI
Financial Balloting Group LLC(2)	New York	Financial Balloting Group
Poorman-Douglas Corporation(1)	Oregon	Poorman Douglas Huntington Legal Services
Novare, Inc.(2)	Illinois	Novare
Hilsoft, Inc.(2)	Pennsylvania	Hilsoft
nMatrix, Inc.(2)	Delaware	nMatrix
nMatrix Australia Pty. Ltd.(2)	Australia	nMatrix
nMatrix Ltd.(3)	England and Wales	nMatrix

(1)100% owned by EPIQ Systems, Inc.

(2)100% owned by EPIQ Systems Acquisition, Inc.

(3)100% owned by nMatrix Australia Pty. Ltd.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-30847, 333-57952, 333-101233 and 333-107111 on Form S-8, and in Registration Statement No. 333-101232 on Form S-3 of our reports dated March 7, 2006 relating to the financial statements and financial statement schedule of EPIQ Systems, Inc. and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of EPIQ Systems, Inc. for the year ended December 31, 2005.

DELOITTE & TOUCHE LLP

Kansas City, Missouri

March 7, 2006

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Tom W. Olofson, certify that:

1.     I have reviewed this annual report on Form 10-K of EPIQ Systems, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a)    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

(d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 8, 2006

/s/  TOM W. OLOFSON

Tom W. Olofson

Chairman of the Board

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Elizabeth M. Braham, certify that:

1.     I have reviewed this annual report on Form 10-K of EPIQ Systems, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a)    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

(d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 8, 2006

/s/ ELIZABETH M. BRAHAM

Elizabeth M. Braham

Executive Vice President, Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATIONS OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350

I, Tom W. Olofson, Chief Executive Officer of EPIQ Systems, Inc. (the “Company”), hereby certify pursuant to Section 1350, of chapter 63 of title 18, United States Code, and Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, (1) the annual report on Form 10-K of the Company to which this Exhibit is attached (the “Report”) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ TOM W. OLOFSON

Tom W. Olofson

Dated:March 8, 2006

I, Elizabeth M. Braham, Chief Financial Officer of EPIQ Systems, Inc. (the “Company”), hereby certify pursuant to Section 1350, of chapter 63 of title 18, United States Code, and Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, (1) the annual report on Form 10-K of the Company to which this Exhibit is attached (the “Report”) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ ELIZABETH M. BRAHAM

Elizabeth M. Braham

Dated:March 8, 2006